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CU-to-bank conversions declining
MADISON, Wis. (1/14/11)--2010 was a year without a single credit union-to-bank conversion, and it arrived on the heels of two years in which only one such conversion per year occurred. News Now, sniffing a trend, decided to look closer and noted a decline in conversions since they peaked at eight conversions in 2001. Conversions of credit unions to mutual savings banks never were "in fashion," according to Credit Union National Association (CUNA) economists. "In the scheme of things, only a handful of credit unions have converted in the past 30 years," said Mike Schenk, vice president of economics and statistics at CUNA. Between 1995 and 2011 only 31 credit unions have converted. In the past 15 years, there were two "spikes" in conversions--one in 1998, which saw five credit unions convert to banks, and again in 2001, when eight converted. All other years have either three conversions a year (1999, 2000, 2004, 2006, and 2007), two conversions (in 2003), or one conversion (in 1995, 1996, 2002 and 2008 and 2009). Two previous years also saw zero conversions--in 1997 and 2005. Several factors have contributed to the 2010 zero-conversions figure and the low rate in the previous two years, and they all relate to the financial crisis that caused the recession. "'Bank' truly is a four-letter word in the current environment," Schenk told News Now. "Convincing members that for-profit banking provides a better model in the wake of the bank-induced calamity we just lived through would not only be very difficult but it has a high probability of being a career killer," he said. Credit unions facing costs related to the corporate credit union restructuring are in better shape than banks facing huge premiums for bailing out the Federal Deposit Insurance Corp. (FDIC)'s insurance fund. Schenk noted that the FDIC deposit insurance fund has a negative equity level and bankers will be paying hefty premiums to restore it to health. He added the expenses they incur to do this will greatly exceed those credit unions incur to pay for NPCU (natural person credit union) failures and corporate stabilization. "Combine that with taxation and it really makes no sense from a bottom-line perspective," Schenk added. A third factor includes what happens after a credit union converts to a mutual savings bank. "The subsequent conversion from a mutual savings bank to stock ownership now promises a relatively small possibility for personal enrichment because investor demand for bank stocks is low," Schenk said. "Furthermore, the specter of relatively low earnings, due in part to insurance premiums, in part to big regulatory changes, and in part to the bottom-line effect of possible market interest-rate increases will likely mean soft demand for bank stocks for quite some time into the future," he added. CUNA Chief Economist Bill Hampel noted two other factors possibly contributing to credit unions' lack of interest in becoming banks. "It’s not clear there is a receptive place for a converting credit union to go right now," he said. "For the past 15 years, the Office of Thrift Supervision (OTS) was very receptive to conversions considering they were responsible for an atrophying industry. [The] Dodd-Frank [financial reform legislation] closes OTS down, moving its responsibility to the Office of the Comptroller of the Currency (OCC), which is not in need of new institutions to regulate." Hampel also explained that "particularly in the last two years, OTS, OCC, and FDIC have been too busy dealing with the financial crisis to spend much energy on accepting new institutions." CUNA's assessment was backed up by a Utah-based credit union that tried to convert to a mutual savings bank charter in 2009 but decided not to. Beehive CU, based in Salt Lake City, said it decided to remain a credit union because of the turmoil in the economy and reluctance by federal regulators to approve a new bank charter in that environment. Because of that its board changed its mind about what was in the best interest of its members, its management said (News Now Jan. 22, 2009). Legislation in some states and changes in regulations have also tightened the conversion process. For example, in 2007, North Dakota and Massachusetts each passed laws specifying requirements for such a conversion (News Now Jan. 5, 2007 and April 17, 2007). On a federal level, the National Credit Union Administration made its regulations governing charter conversion requirements clearer. Also, several high profile conversions were pulled as a result of members' opposition to a conversion. Those battles resulted in the Principles for Credit Union Conversion, a policy adopted by leagues and credit unions to help educate members about their rights of disclosure and voting processes involved in conversions.


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