Conflict of Interest

The Board of Directors and Executives may have a conflict of interest in recommending this conversion

In previous credit union to bank conversions that ultimately became stock banks, credit union directors and executives have profited personally by converting their members’ credit union to bank in most cases, according to the Washington Post.1 The Post cites a study in which insider gains averaged at $742,000 for each director and more than $1.2 million for top executives.

Learn more about insider enrichment from the National Center for Member Trust.

According to the National Center for Member Trust, an organization founded for the purpose of informing credit union members about these conversions: “This financial gain for insiders generally comes at the expense of members. In addition to rates and fees getting worse, conversion usually means the loss of valuable ownership."

To cite just one recent example, the CEO of the former Community Credit Union in Plano, Texas, made over $3 million of windfall profits on stock by converting Community Credit Union to a mutual savings bank and then to a stock bank. Fewer than 2% of Community Credit Union’s former members received stock.

How It Works
Converting to a bank is generally a two step processes. In the first step (Beehive’s proposed method), the credit union converts to a “mutual savings bank.” In the second step, the mutual savings bank issues stock. Though Beehive has not proposed such a second step, to date over 75% of converted credit unions eligible to issue stock have done so. According to a study by the University of Wisconsin, “The credit union that converts to a mutual is simply creating the device through which it can issue an IPO (stock offering) and become a commercial bank.”2

The opportunity for board members and executives to enrich themselves are so common in the second conversion to a stock bank, that at least one consultant makes a living by pitching these conversions to credit union boards and executives by outlining the potential gain.3 Here’s what the consultant says insiders can gain:

What does this insider gain mean for us? See:

Award themselves 4% of the stock issued by the bank as a so-called “recognition and retention reserve”
Award themselves stock options equal to 10% of the stock issued
Profit from the stock they purchase in conversion

Even before issuing stock, credit union insiders are able to profit:

Bank CEOs are paid 20% to 57% more than Credit Union CEOs
Directors, who serve as volunteers under credit union rules are paid between $2,500 and $50,000 annually, on average, at mutual savings banks.

Notes:

1. “Credit Union Conversion Plan Draws Opposition From Members,” Washington Post. August 24th, 2006

2. “Credit Union to Mutual Conversion,” University of Wisconsin-Whitewater. http://ideas.repec.org/p/uww/wpaper/06-01.html

3. Theriault, Alan D., “CEO & Directors: Salary Imbalance is Corrected by Converting to a Bank,” Converting From a Credit Union Fax Update, 9/16/02, http://www.cufinancial.com/pdfs/NL2002.pdf