The pace of credit unions converting to mutual savings banks has slowed considerably in recent years, largely because a number of credit unions that wanted to switch charters gave up after running into roadblocks put up by their members or their regulator.
But industry experts say that a confluence of events brought on by the mortgage market meltdown, most notably the multi-billion-dollar bailout of the nation's corporate credit unions, could be setting the stage for a surge of conversion applications this year.
Alan Theriault, a Portland, Maine, consultant who helps guide credit unions through the conversion process, estimates that about 25 of them are looking "in a very serious way" at switching to savings bank charters, including several that have more than $1 billion of assets.
That's significant, considering that only eight credit unions have made the switch since 2004, and only three had more than $1 billion of total assets.
Washington attorney Richard Garabedian, says that among credit unions he represents, the number looking into changing charters is roughly twice what it was this time last year.
Theriault says that, above all, the cost of recapitalizing the corporate credit unions, which have taken massive writedowns on investments in mortgage-backed securities, is driving the increased interest in conversions. Industry executives are so furious that individual credit unions are being forced to rescue the corporates, Theriault says, that some who had been on the fence about conversions could be pushed into action. The recapitalization plan will collectively cost credit unions at least $5.9 billion, and the National Credit Union Administration has said the price tag could rise to as much as $16 billion.
"NCUA is asking essentially all the credit unions to chip in to bail out the corporate network," Theriault says.
Credit union officials are particularly upset with the NCUA's March 20 decision to seize the nation's two largest corporates, U.S. Central Federal Credit Union and WesCorp Federal Credit Union. So upset, in fact, that one of the two national trade groups, Credit Union National Association, briefly threatened to sue the NCUA unless it made public the report the agency used as the basis of the takeovers, which added at least $1.2 billion to the over all cost of rescuing the corporates.
In a letter to the NCUA, CUNA's chief executive, Daniel Mica, said that the group's members "have lost confidence and trust in their regulator and feel that our request for additional data, information, communication and cooperation is being ignored."
Beyond the outrage over the bailout, some credit unions may be looking to convert because they see a window of opportunity.
The NCUA has long been viewed as a chief obstacle to so-called "charter choice," but observers say it is too preoccupied with saving the corporates to devote much energy and resources to challenging conversions.
By law, the NCUA can't reject a credit union's application, but it can force an institution that has already won members' approval to switch to hold a new vote. Indeed, several credit unions in recent years have withdrawn conversion applications after run-ins with the NCUA over the voting process.
"Credit unions had almost stopped trying [to convert] because it is so expensive and so difficult to get it through the NCUA," says Lee Bettis, a former credit union executive who now heads a group that advocates for charter choice. (The NCUA did not return calls for comment.) Also, a group organized in Raleigh, N.C., for the purpose of blocking credit union conversion plans appears to have been weakened by the mortgage crisis, according to sources. The group, the National Center for Member Trust, has successfully thwarted several attempted conversions by rallying members to vote against switching to thrift charters. But its war chest could be running low because some of its primary backers, which include several of the nation's largest credit unions, are reeling from losses on real estate loans.
Fred Becker, chief executive of the National Association of Federal Credit Unions, says that some members are frustrated with the cost of the rescue, as well as the general state of the economy. But, he says, "while there's an emotional reaction, over time as people sit back and look at this and think of it from a long-term strategic position, it doesn't make a lot of sense" to convert.
Credit unions' biggest competitive advantage over banks, of course, is that they don't pay federal taxes, and they can pass the savings on to members in the form of higher interest rates on deposits and lower rates on loans. Bankers view this as a huge advantage, says Keith Leggett, senior economist at the American Bankers Association.
But there are also some distinct disadvantages to credit union charters, including restrictions on business lending and limited options for raising capital.
One of the most vocal opponents of conversions is Wendell "Bucky" Sebastian, the CEO of GTE Federal Credit Union in Tampa who also heads the National Center for Member Trust.
Sebastian, whose credit union lost $27.5 million last year and recently agreed to merge with another Tampa credit union, says that while credit union executives and boards may cite the restrictions on business lending and raising capital as reasons for converting, their real motivation is personal enrichment.
Credit unions that convert to mutual thrifts often later go public, resulting in large paydays for those that can most afford to get in on the public offering - executives and directors - Sebastian says.
"Not one of [those previous conversions] would've taken place," if the profits went to the depositors and not officers and directors.
Yet, of the 34 credit unions that have converted since 1995, seven have remained mutual thrifts, according to Theriault's CU Financial Services. (The rest either later went public or merged with other institutions.) Also, if directors and officers are only in it for personal gain, then now is not a good time to consider converting, since there is little investor demand for thrift IPOs these days.
Garabedian, a partner at Luse Gorman Pomerenk & Schick, says that conversion critics are ignoring the fact that there are legitimate business reasons for converting. Chief among them: "The credit union industry as a whole has a negative net-interest margin, the banking industry does not," he says.
Still, he adds, even if a credit union wants to convert, approval is hardly guaranteed. Earlier this year, a Utah credit union whose conversion plan was approved by the NCUA was rejected by banking regulators because its financial condition had been deteriorating. "If you're weak, there's no way [a bank regulator] is going to take you," Garabedian says.