Discussion Heats Up on CU Conversions; CUNA Chair Blasted

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As the battle over the proposed conversion by two Texas credit unions to mutual bank charters heats up, the credit union community is struggling to determine how to address this incendiary issue.

Evidence of this boiling undercurrent in credit union land:

  • In Las Vegas, former NCUA Chairman Ed Callahan criticized the credit union trade associations for their stance-or lack thereof-on credit union-to-bank conversions; Callahan particularly called CUNA Chairman and Texas CU League CEO Dick Ensweiler to task for not doing more to oppose two major conversions planned in Texas.
  • In North Carolina, State Employees CU CEO Jim Blaine, who has been accused by some critics of "masterminding" the group that is opposing Community CU's conversion, is inviting conversion consultant Alan Theriault to show him how SECU could benefit from converting to a bank charter.
  • In Palm Springs, Calif., at an annual CUNA-sponsored Roundtable of the largest 150 credit unions, conversions was a hot topic.
  • In Florida, Suncoast Schools FCU CEO Tom Dorety, who is also a member of the CUNA board, has suggested CUNA and credit unions as a whole need reevaluate the credit union response to these conversions.

Callahan, the well-known former head of NCUA, CEO of Patelco CU and co-founder of the consulting firm that bears his name, said last week the best way to thwart the growing number of credit union conversions may be to sue directors on the basis of violation of their fiduciary duties to members.

"I think we ought to get some of the members to sue the board of directors, personally," Callahan told more than 400 attendees at the annual NACUSO Convention last week. "I'm open to anything that will work."

Callahan said the legal challenge would be to prove to a judge or jury that credit union directors, such as those at Plano, Texas-based Community CU or Fort Worth, Texas-based OmniAmerican CU, both of which are seeking to convert, have a responsibility to members that they are violating by engineering a charter switch that will eliminate their ownership rights. "By insisting that you, as a board member, that's been charged with looking out for the members, are selling them out. And I don't think it's hard to prove that to a jury of your peers," said Callahan.

"These are volunteer directors who serve without any personal responsibility," he charged.

"I believe this is about greed. I think it's about greed for a small group," said Callahan, alluding to the promise of financial gains once the two credit union giants convert to stock form after switching to a mutual, as planned.

He worried that if the $1.4-billion Community CU conversion is successful, it could encourage more credit unions to opt for the mutual savings bank charter. "If we don't stop this one, it's Katie bar the door."

The outspoken former chief credit union regulator also took Dick Ensweiler, president of the Texas CU League and chairman of CUNA, to task for what he called a lack of action on the conversion. "I, for the life of me, thought Dick Ensweiler was more of a fighter," said Callahan. "I think he's more impressed with himself being chairman of CUNA. (But) when he goes home to Texas there'll be nothing left, they'll (the credit unions) all be banks."

Ensweiler was unavailable for comment by presstime, as was Gary Base, CEO of Community Credit Union and Larry Duckworth of OmniAmerican Credit Union.

Dorety was more careful with his criticism, emphasizing that he was not speaking for CUNA. "I don't want to criticize what anyone has done or not done. But I've read some of the (conversion) disclosures to folks, and I'm not an attorney, but it seems to me that if it is not misrepresented what is occurring it sure is very, very unclear what they are doing and that they are masking what they are doing."

In Tampa Fla., GTE FCU CEO Bucky Sebastian agreed. "The credit unions that do this are given an enormous amount of cover by the federal agencies," he told The Credit Union Journal. "Their pat defense is 'we've done everything that is required by the federal regulators.' That may be true, but that's not sufficient protection for the owners of the credit union. You may have said everything you HAD to say, but that isn't necessarily everything you NEED to say."

Part of what is clouding the argument is the question over whether board members and executives are deciding to convert based on the opportunity for personal gain rather than what is best for the member.

"I'm very surprised that any credit union board would choose a bank charter over a credit union charter. It's hard to imagine that such a move is in the best interests of the member/owners who that board represents," Dorety told The Credit Union Journal. "I don't know why some credit unions try to convert other than the reasons they give, and I think we can all see through those."

'Like To See Open Discussion'

"I would like to see an open discussion of this issue. This should not be about going in to a credit union [that is looking to convert] and telling them what they should or shouldn't do. This should not be about whether they stand to gain personally from making this decision," Sebastian observed. "I think the credit union philosophers in the group don't think there should be any hint of an opportunity for personal gain. Take that away, and suddenly there are far fewer questions about whether a board and the management team are doing this for the good of the institution and its members or if it's about personal gain."

But getting to that open discussion may not be easy. Ensweiler, for example, noted that for as much as he'd like to be doing more to oppose the pending conversions of Community CU and OmniAmerican CU in Texas, his board-made up of credit union CEOs-has made it clear that the league must be restricted in how involved it can get.

The concern, some CU observers have suggested, is that these credit union leaders don't want to be seen as telling other credit unions what to do, lest it come back on them should they choose an unpopular action like converting to a bank in the future.

"I have heard that argument before, and I do think there is a minimal fear that any revolt [against conversions] would go too far and eliminate the option entirely, but no one is really calling for that," Sebastian offered. "So there is that, but the rest of it really is apathy. People are thinking 'it's not happening here, this isn't Texas, it's not in my back yard.' They've got their heads down, running the credit union, and it's a big job. They've got to be involved in the community, they've got to be involved regionally, at the state level. They're too busy to worry about something that's happening in Texas, that isn't happening to them."

The problem, he suggested, is that this isn't just about something happening in Texas.

"I would encourage my colleagues in the credit union movement to be more concerned about this because we are a cooperative movement, we are part of a whole, and to the degree that the cooperative movement starts getting eaten away by these mergers, we all suffer," Sebastian advised. "When these credit unions convert, they pull out of shared branching networks, ATM networks, they pull out of the leagues and trade association, they pull out of the NCUSIF, and that weakens our fund because with every credit union we lose, we lose a certain amount of diversification. This does have an impact on all of us, and to not pay attention to that is shortsighted."

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