Don't tell Herb Moltzan he's "one of the bad guys" or that he "went to dark side." And whatever you do, don't suggest that it's just too easy for credit unions to convert to banks.
Six years ago, in the wake of the Supreme Court decision that limited federal credit unions' ability to add SEGs, BUCS FCU was on the cusp of what it believed was a long, slow death for the credit union.
"We had just been approved to take in a huge SEG in Baltimore, but just after that, the court decision came down and we had to tell the SEG that we couldn't serve them after all. People were very upset," recalled Moltzan, a former NCUA examiner who went on to become the CEO of BUCS FCU and helped convert it to BUCS Federal Bank. "We wanted to find a solution that would be independent of the judge or Congress or anything like that, so we tried to carve out portions of Baltimore County. But the community charter wasn't really an alternative then."
Although it seems difficult to believe in an era when community FOMs encompassing more than a million people are becoming common, in the late 1990s community charter requests could languish for years at NCUA.
"So, we looked at the thrift charter, which would allow us to serve anybody as a community bank, and that solved the problem of taking in this SEG," Moltzan related. "Plus, it would help diversify our membership. We were originally chartered to serve Blue Cross and Blue Shield and had a number of SEGs from the health care industry, but we felt like our exposure to one industry put us at risk. We made the strategic decision that conversion was the way to go."
Nightmare On Conversion Street
Such a decision, considered a betrayal of the credit union community, made Moltzan unpopular among his fellow credit unionists, but that was the least of his problems. The conversion itself presented much larger challenges.
"It was a nightmare," Moltzan told The Credit Union Journal. "This was before HR 1151, so we were required to get more than 50% of our membership to vote in favor of the conversion, and we had 30 days to do it. We had to hire a Wall Street proxy solicitor to do it. It cost us in the neighborhood of $150,000 to $200,000, and most of that was just for the vote. It was very difficult, to say the least."
While Moltzan, who spent some 20 years in the credit union movement, still has friends from his credit union days, leading his CU through a conversion has put a dent in some of those friendships. BUCS had been a member/owner of card processing services provider PSCU (now PSCU Financial Services), but could no longer receive PSCU's services because the CUSO's charter requires that all of its members be not-for-profit institutions. "The members of Encore (Services) voted us out," he added. "I don't associate with my friends in credit unions as much as I used to just by virtue of not going to a lot of the same conferences and events as them."
No Inside Bandits
But if it was "bad" when BUCS converted to a thrift, then some CU observers would suggest that things have gone from bad to worse: BUCS converted to a stock institution two years ago.
"You know, I've heard people talk about what bad people the boards and management of [former CUs that become stock institutions] are, and how these 'insiders' make out like bandits at the expense of their members, so I know they must be saying what a bad guy I am," Moltzan offered. "But what they never mention is that every single member had the same right to buy stock in the bank. They had the first option to buy in. Some did, some chose not to. We have happy stockholders, and we have happy customers who think of themselves as members."
The $120-million BUCS Federal Bank currently trades over-the-counter on the so-called pink sheets. It went public at $10 a share, hit a high of $27, and at press time was trading at $24.50 per share. Moltzan said the share price declined slightly after it announced it would pay a 10% stock dividend on Jan. 31.
Moltzan asserted little has changed at the former credit union-except having more and better opportunities to serve people.
"I don't feel guilty about what we've done. We're providing better service, we've got more capital, and we're a stronger institution," Moltzan stated. "When we converted, nobody cared. There were no complaints, though we did have one woman who closed all her accounts with us. We haven't had to change our rates or our fee structure because of taxation. We just accepted the fact that we wouldn't be as profitable for a while. We looked at becoming a taxable entity in much the same way you look at building a branch. It won't immediately make you money, but it offers the opportunity to grow the institution. You don't have to change what you are because you change your name."
As for the fact that the members-at least those who didn't opt to buy stock-have lost their ownership of the institution, Moltzan suggested that's not as big of a deal as it seems on paper.
"I don't know how members can get their equity out of the institution, there really is no way to do that," he noted. "Credit union members may own the place, but there is no way to manifest that ownership."
And while taxes are the most discussed issue related to a conversion, Moltzan suggested it's really the Community Reinvestment Act requirements that are most onerous. "God bless credit unions for what they can get away with, but if you're allowed to serve a community half the size of Texas, then you should have to come under CRA," he said.
But even with taxation and CRA, Moltzan believes the conversion has been worthwhile.
"FDIC is much more recognizable to people than the NCUSIF, for example," he observed. "Being a bank is an advantage. There are people who don't know what a credit union is. Everyone knows what a bank is. People still think of credit unions as car loans and Christmas Club accounts."
As both a former NCUA examiner and a CEO who has gone through the conversion process under the more burdensome requirement that a majority of all members vote in favor, Moltzan offered a unique perspective on proposals to repeal portions of the Credit Union Membership Access Act that allow conversion based on a majority of voting members.
Self-Preservation At NCUA
"As far as NCUA is concerned, this is self preservation, pure and simple," he suggested. "A credit union is owned by its members and run by the board elected by those members. NCUA's job is to examine the credit union for safety and soundness, and they should stay the hell out of corporate decisions."
And as for the idea that greater disclosure is needed, Moltzan disagrees. "The members aren't as stupid as NCUA thinks they are. And the board members and management are not the money-loving blackguards that they've been painted as.
"In my estimation, any credit union should, as part of its strategic planning, look at all its chartering options for long-term growth," he continued. "Put philosophy aside for a moment to at least give a cursory look at your chartering options. You don't have to change who you are just because you change your name."
