Switching to a Bank Just Became a Lot Harder

The close membership vote to convert $600 million asset Columbia Credit Union to a mutual bank, coupled with the announced intentions of NCUA Chairman Dennis Dollar to improve member disclosure information, represents a turning point in CU to bank charter conversions. The less than two dozen credit unions that have jumped ship since 1995 should be glad they made the move when they did. From this day forward it will be a lot more difficult to get necessary approvals to abandon a credit union charter, both from members and NCUA. Not that it was exactly a piece of cake by credit union CEOs, their boards, and their specialized consultants before. From the day that the first conversion was announced, credit union loyalists never bought into the various reasons cited for conversions advanced by those credit unions that apparently only saw a brighter future (or a future at all) as a bank. Most credit union observers were convinced initially, and are now more so, that the primary reason that the controversial conversions were being undertaken was mostly for personal enrichment of the credit union board and management staff. They did not for a moment accept the argument that any such conversion was undertaken solely to benefit credit union members, especially in the long term. On the other hand, conversion opponents had to admit when pressed that every credit union belongs solely to its members. Thus it is a membership decision alone that can make a conversion happen. If members voted to change charters, what was wrong with that? For one thing, there was always that nagging feeling that members didn’t really know what they were voting for. When one converted CEO heard that comment he fired back, “Do you think my members are stupid and don’t know what they are voting for?” Since his CU’s conversion, one of the first, the answer to his question has become rather clear. No, members are not stupid, but it sure does appear in hindsight that they were not as informed as he would have one believe. Also, most likely they were not all that sure exactly what would be the consequences of their affirmative vote on either the CU itself or their stake in it. Because of the tightened NCUA disclosure requirements and the vocal membership challenge to those who would convert Columbia Credit Union, it is safe to say those days are gone. With only a sketchy knowledge of what happened to those handful of credit unions that became banks, members of Columbia who were being asked to sprinkle holy water on the conversion proposal. However, unlike their predecessors, Columbia Credit Union members did not roll over and play dead. At a two and one-half-hour rather heated meeting, only three of the nearly 200 persons who turned out spoke in favor of converting while 20 voiced strong objections. When the votes were finally tallied, 52% said let’s do it with 48% saying no. Those percentages represent 4,821 yes votes and 4,407 no votes, a victory margin of only 414 votes. Technically that’s a win and gives permission for the CEO, management staff, and board to proceed to convert effective January 1, 2004 an action they intend to take. In reality, it is not a win at all. When a nine-person credit union board votes on a controversial proposal and it comes in at five to four, the smart chairman and CEO will call for a motion to table the matter until another day. If they don’t, it will come back to haunt them just like the Columbia CU vote will if they are misguided enough to proceed. If Columbia Credit Union’s leadership decides to still rush to convert on the basis of such a slim victory margin, the CEO and the entire board are putting themselves at serious risk at some point in the process. One more time, members own the credit union. Members elect (and dump) boards. Boards hire (and fire) CEOs. Where is the mandate to convert? From this point forward, converting a credit union charter to a bank charter will be much more difficult if not impossible. The Columbia Credit Union conversion will become the poster child to show to members of any other credit union asked to vote to convert. Other credit unions even toying with the conversion idea can expect to see the Columbia Credit Union experience as a reason not to do it. And that scenario is still playing out. Keep in mind that another very recent high-profile credit union-to-bank to stock conversion just took place up the road in which the former credit union management and board did very well financially. It is a certainty that members will be informed who eventually receives what benefits if the Columbia CU conversion takes place. Meanwhile, holes continue to be shot in reasons given for converting. For example, the argument that the credit union needed a higher cap for making member business loans has been exposed as bogus. The CU already applied and received state regulatory permission for a higher cap (from 12.5% to 20%) while still a credit union. Final point: With all the improvements in the federal charter and many state charters as well, there is less reason now than ever for a credit union to convert to a bank. Thanks to the leadership of NCUA’s Dennis Dollar and many state regulators, credit unions can serve the financial needs of members better as a credit union than as a bank. Compare the stats! The numbers of converts pale in comparison to those of the credit unions they left behind. Those seeking conversions to bank charters need to resign from their credit union and either go to work for a bank or start their own bank from scratch. Comments? Call 1-800-345-9936, Ext. 15, or Fax 561-683-8514, or E-mail [email protected].