More and More CU Leaders Concerned Greed is Motivating Bank Conversions:
Greedy Intentions: While Pro-Conversion Groups Say CUs Should Have Charter Options, CU Leaders Say Those Options Shouldn't be Exercised for Personal Gain.

ALEXANDRIA, Va. - The $7.4 billion Pentagon FCU wanted to see for itself just what kind of money credit union management and directors stand to gain in a bank charter conversion.

The CU utilized some of its contacts at Goldman Sachs and had a report done on the subject and after seeing the results Pentagon FCU CEO Frank Pollack believes that the credit union industry needs to be very concerned about what may be motivating credit unions to convert to banks.

Pollack said Pentagon in no way ever considered converting to a bank, but wanted to understand what happened to member capital and learn about the money CU management and directors could gain from a conversion. Pollack said he now fears greed is likely the motivating factor in many of the conversions. He noted Pentagon directors and management, for example, could share in some $120 million if a conversion took place, based on Goldman Sachs' data.

"Our board is committed to being a credit union. I don't think they had any idea how much money was involved. It was very eye opening, in a bad way," said Pollack.

He said if members saw in real dollars what board and management could reap from a conversion, they'd likely oppose it. Printing in a disclosure that the "board and management can gain financially from a conversion", may be legal said Pollack, but by not including the dollar amounts, members aren't getting the full picture.

Pollack, who has been in the credit union industry for 27 years, said what makes conversion to a bank fundamentally wrong is the members lose the capital they may have spent years helping the CU build.

"We are concerned about the fact that the board and management are reaping personal gain as a result of capital that was accumulated, capital that is owned by the member. That is just not right," said Pollack. "At the end of the day there's no way for the member to benefit over the long haul."

Pollack said the conversion issue has even changed his view on secondary capital. "I started out as an opponent of secondary capital, to be honest, because I'm just old fashioned. But if you're going to take a choice between converting and secondary capital, I'd favor secondary capital," said Pollack.

He said the $7.4 billion CU has been growing at a 17% clip in recent years, and maintaining its capital, so it is possible for CUs to balance growth and capital. "I just don't buy the capital reason for converting, I don't buy it."

Pollack believes NCUA's changes to PCA will help somewhat on the capital front.

He said the industry is handcuffed somewhat in its argument against initial conversion from CU to bank because the potential for gain doesn't occur when a CU converts to a mutual, but not until the next step, when it converts to a stock-owned bank. However recent news on former CUs is showing many former CU leaders seeing large windfalls post-conversion.

Pollack did say if credit unions were ever taxed, all bets are off about converting to a bank. He said if taxed, credit unions really wouldn't be credit unions any more.

Pollack, who hasn't been very public on this issue, shared his views on the bank conversion controversy last month during the annual meeting of the high-level National Credit Union Roundtable in Palm Desert, Calif.

Pollack said the Goldman Sachs' data was presented to the Pentagon Board by attorney Richard A. Schaberg, of New York-based Thacher, Proffitt & Wood, who also took part in conversion discussions during the Roundtable meeting.

"I thought Frank and his attorney gave a very clear explanation of where the money and equity goes in conversion transactions," said Tom Dorety, president/CEO of Suncoast Schools FCU in Tampa, Fla. and one of the Roundtable participants.

Like other CEOs discussing conversions, Dorety, a CUNA director, agreed with Pollack in voicing strong support for the CU charter adding that "this will be a contentious issue" in the industry for quite a while.

But unlike Jim Blaine, CEO of State Employees CU of Raleigh, he has no intention of going out on the circuit appearing at meetings of converting CUs like Community CU of Plano, Texas. Blaine works "his own style," said Dorety adding, however, he finds it disconcerting "people start ripping our leaders."

The chairman of the Roundtable, Dennis Pierce, also CEO of Community America CU in Lenexa, Kan., said CU leaders "have to be clear with their members" about the impact of conversions.

Pierce also said he found the Pollack presentation helpful "to understand how Pentagon looked at the issue and "where Pentagon is at." He also supported Pollack's contention that "if the rules change and taxation" occurs, then CUs like his would be looking seriously at converting.

Though deliberations of the Roundtable-held May 1-3 at a Palm Desert resort - are private. Pollack's observations on conversions were aired June 4 in a speech in Arizona by Gary L. Plank, president/CEO of the Arizona Credit Union System.

In a talk at the annual business meeting of the League convening in Chandler, Ariz., Plank, also a Roundtable participant, decried the conversion moves of the two Texas CUs and joined the chorus of CUNA and state League executives labeling "greed" as the prime motivator.

Plank, slated to move up next month as chairman of the World Council of Credit Unions, also called disclosure moves of the Office of Thrift Supervision as "disturbing news" maintaining the outcome of a possible clash between OTS and NCUA over which agency has authority over conversion rulemaking would likely wind up in court.

"Lawsuits will settle all that," forecast Plank adding that in the meantime League managers like himself have an obligation to protect the industry as well as ensure its growth but conversions loom as a negative because of self-serving forces.

"Our job," Plank told the Arizona audience is to preserve and protect the interest of the CU system "and your job is to serve the members."

-pgentile@cutimes.com Senior Correspondent Jim Rubenstein contributed to this story.