A Credit Union Conversion 'Poison Pill'

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As controversy swirls around credit unions that have converted or are seeking to convert to a bank charterone credit union here is poised to make it more difficult for the co-op to morph into a bank in the future.

Washington State Employees CU's board will vote this week on a bylaw amendment that would make it more difficult for a future board to convert to a mutual bank charter by adopting a tougher voting standard than the present simple majority of voters required.

While the board has already decided it will adopt some sort of "poison pill" amendment, the real question is just how difficult to make such a conversion, according to the board's vice-chair Meredith Rafferty, who has spearheaded the exploration of the bylaw amendment.

WSECU's board is wrestling with those questions at the same time this state has become fertile ground for such credit union-to-bank conversions. Four credit unions, including Rainier Pacific and Credit Union of the Pacific, have already converted to a mutual bank charter, and Vancouver, Wash.-based Columbia Credit Union is seeking to do the same. Several members of Columbia are challenging the conversion and the rules that apply to the voting procedures used (CU Journal, Dec. 8). Another member has indicated he may start a petition drive to turn back the conversion.

The board at the $1-billion WSECU has seen what has been going on in Washington.

"We are definitely going to move forward on this; it's a question of how high a standard we set for future boards," she told The Credit Union Journal. "The past two years we have been making an effort to reaffirm that we are a credit union and a co-op and ensuring that we are providing good service to our members. In that process, we have gelled around the idea of a brand image, and so much of that is wrapped up in who we are-and who we are is a credit union owned by its members.

"We've talked amongst ourselves, and we believe that our strength is in being a credit union and a co-op. The question is how to convey to a future board how important that is, and that we intend to remain a credit union forever."

What Is A Majority?

That said, Rafferty noted that the current board doesn't want to make it impossible for the credit union to convert to a bank charter if the board really believes it is in the best interest of all members to change charters. The key, she said, is ensuring that the members really understand what it means to give up the credit union charter.

"Members must have a certain amount of notice of the board's intent to convert so that they have enough time to learn about the consequences about such a decision and to react," she explained. "And the other side of that is defining what a 'majority' is. Is it a majority of those who are voting, or a majority of the membership? Some might say that getting a majority of the total membership is an impossibly high standard, but there are other standards we can look at. Perhaps we require two-thirds majority of those voting, or 90% of those voting."

WSECU has 122,000 members. Rafferty also liked the idea of requiring a certain number of members to participate in the vote-essentially creating a quorum requirement.

"We don't have the slightest inclination to convert, but we are trying to consider what reasons a future board might have to convert," she offered. "We're really struggling to identify those reasons. We really can't quite imagine it ever being in the members' best interest to become a bank, but at the same time, is it really in the members' best interest to make it impossible to convert? I don't think so. But honestly, we're struggling to come up with a scenario where it would make sense for us to convert."

Yet a number of credit unions in Washington have converted or are currently pursuing a conversion, despite the fact that the state has one of the most liberal credit union charters in the nation.

"We're trying to look at who really benefits and what happens when you convert," Rafferty explained. "I believe very strongly in the cooperative future of credit unions. Yes, we've had our ups and downs and economic challenges, but looking at the big picture, we have grown and prospered on the whole. I would not endorse paying directors or moving to some other form of institution. Many members [at CUs converting to banks] don't even realize what's going on. I look at the discussions about these boards of directors and how self-serving they can be and whether they're a rubber stamp or truly independent. When I hear those discussions, I know that we can be an example of what works right. Our management doesn't sit on our board, and I think that's important. Our management has always been supportive, but it's our job to set policy."

Rafferty has been a member of WSECU since 1971 and has served on the board several different times in the late 1980s, when she filled in for another director in the 1990s, and is now finishing up her current three-year term.

"All the recent conversions in our state have compounded our interest in this issue, but that's not what got the conversation started," she commented. "The primary thrust is reaffirming who we are and how to present ourselves to the membership. When we open new branches, we don't do it because of the competition, we do it to better serve our membership. It became more important to us to preserve our heritage. Both the board and the management take great pride in being a credit union and a cooperative, and I do believe that this form of ownership does make a difference in our day-to-day decisions. Being a member-owned institution and having the credit union philosophy makes a difference every single day. Even though those other boards [at credit unions that have chosen to convert] may have had the best interests of their entire membership at heart, it makes a difference if you're looking for a profit or if you're looking for net income to be reinvested into the membership or provide a cushion of security for the membership."

And no matter how hard she tries, Rafferty simply can't imagine a case where it really would benefit credit union members to become bank customers.

"Sure, maybe it allows you to make new types of loans, but is that really what your members need and want," she asked. "We are voting (Dec. 17) and I'm positive that we will definitely make a statement that we are a credit union, and that's what we always want to be."

WSECU isn't the only credit union interested in making that sort of statement. In fact, the Washington Credit Union League is working on crafting standard language for the same sort of poison pill amendment WSECU is looking to adopt, according to league President John Annaloro. The idea is to create a standard amendment that all credit unions could adopt if they so choose. But that may not be enough.

The 'Unspeakables'

"[What WSECU is doing] is a step in the right direction, but let's face it, if you're a credit union that wants to convert, then you're simply not going to adopt this amendment," said CUNA Economist Bill Hampel. "But if you do see a lot of credit unions making this type of statement, it could increase the moral suasion, credit unions asking other credit unions 'how come you haven't adopted this, yet?'"

But Annaloro acknowledged just how many factors may be in play.

"We have had four credit unions that have gone to a bank charter, and that's a lot for our state," Annaloro suggested. "Washington is considered to have the most progressive credit union charter in the nation, so it is surprising to everyone that we should have so many credit unions looking to convert.

"I suppose one of the embedded lessons, then, is that no matter what you do to enhance the credit union charter, some will go under any circumstance. We have one of the best regulatory systems in the nation and the most liberal legislation, so it comes down to either the charter is still too limiting, or these credit unions really have a desire to run their institution in a more bank-like fashion. Sure, there's the question of capital acquisition and business lending restrictions, but then there are also questions about personal financial gain and other unspeakables."

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