Lake Michigan CU Conversion Bears Watching

Recently a banking industry trade group dangled prizes in front of bank employees who would take the time to pen an anti-credit union letter. Last month Credit Union Times learned that officials of a billion dollar credit union in Michigan want so badly to become a bank that they are conducting a lottery to help the process along. (See October 20, 2004 issue, page one.) Current credit union members who participate in the contest will have a chance to earn cash (five $1,000 awards) and merchandise (leased luxury autos) just by participating in the voting process which will determine if the CU’s charter should be converted to that of a mutual bank. Even before it becomes a bank, Lake Michigan Credit Union, at the moment a state chartered credit union located in Grand Rapids, Michigan, has apparently already picked up some of the more questionable shenanigans of the leading bank trade association, the not-for-profit, tax-exempt American Bankers Association. Both moves sound pretty desperate and just short of bribery. It seems like the credit union and its high-profile consultant, Alan Theriault, who seems to be front and center every time a credit union gets involved in changing to a bank charter, is determined to make this conversion happen no matter what it takes. What it takes is 66% of those members voting (any number at all is OK) on the charter change to approve the measure. Typically, what Theriault and company have neglected to do, is provide maximum amounts of any really credible evidence on why credit union members will be better off being bank customers. (Note the word credible.) For example, they claim that product selection, product pricing, interest rates, fees, and growth potential will all improve substantially after the conversion. First, Lake Michigan Credit Union is already a very good financial institution with very impressive numbers. Second, how can those claims be guaranteed? Answer: they can’t. Current banking industry data also doesn’t support the promise of better rates and lower fees. Banks are seldom a better deal than credit unions, even those that are large and growing rapidly (30% a year) like Lake Michigan Credit Union has been. Charter conversion advocates also neglect to point out the not insignificant impact of the institution losing its current tax-exempt status. Like other conversions, there seems to be little in this one for members. However, from the vantage point of those who really stand to gain the most, the consultant, the members of the board, and the management staff, it sounds like another sweetheart deal. It will look even more so after the credit union converts to a bank charter and later becomes a mutual holding company and issues stock. (That stock offering is projected to raise $70 million.) No wonder those behind the conversion are willing to wage a lottery to further insure that the conversion happens. Most troubling of all, however, is the fact that the new bank will, under federal law, be held to a 35% of assets limit on its consumer loans, still the highest percentage of loans at most credit unions. Do you suppose the members know that? Once again it needs to be said that members own credit unions and thus have every right to vote to convert their CU’s charter to a mutual bank charter. But members should also be fully informed on what exactly it is they are voting on, and more importantly, what exactly it will mean to them. The Michigan Credit Union League has stepped in to fill what they and other observers such as me see as an information void. This hasn’t made Theriault and crew too happy. First, they say, the league has a vested interest and is getting so involved (they even set up a Web site, memberinform.org) so they won’t lose one of the state’s largest credit unions and a dues payer. No doubt some truth here. However, a state trade group also has the responsibility to represent the best interests of its members, in this case credit unions, and by default those credit unions’ members. So can they really be faulted for jumping in and providing information that in their judgment is not provided as clear or at all elsewhere? Although much larger than previous successful and unsuccessful bank conversions, this one like the others just doesn’t seem to make much sense. All this talk about how much better former credit unions will function as banks just doesn’t wash. And the explanations about serving their communities better, needing more capital to grow faster, anticipated improved lending ability especially to businesses, wanting to serve the entire state (something Michigan law already allows for its CUs by the way), just doesn’t hold up under close scrutiny. Is what Lake Michigan Credit Union officials are doing perfectly legal? Yes. Are they following regulatory procedures? Yes. Are they disclosing future plans and even specifics such as what board members would get paid as bank directors ($200 per meeting)? Yes. Is it OK to conduct a lottery in the manner in which they are doing so? Yes. Could the bright post conversion picture they are painting actually become reality? Yes. So what’s the problem? Like previous credit union-to-bank charter conversions, alleged potential benefits to members are touted loud and long while benefits to those engineering the conversion are pooh poohed. Once again, something just doesn’t seem right from a member perspective. At the very least, all credit union officials and their management staffs, even if a charter conversion is the furthest thing from their minds, should watch closely how this one plays out. Will Lake Michigan Credit Union/Bank (choose one) turn into another Columbia Credit Union/Bank (choose CU) fiasco? Or will it slide through and eventually be forgotten like all previous credit union to bank conversions? Hard to tell at this point. But one thing is certain. It’s definitely a high risk, game of chance. Comments? Call 1-800-345-9936, Ext. 15, or Fax 561-683-8514, or E-mail [email protected].