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I continue to read Credit Union Times with great interest how national credit union trade groups, local leagues, credit union executives and the NCUA all know what is in store for the credit union members in a bank conversion and how they have vowed to protect them from this dastardly fate. The problem is that most of the information presented by these “experts” is misleading or flat out wrong. Even though none of these people have ever been through the conversion process nor have they apparently taken the time to research what is involved and what is legally permitted, they have become instant experts for no apparent reason other than the fact they represent large credit unions or associations. In addition, Mike Welch in his June 22 Credit Union Times ponderings states that the most important question he has is whether anyone can show what members get out of a credit union to bank conversion. Being someone who likes a challenge, I thought I would take a shot at it because I think it is really interesting to look at the process from the eyes of someone who has “been there done that”. With 22 years in credit unions as both a regulator and credit union CEO and seven years experience as a bank CEO subsequent to our conversion, I think I can shed some light on the topic and counter some of the pure speculation about what happens in a conversion from the new, self-proclaimed pundits on the matter. It was 1996 when we began and 1998 when we concluded our conversion from a federal credit union to a mutual thrift. Subsequently, in 2001 we converted from mutual to a full stock institution. Through those two very lengthy experiences, I learned a good deal about what members/customers may expect in a conversion and have concluded that they lose very little while gaining a great deal. In the credit union to mutual conversion, the members remain the owners of the institution just as they are with the credit union. In addition, OTS has allowed converted credit unions to adopt a one member one vote provision just like credit unions. We at BUCS opted not to do this and went with the standard thrift provision of one vote for every $100 on deposit because it seemed fair that those with the most at stake should have the bigger voice. Of course, this is really a moot point because as we all know hardly anyone ever exercises their voting right in either type institution. The other speculation pertinent to a credit union to mutual conversion is that the thrift will adjust savings and loan rates and charge additional fees to compensate for taxation. We have been a bank for over seven years and have not yet and never plan to do this. Prior to conversion, we had a goal of a 1% ROA. After conversion, that goal was scaled back in the early years to compensate for taxation. We fully expected to make less money early on but to compensate for this with future earnings from the expansion of territory and service opportunities that the bank charter would provide. It is analogous to opening a new branch. It loses money early on but, as the business derived from the expansion of territory grows, the branch provides a long-term benefit to the bottom line. Thus, after we became a mutual thrift, the members enjoyed rates and fees the same as those they would have received if we did not convert. In addition, they received expanded services such as small business and other commercial banking opportunities, and improved access because we have been able to open two additional branches since our conversion. At no time since that initial conversion have any members ever complained of lesser quality or availability of service. In fact, the ratings on our annual member/customer service surveys have improved steadily since the conversion. By the way, there is no truth to the story that credit unions and their regulator are spreading that insiders derive great benefit from a credit union to mutual conversion. In reality, salaries and benefits are set by the board of directors just as they are in credit unions. So, for three years as a mutual institution we were able to add services with no changes to our rate and fee philosophies and were, in fact, so successful that we grew rapidly and needed to raise additional capital. Fortunately, because we were now a bank we had the option of converting to a mutual holding company or straight stock holding company to accomplish this. After a good deal of study, we decided on the full stock option. Of course, as we all know from listening to NCUA, the credit union trades, and some “astute” credit union CEOs, this is where the members really get hammered and the insiders get rich. Wrong again! What people in credit union land seem to overlook is that thrifts have a real regulator in OTS, which takes seriously their responsibility to protect the members in a mutual to stock conversion. There are numerous provisions and rules to be followed but arguably the most important one, and the least discussed, is the requirement that the bank establish a liquidity reserve equal to the total capital at the time of conversion. The newly converted stock institution cannot pay any dividend to stockholders that would reduce total capital below this reserve level and in the unlikely event of liquidation of the bank the capital in the reserve is earmarked for the remaining mutual members (sounds a lot like what would happen in a credit union liquidation doesn’t it). Of course, this is another moot point because solvent institutions, credit unions or banks, rarely if ever liquidate. The best way to show what really happens in a stock conversion is to look at a simple what-if scenario: What-if, 30 years ago, three credit union members each inherited $100,000 and all decided to deposit it into their credit union accounts? Member A belonged to XYZ FCU while members B and C belonged to BUCS FCU. To simplify the illustration, let us assume that they all took out their dividends/interest each month. So at the end of the 30 years each would still have $100,000 on deposit. Assuming that each credit union realized an after overhead expense spread of 2% annually, they would have accumulated over $80,000 in equity from each member. Now the members are ready to retire and move to a retirement community in another state. Member A goes to XYZ and asked to withdraw his $100,000 to help supplement his retirement. Being an astute fellow he asked how he can cash in on his portion of the equity that has amassed because of his long-term loyalty to the credit union. He is told he can not do this. Being as persistent, as he is astute, he tells the XYZ CEO that he has reviewed the recent financial statements and can’t understand the need for a capital position of 12.5% in a “not for profit institution”. He further states that he recently saw a Credit Union Times article where a letter writer, who seems a knowledgeable chap, suggested that credit unions considering conversion to a bank should first liquidate the credit union and return the equity to the members. He states that he realizes that XYZ has no plans to convert but if converting credit unions can do this why not XYZ, at least a partial liquidation so he can get his equity. The CEO explains to him that the liquidation idea is not as simple as some would lead you to believe. “You see, in order to liquidate, the credit union must sell assets to accumulate cash and that assets tend to have much lower value in liquidation than they have in a going concern. Thus, there would be a significant loss of value to the institution and the directors could be opening themselves to a lawsuit by the members whose equity was squandered”. Reluctantly, member A says he understands. He is then given his check for $100,000, a pat on the back, and best wishes for a happy and healthy retirement. Member B now goes to BUCS (his current bank and former credit union) to cash out as well. Although given the opportunity to participate in the BUCS IPO four years earlier, he chose not to do so. He has, however, remained a loyal customer because all the great service and products he was accustomed to receiving from BUCS has never diminished over the years. He too asks for his $100,000 and questions what happens to the equity he has helped amass. He gets a similar answer to that given member A, i.e. for him to get his entire share, the bank would need to liquidate He is given his $100,000 check, a pat on the back and a little advice. He is told that he still has the option to purchase BUCS stock on the open market and that if past trends continue the stock can be expected to appreciate handsomely over time. He could then sell at the higher value and realize the return of some of the equity he helped build. Although there are certainly no guarantees that this will happen, he says he will think it over and he leaves not quite as unhappy as member A. Member C is the risk taker of the bunch. When BUCS did its IPO four years earlier he chose to take his $100,000 in savings and purchase 10,000 shares of BUCS at the IPO price of $10. On the occasion of his retirement four years later, he calls his broker and sells his BUCS stock at its current value of $294,800. He is happy to pocket the nearly $200,000 gain (a return in excess of 40% per year) says thank you very, very much and moves on to greener pastures with significantly more money than members A and B. Coincidently, the CEO of BUCS is also getting up in years and he decides that he has had enough of being called a thief and neer-do-well for the unspeakable deeds he has perpetrated on the members and customers of BUCS and decides to also sell the 10,000 shares of BUCS that he purchased with his own retirement funds at the time of the IPO. As a result of the sale, he receives the total sum of $294,800 (does that number sound familiar). He also has additional shares he has accumulated from employee benefit programs such as stock option awards and the employee stock ownership plan. Of course, he realizes that these were included as part of his total compensation package that was set each year by the board of directors after careful study of the total compensation of peer CEOs in both banks and credit unions. He may have done a little better than his credit union counterparts because the value of their retirement investments may not have appreciated as quickly as did BUCS stock. He thinks about this and says “well I had a huge part in the success of the organization and deserve the benefit of the appreciation of the stock resulting from the performance of the bank and its service to its customers and members over the years”. He is happy with the value of the stock in his retirement accounts but he wonders how he missed the boat and did not get filthy rich from the conversion and theft of the credit union members’ capital as all the credit union “experts” proclaimed he would. Finally, he contemplates whether he should remain on the board of the bank after retirement as CEO. After all, he will be rewarded with handsome salary of $500 per month for taking on the numerous committee and business development requirements of the directors as well as the enormous fiduciary responsibilities that go along with being a public company. He realizes that there is another benefit afforded directors and that in addition to that huge salary he may be awarded 800 additional stock options, the same as the number awarded to all the other directors after the IPO. He thinks it over and questions if the $500 monthly salary and 800 options really qualify as getting rich at the expense of the members as all the credit union “experts” said it would. What the hell – he is a big spender so he stays on the board to see if can help everyone involved, both insiders and outsiders, (including himself) do better in the future. Damage to Members? Where? I hope that this little what-if exercise opens the eyes of some people inside and outside the credit union industry (not movement). You see the facts of the what-if are exactly that – facts. With the exception of the CEO’s retirement, that is what really has happened to the members and insiders at BUCS over the past seven years. The former credit union’s members have seen no impact on rates and fees, they have received improved services and new products, and they were given the first option to by all the stock in the IPO, some chose to do so and others did not. Those who did have seen a nearly 200% return on their investment in four years. The insiders were able to invest their own funds just like everyone else and realize a gain on the stock appreciation. All employees from top to bottom are allowed to participate in the employee stock option and/or employee stock ownership plans. This has given them a sense of ownership and pride and has helped the bank achieve record numbers on customer service surveys. You see, the employees all understand that no matter what structure a financial institution chooses, you win with competitive rates and fees and top quality service. To convert a credit union with any lower expectations would be an abdication of responsibility by the credit union board. As stated above, these are facts not fiction. Now on to the fiction. All the bad things that NCUA and credit union “experts” contend will happen to the members in a conversion are pure speculation on the part of NCUA and credit union insiders. There is no case that I am aware of that any members have been damaged as a result of a conversion. In BUCS’ case, the members made out, the bank employees benefited, and the insiders were rewarded with compensation commensurate with their performance over the years and the amount of personal risk they took by investing their own funds. Someone needs to explain to me what is wrong with that picture because I am having a very hard time finding someone who was harmed or has become rich in this deal. The ironic thing is that the members of credit unions now looking to convert will never be privy to this information because NCUA will not allow it and the credit union trade groups and high level CEOs would fight it at every turn. My question is – if no one is hurt in the conversion why are credit union insiders fighting so vehemently? Of course, the only answers are to pacify their ego or champion their own agenda. NCUA and the trades are certainly threatened if credit unions leave the fold. Something they do not want regardless of what the result is for the members. This coming from the same people who have chastised those of us who have converted for our personal motives I find exceedingly hypocritical. One last point – if the true facts of the BUCS case show that there is a least one real instance where all members have benefited quite nicely from a conversion, should this not be disclosed in the mailing to members in new credit union conversions. After all, everything we read from NCUA and credit union insiders is that they are not out to stop conversions but they want to assure “fair and unbiased disclosure”. Well we have undeniable facts in the BUCS case of the potential for member benefit while we have nothing but pure conjecture as to what negatives there may be. To the best of my knowledge, none of the bad things NCUA requires to be included in their new disclosure regulation (which by the way is probably the single most ridiculous piece of regulatory abuse I have encountered in my 35 years of dealing with regulators) have ever actually happened. So I propose that NCUA change its regulation to include a presentation of the BUCS case to make the document truly fair and unbiased. Do you think that is about to happen – not! So another proposal is that some interested outsiders “mess with Texas” and take up a campaign to send anonymous post cards and letters to members with an analysis similar to that above whenever there is a conversion vote pending. It would really be interesting to see how the votes would go if the members were actually provided factual disclosures. Herb Moltzan is president/CEO of BUCS Federal Bank (formerly BUCS FCU). He can be reached at [email protected]

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