Banks Look to Make Converts Of Credit Unions

Today, more than 86 million Americans belong to credit unions, and, though they remain dwarfed by the largest banks, some credit unions are much larger than before.

But that growth also has made conversion more inviting for management.

This is how it benefits managers, according to a scenario sketched out a few years ago by CU Financial Services: If a credit union with $50 million in capital converts to a stock bank, directors and management would be allowed to share a reserve equal to 4 percent of the stock in the initial public offering.

If the IPO raises $100 million, the directors would get $2 million worth of stock to divide among themselves -- $400,000 each for a five-member board. With successful management, "a two or three fold increase to the $1.2 million range for each director is not out of the question," CU Financial said. Managers might also expect additional stock compensation that "could lead to a $10 million plus ownership stake for a capable CEO," the consulting firm said.

And, it warned, "if the conversion is not made during the current [CEO's] tenure, the next CEO in charge may very well realize the value."

Credit union industry officials contend that personal financial gain, rather than the best interests of members, is spurring conversions. Members may also make money off the stock if their credit union is converted, but only if they have enough money to buy it and recognize the potential.

The Credit Union National Association, an industry group, notes that several executives have realized multimillion-dollar rewards following conversions to banks, in some cases 10 to 20 times their annual pay as credit union chief executives.

The banking industry has a strategy to "contain and convert" credit unions, said CUNA head Dan Mica, and "what they are trying to do is play with the minds of our CEOs" by suggesting that if they do not convert, their successors will -- and collect the benefits. Also helping press the case for conversion is a small group of lawyers and consultants who not only encourage the process but have made a business of helping credit unions through it, he said.

Bankers say that their only goals are to make sure credit unions stay within the rules and stick to their historical mission of serving small groups and that credit union members who want their institution to convert to a bank should have a chance to do that.

They say many credit unions not only have outgrown the limited role that originally justified their tax-exempt status but also have expanded beyond what applicable laws permit. For these institutions, conversion to a bank is the appropriate move, they say.

"Our view is that people ought to follow the law, and a windfall for insiders ought not to be an issue that drives" conversions, said Ed Yingling, president and chief executive of the American Bankers Association.

The Coalition for Credit Union Charter Options, a group formed two years ago "to represent the interests of credit unions that want to preserve charter choice," calls credit union industry officials' criticism of insider profits "moralistic posturing about greed."