Profitability Of Conversion Proven Out At 2 Former CUs

PLANO, Texas- Two credit unions in various stages of converting to a bank charter showed last week the profits that can be had for insiders.

Shareholders of Viewpoint Bank, known until last year as Community CU, are expected when they meet in one week to approve a pot of more than $30-million in stock and stock options for insiders-by far the richest bonus pool ever granted by a credit union-convert.

The shareholders are expected at their May 22 annual meeting to approve an Equity Incentive Plan that will dole out 1.6 million shares of restricted stock to managers and directors valued at $30 million, and an additional 1.2-million shares subject to options and stock appreciation rights, according to the ex-credit union's annual proxy statement filed with the Securities and Exchange Commission.

The largest beneficiary of the bonus pool is expected to be Gary Base, president and CEO of the $1.4-billion credit union-turned-bank, who stands to receive 140,000 shares valued at $2.5 million.

The shares will vest in equal installments over five years, but the former credit union executive will earn dividends on them and have full voting rights the day they are awarded. Base earned more than $1 million last year from the conversion of his credit union, including compensation of $920,000 and more than $200,000 in profits on his newly minted Viewpoint stock., according to the proxy.

The multi-million dollar pay package comes as Congress is reviewing the conversions issues and debating how it may address the issue in pending legislation, the CU Regulatory Improvements Act.

As currently drafted, the bill would make it tougher for credit unions to convert to mutual savings banks by requiring at least 30% of eligible members vote on the matter-a threshold that few converts have met till now. Another provision in CURIA would require that members get to meet and discuss the conversion before it is voted on by the board. The process now has the board vote the conversion, then put the question to members for a vote.

Members of the House Financial Services Committee were meeting last week with representatives of both sides of the credit union conversions debate to discuss how the committee might proceed with their bill.

Like the credit union conversions before it, the initial public offering in Viewpoint/Community CU has been a big success, earning millions of dollars in profits on just a few months. Shares in Viewpoint, the largest credit union to convert to bank, have soared 80% to $18 each, since the credit union-convert went public last October, just 10 months after its switch to bank.

Meanwhile, in Waycross, Ga., the second-step conversion of ex-credit union Atlantic Coast Federal Bank could reap as much as $1 million in underwriting fees for investment bank Friedman, Billings, Ramsey & Co., adding to millions of fees already earned by the company for selling stock in former credit unions.

The former Atlantic Coast FCU announced last week it will follow up its October 2004 limited initial public offering by selling a majority stake to the public-a two-step conversion that could yield in excess of $120 million. Friedman, Billings earned $580,000 from the 2004 IPO, in which just 36% of the converted credit union was sold to the public and a mutual holding company retained a controlling 64% stake-which it plans to sell now. At the traditional 1% commission, the two-step offering could yield as much as $1.2 million in fees for the investment bank.

"The reason that they want to make the mutual holding company a fully stock company is there's a whole lot more money to be made. It's a second trip to the well," said Steven Bisker, a Virginia attorney who has helped oppose credit union conversions.

Friedman, Billings is just one of several investment banks that have earned millions of dollars by serving a multitude of functions for credit union converts. One Wall Street firm, Sandler O'Neill, for example, has not only advised credit unions on the switch to bank, but earned fees underwriting one IPO, then traded millions of dollars in stock in former credit unions.

The company's Sandler O'Neill Asset Management unit is one of the biggest shareholders in First PacTrust Bancorp, (once Pacific Trust FCU) with stock valued at $4.2 million, according to a Securities and Exchange Commission filing.

Keefe Bruyette & Woods, another Wall Street bank, has earned more than $6 million in fees from underwriting deals for converted credit unions, including $1.2 million for last October's hugely successful IPO for Viewpoint Bank, known until January 2006 as Community CU. KBF is also expected to be the underwriter for the IPO of OmniAmerican Bank (OmniAmerica CU), to come to market any day and expected to raise more than $100 million.