Credit Union-to-Bank Conversions for Money?

Conversions to banks, along with the high rate of mergers and consolidation within the credit union market, interest us all. In Washington State, these changes are occurring at the highest rate in the nation. Bank conversions are emotionally charged issues, with CEOs citing reasons that include business lending restrictions, capital accumulation, and outdated or needless restriction on business operations. CU critics say these actions are profit motivated, and that all conversions to mutual structure will eventually result in a second conversion to a stock-held institution. That’s when executives have the greatest potential for personal gain. Is it really possible to make a big profit in a conversion from credit union to bank? Yes. Rainier Pacific Financial Group, formerly Rainier Pacific Community Credit Union, started trading on the NASDAQ this month. Just five weeks prior, past credit union account holders as well as employees, officers and directors were able to purchase stock in advance of trading at $10.00 per share. When the stock went public it opened at an immediate 60%+ gain. Expect other credit union leaders to notice, as well as investors and business leaders in our state. Rainier’s story has been reported in all corners of the country. Quoting the Miami Herald, “The bank originally had planned to offer a maximum of 6.9 million shares, but there was enough demand that the deal was bumped up 15 percent. Part of that demand came from `professional depositors’ -investors who seek out mutual savings banks converting (or likely to convert) to stock ownership and open accounts so they can get in on the action.” Okay, so everybody’s looking. But the WCUL Board members as elected leaders of the Washington credit union system have an obligation to consider the strategic implications of these marketplace changes. The question on the board’s agenda is “Are we going to do something about it?” But what does “it” mean? Is it the act of converting to a bank charter? Or does fixing it require fixing the reasons why the bank-charter alternative seems increasingly attractive. One implication is the League should make conversions more difficult. That process includes lobbying to make a switch to bank charter a regulatory nightmare, heaping an epitaph of disparaging commentary on CEOs involved, and ignoring the root causes of the market forces behind the issue. Numerous executives seem drawn to this path, as well as trade groups. There is simplicity in calling the converting CEOs philosophically un-pure while at the same time ignoring big shortcomings in the credit union charter. My guess is that this method is also favored by the same conspiracy theorists who want to blame all problems on orchestrated banker attacks. Still, in today’s global, deregulated, diversified and multifaceted financial system, both state and federal credit union charters are far from perfect. They are needlessly restricted, contain excessive regulatory burdens, capital accumulation is hampered, and powers in the not-for-profit financial sector lag far behind the other providers. New credit union start-ups are a practical impossibility; small CUs find growth difficult. Credit union problems do not decrease with institutional size – instead they are magnified. Mergers and conversions are becoming too common. Something is wrong. But it’s all about the money, you may be saying. Possibly. But studies point out that credit union professionals are underpaid compared to banking counterparts. Additionally, CU executives aren’t offered equity ownership in an institution they’ve grown, and often lack appropriate retirement plans after a career of distinguished service. Regulators worry about CEO pay thinking it is becoming too hard to replace execs at smaller shops ($50 million and under, or 75% of all CUs) because boards have historically underpaid CEOs – and experienced talent that can manage the fiduciary and regulatory demands will not be attracted to our business. Complicating matters, surveys show the compensation gap between credit union CEOs and bankers gets wider as CUs get bigger. For the credit union movement to succeed, it needs first-class institutions, first-class regulation and examination, a first-class deposit insurance system, and first-class CEOs as institutional leaders. Long term success of the system requires fixing the pay equity issues, to attract, employ and retain the best leaders from the pool of executives within the entire financial services sector. Long-term success for the credit union sector means not looking the other way on this issue, so that system survival and success is better assured. So it could be about money. But it is probably not about greed, since the CEO of a converting institution will not be out-earning counterparts at other banking institutions; compensation for converting CEOs has proven to be only about average for bankers. With bonuses, some could have gotten more by just changing jobs. Which brings us back again to our upcoming WCUL League Board meeting. Using an analogy, if the group were seated as board members of a medical trade association, the decision might be whether to treat the symptom, or cure the problem(s). It should be an interesting discussion. As a league CEO, I am proud of WCUL’s record in achieving one of the most progressive operating environments in the nation; with expanded powers, regulatory relief, elimination of FOM restrictions, and more. But it is seemingly not enough. There are symptoms present. Something is wrong. It is my belief there is still work to be done to improve the quality of the credit union charter. WCUL and its board, as arguably the most successful trade group in advancing a state credit union system, cannot afford to stop half-way. Nowhere else is a group as close as ours to finding the cure. By the way, for those who like to point the finger of blame, because assigning guilt is almost as good as fixing the problem: * Blame me, and my colleagues and my predecessors before me, as the trade association executives who have not brought our system along fast enough. More should/would/could have been done to not let the CU charter fall behind. There is nothing in the entire realm of contemporary banking services that can’t be done on a not-for-profit, people-first, basis. Credit union charter limitations are senseless. * Blame all the regulators who don’t/won’t/can’t act on the first sign of systemic stress, claiming they need a majority-rule mandate in order to green-light new activities that are done safely elsewhere in the financial services community.Regulators are paid by us to eliminate problems as quickly as they arise. Part of their responsibility is a real duty to maintain charter viability by keeping it up to date with the rest of the global financial marketplace. * Blame all the credit union CEOs who knowingly hold back progress by claiming, “If they do that, I’ll be taxed.” It started with “once a member-always a member will get us taxed.”, share-drafts will get us taxed, then mortgage lending and credit cards, diversified sponsor groups, CUSOs, state-charters, large FOMs, community credit unions, financial planning, trust activities, risk-based pricing, credit insurance, shared branching, business services, big CUs, alternative capital, etc., etc. Baloney. We’ll be taxed when we turn our back on our not-for-profit, people-first heritage. And finally. * Blame the board of directors of a converting credit union, who allow flipping to a bank charter because it is easier to “make the numbers” and run an organization for the benefit of the institution-rather than for the benefit of the institution’s members. Technically, it may be easier to run a bank than a credit union of equal size. So what. It’s about the economic well-being of the members, and future members. Either we commit to achieving timely improvements and a progressive credit union charter – or we agree to lock ourselves in – by making conversion to a bank impossible.