Members and the Community Are the Ones to Gain from Conversion to a Bank

  Community / Member Benefit Illustration
    A B C
  Financial Data (Dollars in thousands) Credit Union Mutual Savings Bank
Mutual Holding Company
1 Capital / Assets ratio to manage to
2 Assets
$ 714,285
$ 2,500,000
3 Capital
$ 50,000
$ 50,000
$ 125,000
4 Investments
$ 171,428
$ 240,000
$ 600,000
5 Loans
$ 501,142
$ 710,000
6 Additional capacity for new community loan origination
$ 202,858
7 Increased loan revenue NIM (3% estimate)
$ 6,086
$ 38,036
8 Increased Yield on Investments (2% estimate)
$ 4,057
$ 12,000
9 Additional earnings available for taxes, member benefits, incidental costs, and stock dividends
$ 10,143
$ 50,036
10 After Tax ROA @ 1.0%
$ 7,143
$ 10,000
$ 25,000
11 Additional earnings (line 9) available for taxes, member benefits, incidental costs, and stock dividends plus regular ROA (Line 10)
$ 7,143
$ 20,143
$ 75,036
12 Performance difference between a mutual and a credit union (Column "B") and between a MHC and a credit union (Column "C"). These earnings are available above and beyond current activity to increase retained earnings and to expand member benefits; like branches / technology / yields
$ 13,000
$ 67,893

Economic Conditions Require a Progressive Response
Taxation is Managed like Every Other Business Expense
Converting Allows Growth and Member Benefits to Continue
Proposed Legislation: A Risky Accounting Gimmick - Secondary Capital Unlikely

  • The table illustrates the huge differences possible by converting to a mutual savings bank. Column "A" illustrates a hypothetical credit union with $50 million in regulatory capital. Column "B" indicates that with the same level of capital a non-stock mutual savings bank can outgrow credit union assets by almost $300 million because bank regulations support higher levels of growth per dollar of capital; Column "C" illustrates $1.5 billion more growth possible by utilizing the mutual holding company structure (MHC) and a $75 million minority member stock offering. Members continue to control the non-stock mutual holding company. The MHC structure preserves the ownership and control of the institution. A MHC cannot be sold or taken over. It can, however, merge with another mutual or MHC and it may acquire banks or merge credit unions. This opportunity is not available to a credit union.

  • Row 6 illustrates the much higher bank lending capacity in the amount of $203 million and $1.3 billion respectively. Invested in the community infrastructure, these loans would have a powerful impact on job creation and related community benefits, like home ownership and small business development.

  • Row 7 & 8 illustrates the additional revenues from higher loan volumes per dollar of net worth (capital); and the impact of a bank's historical investment portfolio yield advantage. Added together (line 9) they illustrates that substantial revenues become available for paying taxes, adding member benefits, managing incidental costs and contingencies (like conversion cost), and to pay stock dividends. Row 7 does not consider the more profitable loan mix possible as a bank, which would result in higher revenues.

  • Row 10 illustrates managing an institution to a 1.0% after-tax ROA.

  • Row 11 illustrates the $20.1 million annual additional member benefit as a mutual and an additional $75 million annual benefit as a MHC. These additional benefits are available to pay taxes, incidental costs, stock dividends, increase retained earnings, and expand and improve branches, technology, and delivery systems or for member distribution in the form of higher yields or lower loan rates. Row 12 illustrates the net financial benefit from a conversion to a mutual or a MHC.


Economic Conditions Require a Progressive Response

The mandate of a community chartered credit union is to serve the entire community. Some market areas served are facing increasingly sober news including weak employment numbers, layoffs, factory closings, and slow economic growth. In order to maximize their contribution to turn these communities around, a few credit unions are proposing a conversion to a mutual savings bank, or thrift charter, and even the additional step, which requires another vote of depositors, to raise equity capital by providing the opportunity for members to invest in a minority stock offering.

The credit union charter has supported the growth of many institutions. But many credit unions can do a lot more. These communities need everybody to do their part – to be their best. The additional investments that can be made, in new loans, is a way for progressive conversion candidates to serve communities to the very best of their abilities – something that they can’t do under current credit union regulations. The reorganization as a mutual savings bank unlocks substantial additional lending ability because bank regulations and bank convention permits higher loan volumes per dollar of net worth. Credit unions are handcuffed by punitive net worth requirements that affect their competitiveness in this area. Also, credit unions are prohibited from accessing the capital markets in order to increase net worth (capital), while banks do this on a regular basis.

Switching to a thrift charter would mean giving up the state and federal income tax exemption enjoyed by credit unions. Critics point to taxable status as a disadvantage, without considering the growth in revenue and profit that can come from an expanded market opportunity, product line, and capital access. The vast majority of financial institutions in this country pay taxes and achieve a return on equity far in excess of most credit unions, while delivering value that results in market share domination. Income taxes, like any other cost of doing business, are manageable. Credit Unions in other countries pay taxes. Some non-profits (like $400 billion TIAA-CREF) have relinquished their tax exemption in exchange for modern powers.


Taxation is Managed Like Every Other Business Expense

Contrary to the view that converting to a taxable institution would mean injury for members and the community, financial modeling shows that, as a future thrift, a hypothetical credit union with $50 million in net worth would be able to offer members and future members more than $1.3 billion in new loans. Not only is increased loan activity a real benefit to the community, the earnings from that business – coupled with investment yields far superior than historically possible for credit unions – would produce net profits for members greater than what is now possible as a tax-exempt credit union. Credit unions historically earn much lower yields on the investment component of their balance sheet compared to banks. Recent NCUA and FDIC data indicates the yield disadvantage is greater than 2%. (See Table "B") A better performing investment portfolio along with higher levels of loans outstanding, at a minimum, neutralizes the impact of taxation. Member service levels and returns are thus preserved.

commun3Therefore, converting to a bank charter allows a former credit union to be in a better position to serve its members and its communities while retaining high levels of service, a member oriented philosophy, and independence. The benefits of being able to make more loans, provide more employment opportunities, build more branches, and serve all types of depositors and borrowers generate economies of scale that causes a former credit union to be more productive. The move is clearly a win for the community and the membership.


Converting Allows Growth and Member Benefits to Continue

As a credit union, many are currently faced with slowing growth to stay in compliance with the higher credit union capital requirements. The slow down would not be necessary as a bank. Slowing growth involves reducing rates on deposit accounts and has the undesirable effect of encouraging members to move banking relationships elsewhere. Although increasing loan rates and fees helps mitigate the need to slow growth, a credit union’s competitiveness and new account acquisition strategies would suffer. These strategies underwrite adding member conveniences, like new branches, as well as support ongoing high levels of member responsiveness. Branch development requires account and deposit acquisition to cover operational costs and helps make services more cost effective for all members. But, branch expansion must be supported by capital. Lack of capital slows growth and delays branch development, thus reducing convenience for existing members, and delays the hiring of new employees and infrastructure development which supports economic recovery.

Remaining a credit union and living with capital constraints will mean putting a stop to growth, turning away new members, lowering the rates offered on deposits and raising the rates charged on loans. Moreover, the facts challenge the assertion that credit unions have an inalienable pricing advantage over banks, as some observers would have you believe. Many banks and other financial institutions charge no fees whatsoever on basic products like checking accounts, or offer savings yields well in excess of the average credit union.

The credit union capital disadvantage is widely acknowledged by credit union industry leaders. For example, Dan Mica, President of Credit Union National Association, recently wrote, "Credit unions are indeed burdened by an inappropriate system of prompt corrective action, which requires them to hold even more capital than a bank despite their typically lower risk profile." John Annaloro, president of the Washington Credit Union League, said in a press release that recent (bank) conversions are representative of the "fundamental weaknesses in the overall national credit union charter that needlessly restrict capital accumulation and business lending." Mica remarked that he was "heartened" by legislation proposed to reform PCA.



Proposed Legislation:

A Risky Accounting Gimmick - Secondary Capital Unlikely

Despite Mica’s optimism, the proposed legislation regarding PCA is viewed by some as an accounting gimmick that fails to provide a safe and solid solution for fast growing credit unions. The tinkering supported by this proposed legislation is not a long term solution. It does not add a single dollar of actual (tangible) capital - it merely leverages the credit union’s existing capital across more assets. The legislation has mixed support among credit union leaders and generates serious concerns for the 6,500 smaller credit unions experiencing slow growth. The bill, designed to fuel the rapid growth of large credit unions, increases systemic risks and the liability of directors who might utilize its provisions. The growth would force NCUSIF to charge insurance premiums, thus hurting the earnings of the smaller credit unions already pressured by plunging investment yields and rapid member defections to larger credit unions. The Bill’s passage is unlikely. Efforts, dating back to 1999, to enact laws to allow secondary capital, opposed by many credit unions large and small, are also likely to fail.