Decision Near On Turning Credit Union Into a Bank

Some Petition to Oust Lafayette's Board

Members of the Kensington-based Lafayette Federal Credit Union have until Saturday to vote on whether to turn the tax-exempt, depositor-owned institution into a for-profit, stockholder-owned bank. As advocates on both sides try to rally the 16,000 members to vote, others are conducting a parallel campaign: They're attempting to fire the nine-member board of directors for proposing the conversion.

"They haven't represented the interests of the credit union's members," federal worker Amber Brooks told customers leaving a Lafayette branch in the Ronald Reagan Building one day last week. Along with about a dozen other members, she was spending her lunch hour asking members to sign a petition to call a vote on an ouster. At that point, she said, they had collected about 400 of the 750 signatures required.

The tug of war over who will own Lafayette -- and control the $30 million in retained earnings the institution has build up over its 71-year history-- is one of several dozen such fights at credit unions across the country over the past eight years, since Congress eased rules for converting credit unions to banks.

Lafayette's members work for a variety of area employers, including the U.S. Agency for International Development, the Export-Import Bank, the Takoma Park Silver Spring Co-op and some Whole Foods Markets. With assets of $331 million, it is the 13th-largest credit union in Maryland.

In materials accompanying mailed ballots, chief executive Michael S. Hearne and board Chairman Arnold S. Rosenthal say becoming a for-profit bank is the only way the institution can gain enough new depositors and business borrowers to survive in the long run.

Opponents say that even if Hearne and Rosenthal were right, the two-step conversion process unanimously approved by the board is unfair because credit union members would lose ownership of the credit union while directors and top executives would be able to increase their salaries and profit from buying stock in the new bank.

Under the proposed plan, the credit union would be converted first to a mutual savings bank -- one owned by its depositors. Then there would be a second vote to convert it to a stockholder-owned bank. Deposits and loans from the credit union would be transferred along the way. At the end of the process, members of the former credit union would be offered a chance to buy stock in the new bank.

Credit union member Tom Carter argues that it makes no sense for members to pay for shares in an institution created from one they already own. He says that before any conversion, the board should pay each member his or her portion of the $30 million in retained earnings, or about $1,875 a person.

"We've never been told what other conversion alternatives the board even considered," he said.

Although a credit union is a nonprofit organization, federal regulators require it to earn enough money to provide a cushion against possible losses on loans. That cushion comes from retained earnings -- money left over after expenses are subtracted from revenue. Because credit unions are cooperatives or mutuals, each member owns a portion of the retained earnings.

Under federal rules governing a conversion, the original members of a credit union are not allowed to receive shares of bank stock in exchange for retained earnings. Distributing that money before a conversion begins is the only way to fairly compensate members, opponents of the conversion say.

Lafayette directors, who by law must act in the best interest of members, did not return calls or referred requests for comment to Hearne. Hearne declined an interview, saying he "didn't think it was in our interest."