DFCU's Failed Conversion Attempt Has Lasting Effects, But Story Is Changing

The $1.8 billion DFCU Financial, Dearborn, Mich., wasn't the first credit union to try to convert to a bank, nor will it be the last, but it more than any other conversion attempt has changed the rules surrounding conversions.

DFCU was villainized for not granting members a special meeting to remove board members even though the conversion opposition group had the required number of signatures under the CU's bylaws. Credit union faithfuls were outraged that NCUA did not step in and stop this blasphemy. Wasn't a special meeting the ultimate display of the democratic nature of credit unions? We later learned that NCUA got out of the bylaw enforcement game about 12 years ago when it removed bylaws from its rules and regulations. Of course that's not the end of the story. NCUA later passed a reg outlining when it may get involved in bylaw disputes. That was a watershed change and it was driven by the DFCU case.

One other area of dispute in the DFCU conversion attempt was whether members who opposed the conversion could get access to records pertaining to the failed conversion bid. DFCU said members could see the records, but had to sign confidentiality agreements. NCUA recently passed its membership access regulation outlining what kinds of credit union documents members can get their hands on and how they go about it. Again, DFCU could be looked at as a driving force.

There is probably no question the DFCU attempt drove in part the new conversion regulation that lays out the notification steps required by a CU attempting to convert to a bank to ensure members are well informed.

This was also one of the nastiest conversion attempts and that won't soon be forgotten.

But maybe it's time to try and do just that and give DFCU a break. Why? This credit union is acting very credit union-like. It just announced, for the second straight year, a $17 million dividend! Its first $17 million dividend was viewed as suspicious by many last year because it was announced just prior to a court date to decide whether DFCU had to grant the special meeting request that was aimed at removing board members. Members who opposed the conversion went so far as saying last year's large dividend was an attempt by DFCU to buy their silence!

I was one of the most vocal critics of DFCU. I looked back at my columns. I was very harsh on some aspects of DFCU's conversion attempt and I stand by that. But I also recognize this credit union is doing right by its members. DFCU was originally a Ford Motor credit union and it still serves Ford, a company that has laid off thousands and is having trouble competing with foreign car companies. Michigan has taken a tremendous financial hit in recent years. Businesses, and yes banks, have left the state or have reduced their presence there.

DFCU is giving back $17 million to its members that support the credit union. The credit union has also committed $10 million to a career transition program that helps displaced workers pay their bills. It helps them go back to school. It plans on increasing this program if demand continues. This credit union has stepped up for Michigan workers.

So what happened? Was DFCU an anti-credit union, want-to-be bank last year, and is now a pure credit union again? Once you talk to CEO Mark Shobe you realize there was something more in play. Shobe is a former banker and a sophisticated financial professional. Under his leadership, the CU went from a standing still start in 2002 to today having $600 million in off balance sheet investments through its investment CUSO. DFCU is one of the most efficiently run credit unions in its peer group.

Shobe saw a market in Michigan that wasn't growing. He says the CU owed it to its membership to look at ways to grow, and felt the mutual bank structure was a viable option. Namely, it permitted interstate branching. In other words, Shobe was taking an all business approach to the growth issues. Shobe regrets how ugly the conversion process became, and noted that his CU's communication efforts with members were hampered by the regs and lawyers. He regrets that the membership never got to vote and decide the CU's fate, no matter what charter they chose.

Today, Shobe is committed to running Michigan's largest credit union as a credit union, but believes credit unions can't be isolationists. Looking at what the bankers are doing isn't bad. He sees a banking industry that churns out de novo banks, and a credit union industry that rarely produces a new credit union. Shobe wonders if credit unions and credit union organizations shouldn't create and capitalize an organization to fund new credit unions and get a return on it, taking a financial, business approach to helping the industry survive and thrive.

There are a lot of lessons in the DFCU story. Yes, the credit union philosophy is still what drives credit unions--member-owned cooperatives that exist for their members. It is a timeless concept, especially when banks are feeing their members like crazy. But we can never forget, financial services is a business and credit unions are going to have to take a 2007 business approach in finding new ways to grow and thrive. Shobe thought he was taking a strategic, business approach to fighting DFCU's market restraints by looking at what DFCU thought was a more liberal charter structure, and he ran into a philosophical buzzsaw. Rightly so. I think charter conversion is the ultimate last resort and when you lose the credit union structure, members lose. However, credit unions can't just rely on philosophy to grow. They have to get in the "business" game. Many are clearly doing it, but many aren't.

--Comments? E-mail pgentile@cutimes.com