Depositions Reveal Partial Picture of Pre-Conversion Research at First Basin
In documents sent to members prior to the CU's August 2007 charter change application, credit union CEO Shem Culpepper and Board Chairman Annette Snowden argued the CU needed to make the charter change to grow in some specific ways.
"Would we be able to meet this need [to grow] 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," the CU offered as a reason for changing charters. "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 added.
The credit union also cited its commercial lending activity as a reason for the charter change, arguing it was already making some member business loans as a credit union but needed to be able to do more.
"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," the CU wrote.
But in sworn statements taken after the conversion, Culpepper and Snowden denied commissioning any studies, audits or reports that would back up their assertions and failed to mention receiving analyses conducted by credit union economists that contradicted them.
Culpepper's and Snowden's statements were taken as part of a set of May 12 depositions flowing from a legal battle between the CU and some of its members who opposed the conversion attempt. Also deposed on the same day were First Basin members Letty Ayala Moreno, Carol Uranga and Sylvia Acosta. Moreno, Uranga and Acosta were organizers of Save First Basin, an organization set up by some members to oppose the conversion attempt.
Instead of conducting any detailed study of the benefits of the charter change, Culpepper acknowledged meeting once with former credit union CEO Gary Base, who led Community Credit Union through conversions to first a mutual bank charter and then to a stock-issuing mutual holding company. Culpepper and the board also consulted numerous times with Alan Theriault, CEO of CU Financial Services, a consultancy that helps credit unions convert to mutual bank charters.
Culpepper also said First Basin hired the Washington law firm Silver, Freedman & Taff, which includes credit union to bank conversions as one of its services.
During the deposition, a low level of conflict simmered between Culpepper and Calvin Hendrick, the lawyer for Moreno, Uranga and Acosta, as Hendrick tried to probe into what sorts of research into charter change the credit union leadership had done prior to First Basin's launching its charter change bid.
At one point, Hendrick asked the CEO, "What analyses, studies or reports did the board of directors or you perform" to show that the CU would be able to offer its members a better deal as bank customers than they received as members?"
Culpepper answered, "None. You are asking questions that are too complicated for me to follow. They are too loaded."
Hendrick's question to Culpepper was significant because Culpepper had received a detailed analysis of First Basin's position and options as a credit union in April 2007. CUNA Chief Economist Bill Hampel performed the analysis at the request of Dick Ensweiler, then chairman of the Texas Credit Union League and with Culpepper's assurance that he would consider it.
The study followed upon a telephone conversation between Ensweiler and Culpepper, as well as a number of e-mail communications to Culpepper and a phone call between Culpepper, Hampel and CUNA General Counsel Eric Richard, all in April 2007. The focus of all this communication, Hampel explained later, was to help Culpepper understand that First Basin had plenty of room within a credit union charter to achieve the CEO's goals. Hampel's analyses also suggested that the charter change could leave First Basin with significant challenges it did not then have as a CU.
"With very high growth, a modest risk profile, solid earnings and a high net worth ratio, it is difficult to identify a compelling reason for the conversion of this credit union," the Hampel report said.
"In fact, it might be argued that conversion would introduce substantial legal and regulatory changes that would not be in the best interests of current member-owners. For example, as a mutual savings association (MSA), FBCU [First Basin Credit Union] would have to make fundamental changes to its operations to meet thrift lending guidelines; it would face more stringent branching requirements; and it would not significantly increase opportunities in the business lending arena."
Ensweiler, the Texas Credit Union League and Hampel all confirmed the meeting with Culpepper and the existence of Hampel's report in August 2007, after First Basin filed its charter change application, but none were available to comment for this article.
Hendrick's question may also have bearing on the certifications that First Basin's board members had to include with the charter change application to the NCUA.
In these certifications, credit union board members that vote in favor of a conversion must certify to the NCUA that they believe the charter conversion is in the best interest of the credit union and its members. Further, according to NCUA's regulations, board members must also provide copies of all the documents they have studied in coming to support the conversion.
But in her deposition, Snowden said board members did not look at any external reports or documents about the advisability of the conversion before they approved it, which would appear to call into question the basis for their certified belief that the conversion would be best for First Basin's members if Culpepper had Hampel's analysis in April. First Basin's board voted to approve the conversion application in July.
As of press time, no one from the credit union responded to questions about the depositions.
The depositions from Uranga, Moreno and Acosta reaffirmed what had been previously reported about Save First Basin and added some additional detail.
As previously reported, the three members indicated that they received a high degree of support for the Save First Basin organization from the National Center for Members Trust. The depositions confirmed previous reports that the National Center helped fund, with $12,000, the members' letter to other members outlining their opposition to the conversion.
The members testified that they learned about other credit union to bank conversions from the National Center Web site and that the National Center put them in contact with someone who could develop their own site. The members also testified that a staff member with the National Center helped draft their press releases.