EAU CLAIRE, Wis. – If at first you don't succeed, try, try again. That's the attitude of Citizens Community FCU here as it begins its second attempt to convert to a mutual savings bank. The second time around should be much easier for the $100 million credit union since the passage of H.R. 1151 has simplified the credit union-to-thrift conversion process, especially in the area of member approval. Prior to its passage, a credit union had to get a majority of its total membership to approve the conversion.The process was also limited to 30 days. Now credit unions have 90 days to alert members of their plans, and they only need a majority of those members voting to approve the conversion. Under these guidelines, Citizens Community FCU should have no problem converting given that its first crack at it back in 1997 garnered 6,200 `yes' votes out of 9,000 voting members. It simply didn't get enough participation last time. The CU has 23,500 members. "If that same vote happens today, we win by a landslide," said Jim Cooley, president/CEO of the credit union. Cooley said the FCU charter is not built for what his credit union wants to do-start-up business lending, commercial business lending, and commercial real estate lending. Cooley describes the Eau Claire-Chippewa Valley as the largest retail market in Western Wisconsin, and his CU is not armed to serve it. He said his CU's charter only allows it to serve 41% of the people living in the burgeoning area. As a thrift those restrictions would vanish, said Cooley. It's also an area with a strong demand for real estate and business loans. Cooley said that those activities are not prohibited under the FCU charter, but they are encouraged under the thrift charter. "What happened in Eau Claire is a big transition from a manufacturing area to a retail trade area. The forecasters are telling us there will be a lot more start-up businesses going up. We have a responsibility to respond to people in our trade area," said Cooley. The credit union's loan portfolio resembles that of a thrift. Real estate lending hovers around 50% of the CU's total portfolio. Just-released March NCUA data shows the CU's real estate loans accounted for about $50 million of its $93 million portfolio. (See chart page 1.) The credit union's capital is 8.66%, healthy, but below its Peer Average of 11.05%, according to NCUA data. Five percent is considered well-capitalized for a thrift, with 7% being well-capitalized for an FCU. Another reason this time around may be easier for Citizens, is there doesn't appear to be the same strong opposition from the Wisconsin CU League. Back in 1997, former Wisconsin President/CEO Ron Halvorsen staunchly opposed the CU's plans. The League even went as far as running ads in local newspapers stating its opposition. At press time, the Wisconsin CU League said it did not have a position on the conversion. The League may not have a position, but a local credit union sure does. "I've told Mr. Cooley I'm not in favor of this. I'm not crazy about any credit union converting to a bank," said Charlie Grossklaus, President/CEO of the $500 million Royal CU, Eau Claire. Grossklaus said if the conversion is approved his CU will be waiting with a marketing campaign to try and attract members of the former Citizens Community FCU. Grossklaus doesn't buy the CU's claims of needing more members to serve, or expanded business lending. "I think there's plenty of market here for any financial institution, including a credit union," said Grossklaus. He also questioned how the CU could want to do more business lending, when right now it doesn't do any. According to the latest NCUA call report, Citizens had no outstanding member business loans on its books. John Hehli, CFO at Royal CU and who worked for Citizens for 15 years, said if the CU really wanted to do more business lending it could have at least gone out and did 12.25% of its total portfolio (the cap for FCUs), and dealt with it then. Grossklaus does back up Cooley's comments on the transformation of the Eau Claire-Chippewa Valley. Royal CU at one time primarily served Uniroyal, a major tire manufacturer. The CU now serves about 2,000 different companies. Grossklaus said the Valley is described as the Silicon Valley of Wisconsin. To survive the transformation, Royal CU converted to a state community charter a few years back and can now serve all five counties in the Valley. "We're the leading real estate provider in Eau Claire-Chippewa Valley," said Grossklaus. Royal CU is also strong in business lending, having about $100 million on its books, about 22% of its total loan portfolio. That would put the CU over the 12.25% MBL cap for the federal charter. "At the national level, we need to get that 12.25% cap lifted. CUNA and NASCUS are looking at that now," said Grossklaus. When Citizens' first attempt to convert to a thrift failed, it converted to a federal community charter. It was formerly a state-chartered CU. Grossklaus said the CU would have had more powers as a state-chartered community CU, such as Royal CU. In Wisconsin, state-chartered community charters have no business lending cap. He didn't want to speculate on why the CU is converting, but said it would be a "sad day for credit unions" if the board was converting to become stock-owned and profit from a big payoff. He said a few years back an S&L in the region converted to a thrift and upper management and the board were all given large stock bonuses. Cooley said he wants Citizens to maintain its cooperative philosophy once the conversion is complete. "We'll still have one member, one vote. I definitely think it's a cooperative charter. I don't see any differences." He said there are no plans for converting to a stock-owned thrift. The former IGA FCU, Feasterville, Pa., was the first CU that converted to a thrift to go the stock route. It was eventually bought out by a larger Philadelphia bank. There are also no plans to compensate the board of directors, said Cooley, even though the thrift charter permits it. "We haven't even looked at it. But even in our industry I know of a CUES study that showed 50% of people support professional boards and fees. I'm not opposed to that by any means. When I came here 12 years ago, the board and I had to respond to an insolvent situation. Together we had to turn this thing around," said Cooley. So far there have only been 15 CU-to-thrift charter conversions, not enough to worry CUNA and NAFCU. "It's still not a trend. We're far more concerned with federals converting to state charters. It seems that in a lot of them (CU-to-thrift conversions), some of their stated reasons are more concentration in mortgage lending, or to serve a broader base, both legitimate reasons," said John Zimmerman, NAFCU's Communications Manager. However, despite the low numbers of conversions, the size of conversions is on the rise. Three of the latest conversions – AGE, Atlantic Coast and Rainier Pacific – had $266 million, $321 million, and $356 million in assets respectively. Mary Dunn, associate general counsel and senior vice president for CUNA said the new guidelines for converting to a thrift contained in H.R. 1151 need to be evaluated. "The legislation (H.R. 1151) made it easier for a credit union to convert to a thrift. Is that good public policy? I contend it's not," said Dunn. "If we see these numbers grow, we really do need to look at this, particularly from the aspect that credit unions are such a good deal, how's the consumer better off? (with a conversion)," said Dunn. Dunn said the regulatory issues driving CUs to convert also need to be evaluated. One issue Citizens brought up was doing more real estate lending. "I think we still have some folks at NCUA that think real estate lending is dangerous," said Dunn. Alan Theriault, president/CEO of CU Financial Services, a firm that helps CUs convert to thrifts, consulted on this deal. "I think some of the same reasons Atlantic Coast and AGE cited are going on here. They're looking to be able to serve in a more comprehensive way, removing barriers," said Theriault. Theriault claims that one of the "hidden taxes" CUs pay is low visibility among consumers. "The consumer's awareness of what a credit union is is low. You reach a point, no matter what your size, of diminishing returns. You can only use the promotion of the credit union to a certain point. People just don't understand what a credit union is and does. Putting the bank name on the door instantly increases awareness." "The thrift charter has become the charter of choice. State Farm, Nationwide, AG Edwards, Merrill Lynch, they've all gone this route. If you go through what the Renaissance Commission wants, they're all things that the mutual charter has today," said Theriault. One interesting sidebar of this conversion is that when the CU first attempted it in 1997 Thomas Maday, the former Wisconsin commissioner of credit unions, was executive vice president of the CU and highly vocal in the process. Cooley said he is no longer with the CU. He has moved on to a financial company in the area. [email protected]