Community is the first credit union to seek to change its charter to a mutual bank under NCUA's revised and toughened disclosure regulations. The agency designed the new rules to make sure that credit union members facing a charter change have the information they need to make their decision, and charter conversion advocates have largely decried them. The detailed breakdown of the credit union's charter change spending was part of that agency mandated information, which appeared in the charter information packed in a black-bordered box and with some use of larger, bolder type. Other elements in the black box included changes to the members' ownership interest in the institution, the impact of increased expenses on its operations and the fact that sometimes officers and directors of mutual financial institutions do better than members when the institutions issue stock. But while the credit union dutifully included all of NCUA's required information, it also added a supplemental page under the upper case and bold headline YOUR CREDIT UNION WANTS YOU TO KNOW THE FACTS. On this page Community told members that it does not believe that changes to the voting structure will change how much control any member or group of members can wield, even though the voting structure will allow members with greater deposit balances to have more votes. It also told members that increased capital and growth will offset the increased expense taxation will bring and that further regulated votes will be required before the former credit union could issue any stock. Significantly, Community also used this space to suggest that it would save substantial money by not being a credit union. As of December 31 2004, Community said it had almost $10 million deposited with the National Credit Union Shared Insurance Fund and that this money generated approximately $200,000 in interest and that 60% of this money went to support NCUA and nothing was returned to the credit union. "If the conversion to a mutual savings institution is completed, the NCUSIF deposit will be returned to Community and invested by us for the benefit of our members," the credit union wrote, "thereby creating more earnings to pay interest on savings accounts, keep interest rates low on loans and hold down service fees." This is somewhat ironic. The only reason Community can anticipate a savings in this part of its operations is because, if it becomes a bank, it will become what bankers call a "free rider." Free riders are recently created banks or thrifts which are considered well capitalized and thus get their FDIC insurance for free without ever having paid into it, according to David Barr, spokesman with the FDIC. It was also a somewhat incomplete disclosure because free riding banks are controversial within the banking industry and various proposals to reform the FDIC and assess a premium on even well-capitalized banks are circulating among federal lawmakers and may pass this year. Various bank organizations, such as American Bankers Association and America's Community Bankers have differing proposals out, almost all of whom will impact Community's future relationship with the FDIC if the charter change comes to pass. Unlike other credit unions which have sought to become mutual banks, Community didn't offer any justification for seeking to change its charter other than its need for increased capital. Other credit unions have cited the need for capital, but also member business lending regulations and field of membership rules. "We currently have no ability to raise capital other than through profits (i.e. net earnings), which are generated almost exclusively through fees and interest charged to members," the credit union wrote. "We have been restricting our branches, products and services in order to comply with the 7% minimum regulatory net worth ratio imposed on credit unions by federal regulations to be considered well capitalized." Community did not offer any specific examples of branches, products or services it had decided not to open or to offer because of the capital ratio and Community CEO, Gary Base, declined to answer any questions about the disclosures at all. Base would only confirm that the credit union had sent the disclosures to its members and said that any other information about the disclosures "must remain between the credit union and its members." But Credit Union Times Correspondent Jana Fowler is a member of Community Credit Union and called to ask for examples of branches or products that the credit union has not been able to offer, especially since the credit union has seemed fairly pro-active about building branches. The Community representative that Fowler spoke with could not answer the question and offered to have Base call her back (see sidebar). The credit union's unwillingness to answer questions about how its members are reacting to the disclosures makes it difficult for the NCUA or other credit union industry organizations, such as the Texas Credit Union League, to evaluate how well the disclosures are doing in informing members of both sides of the charter change. This is important because waiting to measure the disclosure's impact was one reason the TCUL gave for not taking a more pro-active stand, such as with an advertising campaign, to educate members about the merger. The Community representative that Fowler talked to on the phone suggested that the lines had been active and that members have been concerned about the possibility they might lose control of the credit union, along with concerns about signing the outside of their ballot envelopes. But even without any formal reaction from the League, at least one small credit union has offered its support for an advertisement aimed at countering the possible charter change. The $19 million Space City Credit Union, based in Houston, has offered $1,000 to a credit union in the Dallas area to help pay for an advertisement in the Dallas press that would seek to inform Community members and those of the $1.2 billion OmniAmerican Credit Union of what they will lose if their banks change charters, according to Craig Rohden, CEO of the credit union. OmniAmerican announced its intention to seek a charter change about a month after Community's announcement. Rohden estimated that an advertisement in the Dallas press would cost $10,000 but said his credit union was willing to chip in to help defend the credit union charter. (See related Rohden letter on page 16.) "I think many credit union people concentrate on living their lives and growing their credit unions," Rohden said. "But we need to wake up. The banks have a lot more money than we do and if we don't stand up for our charter they are going to sweep us under the rug." -

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