HarborOne Credit Union President and CEO James Blake says he, his executive team and the $1.8 billion institution’s board of directors have had “no discussions whatsoever” about a future conversion to a stock bank charter.
And while that may be true, industry executives said they do not think it will be long before that conversation takes place.
In fact, those who claim to know Blake, HarborOne and the industry say it won’t be much more than the one year required by law before a converted mutual cooperative bank version of HarborOne applies to become a stock bank. And should the institution refrain from converting to a stock bank subsequent to a conversion to a mutual bank, it will be among a tiny minority of institutions that do so.
HarborOne recently announced that it is considering converting to a mutual cooperative bank charter. Its board of directors is scheduled to vote on whether to pursue the option at a March 21 meeting.
Industry attorneys, trade association leaders, vendors and others praised Blake as “bright,” “professional,” “well-respected,” “results-oriented” and “methodical.”
“He’s top-shelf,” said one executive. “He’s just a great guy and a superb businessman.”
And that reputation may be why those same industry experts expect Blake to take a newly converted HarborOne quickly from mutual to stock.
“Jim Blake isn’t going to leave any money on the table,” said one executive. “They’ll wait the year and then convert [to stock].”
History Repeating
Recent history and important members of the credit union’s executive team, including Blake and CFO Joseph Casey, indicate that a further conversion from mutual to stock status would be likely should membership approve the initial changeover. Both Blake and Casey, as well as other HarborOne executives, have extensive experience with banks that have converted from mutual to stock charters, and have subsequently been acquired.
Blake is no stranger to sweeping changes. He was at the Provident Institute for Savings, the first savings bank in the United States, when it became the first savings bank to convert to stock form. It was later acquired by Shawmut. Before HarborOne, Casey was at Andover Bank, which converted to stock and was acquired by Banknorth Group, and in 2005 by TD Bank.
In research published in 2007, the Federal Reserve Bank of San Francisco noted, “One concern expressed in the credit union industry is that converting to a mutual thrift charter is often a step en route to abandoning mutuality and becoming stock-owned.”
In that way, converted credit unions are simply part of a national trend away from mutuality, the San Francisco Fed argued, noting that “from 1975 to 2006, 1,870 thrifts converted from mutual to stock-owned, accounting for more than half of the decline in the number of mutual thrifts and a shrinking of mutuals’ share of assets in all depositories from 24 percent to 1 percent over that period.”
There hasn’t been a credit union-to-bank conversion in Massachusetts in the last 10 years, according to the state Division of Banks. Nationwide in the last 10 years, 13 credit unions have made the switch, according to the Credit Union National Association.
Each year, a few Massachusetts mutual banks seek permission to issue stock.
It’s not easy for credit unions or banks to convert to any other charter. The process is time consuming and complicated.
Get Rich Quick
If HarborOne’s board votes against the conversion later this month, “that’s the end,” Blake said. But if it approves the conversion, HarborOne must prepare an informational dossier explaining the conversion and send it to the National Credit Union Administration (NCUA), the credit union industry’s overseer. It must also send the dossier to its members.
A deadline for a vote by members will be set and the summary and explanation of the conversion effort will be sent to members three times: 90 days prior to the voting date, 60 days prior and 30 days prior. The third mailing will include a ballot members may use to vote on the proposal.
The proposal must also be approved by the NCUA, and HarborOne will be subject to its first examination by the FDIC.
The most obvious reason behind such conversions is perhaps the worst-kept secret in banking. Bankers say they say they do it for their members, or their customers, or their community – but, really, they do it to get rich, either through what the San Francisco Fed called “generous, stock-related compensation packages,” or by courting a buyer for the bank.
And the NCUA knows this.
In recent years, it has tried – and failed – to require credit union executives to disclose any personal gain expected from the conversion to a mutual bank charter or a subsequent conversion to a stock bank charter.
Congress was concerned that the NCUA had “overreached its authority” in proposing such disclosures, according to a Congressional Research Service report.
According to the Congressional Research Service, the NCUA believed “the possible later sale of the converted credit union as a stock-issuing organization is the major issue in converting a credit union to a mutual savings bank.”
Expanded Opportunities
It should be noted that HarborOne is proposing a conversion to mutual cooperative status, which makes it a bit more difficult to convert to stock.
But Blake did outline several factors that would prompt HarborOne executives to consider a conversion to stock in the future, including a severe double-dip recession or other economic conditions that would otherwise make it difficult for the bank to raise capital.
The San Francisco Fed found that of the 20 credit unions to convert between 1995 and 2003, 17 had issued stock or merged with another stock-issuing institution by 2007.
Surely, there must be something in it for the members. But perhaps not enough, the San Francisco Fed found.
“Experience indicates that most members surrender their ownership during conversions and that many better-informed insiders do not,” the Fed wrote. “Critics of conversions often point out that management and directors might have conflicts of interest: Better-informed insiders have incentives to advocate conversions and then to exercise their resulting options to buy IPO shares and to institute what may be generous, stock-related compensation packages.”
Blake told Banker & Tradesman the conversion talk is centered around his members and clients, and that it comes down to convenience, service and simple geography.
“About one third of the labor force south of Boston commutes to Boston every day, and we don’t have a location in Boston” because of the geographical limitations imposed by its charter, Blake said.
The credit union is also hampered by limitations on the volume of business lending it can do. Blake said HarborOne had to “turn away” $70 million in business last year because those potential customers didn’t live or work in the areas in which HarborOne does business.
Greater reach gives a bank version of HarborOne “more ability to generate more revenue for the organization,” Blake said. “Last year, we were the number two auto lender in the four counties we serve. Toyota was number one. Everyone in the market looking to do business is just taking business away from us.”
More revenue means more branches and more convenience for customers, Blake said. He said HarborOne is confident it will more than offset increases in taxes and compliance costs inherent with a bank conversion with increases in business.
Sectarian Violence
Industry executives said Blake and HarborOne should brace for an onslaught of spite and criticism from the state’s other credit unions – but so far, that has not been forthcoming.
“This is like if someone converted from Judaism to the Muslim religion,” said one executive.
But John Lahair, a spokesman for DCU, the largest credit union in New England (HarborOne is second-largest), was more measured.
“In today’s regulatory and legislative environment, we feel strongly that the credit union model is in the best interest of our members,” Lahair said. “In 2011, more than 25,000 members joined DCU.”
“The credit union community is indeed upset by the possibility of HarborOne Credit Union becoming a bank,” Massachusetts Credit Union League Spokesman Rob Kimmett said in an email to Banker & Tradesman. “We feel that a credit union with a credit union charter provides the ultimate financial institution for consumers. But as we have noted in the past, we are very committed to the principle that credit unions as member-owned financial cooperatives are driven by their members. If a fully informed membership understands the ramifications of the conversion plan that the HarborOne leadership has proposed, and votes in accordance with the applicable laws and regulations, then we would respect that decision.”
