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Firm Says if the Conversion Can’t be Sold to Members, Don’t Bother Trying. WASHINGTON – In many ways, the offices of Luse Gorman Pomerenk and Schick belie the firm’s reputation and history. As one of the leading financial service law firms in the country, as specialists in the formation of mutual holding companies and with more credit union to mutual thrift conversions under their belt than any other firm, a visitor might expect their space to be grander. But while a humble appearance may fail to illustrate the firm’s accomplishments, the faded carpet on the floor, the lack of a formal lobby and the offices filled with family photos testify to the firm’s other trademark – a low-key approach to the credit union charter conversion issue that focuses more on the nuts and bolts of each credit union’s situation and less on the pyrotechnic rhetoric the issue sometimes generates. Sitting in Eric Luse’s office with he and two other of the firm’s 20 lawyers, John Garabedian and Robert Pomerenk, feels more like sharing a few moments in someone’s living room than interviewing some of the leading lawyers in credit union charter conversion in the country. “Some people might be surprised to learn that if we believe a charter conversion is not in the best interest of a credit union, we will advise them not to attempt it,” said Richard Garabedian, a partner in the firm whose experience has included advising nine credit unions in their successful charter conversions. A credit union might not be adequately capitalized for the switch to a mutual charter or they might have a balance sheet that is too unbalanced in one direction or another for one of the regulators, Garabedian explained. Robert Pomerenk, a lawyer whose background includes work at the Securities and Exchange Commission, also noted that a credit union that does not a have strong plan for why it wants to convert or a plan that it can articulate to its members in a clear or forthright way, the law firm will also advise against conversion. “Credit unions that are seeking to convert need to have that sort of plan or risk having the conversion fail to win member support,” Pomerenk asserted, “and even more, it can get you bounced.” Pomerenk’s assertion brings up the failed recent conversion attempts at Columbia Community Credit Union, the $600 million credit union headquartered in Vancouver, Washington and Lake Michigan Credit Union, the $1 billion CU headquartered in Grand Rapids, Michigan. NCUA invalidated the credit union’s conversion ballot early in 2004 and Lake Michigan failed to gain adequate member support for its own conversion attempt late in the year. The lawyers will not criticize the way these two credit unions attempted their conversions, in part because they were advised in their efforts by the competition in the conversion space – Alan Theriault at CU Financial Services and the associated Washington, D.C. law firm of Silver, Freedman and Taft – but they will note that NCUA has not recalled any of their credit union conversions and none have failed at the ballot box. “The bottom line is that I believe we bring a different approach and a different attitude to these questions,” Garabedian said. “You will never find a lawyer attached to this firm authoring a public article which makes the case for how a credit union could benefit from the conversion,” Garabedian said. “I doubt you will ever see a credit union that we advise deciding to pay its board of directors even a nominal amount before the conversion process has begun. If they want to pay the board of directors something at a later time, that’s their decision as a financial institution, but announcing that they were doing so was a tactical error.” Theriault, a consultant with CU Financial Services, has written such an article that played a role in both the failed conversion attempts at Community and Lake Michigan. Lake Michigan also announced that, upon conversion, it would pay the members of its board $200 per meeting. The Mutual Holding Company Structure Rather than debate the question of whether or not the executives or board of a credit union “cash in” on conversions, Garabedian and the others argue that the bigger issue is the mutual holding company structure that, they assert, allows a credit union to retain its overall “credit union” attitude and service and have access to the capital that it can use to serve more people. Mutual Holding Companies allow a mutual bank to issue up to 49% of its equity as stock (in practice most institutions offer less) and still keep control of the institution in the hands of members. Mutual holding companies cannot be purchased by regular stock banks, for example, but they have a much greater flexibility when it comes to raising capital and owning other related firms. “I think a credit union’s leaders should really ask themselves whether their members are going to be better served,” said Eric Luse, one of the firm’s partners who was involved in the creation of the Mutual Holding Company by the Office of Thrift Supervision in the late 1990′s. “Would they be better served by a credit union charter which limits their ability to attract capital they can deploy to better serve their existing members and add others or would their members be better served by a charter which allows the mutual bank to grow, offer more services at good rates and serve their communities better?” Luse argued that, in many ways, credit union charters represent “the dark ages” of financial institution charters and that many credit unions would better serve their members if they opted for the stronger charter. He and the others also observed that, fundamentally, mutual banks and credit unions have more in common with each other, with the exception of the tax issue, than they do with regular stock issuing banks. They are each controlled by their depositors; they each tend to keep a focus on their members and neither one is driven by stock prices. Further, Luse added, the discipline of issuing stock can help an institution make better use of its money. While they did not reveal which ones, the lawyers estimated that there would likely be at least five more credit unions that would seek to convert their charters in 2005 and that at least two of them would do so with the advice of their firm. They anticipated as well that their conversions would, on the whole, be conducted in a more open and above board way than conversions had been conducted recently. “I think it sends a bad signal when you appear to be doing something under the table or behind closed doors,” Pomerenk said. “A credit union should have a good reason to convert charters and a good plan for what they will do with the money. If they have that their plan will fly with the members, if they don’t have that they shouldn’t convert.” -

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