The Real Story on Stock Conversions from a Credit Union That's Been There, Done That

I have been reading with interest all the articles and letters (especially that of John Siefken in the March 17 issue of Credit Union Times) that have been printed recently about the greed and outright immoral character of any group that would have the audacity to convert a former credit union to a stock bank. As someone who has been through the entire process, I thought I would set the record straight with some real facts as opposed to uninformed innuendo. First of all, our original decision to convert to a mutual savings bank was the result of a sound strategic directive by a very good, dedicated board of directors not for personal gain. Each credit union has issues it must face in its planning process. Ours was, among others, having most SEGs tied to one industry (healthcare) and we saw a need to diversify. Back then, in 1997, NCUA had not yet adopted the current give everybody everything field of membership attitude so we did not have a viable community charter option. After much discussion and analysis we decided that the best option for the future of the institution and the members was conversion. That was in March 1998. Two years later we found our success at growing the institution as a mutual was starting to effect our capital position and we decided to raise capital through an IPO. Something that Mr. Siefken and others never seem to mention, and probably are not aware of, is that every mutual that converts to stock is required to establish a liquidity reserve equal to the total capital on the day of conversion. This money cannot be used to pay dividends and it is earmarked to be distributed to the members from the original mutual who still have accounts if and when the bank liquidates. So John, we were unable to “steal” our members’ capital. You can argue that these members lost the right to share in future capital growth but the truth is that a bank, just like a credit union, rarely if ever voluntarily liquidates so the point is moot. The fact is that regulators did think in advance to protect the interest of the mutual members from us “thieves”. Mr. Siefken’s other point about “CEOs and a few affluent members and their shyster friends” being enriched in the stock offering is equally uninformed. He argues that most credit union members are unwilling or financially unable to participate in the IPO. Our stock sold for $10 with a 25 share minimum so I do not think the financial burden was a big issue. On the other hand, those that chose to participate in the IPO were able to cash in on their ownership right and at the same level as the greeting officers and directors. Insiders have no more right at the IPO than any other depositor. In addition, we set our first qualification date as the date of our credit union to mutual conversion so the former credit union members had the ability to buy the entire bank if they so chose. Why some were unwilling to do so I can not address. However, because of the liquidity reserve requirement, they are no worse off than before. Those that did buy stock have seen there investment grow by 200% in three years and have the ability to actually sell their stock and cash in their ownership interest. This is something a credit union member can never do. Sure they own the institution but how can they ever manifest that ownership right other than through the liquidation of the credit union which almost never happens. As noted above the “greedy” officers and directors have no preferential position in the IPO so what we got was what we bought out of our own funds. If you take the risk, there should be some reward and we have been rewarded for our performance through appreciation of our investment. The one area where insiders do get a special treatment is in stock options. For directors, the number of options that can be awarded in not a material amount. For senior staff this can be significant but it is factored in to the overall salary and benefit package received and it is not simply a give away. Our board still does annual salary surveys and sets pay in the range of peer institutions with all benefits, including options and the ESOP (employee stock ownership plan) factored in. Just as with credit unions, salary packages naturally increase with the size of the institution. I am even bold enough to assume that at least one motivation for senior credit union executives to continually expand the credit union to broader and broader markets and thereby increase asset size by leaps and bounds is to get a bigger paycheck and better benefit package. Around here that is called human nature not greed. I wonder what the readers’ response would have been if the loaded question in your recent survey asked “Do you think the potential for individual profit is at all playing a role in the decision making process of directors and upper management of credit unions who have decided to continue to grow and expand their credit union” (my underlining). This is especially true when you consider that many credit unions are only serving a small fraction of their current membership while expanding to FOMs with hundreds of thousands of members. It appears a much easier task to just penetrate a small percentage of a very large membership than work hard on serving existing members. Either way the credit union grows and with it the paychecks of the executives. Of course, according to Mr. Siefken et. al. this could not be true because only those who convert to a bank are greedy. As I stated in the beginning I thought a few real facts may be appropriate for your readers. Perhaps the credit union movement would be better served if the senior representatives of the movement, such as Mr. Siefken and the great debater, Jim Blaine, thought more and researched their facts before opening their mouths.