The Conversion Myths
Conversion proposals usually recycle the same eight arguments.
Here are the conversion myths:
- We need to convert to make more business loans.
- We need to convert to expand access to new members.
- We need to convert for more capital.
- We should convert in order to grow faster.
- We need to convert to open new branches.
- We don't believe a new tax of 34-45% will lead to worse rates.
- A mutual bank is basically the same as a credit union.
- We will convert to mutual holding company, not a stock bank.
Claim 1: We need to convert to make more business loans.
Most credit unions are limited to holding 12.25% of their assets in business loans.
Most mutual banks are limited to 20%.
The Conversion "Experts"
The same few consultants and attorneys have managed most credit
union conversions. In many cases, they approached the credit
union's management with the conversion proposal.
Learn more.
Truth: Credit unions are not prevented from lending by the
business loan cap.
If a credit union reaches the maximum amount of business loans it is allowed to hold, it
does not need to stop making business loans. It can continue making those loans and selling
them to other credit unions for a profit. However, most credit unions making this argument
are well below the 12.25% limit. Furthermore, becoming a bank creates additional
restrictions on business lending and raises the limit to just 20%.
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Claim 2: We need to convert to expand access to new members.
A credit union's membership is limited to those of a set community. If we become a bank,
we can reach more customers.
Truth: Most credit unions already have access to many potential customers. Becoming
a bank will probably not benefit current or potential new members.
Most credit unions today have wide fields of membership. Credit unions attempting to convert often
have many potential members still available within the community they were chartered to serve.
For example, Beehive Credit Union and First Priority Credit Union have both claimed the need to
reach outside their membership limits, but at that time served only 2.19% and 0.31% of their
potential members. Nationally, the credit union average is 24.8%.
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New members will probably benefit little from access to yet another bank, while the current members
will probably not benefit from losing their credit union.
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Claim 3: We need to convert for more capital.
A mutual bank is required to keep 5% of their assets as available capital rather than loans,
which is slightly lower than a credit union's 7% requirement. Issuing stock can generate
significant new capital.
Truth: Capital raised by selling stock comes from selling the members'
ownership without fully compensating them. New capital at the cost of lost ownership and worse
rates and fees does not benefit members.
Even prior to a stock sale, the 2% capital advantage of a mutual bank comes along with a 34-45%
tax on income. This may force the former credit union to choose between losing money or charging
worse rates and fees. Credit unions using this argument are generally well above the 7% minimum
capital requirement anyway.
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Claim 4: We need to convert in order to grow faster.
By using more capital and reaching new members, conversion to a bank could allow our credit
union to grow faster.
Truth: If conversion allows a credit union to grow faster,
but causes rates and fees to get worse and allows management to appropriate the members'
ownership, that is not a success.
Unlike a bank, a credit union's mission is not to generate profits or even to grow. It is
to serve members with the best rates, fees, and services possible.
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Claim 5: Converting will allow us to open new branches.
Becoming a bank would allow a credit union to open branches outside of the community it was
chartered to serve. Credit unions are limited in the amount of money they can spend on branches.
Truth: Credit unions are not prevented in opening new branches
by these limits.
Credit unions can open unlimited branches by leasing property, and are able to share branches
with other credit unions, which mutual banks are not. If a credit union has reached the
"fixed asset" cap and wants to
own new branches, it applies for permission to do so.
Permission should be granted if the credit union can demonstrate that exceeding the limit on real
estate is in the best interests of members. However, most credit unions using this argument are
well below the fixed asset limit anyway.
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Claim 6: We don't believe a new income tax of 34-45% will lead to
worse rates.
Truth: Studies show that credit unions that have converted now
charge worse rates.5
If costs increase—and paying taxes is a real cost—a credit union has two options: a) earn less
money, or b) charge worse rates and fees. The mutual charter offers very little that could
generate enough income to make up for its tax cost. (More on
conversion and rates.)
Why isn't the credit union talking about offering better rates?
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Claim 7: A mutual is basically the same as a credit union.
Truth: There are many important differences, and converted credit
unions aren't likely to stay as mutuals anyway.
According to a study by the University of Wisconsin-Whitewater, mutual bank status "is
simply a stage. The credit union that converts to a mutual is simply creating the device
through which it can issue an IPO and become a commercial bank."
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Some differences prior to a mutual bank to stock bank conversion:
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Claim 8: We will convert to a mutual holding company, not a stock
bank.
A mutual holding company is the best of both worlds: members keep their ownership, and the
institution has access to more capital.
Truth: A mutual holding company is the best of both worlds—
for the board of directors. They may even get paid twice.
By converting to a mutual holding company, directors may enjoy all the financial gains of a stock
bank conversion, and could be paid two salaries—one as directors of the mutual holding company,
and another as directors of the stock bank that the holding company owns. On top of that, they
may escape accountability to anyone: Directors can’t be voted out by their shareholders because
less than half of the ownership is in stock. It is unlikely that mutual owners are able to vote
them out either because running proxies may allow the directors to control a majority of the votes.
For members, the conversion can be just as bad. Rates are likely to get worse, and ownership of
a mutual holding company is essentially worthless. It offers neither the dividends and liquidity
of stock ownership, nor the better interest rates and lower fees a credit union provides.
7 This
article
explains why mutual holding companies are "a safe haven for insider self-enrichment."
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For more pro-conversion information, see the
website
of conversion consultant Alan Theriault.
