Another CU Aims to Become Bank; Converting CU in Texas Run by Former NCUA Examiner; Shows Pattern of Strong Growth

Credit Union Times   September 12, 2007
By David Morrison

ODESSA, Texas — A state chartered credit union in Texas whose CEO is a former NCUA examiner has filed an application with the Office of Thrift Supervision to become a federal mutual savings bank.

The $113 million First Basin Credit Union, headquartered in Odessa, is 42 years old, has over 23,000 members and a recent history of very strong growth. NCUA data indicate the CU has seen 12.61% growth in its loan portfolio, an average 8.49% increase in the number of its members and an average 16.77% growth in its assets since June of 2006.

This rate of growth has meant the credit union has an ROA of more than double its peer group (1.59 vs. 0.71 for peers) while its net worth lags significantly (9.32 versus 11.68 for peers).

In its summary of the CU’s application, the OTS has said that it expects to make a decision about the conversion application by Nov. 22. Should the CU convert before others also in the process, First Basin would be the 34th credit union in the country to make the charter change, according to CU Financial Services, a consulting firm that specializes in credit union-to-bank charter changes.

It may also be the first CU in the country to convert with a former NCUA examiner at the helm. The agency confirmed that First Basin CEO Shem Culpepper, worked for the NCUA as an examiner from September of 1987 to August of 1995.

Neither the credit union nor its CEO have responded to requests for interviews about its charter change application, but sources with other CUs in that part of the state, as well as the Texas Credit Union League said that they had known the move might be a possibility for some time.

"I am not terribly comfortable commenting about this because it's not my credit union," said one CEO of a credit union in First Basin's area who did not want to be on the record. "But, no, I can't say that I was surprised and I doubt if many others were either. It's seemed to me that the character of that credit union has changed over the years."

As examples of the sorts of changes they meant, area credit union executives said that the board of the CU had changed to include more small business people, to the point where small businessmen had become the majority of the board. These new board members, the executives said, were people who might have been more sympathetic to a move to a bank than other board members might have been.

The Texas Credit Union League also confirmed that TCUL CEO Dick Ensweiler had met with Culpepper to discuss ways First Basin could meet its objectives while remaining a credit union, but Ensweiler was traveling as of press time and was unable to comment.

The credit union executives agreed that in addition to having very strong growth and lots of advertising in the area lately, something at least one credit union CEO thought indicated the CU was trying to grow in advance of the conversion; First Basin also lacked a strong identity in the area.

While it is 42 years old, sources said the CU really only began to grow fairly quickly when it took on a nearby major medical center as a SEG. The CU became First Basin in 2005, a name drawn from the geological formation that is credited with giving the area its deep oil and gas reserves.

First Basin does not belong to any CUSOs and while the CU has made almost 2,500 indirect auto loans worth just over $36.25 million and 18 member business loans worth roughly $2.68 million, (of those 10 worth $1.77 million were made in the last year) First Basin offers no credit card.

Notification Problems?

Under NCUA's current regulations, First Basin first notified its members that it was contemplating a conversion and solicited their comments on at least its Web site and perhaps through a member mailing in early June of this year. Access to the notice has disappeared from the public part of the CU's Web site since, but in copies obtained by Credit Union Times First Basin does not mention the charter move.

In the documents First Basin avoided the use of the word bank, choosing instead the term "federal mutual savings association."

Inviting members to comment on a possible charter change is a mandated first step in the charter change process and was meant to let members weigh in on the possible change in advance of the CU's board initiating an application. The CU had to first run the notice past NCUA.

The agency has not commented on why it allowed documents that were meant to notify members of the possible charter change to obscure the fact that the CU would seek to move to a bank charter and would only say that the CU's other documents were still under review.

Comments were due by July 8 and the CU said its board would consider the move on July 11. The Office of Thrift Supervision dated the CU's application Aug. 24.

In the documents First Basin argued that it needed to make the change to help further growth and that remaining a credit union would slow the institution down too much. In one of the documents First Basin wrote:

"Would we be able to meet this need as a credit union? To some degree, yes, but on a smaller scale and at a significantly slower pace than would be permitted as a mutual savings association. In this regard, we believe the federal mutual savings association charter, which was created to promote home ownership and has more favorable capital requirements, particularly as they relate to real estate lending, is more appropriate for First Basin as we move forward."

First Basin also noted its commercial lending activity, arguing it was already doing some but needed to be able to do more. "While we currently do make some small business loans to members, to operate a successful commercial lending program requires considerable investment in staff and infrastructure," First Basin wrote. "As a federal mutual savings association, our capacity to make commercial real estate, construction and development loans and other business loans, and our competitive ability in making these loans, would be significantly increased, making the decision to invest resources into this line of business more reasonable."

But while the notification outlined the board's reason for urging conversions, it did not include any specific references to analysis performed by CUNA Chief Economist Bill Hampel in 2006 on whether the members of the credit union would benefit from a charter change.

Hampel noted that changing charters would specifically act against some of the things First Basin had used in its argument for conversion. For example, the credit union had cited the federal quality thrift lender test that would require that the CU make at least 60% or 65% (depending on which way they are counted) of its assets to qualified thrift loans, which do not include auto loans. The CU downplayed this, arguing that the CU had been heading in that direction "for the last couple of years," but Hampel's analysis suggested that the shift would be significant.

"To meet Qualified Thrift Lender (QTL) test guidelines the institution would need to change its operations substantially—essentially doubling its portfolio of mortgage and non-automobile consumer loans," Hampel wrote in the analysis. "A drastic change, such as growing the mortgage portfolio by liquidating the entire $23 million surplus funds portfolio would still leave First Basin short of QTL guidelines."

The CU also downplayed or failed to mention Hampel's observation on what the addition of CRA would mean to the CU, as well as taxation.

"The substantial costs associated with conversion arising from additional legal and regulatory guidelines make operations more difficult," Hampel wrote. "But tax payments also are substantial and (all things equal) limit growth opportunities. For example FBCU's 2006 ROA of 1.66% would be closer to 1.00% on an after-tax basis. Taxation would likely put downward pressure on dividend rates on savings, put upward pressure on loan rates and/or cause the institutions capital to decline."

However, First Basin did tell its members it has yet to decide if it would keep the one depositor, one vote standard which characterizes CU governance or whether it would adopt a mutual savings bank standard of granting more votes to bigger depositors. But it did say that it did not expect to further convert to a stock issuing institution in the next 3-5 years.


© 2007, Used with permission from The Credit Union Times. All rights reserved.

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