What's Really Driving Those CHARTER CHANGES
As controversy surrounds the conversion attempt by the latest credit union seeking to become a bank-Columbia Credit Union-the larger question remains what is really driving these decisions?
The most common reasons soon-to-be-banks cite is to escape restrictions under which credit unions must operate, including field of membership requirements, the cap on member business lending, and secondary capital.
Two consultants who have worked with credit unions contemplating the conversion option and/or which have already converted, said there are other reasons, as well.
"For some, their earnings just couldn't keep up with their asset growth," said Richard Garabedian, an attorney who has worked on a number of credit union conversions and who is managing shareholder of Jenkens & Gilchrist's Washington office. "I've been involved in three that raised capital by converting. They like that they can still be a mutual institution and also raise capital. It's inevitable that we will see more conversions."
Conversion consultant Alan Theriault of Portland, Maine-based CU Financial Services agreed "What has moved to the forefront is the need for capital. In the past, [converting] was about the need to enhance products and services, and there's still some interest in that."
It is that retention of some semblance of member control that is often used in persuading members to vote in favor of a conversion to a mutual bank charter. But critics note that the mutual bank charter status is often only a temporary stage, and that these same institutions in short order seek to convert to stock-issuing institutions. Not only does this demutualize the institution, but it has raised the hackles of some credit union loyalists who question whether there might have been some ulterior motives behind the initial credit union conversion in the first place.
"There probably are some that had [a conversion to a stock-issuing bank] in mind all along, but that doesn't necessarily mean that [the board members] were putting their own interests before that of the institution or the members'," Garabedian said. "I tell people that if they are thinking about converting in order to gain wealth, then that's a breach of your fiduciary duty."
But the fact is, converting to a bank can and does put the board and senior management in a position to cash in by virtue of having the right to purchase stock in an initial public offering, and then watching that stock appreciate.
"It's disturbing, this marketing of the greed factor," Garabedian opined. "Conversion is supposed to be a strategic option for credit unions. It was never supposed to be about cashing in."
The question of motives and whether it really is in the best interest of credit union members to ditch the CU charter is a thorny one. Some credit unions looking to convert have suggested that the choice was to continue on as a credit union and continue stagnating to the point that there was no longer an institution to serve the members or to convert to a different charter.
And indeed, that is exactly why CUNA, for example, doesn't advocate eliminating the ability to convert altogether. "It's like an insurance policy, so that if the legislative or regulatory environment were to become such that a credit union couldn't continue to serve its members, they could convert to a different institution," explained CUNA Economist Bill Hampel. "It's like an escape hatch in case of some future crisis."
The rub, insisted Hampel, is that such a crisis doesn't currently exist within credit unions. "The current situation is very far from that, and it's almost impossible in today's environment to dream up a scenario where members are better served by changing charters," Hampel suggested. "It's just not necessary now."
"Necessary" or not, there are more to come, with some insiders suggesting a veritable wave of conversions on the horizon. While both Garabedian and Theriault said they are currently working with credit union clients that are considering converting to a bank, neither of them were forecasting a major trend toward conversion.
NCUA Chairman Dennis Dollar agreed that the relatively small number of conversions already out there couldn't really be called a trend, but he suggested there is a trend worthy of concern.
"If there is a trend, it's not that a large number of credit unions have converted, but it's the number of those that have converted that are now going public or have merged with a stockholder-owned bank," he observed. "And even if we aren't in for a wave of conversions, I do believe that conversion is beginning to raise itself as an issue within the credit union community that does deserve very significant attention. The argument [supporting conversion] is often 'you still are a mutual institution, you still have ownership rights.' But the untold story is that those membership rights can be taken away with just one more vote, and in most cases, those votes will be weighted based on the amount of money on deposit, not one member, one vote. So, many members will see their voting rights diluted."
So, while there may be no tsunami of conversions on the horizon, there are more on the way, and it's not just credit union officials questioning why-in some cases, it's the members themselves.
"Unfortunately, we usually don't get complaints until after the vote and after the conversion," Dollar observed. "Members-or I should say former members-come to us and say, 'I had no idea my credit union would ultimately become a stock institution. I thought we would just have a different form of mutual institution.' And of course, by that time, the credit union is long since gone from our jurisdiction."
The Role of Former Bankers
Another driver of conversions may be the changing make-up of credit union leadership.
"You see a lot of former bankers at the helm of these credit unions," said Garabedian. "They are familiar with and comfortable with operating in a bank environment. We're seeing more credit unions hiring former bankers. That's an element that can lead to a bit more conversions. Having a former banker on the payroll does help in the conversion process."
Wayne Langei, CEO of Whatcom Educational CU, Bellingham, Wash., agreed, but took that idea one step further. "When you look at who is converting, at least here in Washington, many of them are people who worked for banks and never bought into the credit union philosophy in the first place," he commented. "It's the board's mistake for hiring them."
But if it is a mistake, it's one that is tempting to make-both in terms of the initial decision to hire a former banker as well as the decision to convert to a bank down the road.
During a recent CUES meeting, Theriault was asked by a credit union CEO if conversions would occur if there were not financial motives for management and the board. Theriault responded by saying, "I don't know if I know the answer to that. I think conversions are driven by marketplace forces."
While the credit unions that have converted or are currently seeking to convert insist their reasons have more to do with serving the member well and nothing to do with the potential for personal gain, some critics have suggested that all the other reasons are something of a red herring.
"A credit union doesn't have to make more commercial loans. A credit union doesn't have to grow that fast," said Langei. "These aren't credit unions that are in dire financial straits that have to convert. They just want to be banks, period. You have to wonder why."
Washington CU League CEO John Annaloro has similar questions, noting that in Washington-which he pointed out has a very credit union-friendly regulatory environment-the credit unions that have converted were all in sound financial shape. "The CEOs of the credit unions that have converted represent some of the best leaders out there," Annaloro said. "This represents a tremendous loss of assets and talent."
CUNA Economist Bill Hampel suggested another possible answer. "Members are going to lose out when a credit union converts. A credit union is its members. The board and management are supposed to be acting for the benefit of members," he said. "Credit union charters do need to be enhanced so no one can make the argument that members would be better off as bank customers. But what the situation in Washington shows is that some credit unions may be converting for the best interest of the insiders, not for the best interests of the membership as a whole."