Banks Look to Make Converts Of Credit Unions
Saturday, February 11, 2006
After more than a decade of trying unsuccessfully to roll back the credit union movement in Congress and the marketplace, the banking industry has come up with a new strategy: If you can't beat 'em, get 'em to join you.
In a small but significant number of cases, it seems to be working.
Last year in Texas, two credit unions, each with more than $1 billion in assets, converted to mutual savings banks, and another of comparable size in Michigan is seeking to convert. These transactions would bring to 26 the number of credit unions -- out of a total of about 9,000 -- that have converted in the past decade. Of those, more than half have gone on to become stockholder-owned companies -- a far cry from the cooperative movement that spawned credit unions.
The size of the recent conversions heartens bankers and alarms many in the credit union industry, both for the same reason. As low-cost competitors, credit unions have exerted downward pressure on the fees banks charge.
Some bankers envision a wave of conversions as officers, volunteer directors and some members of credit unions realize that they can make a lot of money if they switch over to a stockholder-owned institution.
"At some point, either the management or the members or both will figure out what [their credit unions] are worth, and their enlightened self-interest takes over," Richard C. Hartnack of U.S. Bancorp told an industry meeting last year.
Congress made conversion much easier with a bill passed in 1998, which, among other provisions, eliminated the authority of the National Credit Union Administration, the federal regulator, to block conversions. The measure also eased the threshold for approval of a conversion from a majority of a credit union's members to a majority of those who vote.
Some bankers and consultants involved in conversions say the switches are needed to cope with a changing marketplace.
"I would have loved to have stayed a credit union, but I couldn't do it under the [legal] constraints" on who could join her institution as a credit union, said Kay Hoveland, president and chief executive of Kaiser Federal Bank, formerly Kaiser Permanente Federal Credit Union, in California. Medical care was changing, and the institution, created to serve employees of a health care system, needed more members, she said.
Others, such as Alan D. Theriault, president of CU Financial Services, a Maine-based consulting firm that helps credit unions convert, say that as financial institutions get larger and more complex, they need more flexibility in compensation in order to attract the caliber of management they need.
Credit unions are nonprofit, tax-exempt cooperatives. They once were primarily niche players, typically serving employees of a single company.
However, membership grew sharply in the 1980s and '90s, spurred in part by a wave of bank mergers that sometimes left depositors feeling neglected and overcharged and looking for an alternative. At the same time, changes in law and regulation allowed credit unions to take in multiple groups of members and made it easier for institutions to merge.