Changing Charters

By Pike, Kelly | Independent Banker, March 2005 | Go to article overview

Changing Charters


Pike, Kelly, Independent Banker


If you ask Susan Ralston, she will tell you the credit union competition in Virginia Beach, Va., is fierce. Nearly 32 credit unions, some with community charters, vie for loans and deposits within a 10-mile radius of her bank's main branch.

Until January 2004, Bank @LANTEC, where Ralston is president and CEO, was one of those credit unions. But membership at @LANTEC Financial Federal Credit Union was waning, dropping to 14,255 in 2003 from 22,000 six years prior. Ralston and her team saw opportunities in small business and mortgage lending, but Bank @LANTEC was limited in those activities as a tax-exempt credit union.

The solution, Ralston decided, was to switch to a mutual bank charter. One memberwide vote with a near 72 percent approval rating and a whole lot of paperwork later, Bank @LANTEC is now a highly capitalized mutual bank with about $8 million in commercial loans booked in the past six months. It holds $90 million in assets.

"It wasn't an easy decision to convert," says Ralston, who considered making the transition for six years and hired two outside consultants to assess the idea. "But it's what's best for the customers and the viability of the institution."

Bank @LANTEC isn't alone in converting from a credit union to a bank. Approximately 30 credit unions have made the switch to mutual bank charters or are in the process, according to Alan Theriault, president of CU Financial Services, a firm in Portland, Maine, specializing in credit union conversions.

These institutions range in assets of a few hundred million dollars to $1.7 billion-asset Community Credit Union in Plano, Texas, the nation's largest community-chartered credit union and, if successful in its conversion, the largest credit union to ever to become a bank. "Among the driving forces that have credit unions converting are the ability to raise regulatory capital, enhance consumer awareness and get product and market flexibility," he explains.

Critics have unfairly charged that credit union conversions to mutual bank charters are little more than get-rich-quick schemes for bank management and Johnny-Come-Lately shareholders with minimal benefit for members. An inaccurate picture has been painted of fat-pocketed directors extolling higher interest rates on helpless consumers. But the decision to convert to a tax-paying bank is one that is made as part of an overall business plan, and one that no tax-exempt credit union takes lightly, experts suggest.

Pros versus Cons

Like any other business decision, conversion from a credit union to a mutual bank is an investment in time. From filing a business plan and sorting out the legal issues to undergoing scrutiny by regulators and preparing members for the vote, it's a process that can be fraught with frustration and protests or a smooth transition. Most important of all, it's a slow and steady course where member needs and institutional stability come first.

Credit Union of Pacific in Seattle, Wash., was a bit of a misfit in the typical credit union mold. While credit unions are meant to have a consumer focus, limited in their portfolios to 12.25 percent commercial lending, Laurie Stewart, president and CEO of Pacific, saw her financial institution developing more and more business in the commercial real estate area. Rules requiring credit unions with portfolios heavy in real estate lending to carry more capital were putting a damper on the institution's growth.

"If you looked at our balance sheet, we looked more like a thrift than a credit union in composition of loan products," says Laurie Stewart, president and CEO of the former credit union. "The regulatory environment for a thrift was more appropriate for the kind of business model that we had."

So that's exactly what the credit union became. In May 2003 Pacific converted to Sound Community Bank and has since grown its real estate and small business portfolio and can offer more commercial products and services-all without losing the institution's mutual heritage.

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