Another Former Credit Union Headed to Capital Markets; Irony Galore Considering CEO's Recent Testimony

WASHINGTON — Another former credit union has notified the U.S. Securities and Exchange Commission that it intends to reorganize itself into a mutual holding company and to issue stock.

Up until May 2003 Sound Community Bank had done business as Credit Union of the Pacific, a state chartered credit union headquartered in Seattle, when it converted its charter to that of a federally chartered mutual savings bank. Since then the former CU has conducted business as a mutual bank with its CEO, Laurie Stewart, becoming an outspoken proponent of credit unions changing their charters to mutual banks.

Stewart has testified before the House of Representative's Financial Services Committee in favor of a bill that would restrict NCUA's authority to regulate the credit union-to-bank charter change process. She also serves on the advisory board of the Coalition For Credit Union Charter Options, a banker led group that advocates in favor of charter conversions and which is suing NCUA to attempt to overturn the agency's regulations.

According to the bank's filings with the SEC, Sound Community said it will restructure itself into a mutual holding company for the deal. The bank said in its filing that it expects to issue and sell 45% ownership in Sound Financial Inc, the holding company owner of the bank.

The bank's filing said that it will offer between roughly 1.1 and 1.5 million shares of stock at $10.00 and will bring the bank, a foundation it is establishing, and its employee stock ownership plan between roughly $10 million and $16 million, depending ultimately on how many shares it winds up offering which is a function of demand.

According to the filing, Stewart has committed, with an unidentified "non-family associate", to purchase 25,000 shares at a total price of $250,000. The other directors and executives have committed to purchase a total of 126,000 shares at a total price of $1.26 million.

In addition to whatever profits the stock's initial rise will bring, Stewart and the others also stand to benefit by participation in a employee stock offering plan that will purchase 8% of the offering with a loan from the bank, according to the bank's filing. The ESOP must be approved by bank depositors to be put into effect.

The bank has not revealed how many of its directors or executives were directors when the bank was a CU.

According to CU Financial Services, a consultancy that helps CUs change their charters to banks, only 14 of the 33 credit unions that have changed their charter to mutual banks have not issued stock. When Sound makes its initial public offering of stock the number will drop to 13. Of the 19 remaining banks, 10 have reorganized as mutual holding companies, as Sound proposes to do, and nine have become stock-issuing banks outright, according to the firm.

There is a certain degree of irony in Sound's move since, to some extent, it was partially on the strengths of her being CEO who had not benefited financially from her bank's stock offering that got her to testify before Congress.

In her prepared remarks she told legislators that, "[T]he NCUA and critics of credit union conversions have depicted credit union executives who desire to convert as greedy insiders seeking to enrich themselves. This is simply not true. First, it is ironic that the credit union executives who are painted by the credit union trades as selfless and dedicated cooperative executives suddenly become fraudsters looking to fleece their members of millions of dollars. These executives, like me, are merely looking to find the charter that enables them to best serve their members."

She also wrote that NCUA and CU trade associations "like to assert that there is a tremendous windfall to the executives and directors of the resulting institution. This is not a true statement. The conversion from a credit union to a mutual institution involves no transfer of net worth to insiders. Furthermore, like credit union executives, the compensation of mutual executives will be determined by the institution's board of directors."

—dmorrison@cutimes.com