The Conversion Myths

Conversion proposals usually recycle the same eight arguments.

Here are the conversion myths:
  1. We need to convert to make more business loans.
  2. We need to convert to expand access to new members.
  3. We need to convert for more capital.
  4. We should convert in order to grow faster.
  5. We need to convert to open new branches.
  6. We don't believe a new tax of 34-45% will lead to worse rates.
  7. A mutual bank is basically the same as a credit union.
  8. 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%.

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%.1,2

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.4

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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.

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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."6

Some differences prior to a mutual bank to stock bank conversion:
  Credit Unions Mutual Banks
Board of Director pay: Usually volunteer by law. Directors generally paid.
Tax status: Not-for-profit, tax exempt. For-profit, taxed.
Governance: Democratic, one-member-one-vote. Usually one-dollar-one-vote.
Running Proxies: Not Permitted. Permitted. May effectively disenfranchise members.
Lending advantages: Able to hold more consumer and car loans. Some advantages in business lending.

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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

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  1. NCUA Financial Performance Reports for Beehive Credit Union and First Priority Credit Union, May 31, 2006
  2. Beehive Credit Union, Community Credit Union of Lynn, First Basin Credit Union, and First Priority Credit Union. Data from NCUA Financial Performance Reports.
  3. NCUA Financial Performance Report, First Basin Credit Union, May 31, 2006. Assumes average business loan size remains the same after conversion.
  4. 34% Federal Corporate Income Tax for businesses with $300,000 to $10 million in income ("2006 Instruction for Forms 1120 and 1120a," available at, plus state taxes ranging up to 10.5% in MA and 10.84% in CA.
  5. Heinrich and Kashian, Credit Union to Mutual Conversion: Do Rates Diverge? University of Wisconsin-Whitewater, 2006.
  6. Kashian, Russ. "Study indicates converted credit unions will issue IPO eight years after mutualizing." University of Wisconsin at Whitewater, 2007.
  7. 12CFR575.11