The changing face of credit unions -- Page 2
By Laura Bruce • Bankrate.com

Approximately 850 federally chartered credit unions have a community charter. According to the NCUA, 96 federally chartered credit unions switched to a community charter in 2002, and more than 125 have switched in 2003.

"It gives the credit union the opportunity to have some growth," says Mary Dunn, senior vice president at the Credit Union National Association. "They have the opportunity to continue serving the current membership, but can reach out and bring in new folks to invigorate the credit union with ... their financial support."

But for the banking industry, the shift toward community charters is a disturbing trend.

"Banks have no issue with smaller credit unions," says American Bankers' Birch. "It's the ones that have community-based charters spanning several counties. We're concerned with community banks in the $100 to $200 million-in-assets range who are competing against a $2 billion credit union that's several times larger, and tax exempt, and offering a full range of financial products. There comes a point where you scratch your head and say, 'Why are you different from me?'"

If the shift to community charters disturbs bankers, the shift to mutual savings banks may someday bother the credit union industry, if it doesn't already.

Credit union constraints
As of December 2003, 29 credit unions have switched to mutual banks or applied for conversion. That's 29 since 1995. Not exactly a tidal wave, but more credit unions, especially the larger ones, are expected to explore this option as they tire of chaffing under credit union constraints.

Alan Theriault of CU Financial Services in Portland, Maine, advises credit unions that are considering converting to a mutual bank charter.

"There are capital issues. Credit unions are required to maintain 7 percent core capital ratio to be well capitalized; banks have to maintain 5 percent. In this environment when yields have plunged, it puts pressure on net interest margin. Consumers want debit cards, ATMs, convenient hours, phone, Internet. To maintain that level of service you have to leverage your institution. This puts them at a disadvantage to banks despite the fact that they have a tax subsidy."

Another constraint that banks don't have is that commercial loans, or member business loans as they're called, are limited to 12.25 percent of the credit union's total assets.

A case study
Kaiser Federal Bank in Covina, Calif., was chartered as a credit union in 1953, and was known as Kaiser Permanente Federal Credit Union until 1999, when it became a mutual savings association. Kay Hoveland is Kaiser's president and CEO.

"Our field of membership reached from Santa Clara to San Diego, about half the state of California. We were the credit union for the country's largest HMO, but we were looking to expand outside of just that group of people -- the employees of Kaiser. There were about 50,000 employees, but they were spread all over the place. It's hard to put a branch in every town, and the source of loans was diminishing.

"Our choices were we could merge with a larger credit union that had a broader field of membership, we could live like this for 10 years and die, or we could look for an alternative. If we went with a state charter, we needed brick and mortar in every area we wanted to cover.

"The mutual savings association mirrored everything a credit union did except there was no restriction on the field of membership -- and for that being lifted you paid a tax. We decided we were willing to pay a tax to live."

Since the switch, Kaiser has more than doubled its assets from $190 million to almost $500 million, according to Hoveland.

Resistance to change
Not all conversions are smooth sailing for all credit union members. At Columbia Credit Union in Vancouver, Wash., which has since converted to a state-chartered mutual bank, one of the required membership meetings concerning the conversion resulted in "raucous" arguments according to a local news report.

"We've had this happen at every conversion," says Theriault. "Less than 200 out of 60,000 came to the meeting. A couple of groups solicited people to come to the meeting -- not people in favor of it -- and people vented."

There are concerns that not all credit union members understand all the issues involved in conversion. Those issues may not only affect the institution's governance, but also its bottom line. While a credit union's board is not paid, the board of a mutual likely is paid. A year after becoming a mutual bank, the institution can switch to become a full stock bank. Stock could be issued to compensate board members and top management.

The complaints raised during the Columbia conversion prompted the Washington State Department of Financial Institutions to investigate.

Better disclosure recommended
"Columbia is the first one where we received member complaints," says director Linda Jekel. "We're in the process of doing an investigation and, in doing that, we've decided to come out with guidelines.

"We'd like to see more information on the difference between the members owning the cooperative and being a depositor in a mutual. As a member of a cooperative each member gets a vote. When it converts to a mutual, it's the board of directors that decides whether they want to convert to a stock bank."

The NCUA is also proposing regulations aimed at strengthening disclosure requirements when a credit union is considering conversion.

"We don't know that there isn't adequate notification, but we sometimes get complaints from members that they didn't know this or they didn't know that," says Cliff Northup of NCUA.

"We have proposed rules regarding disclosure. We want the membership to be as informed as possible when they make the decision. Then it's up to the members. It's a democratic organization."

Some state-chartered credit unions are also making progress when it comes to expanding fields of membership, investment options and services they can provide. Most recently, Michigan's legislature passed a modernization act that, among other things, allows its credit unions greater flexibility to expand their fields of membership, permits credit unions to provide services such as check cashing, wire transfers, money orders and traveler's checks to nonmembers, and enables credit unions to offer members small, short-term loans of up to $1,000, payable within 30 days.

Dan Clark, of Dan Clark Associates, is a credit union management specialist who says the road ahead for credit unions will get rougher.

"I don't see the bankers' association giving up on trying to beat up on credit unions. They're an easier target than their true enemies -- the big banks, insurance companies and mutual funds. Credit unions have about 3 percent of the short-term savings market. What kind of a market share is that? And it's not up very much from 100 years ago. We're a flea on an elephant."