DALLAS – The $1.4 billion Community Credit Union, the sixthlargest in the state of Texas, has become the latest credit unionin the country to declare its intention to change to a mutualthrift charter and may be the first among as many as four more inthe Dallas area to seek to do so. The credit union quietlyannounced the charter change move in a notice posted over the NewYear's weekend on its Web site (www.communitycu.org). Theannouncement 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 itrepresented but that it would refrain from commenting at length onthe move until after NCUA had approved its member disclosures. CEOGary Base confirmed that Community has applied to NCUA, the FederalDeposit Insurance Corporation, the Office of Thrift Supervision andthe Texas Credit Union Department to make the change. Base stuck tothe credit union's announcement and would not go into detail aboutthe reasons Community sought the change, other than to state thatthe board and leadership had concluded that a charter shift wouldbenefit the institution and its members and promised more detailsafter NCUA approved the disclosure documents. “As I am sure youunderstand,” Base said, “these charter conversions are extremelycomplicated and we have chosen to not to say much about it untilafter the disclosures are approved.” Sources confirmed that, shouldits members approve the move, the bank would seek to structureitself as part of a mutual holding company that the bank depositorswould continue to control but which would issue stock to raisefunds on the capital markets. Alan Theriault, the foundingconsultant with CU Financial Services, a leading advocate forcredit unions shifting charters confirmed that he is serving thecredit union as a consultant in the effort and that the WashingtonLaw Firm of Silver, Freedman and Taft is providing legal services.Although Base would not address the reasons Community took thisstep, other credit union CEOs said they were not surprised the CUhad done so. Indeed some said they would be surprised if Communitywere not merely the first among three or four in the Dallas areawho might also try to change charters. Ken Sorrels, CEO of the $1.5billion Credit Union of Texas, headquartered in nearby Dallas, saidthat Base had called him personally to let him know the news“before the street gets it,” and that he was not surprised in theleast. Sorrels said that in previous conversations Base indicatedthe credit union felt pressure in three particular areas: memberbusiness lending and the statutory limits on it, real estatelending and the NCUA's regulation of it, and the statutory capitalbuilding limitations. With capital, for example, according toNCUA's records, Community's equity ratio has hovered between 7.16and 7.59 over the year ending in September 2004, and when it cameto member business lending the credit union carried almost $43million in member business loans on its books as of September,$22.5 million of which it had booked in the previous year. Sorrelspointed out that under the current law, a credit union doing a lotof member business lending would reach a point where it just had tostop, a blockade that a bank would not face. But in Sorrel'sopinion it was the capital requirements that really got underCommunity's skin. He noted that Community, like other creditunions, had just been through a period of rising deposits, a flightto safety and Base knew they could not predict when it might happenagain. “I know Gary and some of the guys on that board,” Sorell'ssaid. “They are independent men and not real keen on having NCUAgetting too involved if they got into a bad capital situation andthey had no way of knowing that a similar rush wouldn't happenagain.” Other CEOs also said they had not been terribly surprisedby Community's move, pointing out that the credit union had beensteadily “acting more and more like a bank” for some time. Onerelated how he had been very impressed with how well Community hadbeen doing managing its credit card portfolio, until Base hadexplained that the credit union had been using “nuisance fees”similar to those that bank card issuers used and putting importantdetails of their card program into the finer print at the bottom ofthe card agreements. Another CEO noted how much of Community'sadvertising identified the institution as a bank already. JohnTippets, CEO of the $4.1 billion American Airlines FCU,headquartered in the Dallas area, echoed other CEOs' lack ofsurprise and speculated that the credit union industry might bebetter off if the credit unions who had taken a bank-like approachto doing business just went ahead and changed their charters. “Ihave to question the value of continually expanding the creditunion tent to include credit unions which have really adopted aremore bank-like philosophy and approach,” Tippets said. “As some ofthese geographic fields of membership have gotten so large theyhave really destroyed any notion of the common bond and sharedassociation that credit unions used to be built upon,” he said.Credit unions like these, Tippets suggested, water down theidentity of the credit union movement and tend to make banks andcredit unions appear more similar than distinct. “Maybe themovement would be better off, in the long run, if some of thesefolks who want to move on, just move on.” Tippets said his onlysurprise came because Community was the first credit union that heknew was considering charter change to make the attempt. “I know ofthree or four more who won't surprise me if they try it,” Tippetssaid, though he declined to identify which ones. Other credit unionCEOs in the Dallas area expressed similar expectations, though eachdenied that their credit union was one considering trying to changecharters. Dick Ensweiler, CEO of the Texas Credit Union League andChairman of CUNA said Community's move disappointed him but saidthat he didn't believe the move represented a wave of other creditunions taking the same step. “Of course it's disappointing,”Ensweiler said, “but in the end it's their decision according towhat is best for their members and their business needs.” LikeSorrels, Ensweiler said that Community CEO Gary Base and thechairman of the credit union had visited him personally to deliverthe news and like every other credit union CEO interviewed for thisstory, Ensweiler cast the discussion in business terms. “A creditunion board has to review and make the decisions it needs to makeaccording to that credit union's situation,” he said. Ensweileralso said that Community's move should not be taken as a comment onthe state's CU charter, pointing out that the credit union couldhave chosen a federal charter and chose not to do so. AllisonGriffin, vice president of communications for the League said itwould be “premature” for the League to establish a Web site, as theMichigan Credit Union League had done in response to Lake MichiganCredit Union's disclosures, though she did not rule out thatpossibility. The MCUL began a Website, www.memberinform.org, toprovide information to Lake Michigan members that the credit unionhad left out of its disclosures. It also advertised in the localpress to promote the Web site, a move which some observers notedwould be difficult to do in Dallas due to the Texas' cities moreexpensive media market. Even though some credit union CEOs in theDallas area saw the move coming, it caught many outside Texas bysurprise, largely because of Base's reputation as a strong creditunion advocate and his position in the industry. Not only did heoften participate in credit union industry conferences as aspeaker, Base chairs Texas' Credit Union Commission, a nine-membergovernmental entity which is charged with advising the Credit UnionDepartment about credit union industry matters and regulation. Baseis scheduled to serve on the commission until mid-February in 2007.There are two other members of the commission that are connected tothe industry as board members or CEOs. All members of thecommission are appointed by the governor and confirmed by the statesenate. Despite his institution's seeking to change its charter,Base said he remains “very pro-credit union” and that he has noplans to resign from the position until the charter actuallychanges. Gary Janacek, CEO of the $24 million Scott and WhiteEmployees Credit Union, a $25 million sole-sponsor credit unionheadquartered 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 hasto vote and Chairman Base has served very well.” Harold Feeney,Commissioner of the state's Credit Union Department, agreed andalso noted that, from the point of view of statute, Base qualifiedto sit on the commission unless and until Community ceased to be acredit union. Still, some have questioned whether Base had aconflict of interest sitting on a board which had some say over theregulation of the charter change process, but the record does notbear out any conflict. According to Feeney, under Texas law, astate chartered credit union which seeks to change its charter tothat of a mutual bank must only obtain the agreement of a majorityof members attending a meeting called to vote on the proposedchange and must obtain the permission of the state or federalregulator which will regulate the institution. “There are fiveofficial steps, but it's a mostly pro-forma process,” Feeney said,adding that it had been on the books in the state since sometime inthe early 1990's. Every four years or so, each of the credit unionregulations comes up for review by the commission, Feeney explainedand the charter change regulation came up last year, while Basechaired the commission. But rather than weaken the regulation, Basesupported a move to strengthen charter change disclosureregulations to make them more like NCUA's at the time, a change theLeague explicitly supported. Although Community Credit Union is atthe beginning of the charter change process, there are a couple ofthings worth noting. First, the credit union has avoided having tofollow NCUA's latest disclosure regulations for credit unionsseeking to change their charters. Among other things, thepreliminary version of these regulations mandate the so-called“black box” on the disclosures front page which will lay out somedetails of the conversion in plain language. The NCUA Boardapproved the preliminary version of these regulations in July 2004and the period for public comment on them has closed, but the boardhas yet to approve their final version, so Community will still beable to issue disclosures under the old form. Second, even thoughstate law allows Community to conduct its charter change votesolely in a special meeting called for that purpose, NCUA has saidit interprets its regulations to require the credit union provide aballot that members will be able to mail back to the CU. NCUA'sregulations part 708a.4(c) states that a credit union must “clearlyinform the member that the member may vote at the special meetingor by submitting the written ballot” and NCUA spokesman Nick Owenssaid that the agency interprets as “submitting the written ballot”to be mailing it. This has significance because it appeared underTexas law that the 220,000 member credit union could have changedcharter on the basis of a majority of the members who might fitinto an auditorium. But Theriault scoffed at the possibility that acredit 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 ofthese votes would be conducted,” he said. The next steps will befor the credit union to gain the approvals of the FDIC and Officeof Thrift Supervision, as well as have its disclosure statementsapproved by NCUA, and the final step will be the vote of themembers. “I won't predict how it will come out,” said RobertRogers, CEO of the $559 million EECU Credit Union, headquartered inFort Worth, “but I wouldn't be surprised if it passed. They havebeen acting like a bank for long enough now that I think there maybe 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 andthat credit union for a long time and if they have taken this stepthey expect it to pass. They do their homework over there.”[email protected]