On the letters page of the June 22 issue, Gwinnett FCU CEO Marshall Boutwell addressed an open letter to me sharing his comments about credit unions converting to mutual savings banks. I respect and defend his right to express his opinions publicly, but I am troubled by opinions that appear to be based upon misinformation and misunderstanding. Let me remind everyone that the Coalition for Credit Union Charter Options is not pro-conversion and we most certainly are not anti-credit union. We simply believe in freedom of choice and free-market principles. That said, the Coalition also believes that it is important to remember that mutuals are member-focused cooperatives much like credit unions. Their democratic corporate governance is similar, as is their populist attitude toward serving their depositors and their community. Because the converted institution’s character and personality remain essentially unchanged, members interested in high-quality banking products with great customer service at fair prices find a credit union-to-bank conversion to be largely transparent. It’s simply another type of cooperative that just happens to have another business license and slightly different powers. Conversion proponents say that the mutual charter carries some attractive features credit unions can’t match, such as product and market flexibility, greater consumer awareness, and less confusion about who can be a customer. The mutual charter allows an institution to make more loans, open more branches, and do more for its community than it can as a credit union. Far too many conversion critics harp on the mistaken belief that members lose the capital they may have spent years helping the credit union build. They say that a converting credit union’s windfall profit is simply deducted from the credit union’s capital and somehow gifted to insiders. From a practical point of view, the dollar value of an individual credit union member’s equity ownership in the credit union is largely intangible and extremely limited in liquidity. If the member leaves the credit union, his share of the equity doesn’t go with him. Members will never receive cash for that equity as long as the credit union is in business. The only way a member would get paid for his equity is through a disruptive liquidation process. The member derives the most value from the credit union’s equity through good rates and services on an ongoing basis.The same is true when that credit union member becomes a mutual savings bank member/depositor. Should a mutual subsequently decide to convert to a stock form, the OTS requires the mutual to 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 the reserve. Should the stock institution liquidate, the remaining original mutual members would get their share of the designated reserve. The increase in value of a converted credit union, if there is one, in fact materializes only because of superior performance. Increases in value are contingent on bottom-line performance and growth in the franchise value of the institution. In the mutual holding company structure, this growth in value is shared by the membership, meaning that if managers benefit, so do the members. It puts the management and membership on the same side of the equation. Sharing the benefits of growth is not greed. Having spent 30 years working with credit unions almost exclusively, I am no expert on other types of charters; however, the experts have advised me. They point out that the net worth of a federal savings association chartered by the OTS is owned by the members of the institution in the same way that the net worth of a credit union is owned by its members. That net worth never belongs to the officers and directors of the federal savings association, except for their own pro-rata share as a member. Just like at credit unions, the mutual savings institution board of directors establishes management salaries and benefits. The members of a mutual must approve all charter amendments and any subsequent conversion to the stock form of ownership. The OTS has very detailed regulations regarding the conversion of mutuals to stock form. It’s a highly regulated, closely controlled process. There is no “unjust enrichment” going on. There’s no doubt that the credit union conversion to mutual charter issue has generated a lot of strong opinions. This is not because a lot of credit unions are converting, but because it strikes at the heart and soul of what it means to be a credit union. The credit union approach is to add to capital from retained earnings. This can be a painfully slow process. It’s hard to watch competitors leverage new capital to gain market share while the credit union is forced to slow down or stop growing. Regrettably, when in the throes of emotion some will point fingers and accuse other credit union leaders of nefarious motives. Last time I checked, in America building value and making money were not evil deeds. Perhaps more credit union leaders need to recognize that “profit” is not a dirty word. All prudent credit union leaders should want to preserve the conversion option as a potential strategy to implement under one or more worst-case scenarios like taxation, the need for capital infusion, or intensely competitive markets. I believe that the first to choose to convert will be those credit unions over $500 million in assets that want to grow market share rapidly and that can’t come up with the capital to make that happen within a credit union charter. This actuality will not be altered by philosophical chanting or deploying the Kulture Kops to disrupt an individual credit union,s business decisions. Marvin C. Umholtz President & CEO Umholtz Strategic Planning & Consulting Services Castle Rock, Colo. Editor’s Note: Umholtz serves as membership director for the Coalition for Credit Union Charter Options.

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