No Mr. Moltzan, Members are Hurt When CUs Convert to Banks, and oh by the way, Insiders do Indeed Profit
After reading the lengthy, well-written treatise by Herb Moltzan, the President/ CEO of BUCS Federal Bank, formerly BUCS Federal Credit Union published in the July 13 issue of Credit Union Times, in which he argues that credit union members don't get hurt and insiders don't get rich when their credit unions convert to a bank, I was immediately struck by what was not said. Although I am no longer active in credit unions, after a 40-year career as a credit union executive, I believe that I can make a few valid points that counter Mr. Moltzan's arguments. Please note that my references to "bank" relates to bank holding companies and what Mr. Moltzan refers to as straight stock holding companies because most of the credit union-to-bank conversions wind up in those categories. One category of losses that hurt members relates to the cost of the conversion itself. It is now very clear that the cost of legal fees, staff time, marketing related expenses, printing and mailing of notices and ballots, and the cost of an outside CPA firm to tally the ballots and certify the results is very substantial. Then there is the extended added cost of federal and state income taxes plus the possibility of added cost of federal deposit insurance and examiner fees above existing costs. Also the likely cost of compensation to directors can't be overlooked nor can the fact that bank executives typically are paid more both directly and indirectly through stock options and perks than credit union executives. Members are hurt because the money spent on all of these things and possibly others, could be used to allow for lower interest rates for loans, lower fees, higher dividend rates for share deposits, and improved service. Ideally a combination of all four categories would benefit all of a credit union's members. The greatest loss of all would clearly be the loss of all of the credit union's assets and capital upon completion of the conversion. The loss is direct since every member is an owner or stakeholder of those assets and capital. Ownership is transferred to the investors who purchased the stock, which has a good chance to appreciate rapidly since the assets and capital were basically free. It should be noted or remembered that when a group of investors set out to form a bank a very substantial amount of money must be raised up front for required capital, physical facilities, furniture, equipment, marketing, and the recruiting and training of a staff. No funds are needed for these things when a bank is formed by simply commandeering the assets and capital of a credit union by convincing its members that they will somehow benefit if they approve the conversion. This has been done in the past through inadequate or incomplete disclosures regarding how members will be impacted and what might be described as sales puffery. It appears that in some instances members are told that they will continue to be owners when a conversion occurs only to find that a holding company is involved or a change to a regular stock issuing bank takes place later. Such a process looks a lot like a bait and switch process to me.