The proposed conversion of the $1.8 billion HarborOne CreditUnion to a mutual bank triggered fresh industry debate last weekabout the impact and efficacy of conversions as the Brockton,Mass., CU formally tendered its resignation from CUNA and theMassachusetts Credit Union League.

Action by the HarborOne board on the planned conversion to acooperative bank charter could come as early as March 21 atthe conclusion of an initial member comment period, according tothe CU's regulatory notice posted Feb. 16 on its website.

Meanwhile, the departure from CUNA, not altogether unexpectedbut still apparently unsettling to the trade group, came asindustry discussions heated up among CEOs as well as analysts andconsultants involved in the conversion trade.

“I think the real issue is whether these potential charterswitches by HarborOne, Technology and HAR-CO are aberrations or reflective of a futuretrend,” said one analyst who did not want his name used. Inaddition to HarborOne, he was referring to a similar conversionproposal raised last July by Technology CU of San Jose, Calif., andthe slated April 1 completion of the conversion of HAR-CO Maryland FCU of Bel Air, Md., to a bank.

A sampling of CEOs in New England and elsewhere queried on thetopic said they saw no urgency for now for the CUs they manage toseriously consider shedding the CU charter, though all agreed it issomething that is always on the table.

Nonetheless, some analysts on both sides of the oftenemotionally charged conversion issue acknowledged witnessing freshpolicy questioning by CU boards amid the challenges of uncertainfuture NCUA assessments, hard-line exam procedures and frustrationsover building capital.

But consultants like former NCUA Chairman Dennis Dollardismissed the handful of conversion announcements as more of a blipthan anything close to a genuine stampede.

“Unless the tax exemption is lost, I don't believe the recentconversion announcements, while newsworthy, are the beginning of amajor sustained trend that will signal the end of the credit unionindustry as we know it,” said Dollar.

“Over the past 15 years or so, there have been about 35conversions out of about 10,000 credit unions,” he said, makingbank conversions average about two a year since 1995.

“That is hardly an avalanche,” said Dollar, who heads up aBirmingham, Ala., consulting firm bearing his name.

On the other hand, there were other industry watchers who foundsome CUs more worried than ever about where to build sustainablegrowth in the current climate.

“It's pretty clear from our discussions with the larger creditunions that more of them are recognizing that the easy growth isover for most, and in order to be prepared for the battle formarket share, they need access to capital and rules more like thosethe banks have,” said Peter Duffy, managing director of SandlerO'Neill, the New York investment banking firm.

Duffy said his firm has had discussions with more than 50 CUsthat have conducted some portion or all of due diligence.

“These credit unions are serious about their business and theirdesire to maintain or enhance the value they offer their membershipand want to grow,” said Duffy. “Their boards are holding themaccountable for growth, earnings, capital management and membervalue.”

Sandler O'Neill, he noted, conducts its due diligence based onthe model tailored by the client CU. Duffy stressed that hiscomments should not be construed to say that many are ready toconvert, just that more believe it is important to be prepared.Regarding HarborOne specifically, Washington attorney Steve Bisker,a former NCUA assistant general counsel, questioned the CU'sintentions and its basis for converting after looking at itspreliminary online notice filed with regulators.

“The stated 'consequences of conversion' are inaccurate ormisleading at best,” charged Bisker, pointing to what he said areinconsistencies on its need for more capital to lend and the creditunion's prospects for increased membership under a mutualcharter.

The Brockton CU, he said, only has 20% of its permissiblebusiness loan limits, and yet there is no history or indicationthat it is coming close to its MBL maximum, he said.

Since posting its Feb. 16 notice on its possible conversion to acooperative mutual, the CU has not returned phone calls elaboratingon its plans or reasons for the planned switch due for membercomment by March 16. HarborOne said its board will meet March 21 tofurther consider the conversion concept.

HarborOne also made no comment on its withdrawal from theMassachusetts League and CUNA even though its president/CEO, JamesBlake, is a former league chairman and has been active in CUNA. Hehas been a member of CUNA's GSE Reform Review Task Force.

There was no word when HarborOne formally severed its CUNAties–perhaps prior to the Feb. 16 conversion announcement. In anemail statement issued by Rob Kimmett, vice president ofpublications/marketing, the league said only that HarborOne “is nolonger affiliated with the league or CUNA and none of theiremployees or officials are now serving on the league board or anyleague committees.”

HarborOne's CUNA departure follows by less than a month theresignation of the $1.6 billion Apple FCU of Fairfax, Va., whichsaid it is quitting CUNA while it mulls a possible conversion.Apple also faulted CUNA's advocacy record in its NCUA corporatedealings as a reason for disaffiliation.

Regarding the conversion process, analysts pointed out it couldtake as long as a year and require approval by a phalanx ofbank and CU regulators. That includes the Comptroller of theCurrency that now runs the old Office of Thrift Supervision and theFDIC, representing another hurdle.

Still, Thomas Glatt Jr., a Wilmington, N.C., consultant queriedon the impact of HarborOne, Technology and Har-Co said every CUboard ought to consider the conversion option.

“We encourage our clients to at least think about it,” saidGlatt, adding that, “on a related note, CU people used to getoffended if you even brought up the idea. Now they don't.”

Perhaps this is anecdotal evidence suggesting there could be anincrease in conversions over the next five to 10 years, heconcluded.

CEOs at several Massachusetts CUs said they were taken bysurprise by the HarborOne conversion bid, but it has not alteredtheir plans to stick to the CU charter, which they view asimperfect but workable.

Kenneth Dyer, president/CEO of the $644 million Liberty Bay CUof Braintree, Mass., said his board has in the past discussedconversion, and he can understand the capital argument. “but we'reproud credit union members and we believe the charter providesservice and value to our members,” said Dyer.

He maintained also that there is no guarantee a new regulatorlike the FDIC would provide relief to permit field of membershipexpansion, a point raised by HarborOne in its application. However,some consultants privately counter that the NCUA's existing FOMrestrictions are far tougher than the FDIC's. They also cite the2007 congressional fight over the Credit Union Improvement Act that centered on loosening lending rules as further evidence ofthe NCUA limits.

Dollar, the ex-NCUA chairman and also a vigorous advocate forpreservation of the CU charter, said he would be the first to admitthat the existing CU charter does indeed need modernization throughcongressional action on risk-based capital reform, secondarycapital options, MBL cap increase and expanded FOMs.

“But much of the needed modernization does not require a vote ofCongress and can take place squarely on the regulatory andsupervisory front,” said Dollar. “If NCUA and state regulators wantto see credit unions remain credit unions, they must work to createa regulatory environment that allows credit unions to succeed ascredit unions.”