Credit Union May Convert to For-Profit Bank

Credit Union May Convert to For-Profit Bank

Directors of Lafayette Federal Credit Union say conversion would keep the institution competitive; opponents say it would benefit the directors at the cost of the regular members.

The board of directors at Lafayette Federal Credit Union wants to convert the Potomac institution into a for-profit bank, a move that could generate millions in profit and increase business.

Opponents say a conversion would largely benefit the directors at the expense of the regular members.

Credit unions began in the early 1900s as not-for-profit institutions owned by the members who use them. The cooperative nature of the institutions provides customers with reasonably priced loans and low fees.

Lafayette Federal Credit Union, which is based in Kensington, was founded in 1935 and bought out Potomac Community Federal Credit Union about 15 years ago. It is a $330 million financial institution with a $250 million loan portfolio, and it has more than 16,000 members, employees of member companies or agencie or residents of Potomac.

At, opponents of the conversion claim that Lafayette would likely close its most-used branches because they are currently located in government buildings that cannot continue offering rent-free leases once the credit union becomes a for-profit bank. In addition, the website alleges that since Lafayette would be required to pay taxes as a bank, the increased costs will be passed down to members in the form of higher fees and inferior loan rates.

Michael Hearne of Annapolis is president of the credit union and strongly supports the conversion.

“It makes it infinitely easier for us to execute our strategic plan,” he said. “Over the years, we became a mortgage lender with a lot of business lending activity also, and it’s difficult to do that with credit union. A lot of credit unions have evolved away from mom and pop financial co-ops.”

Barton Veret of Potomac is vice chair of the board of directors. He said that conversion to a mutual savings bank would make Lafayette Federal more competitive and better able to serve its members.

“We really have to increase earnings – we have to grow in order to better serve our members,” he said. “[A mutual savings bank] can provide much better services and loans to small businesses, and it’s important to us because it enables us to diversify our product line.”

Veret acknowledged that the board would consider converting from a mutual savings bank to a stock corporation later on, but he said that this would require another vote. Under this scenario, he said that 51 percent of Lafayette’s stock would be held by a holding company owned by the members of the bank.

“Business may dictate that it would be in the interest of the majority of the members of the bank” to eventually convert to a stock company, he said. “That can bring in $20 million in capital to make more loans, do more business, open branches and do a lot of the things we want to do.”

OPPONENTS OF the conversion argue that the board of directors is the most likely to participate in and benefit from the increased stock options that come with conversion since less affluent members typically don’t have the available funds or knowledge to participate in stock opportunities.

Amber Brooks of Alexandria is a federal employee of the U.S. Agency for International Development who has been a member of Lafayette Federal Credit Union for the past year and a half. She is concerned because members will no longer share ownership of the credit union once it becomes a for-profit bank. She said that research available on suggests that previous conversions have not been to the benefit of credit union members and that directors gain the most.

“They’re claiming it’s going to benefit members, but research shows the opposite,” she said.

Brooks said she was also concerned after she and other opponents of the conversion drafted a letter asking 16 pointed questions about the conversion proposal and “got one paragraph back not answering any of the questions.”

“The board of directors is a volunteer position that’s supposed to represent members’ interests,” she said. “I really think that has not happened.”

Veret said that the board wanted to respond in writing to the letter but was cautioned against it for legal reasons. Instead, the board invited the concerned members to discuss the conversion in person. Brooks said she and others did not go because the available times were inconvenient to their work schedules.

Hearne called said that accusations of insider enrichment are “a red herring that opponents to all conversions use.”

“We stated that the board would stay on as volunteers and would accept no restricted stock options,” he said. “Down the road we do intend to issue stock, but the board and management won't have rights beyond what any other member has.”

IN 1998, CONGRESS passed a law making it easier for credit union directors to convert to for-profit banks by changing the requirement that a majority of members must approve of the change. Now, only a majority of members who vote must approve the conversion.

The board of directors has issued mailings to all members detailing the benefits of a conversion and encouraging them to vote for it. The letter says that voting for the charter change will “provide new sources of capital,” “improve our earnings capacity through a more flexible regulatory environment,” expand the institution’s ability to make member business loans, and allow the institution to enlarge its customer base.

Board members have also phoned members they know directly to ask them to vote for the conversion.

Hearne said that the mailings have been federally regulated by the National Credit Union Administration.

“We provided what NCUA requires us to,” he said. “There’s plenty of opposition and they’ve set up websites and petitions and sent e-mails to the membership, and there’s no regulator telling them to be accurate, honest and objective. So I don't think they're operating at a disadvantage.”

OPPONENTS CLAIM that the mailings are one-sided and that decisions were made behind closed doors with little consideration for the viewpoints of regular members.

Bert Lomax of Bethesda has been a member of Lafayette Federal Credit Union for about 30 years. He said he is furious that the board proposed the conversion without first getting input from members.

“What these guys did was start the entire thing and then come to me [with the mailing] and say, ‘Now that we’ve done this, don’t you think it’s a good idea?’” he said. “No, I don’t.”

Lomax argued that a new board is needed in order to regain transparency.

“I’d like to see the board agree to step down,” he said. “Let’s start all over again.”

Brooks balked at the directors’ use of a solicitation firm to call members.

“They hired a telemarketing firm to call everyone who hasn’t voted and pressure them to vote yes,” she said. “It’s scary.”

Hearne said the callers are not from a telemarketing firm but from a “proxy solicitation firm.”

“We did have them make calls for us, but we told them not to solicit a vote one way or another, but to increase turnout,” he said.