Though the National Credit Union Administration has acted twice in 11 months to make becoming a bank more difficult, some fast-growing credit unions see little alternative and have abandoned the charter or tried to.
Earlier this month the $1.4 billion-asset Community Credit Union in Plano, Tex., became the largest credit union ever to seek bank status.
Gary Base, Community's president and chief executive, said the state-chartered company was "excited about the opportunities" it would have as a bank, but he declined to discuss the reasons behind the planned conversion.
Several observers, however, said Community faces the same dilemma that has motivated other large credit unions to opt for a bank charter: its growth rate threatens to outstrip its capacity to raise capital.
Community, which serves dozens of cities and towns in the Dallas area and is an active business lender, has more than doubled its asset size since 1998. Trouble is, at the end of September its ratio of capital to assets stood at 7.7%, uncomfortably close to the 7% threshold credit unions must stay above to be considered well capitalized.
The only way credit unions can add capital is through retained earnings. Banks, by contrast, can issue debt or sell shares when they need large infusions of capital, and they are not required to hold as much as credit unions. A thrift can remain adequately capitalized with a capital ratio as low as 4%.
And since credit unions are nonprofit cooperatives, the only bank charter open to them initially is the mutual thrift charter. Like credit unions, which are owned by their members, mutual thrifts are owned by their depositors.
In that context, the allure of a conversion is obvious. If Community could use its capital under the looser rules that apply to thrifts, it could become much larger.
"What … [Mr. Base] has recognized is that Community has grown rapidly and substantially, to the point where it is constrained" by the credit union industry's capital regulations, said Stephen Y. Scurlock, the executive vice president of the Independent Bankers Association of Texas.
Richard L. Ensweiler, the Texas Credit Union League's president and CEO, said fast-growing credit unions like Community have been hamstrung by a provision in the Credit Union Membership Access Act of 1998. Though generally favorable to the industry, the law established the 7% capital threshold and required the NCUA to take regulatory action against credit unions whose capital ratio dips below it.
Mr. Ensweiler, who is also the chairman of the Credit Union National Association, said the industry's allies in Congress plan to introduce legislation soon that would create risk-weighted capital ratios for credit unions, much like the ones banks employ. But he acknowledged little can be done now to change Mr. Base's mind.
"I'm disappointed that their business planning took them to a point where they felt they needed to switch charters to meet their goals," Mr. Ensweiler said.
Community, which announced its plan Jan. 4, is the second Texas credit union to pursue a conversion. The $182 million-asset Share Plus Credit Union (also of Plano) announced its conversion plans in December 2003 and became Share Plus Federal Bank in October.
Mr. Ensweiler said that more Texas credit unions are likely to look at the conversion option, and that the Texas Credit Union League has created a commission to study the issue and determine how the league should respond.
At the federal level, the NCUA has been openly antagonistic toward the idea of credit unions converting to banks. It lacks authority to prevent them from seeking a bank charter, but it has the power to regulate the all-important member vote that must be held before any conversion can take place, and it appears intent on using that power to the hilt.
The agency enacted new rules in February 2004 and again last month on how an institution's members must vote, how their ballots must be counted, and what disclosures must be made before the voting begins.
At the same time, the NCUA is supporting legislation in Congress stipulating that no vote would count unless at least 20% of an institution's members participate. Right now there is no minimum.
Conversions have continued despite the NCUA's opposition - there were three in 2004 - but the evidence suggests that the regulator's stance has had a chilling effect on bids by bigger institutions.
Since 2001 only one credit union with more than $250 million of assets has succeeded in becoming a bank, the $250 million-asset Washington's Credit Union of Lynnwood, Wash., which became 1st Security Bank of Washington in March 2004. Two other big institutions' attempts to switch charters failed.
Three weeks before Community announced its conversion plan, members of the $1.1 billion-asset Lake Michigan Credit Union rejected the Grand Rapids outfit's bid to become a bank.
Columbia Community Credit Union in Vancouver, Wash., won its vote in November 2003, but the NCUA invalidated it last January after questions were raised about its timing and about information management provided to members before the balloting. Less than two weeks later the $660 million-asset company dropped its conversion bid.
Robert L. Freedman, a Washington attorney representing Community Credit Union in its conversion effort, said it has one thing going for it that Lake Michigan did not. Texas requires only a majority vote for a conversion to be successful; Michigan credit unions need a two-thirds supermajority. In Lake Michigan's case 60% of the 35,422 members who voted approved the conversion plan.
"There's never been a conversion that did not win a majority of the votes," Mr. Freedman said.
