Credit union OKs switch

Lafayette Federal members vote to convert to for-profit; some seek to block the move

Friday, Dec. 22, 2006

Members of a Kensington credit union have voted to convert the nonprofit institution to a for-profit federal mutual savings bank, officials said this week.

But some members of Lafayette Federal Credit Union — one of the oldest credit unions in the nation — aren’t giving up their fight against the plan, vowing to continue a petition drive designed to oust board members.

Such conversions are fairly rare, with about 30 across the nation in the past decade, according to reports by credit union organizations and researchers. There are some 9,000 federal- and state-chartered credit unions in the United States — about the same number as insured banks and thrifts, although banks have much more assets — with 117 in Maryland, according to the National Credit Union Administration, a federal agency that oversees and insures most credit union deposits.

Executives with Lafayette, which formed in 1935 soon after Congress passed the Federal Credit Union Act, filed for the conversion in June with the Office of Thrift Supervision. Officials cited reasons such as competition and regulatory concerns, plus boosting lending capacity for members.

‘‘We basically outgrew our regulatory environment,” Michael Hearne, president and CEO of Lafayette, said in a previous interview with The Gazette. ‘‘Our board decided to fix the roof while the sun is still shining.”

Hearne did not return calls this week.

Lafayette officials said in a brief statement on its Internet site that accounting firm RSM McGladrey certified the voting results. The next step in the process involves certification of the election by the credit union agency. Officials expect that to occur by Jan. 2.

Saturday was the deadline for the roughly 16,400 members of Lafayette Federal Credit Union to vote. Officials did not say in their statement how many members cast ballots.

Conversion has been condemned by some members and has sparked a recall petition drive of board members who approved putting the matter to a vote.

Lafayette members include employees of government agencies such as the U.S. Agency for International Development and private companies such as the Takoma Park-Silver Spring Food Co-op, Bethesda Therapeutic Massage and some Whole Foods Markets.

Besides Kensington, the credit union has two offices in Potomac and four in Washington, D.C. Services include checking and savings accounts; home equity, mortgage, car, education and consumer loans; vehicle-buying discounts and research; and real estate settlement assistance.

Scott Stiens, a USAID employee working on the petition drive, said Wednesday that conversion opponents had collected about 650 of the 750 signatures needed to force the recall vote.

‘‘We will move forward with the petition drive,” Stiens said. ‘‘This conversion is not in the best interest of members.”

Tom Carter, a USAID employee who lives in Gaithersburg, said he signed the recall petition partly because board members and executives have been ‘‘less than forthcoming” during the process.

‘‘Other options have not been carefully considered, such as merging with another credit union or dissolving the credit union and distributing the reserves among members,” Carter said.

While some have accused Hearne and other top officials of trying to enrich themselves, Hearne has said that’s not the case.

Under the conversion plan, credit union members would become members of the thrift and retain voting rights, he said. Board members will remain volunteers and do not plan to have a stock-based compensation program, although officials may pursue an employee stock ownership plan in which all members have the opportunity to invest, he said.

‘‘If the board later decides to propose a stock offering, that will have to be put to the members for a vote,” Hearne said.

Lafayette has seen a decline in deposits and assets in recent months. The institution had $319.5 million in assets as of Sept. 30, down 4 percent from June, according to the National Credit Union Administration. Deposits also declined about 4 percent to $265.9 million.

Net income was $3 million in 2005, down 25 percent from 2004, according to Lafayette’s annual report. Reasons for the decline included costs to renovate the Kensington branch and executive offices, as well as adding staff and improving operating systems, the report stated.

Although credit unions are generally nonprofit organizations, federal regulators require them to show a profit to guard against potential loan losses.

A decision on approving Lafayette’s conversion plan by the Office of Thrift Supervision was not due until Feb. 27. A spokesman said the vote would not affect the agency’s decision.

The federal credit union agency recently passed new regulations to make top officials disclose more information to members during conversion processes before the board votes on the issue. The new regulations are expected to take effect Jan. 22.

The new regulations would have ‘‘created a new situation” for Lafayette if they had been in effect this year, said Michael Beall, president and CEO of the Maryland and District of Columbia Credit Union Association, a Columbia trade organization.

Lafayette board members themselves voted on the matter and issued ballots for the conversion election before adequately educating members about the issue, Beall said.