$1.4 Billion Community Credit Union Moves Toward Becoming Mutual Bank; Others May Follow, Sources Say

DALLAS – The $1.4 billion Community Credit Union, the sixth largest in the state of Texas, has become the latest credit union in the country to declare its intention to change to a mutual thrift charter and may be the first among as many as four more in the Dallas area to seek to do so. The credit union quietly announced the charter change move in a notice posted over the New Year’s weekend on its Web site (www.communitycu.org). The announcement declared that the 220,000 member credit union, headquartered in Plano, Texas had applied for the charter change, and that the leadership was “very excited” by the opportunities it represented but that it would refrain from commenting at length on the move until after NCUA had approved its member disclosures. CEO Gary Base confirmed that Community has applied to NCUA, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision and the Texas Credit Union Department to make the change. Base stuck to the credit union’s announcement and would not go into detail about the reasons Community sought the change, other than to state that the board and leadership had concluded that a charter shift would benefit the institution and its members and promised more details after NCUA approved the disclosure documents. “As I am sure you understand,” Base said, “these charter conversions are extremely complicated and we have chosen to not to say much about it until after the disclosures are approved.” Sources confirmed that, should its members approve the move, the bank would seek to structure itself as part of a mutual holding company that the bank depositors would continue to control but which would issue stock to raise funds on the capital markets. Alan Theriault, the founding consultant with CU Financial Services, a leading advocate for credit unions shifting charters confirmed that he is serving the credit union as a consultant in the effort and that the Washington Law Firm of Silver, Freedman and Taft is providing legal services. Although Base would not address the reasons Community took this step, other credit union CEOs said they were not surprised the CU had done so. Indeed some said they would be surprised if Community were not merely the first among three or four in the Dallas area who might also try to change charters. Ken Sorrels, CEO of the $1.5 billion Credit Union of Texas, headquartered in nearby Dallas, said that Base had called him personally to let him know the news “before the street gets it,” and that he was not surprised in the least. Sorrels said that in previous conversations Base indicated the credit union felt pressure in three particular areas: member business lending and the statutory limits on it, real estate lending and the NCUA’s regulation of it, and the statutory capital building limitations. With capital, for example, according to NCUA’s records, Community’s equity ratio has hovered between 7.16 and 7.59 over the year ending in September 2004, and when it came to member business lending the credit union carried almost $43 million in member business loans on its books as of September, $22.5 million of which it had booked in the previous year. Sorrels pointed out that under the current law, a credit union doing a lot of member business lending would reach a point where it just had to stop, a blockade that a bank would not face. But in Sorrel’s opinion it was the capital requirements that really got under Community’s skin. He noted that Community, like other credit unions, had just been through a period of rising deposits, a flight to safety and Base knew they could not predict when it might happen again. “I know Gary and some of the guys on that board,” Sorell’s said. “They are independent men and not real keen on having NCUA getting too involved if they got into a bad capital situation and they had no way of knowing that a similar rush wouldn’t happen again.” Other CEOs also said they had not been terribly surprised by Community’s move, pointing out that the credit union had been steadily “acting more and more like a bank” for some time. One related how he had been very impressed with how well Community had been doing managing its credit card portfolio, until Base had explained that the credit union had been using “nuisance fees” similar to those that bank card issuers used and putting important details of their card program into the finer print at the bottom of the card agreements. Another CEO noted how much of Community’s advertising identified the institution as a bank already. John Tippets, CEO of the $4.1 billion American Airlines FCU, headquartered in the Dallas area, echoed other CEOs’ lack of surprise and speculated that the credit union industry might be better off if the credit unions who had taken a bank-like approach to doing business just went ahead and changed their charters. “I have to question the value of continually expanding the credit union tent to include credit unions which have really adopted are more bank-like philosophy and approach,” Tippets said. “As some of these geographic fields of membership have gotten so large they have really destroyed any notion of the common bond and shared association that credit unions used to be built upon,” he said. Credit unions like these, Tippets suggested, water down the identity of the credit union movement and tend to make banks and credit unions appear more similar than distinct. “Maybe the movement would be better off, in the long run, if some of these folks who want to move on, just move on.” Tippets said his only surprise came because Community was the first credit union that he knew was considering charter change to make the attempt. “I know of three or four more who won’t surprise me if they try it,” Tippets said, though he declined to identify which ones. Other credit union CEOs in the Dallas area expressed similar expectations, though each denied that their credit union was one considering trying to change charters. Dick Ensweiler, CEO of the Texas Credit Union League and Chairman of CUNA said Community’s move disappointed him but said that he didn’t believe the move represented a wave of other credit unions taking the same step. “Of course it’s disappointing,” Ensweiler said, “but in the end it’s their decision according to what is best for their members and their business needs.” Like Sorrels, Ensweiler said that Community CEO Gary Base and the chairman of the credit union had visited him personally to deliver the news and like every other credit union CEO interviewed for this story, Ensweiler cast the discussion in business terms. “A credit union board has to review and make the decisions it needs to make according to that credit union’s situation,” he said. Ensweiler also said that Community’s move should not be taken as a comment on the state’s CU charter, pointing out that the credit union could have chosen a federal charter and chose not to do so. Allison Griffin, vice president of communications for the League said it would be “premature” for the League to establish a Web site, as the Michigan Credit Union League had done in response to Lake Michigan Credit Union’s disclosures, though she did not rule out that possibility. The MCUL began a Website, www.memberinform.org, to provide information to Lake Michigan members that the credit union had left out of its disclosures. It also advertised in the local press to promote the Web site, a move which some observers noted would be difficult to do in Dallas due to the Texas’ cities more expensive media market. Even though some credit union CEOs in the Dallas area saw the move coming, it caught many outside Texas by surprise, largely because of Base’s reputation as a strong credit union advocate and his position in the industry. Not only did he often participate in credit union industry conferences as a speaker, Base chairs Texas’ Credit Union Commission, a nine-member governmental entity which is charged with advising the Credit Union Department about credit union industry matters and regulation. Base is scheduled to serve on the commission until mid-February in 2007. There are two other members of the commission that are connected to the industry as board members or CEOs. All members of the commission are appointed by the governor and confirmed by the state senate. Despite his institution’s seeking to change its charter, Base said he remains “very pro-credit union” and that he has no plans to resign from the position until the charter actually changes. Gary Janacek, CEO of the $24 million Scott and White Employees Credit Union, a $25 million sole-sponsor credit union headquartered in Temple, Texas, is the other CEO on the commission. He said the CU’s move did not necessarily mean Base should resign. “It’s not a done deal yet,” Janacek said, “the membership still has to vote and Chairman Base has served very well.” Harold Feeney, Commissioner of the state’s Credit Union Department, agreed and also noted that, from the point of view of statute, Base qualified to sit on the commission unless and until Community ceased to be a credit union. Still, some have questioned whether Base had a conflict of interest sitting on a board which had some say over the regulation of the charter change process, but the record does not bear out any conflict. According to Feeney, under Texas law, a state chartered credit union which seeks to change its charter to that of a mutual bank must only obtain the agreement of a majority of members attending a meeting called to vote on the proposed change and must obtain the permission of the state or federal regulator which will regulate the institution. “There are five official steps, but it’s a mostly pro-forma process,” Feeney said, adding that it had been on the books in the state since sometime in the early 1990′s. Every four years or so, each of the credit union regulations comes up for review by the commission, Feeney explained and the charter change regulation came up last year, while Base chaired the commission. But rather than weaken the regulation, Base supported a move to strengthen charter change disclosure regulations to make them more like NCUA’s at the time, a change the League explicitly supported. Although Community Credit Union is at the beginning of the charter change process, there are a couple of things worth noting. First, the credit union has avoided having to follow NCUA’s latest disclosure regulations for credit unions seeking to change their charters. Among other things, the preliminary version of these regulations mandate the so-called “black box” on the disclosures front page which will lay out some details of the conversion in plain language. The NCUA Board approved the preliminary version of these regulations in July 2004 and the period for public comment on them has closed, but the board has yet to approve their final version, so Community will still be able to issue disclosures under the old form. Second, even though state law allows Community to conduct its charter change vote solely in a special meeting called for that purpose, NCUA has said it interprets its regulations to require the credit union provide a ballot that members will be able to mail back to the CU. NCUA’s regulations part 708a.4(c) states that a credit union must “clearly inform the member that the member may vote at the special meeting or by submitting the written ballot” and NCUA spokesman Nick Owens said that the agency interprets as “submitting the written ballot” to be mailing it. This has significance because it appeared under Texas law that the 220,000 member credit union could have changed charter on the basis of a majority of the members who might fit into an auditorium. But Theriault scoffed at the possibility that a credit union seeking a charter change in 2005, even a small one, would not use a mail-in ballot. “That’s just not the way one of these votes would be conducted,” he said. The next steps will be for the credit union to gain the approvals of the FDIC and Office of Thrift Supervision, as well as have its disclosure statements approved by NCUA, and the final step will be the vote of the members. “I won’t predict how it will come out,” said Robert Rogers, CEO of the $559 million EECU Credit Union, headquartered in Fort Worth, “but I wouldn’t be surprised if it passed. They have been acting like a bank for long enough now that I think there may be a lot of their members who might say, `what’s the difference’ and vote for it.” “One thing,” he added, “I’ve known Gary Base and that credit union for a long time and if they have taken this step they expect it to pass. They do their homework over there.” [email protected]