Tiny Caney Fork Cooperative Credit Union is close to making history.

The $300,000-asset credit union in McMinnville, Tenn., recently applied to become the first credit union to merge with a savings bank - $184 million-asset Beacon Federal Mutual Savings Association. Beacon Federal, which was itself a credit union until it converted to a thrift charter last July 1, is headquartered in East Syracuse, N.Y., but it maintains an office near McMinnville, in Smartt, Tenn.

On June 6, the National Credit Union Administration approved a set of merger procedures for Caney Fork Cooperative to follow. Its members are expected to vote this summer, and if they approve, the deal will go forward.

Don McBee, Caney Fork's president, said he has told its 300 members that merging with Beacon Federal is the only alternative the credit union has to liquidation.

"Over the years, our older members took their money out," he said. "They were interested in investments" that Caney Fork does not offer. "Younger members do not want to put any money in, they just want to borrow. At the rate we are going, we will be defunct in three or four years."

With its unprecedented merger application, Caney Fork would indirectly join the 11 credit unions that have obtained mutual savings bank charters in the past five years. On Sept. 1, 1995, what is now $98 million-asset Lusitania Savings Bank of Newark, N.J., became the first. Nine have converted in the past two years, and four have applications pending with the Office of Thrift Supervision.

Alan D. Theriault, president of CU Financial Services, a Portland, Maine, consulting firm that advises credit unions, said he thinks the number of mutual savings bank conversions will continue to climb but slowly.

"I think a lot of credit unions feel they will have more credibility as banks, but it is a big decision," said Mr. Theriault. "The taxation issue has to be managed."

By converting, a credit union loses its tax exemption. But it also sheds strict limits on commercial lending, and for many credit union executives, that is an increasingly attractive tradeoff.

Mr. Theriault cited studies predicting that as many as 50% of credit union shareholders will be self-employed by 2012, making it likely that credit unions will face growing pressure to make more business loans or risk losing customers to banks.

As things stand now, though, it is difficult for a credit union to boost its rate of commercial lending. The law caps a credit union's business loans at the lesser of 1.75 times its net worth or 12.25% of its total assets. These limits mean credit unions that engage in commercial lending "will continually have to put the brakes on and rein in their growth," said Mr. Theriault.

Though the number of conversions will remain small, Mr. Theriault said, they will have a significant impact because large credit unions - the ones doing most of the commercial lending by credit unions now - are the most likely to convert. Two of the four credit unions with conversion applications pending have more than $300 million of assets.

Credit union officials, for their part, said the recent spate of conversions is not large enough to worry them.

"The number has been so small, it is hard to say there is even a trend," said Fred R. Becker Jr., president of the National Association of Federal Credit Unions. Eleven credit unions out of more than 10,600 "does not even qualify as a statistical sample," he said.

Credit union officials also pointed to IGA Federal Savings Bank in Philadelphia, which converted on July 1, 1998, and became a publicly traded company last October. Shortly after IGA's initial public offering, other institutional investors began pressuring its parent company to sell.

Both Mr. Becker and Elizabeth Wirick, a spokeswoman for the National Credit Union Administration, said commercial lending limits hurt credit unions. "We have identified [the limit] as something that needs to be fixed," said Mr. Becker. He said he has suggested eliminating the commercial lending limit as part of a package of proposed reforms to the federal credit union charter.

The National Credit Union Administration "agrees totally that these limits are restrictive [and] argued against them" in 1998, when Congress last amended credit union law, said Ms. Wirick.

Banking trade groups adamantly oppose any loosening of the commercial lending limits. Letting credit unions make business loans destroys any vestige of the "special status that differentiates them from banks," said Robert Schmermund, director of communications for America's Community Bankers, the thrift trade group.

"If credit unions want to act like banks, they should go ahead and convert," he said.

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