Creditunions that are growing — or want to grow — have in some cases become moreconcerned with their constricted ability to conduct business on equal footingwith banks, with the limitations on the amount of small business lending theycan do and with their lack of access to supplemental capital. "So, whenyou look at those three things, they are all related to the ability to grow andgenerate earnings on the same basis as banks, who are their primarycompetitors," Peter Duffy, managing director at Sandler O'Neill, said inan interview.
Andcredit unions that feel frustrated with one or more of those issues sometimesdecide that life as a bank might be better, and so they seek out a conversion.The latest to make such a move was Bel Air, Md.-based , which isattempting to convertto a state-chartered mutual savings bank, AmericanBanker reported April 25. If state and federal regulators approve the creditunion's application, the institution would change its name to Har-Co CommunityBank, according to the news story.
Duffysaid that not having the ability to transact on the same basis as banks is areal issue for many — but not all — credit unions. Field of membershiprestrictions can best be described as "murky," he said. For example,a state-chartered credit union in Ohio could be limited to serving threecounties but have to compete against another Ohio credit union with the abilityto market to the entire state. "That exists all over the country," hesaid.
Andcommunity banks, credit unions' primary competitors, do not suffer from thosesame customer-access restrictions. That challenge can diffuse its way throughthe entire credit union organization in many ways with the most obvious beingthat it cannot grow on the same basis as its competitors, Duffy said.
Banking,to a large degree, has become commoditized, and that is one of the fundamentalissues of the charter-change decision because institutions need to be able toreach some economy of scale in order to generate earnings. "So, theinstitution that goes to market every day with a limited customer base isseverely limited in their ability to compete," Duffy said. "Thecustomer access issue is — for many credit unions — nefarious."
Thedrawback to credit union-to-bank conversions is that they trigger federaltaxation on income. Currently, credit unions enjoy an exemption from such tax.
HAR-CO'sthoughts on the pros and cons of conversion are not known as President and CEOJames Meehan did not immediately return calls seeking comment for this story.
ButDuffy said the small businesslending issue has obvious implications for credit unions that wantto develop relationships with companies in their area. That is because of thestatutory cap on credit union business lending that sits at 12.25% of totalassets. Banks do not have that limitation. "Bank capacity is easily threetimes that," Duffy said. And that is significant because there is moremargin to be generated on small business loans than in traditional credit unionlending areas such as mortgage and auto. Duffy said some observers say autolending is a zero-profit product line.
Someof the most recent conversion activity has included Monterey, Calif.-basedMonterey CreditUnion, which withdrew its application for conversion late in 2015. Also,Brockton, Mass.-based HarborOneBank converted into a cooperative bank from a credit union inJune 2013.
DennisDollar, a credit union consultant and former NCUA chairman, said in aninterview that there have been only 35 successful credit union-to-mutualsavings bank conversions since 1995. At an average of one or two per year,Dollar said it is hardly a trend that indicates any fundamental challenge tothe viability of the credit union charter. He said history has shown that theoverwhelming majority of credit unions that become mutual savings banks onlyuse that charter as a bridge to their ultimate goal of becoming astockholder-owned, for-profit bank. "In my view, such conversions — thoughfew in number — are more a reflection of a desire in a handful of specificcases for eventual investor return than they are a negative reflection on thestrength of, or commitment to, the not-for-profit, member-owned cooperativestructure of credit unions," he said.
Still,Duffy said access to supplemental capital remains an issue for credit unionsthat cannot be ignored. Many credit unions, in fact, believe it is the onlymajor impediment of the credit union charter. Those institutions already havescale, are generating solid ROA, are growing and have a membership base thatloves them. "But organic growth and mergers are extremely limited if youcannot access supplemental capital," he said. "If your strategy is togrow, the charter for many, if not all, is extremely limiting."
Duffysaid some credit unions previously indicated that conversion was a possibilitydown the road. Increasingly, many have said they know it will eventuallyhappen, although they are not sure when.
Hesaid many credit unions have also correctly noted that charter change rules forcredit unions are significantly more complicated, costly, distracting anddifficult than the rules governing bank charter changes. Those credit unionsalso recognize that this was not Congress' intent, he said.
HAR-COattempted to convert to a bank in 2011 and received its members' approval. Itsapplication stalled at the federal bank regulator, so the institution this timearound changed from a federal to a state charter and is attempting to become astate chartered savings bank. HAR-COcould be aided by the fact that it has a low level of delinquent loans andgenerates solid income. "From a balance sheet perspective they're prettysolid," Duffy said.