CoastHills Federal Credit Union members approved convertingtheir cooperative to a state charter Tuesday after it failed tosecure field of membership expansion approval from the NCUA.

President/CEO Jeffrey York said he found the process a bitfrustrating.

“We know we can't stay at our current size and continue to makea difference,” said York, who leads the $740 million,Lompoc,-Calif.-based credit union that serves more than 58,000members.

By a vote of 844 to 461, members approved the charter changethat comes with a one-time $400,000 conversion cost. As a newstate-chartered credit, CoastHills also will be required to payCalifornia's 7.5% state sales tax.

York said the credit union wanted to keep its federal charterand never had issues with it until it started looking at expandingits FOM about a year ago.

The state charter will allow CoastHills FCU to grow its FOM from its current markets ofnorthern Santa Barbara County and San Luis Obispo County to all ofSanta Barbara County as well as Ventura, Monterey and Santa Cruzcounties.

“When you look at credit unions with a billion dollars ormore in assets, they typically have lower efficiency ratios –meaning they are more efficient – and we need to get to thatpoint,” he said. “There are towns where we have 40% penetration inour current field of membership. It's not going to get any betterthan that. So we need grow and expand to compete with local banksand large banks.”

The credit union's FOM expansion request was denied because itwould have stretched the credit union beyond its metropolitanstatistical area.

That is not allowed under the regulations, NCUA Public Affairs Specialist John Fairbanks said.

York, who understood NCUA's decision, also said he followed upwith an application for a rural district designation.

Fairbanks, however, said there was no formal request fromCoastHills for a rural district designation, which has to meetcertain requirements for population and population density.

“I can tell you that we submitted a request in writing to NCUAon a rural charter along with our calculation and was given thethumbs down on the phone and in writing,” York said.

The current definition to qualify for a rural designation setsthe maximum population of a rural district at 250,000 or 3% of thepopulation of the state in which the majority of the district islocated, whichever is greater. Although the area CoastHills wasconsidering serving would have met the population threshold becauseCalifornia is a large state, the area would not have met theregulatory requirement of having a low population density,according to NCUA.

As far as the population density calculation goes, however,Santa Barbara County officially includes the body of water betweenthe main land and the Channel Islands, which is approximately3,700-square miles, according to York.

“The (U.S.) Census Bureau does not consider the water in theirpopulation density calculation knocking off approximately 1,000square miles, so NCUA would not either,” he said. “If the waterarea (were) an uninhabitable mountain instead of water, it wouldhave (been) counted, at least in my argument.”

CoastHills FCU also considered changing to an associational ormultiple SEG charter.

“We have been a community credit union for almost 20 years, sothat would have been a little more difficult for us, and I don'tknow what the implications would have been for our currentmembership,” York said. “We are all about the community. That ishow we set up our vision and our core values.”

In the end, York added, all of the stakeholders, includingmembers, communities and employees, will benefit from the creditunion's state charter.