The proposed conversion of the $1.8 billion HarborOne Credit Union to a mutual bank triggered fresh industry debate last week about the impact and efficacy of conversions as the Brockton, Mass., CU formally tendered its resignation from CUNA and the Massachusetts Credit Union League.
Action by the HarborOne board on the planned conversion to a cooperative bank charter could come as early as March 21 at the conclusion of an initial member comment period, according to the CU’s regulatory notice posted Feb. 16 on its website.
Meanwhile, the departure from CUNA, not altogether unexpected but still apparently unsettling to the trade group, came as industry discussions heated up among CEOs as well as analysts and consultants involved in the conversion trade.
“I think the real issue is whether these potential charter switches by HarborOne, Technology and HAR-CO are aberrations or reflective of a future trend,” said one analyst who did not want his name used. In addition to HarborOne, he was referring to a similar conversion proposal raised last July by Technology CU of San Jose, Calif., and the 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 the topic said they saw no urgency for now for the CUs they manage to seriously consider shedding the CU charter, though all agreed it is something that is always on the table.
Nonetheless, some analysts on both sides of the often emotionally charged conversion issue acknowledged witnessing fresh policy questioning by CU boards amid the challenges of uncertain future NCUA assessments, hard-line exam procedures and frustrations over building capital.
But consultants like former NCUA Chairman Dennis Dollar dismissed the handful of conversion announcements as more of a blip than anything close to a genuine stampede.
"Unless the tax exemption is lost, I don't believe the recent conversion announcements, while newsworthy, are the beginning of a major sustained trend that will signal the end of the credit union industry as we know it,” said Dollar.
“Over the past 15 years or so, there have been about 35 conversions out of about 10,000 credit unions,” he said, making bank conversions average about two a year since 1995.
“That is hardly an avalanche,” said Dollar, who heads up a Birmingham, Ala., consulting firm bearing his name.
On the other hand, there were other industry watchers who found some CUs more worried than ever about where to build sustainable growth in the current climate.
"It’s pretty clear from our discussions with the larger credit unions that more of them are recognizing that the easy growth is over for most, and in order to be prepared for the battle for market share, they need access to capital and rules more like those the banks have,” said Peter Duffy, managing director of Sandler O’Neill, the New York investment banking firm.
Duffy said his firm has had discussions with more than 50 CUs that have conducted some portion or all of due diligence.
“These credit unions are serious about their business and their desire to maintain or enhance the value they offer their membership and want to grow,” said Duffy. “Their boards are holding them accountable for growth, earnings, capital management and member value.”
Sandler O’Neill, he noted, conducts its due diligence based on the model tailored by the client CU. Duffy stressed that his comments should not be construed to say that many are ready to convert, 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’s intentions and its basis for converting after looking at its preliminary online notice filed with regulators.
“The stated ‘consequences of conversion’ are inaccurate or misleading at best,” charged Bisker, pointing to what he said are inconsistencies on its need for more capital to lend and the credit union’s prospects for increased membership under a mutual charter.
The Brockton CU, he said, only has 20% of its permissible business loan limits, and yet there is no history or indication that it is coming close to its MBL maximum, he said.
Since posting its Feb. 16 notice on its possible conversion to a cooperative mutual, the CU has not returned phone calls elaborating on its plans or reasons for the planned switch due for member comment by March 16. HarborOne said its board will meet March 21 to further consider the conversion concept.
HarborOne also made no comment on its withdrawal from the Massachusetts League and CUNA even though its president/CEO, James Blake, is a former league chairman and has been active in CUNA. He has been a member of CUNA’s GSE Reform Review Task Force.
There was no word when HarborOne formally severed its CUNA ties–perhaps prior to the Feb. 16 conversion announcement. In an email statement issued by Rob Kimmett, vice president of publications/marketing, the league said only that HarborOne “is no longer affiliated with the league or CUNA and none of their employees or officials are now serving on the league board or any league committees.”
HarborOne’s CUNA departure follows by less than a month the resignation of the $1.6 billion Apple FCU of Fairfax, Va., which said it is quitting CUNA while it mulls a possible conversion. Apple also faulted CUNA’s advocacy record in its NCUA corporate dealings as a reason for disaffiliation.
Regarding the conversion process, analysts pointed out it could take as long as a year and require approval by a phalanx of bank and CU regulators. That includes the Comptroller of the Currency that now runs the old Office of Thrift Supervision and the FDIC, representing another hurdle.
Still, Thomas Glatt Jr., a Wilmington, N.C., consultant queried on the impact of HarborOne, Technology and Har-Co said every CU board ought to consider the conversion option.
“We encourage our clients to at least think about it,” said Glatt, adding that, “on a related note, CU people used to get offended if you even brought up the idea. Now they don't.”
Perhaps this is anecdotal evidence suggesting there could be an increase in conversions over the next five to 10 years, he concluded.
CEOs at several Massachusetts CUs said they were taken by surprise by the HarborOne conversion bid, but it has not altered their plans to stick to the CU charter, which they view as imperfect but workable.
Kenneth Dyer, president/CEO of the $644 million Liberty Bay CU of Braintree, Mass., said his board has in the past discussed conversion, and he can understand the capital argument. “but we’re proud credit union members and we believe the charter provides service and value to our members,” said Dyer.
He maintained also that there is no guarantee a new regulator like the FDIC would provide relief to permit field of membership expansion, a point raised by HarborOne in its application. However, some consultants privately counter that the NCUA’s existing FOM restrictions are far tougher than the FDIC’s. They also cite the 2007 congressional fight over the Credit Union Improvement Act that centered on loosening lending rules as further evidence of the NCUA limits.
Dollar, the ex-NCUA chairman and also a vigorous advocate for preservation of the CU charter, said he would be the first to admit that the existing CU charter does indeed need modernization through congressional action on risk-based capital reform, secondary capital options, MBL cap increase and expanded FOMs.
“But much of the needed modernization does not require a vote of Congress and can take place squarely on the regulatory and supervisory front,” said Dollar. “If NCUA and state regulators want to see credit unions remain credit unions, they must work to create a regulatory environment that allows credit unions to succeed as credit unions.”