This Is No Time To Throw Stones At CU Converts

Pentagon FCU CEO Frank Pollack doesn't see a charter change as a panacea (CU Journal, Oct. 18). I respect his opinion but wonder how much due diligence he conducted.

One of the strongest competitors for most military credit unions is USAA Bank. My credit union competes with USAA everyday. Anyone who banks with USAA will sing their praise. USAA offers great service, a big payback to its customers in the form of great rates and low-cost services and they have developed a convenient delivery system that is based on technology and innovation. I think many credit union leaders quickly dismiss banks as a bad deal. Obviously, there are some good banks and a lot more people use a bank than a credit union. Credit Union Journal quoted Mr. Pollack as saying, "...if the costs are comparable (banks vs. credit unions), what do your members gain? Nothing."

I think we have to look at that logic and ask how much due -diligence have credit unions done to determine if the share insurance costs are higher as a bank or a credit union? CUNA recently compared the FDIC and the NCSUIF. The CUNA White Paper analysis showed the FDIC with a big deficit of -.28% as a percent of insured shares and the NSCUIF with a .24% (after adjusting for the corporate credit union assessment) to insured shares ratio. But that is an apple to oranges comparison. The NCUSIF has a 1% of insured shares deposit that has not yet been expensed. If we subtract that from the fund it has a deficit of .76% of insured shares.

There are other apparent differences in how FDIC accounts for and discloses potential insurance losses versus NCUSIF. The FDIC fund just canceled a planned three basis point insurance fund premium increase. The FDIC has clearly stated its estimate of future losses and has disclosed the assumptions behind their future loss estimates. The NCUSIF loss estimate is shrouded in mystery. Most credit union losses are hidden in NCUA merger deals. When NCUA does provide assistance, that assistance is not disclosed. The winning bids are also never disclosed for NCUA assisted mergers. There is no clear measure of the cost of credit union failures or even an acknowledgement when credit unions fail. The lack of prompt corrective action hides failures in the merger process. The lack of transparency makes the NCUSIF estimate of future losses completely opaque and raises the issue as to whether the reserve for insurance losses is adequate. Add to that the concern that the NCUA has been criticized for weak accounting practices and the level of concern rises even higher.

A Careful Comparison Is Needed

Our own internal estimate of potential natural-person credit union losses is based on analysis using the Texas ratio, which compares impaired assets to total equity plus the allowance for loan losses. That analysis shows that about 9% of all federally insured credit unions are potentially a risk to the insurance fund and that the amount set aside by NSCUIF appears to be too low.

I believe a careful comparison of the exposure for future insurance fund premiums shows that CUs may have a bigger burden than banks. That belief is based on the cost of the corporate losses, the exposure for natural-person credit union losses and the fact that most of the insurance fund is a deposit which has not yet been expensed.

The banking system has one great advantage that will mitigate the cost to the insurance fund and therefore insurance fund premiums. The banking system has raised and continues to raise billions of dollars of new capital that will absorb losses before the bank insurance fund will absorb losses.

I think there is considerable room for doubt regarding whether banks or credit unions will pay more insurance fund premiums. But there is not doubt that determining the answer to how much premiums will be paid in future is easier for banks than credit unions. I would rather manage with certainty than uncertainty.

The other implication of Mr. Pollack's statement is that if insurance fund premiums for banks and credit unions are the same then what do members get if a credit union converts?

Credit unions have tried for more than five years to pass CURIA. Most CUs agree that CURIA is good for credit unions. The answer to Mr. Pollack's question--"What do members get if a credit union converts?"--is that the members get the benefits of CURIA.

Alternative forms of capital provide members with greater security and assure that the organization has the means to grow and meet the needs of members and the community in good times and bad times. The current financial crisis has proven the need for alternative forms of capital. Banks have long complained about not having a level playing field. Ironically they were right but what they missed is that the playing field was always slanted in their favor. Conversion is one way to get the rules that will allow the credit union to best serve its members in good time and in bad times. It is unlikely that credit unions will get CURIA without other drastic changes. The banking lobby has successfully blocked CURIA.

Sorry To Read Of Comment

I'm sorry to read of [CU Journal Publisher] Frank Diekmann's comment that MSB stands for "make some bucks." That statement adds nothing to the debate. I expect that those who fought Copernicus heard similar drek. I know of no evidence of great windfalls for CUs that have converted. If so Credit Union Journal should report the facts. The credit union system is for many a source of wealth, too. Have you looked at the IRS 990 forms? One could just as easily criticize some who work credit unions. The real issue is how do you best serve your members and how are you accountable for what you do?

Banks have to face their stockholders and account for their performance. Have you been to a credit union annual meeting? There is far less accountability for financial performance in credit unions. Banks and credit unions are alike in how they are judged for the quality and relevance of customer service. On that score the results are not as encouraging. Members express their satisfaction by remaining members or moving to another institution. Member growth is the best indicator I know of for measuring the quality and relevance of member service.

In the last three years 60% of all credit unions with under $100 million in assets have had negative member growth and that overall over half of all credit unions had negative growth over the last three years. Market share has not moved higher despite the advent of community fields of membership in most credit unions. Maybe MSB stands for members select banks?

I would rather see the CU system focus on improving performance and accountability for performance than to fight charter conversion. Those who convert will face a gauntlet of NCUA and FDIC scrutiny. Charter conversion has been an option that less than two-dozen CUs have pursued. Some of the vigilantes who fought conversion have since seen their own CUs fail. What does that say about those who were against conversion-nothing, other than they should have minded their own business.

I think it is a choice for members and their boards. We should not throw stones at those who convert when there is so much we all need to do to better serve our own members. We all live in a glass house.

Henry Wirz, CEO
SAFE Credit Union, North Highlands, Calif.


Editor's Note: Credit Union Journal has reported extensively on profits that have gone to board members and senior management at credit unions that have converted to mutual savings banks and then gone public. Readers can research those stories at cujournal.com by searching by keyword. Please note much of the reporting was done between 2005 and 2008.