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GRAND RAPIDS, Mich. – The $1 billion Lake Michigan Credit Union has offered its members a lottery with a chance at cash and merchandise prizes if they will participate in the vote about whether to change the credit union’s membership to that of a mutual bank. “The Board of Directors and management are asking for your support and encourage you to vote for the plan of mutual charter conversion to allow us to better serve you for many years to come,” the credit union wrote in a September 9 letter to its members. “Members who vote on the Charter Change will be eligible to win valuable prizes. The grand prize is a three-year lease on the winner’s choice of either a 2005 Cadillac CTS or SRX. Five additional $1,000 cash prizes will also be awarded. Stay tuned!” Under Michigan law, 66% of the members voting on the charter change proposal must approve of the change. Alan Theriault, president of CU Financial Services, the consulting firm that is helping guide Lake Michigan through the charter change process, defended the lottery by noting that there is a long history of credit unions using door prizes and other offerings to induce membership at annual meetings and other credit union governance events. It’s a fact that credit unions may be established on a democratic model, but in fact they are not democratic since most members are not members because of the credit union’s cooperative nature but because of the products and services, Theriault asserted. He also asserted that credit unions using lotteries to boost participation in charter votes is not new as at least four or five previous credit union conversions had also used lotteries. Theriault did not directly reply to the observation that a lottery might help Lake Michigan get the 66% `yes’ votes that it needed for approval by expanding the vote beyond a core of credit union members who might passionately oppose the move. The credit union also revealed that it planned to pay its board members $200 per meeting beginning six months after the successful conversion and noted that these fees “are substantially below fees paid to directors for service on the boards of similar-sized savings institutions.” Lake Michigan further disclosed that it planned to go forward with a further conversion to a mutual holding company structure and said that a second vote would be needed. It also revealed that under a mutual holding company structure, members would be given one vote per $100 on deposit up to a maximum of 1,000 votes. The credit union added that it expected to raise $70 million in a stock offering under a mutual holding company structure. The move would enable the credit union to move beyond its field of membership which it said was limited to the residents, workers or students in Allegan, Kent, Muskegon, and Ottawa counties as well as businesses in those counties. A move to a federally chartered mutual institution would allow it to serve any person or business. But David Adams, CEO of the Michigan Credit Union League said the League found the disclosures significantly lacking and challenged the idea of offering cash to get members to check a ballot and return it. “Our outside counsel couldn’t find anything in the statute that specifically barred the lottery,” Adams said, “but he has given us a legal opinion that it doesn’t pass the smell test” of the intent of Michigan law. He said the league has written letters to Michigan’s Office of Financial and Insurance Services (OFIS) Lake Michigan’s regulator and the NCUA about its concerns. “We might not be able to affect the disclosures in this situation,” Adams said, “but we believe that we need to take an aggressive stance to improve any subsequent disclosures.” Adam’s stressed that the league did not oppose credit union members’ freedom to change charters, but said that the league has been working with regulators to promote a disclosure model that is based more on that contained in the Security and Exchange Commission’s regulation of stock issuing firms. “What’s missing currently is the notion of disclosures of risk,” Adams noted. “Not just what management wants to happen, but real disclosures of what very well could happen if credit union members change their charters.” Point By Point Attack The league cares enough about the issue that it has launched a Web site, memberinform.org, designed to inform Lake Michigan members of facts which it said were left out of the credit union’s disclosure statement. For example, the site notes that the disclosure statement suggested that product pricing and interest rates will improve after the conversion, but that very well might not be the case, the site argued. “In our view, this statement implies that a charter conversion will allow the credit union to continue to grow rapidly and maintain current rates/fees,” the league noted. “MCUL does not believe that it is accurate to suggest that the charter will impact the ability to grow or the rate/fee structure. It is well documented that, on average, bank loan rates are higher than credit union loan rates. Bank fees are higher and deposit rates lower, on average, than those offered by credit unions.” The league noted a September 27 U.S. News and World Report article which found that fees were lower and interest rates higher at the 50 largest credit unions than at the 50 largest banks. The league’s site also pointed out that Lake Michigan neglected to inform members that, as of June 1, 2004, the Michigan Credit Union Act allows Michigan credit unions to effectively have a statewide field of membership and thus one far bigger than the four counties the credit union listed. Memberinform.org also took Lake Michigan to task for not disclosing more fully the implication of the 35% of asset cap on consumer lending that Lake Michigan will have if it converts to a mutual bank. “It is ironic that a member-owned credit union, traditionally focused on consumer loans would find it beneficial to the members to limit its ability to make consumer loans such as automobile loans, leases and personal unsecured loans,” the league noted. “This is the `bread and butter’ business for credit unions. Lake Michigan Credit Union will instantly be above the legal threshold for a Savings Institution and will be limited in its ability to effectively meet these service needs. At a minimum, the credit union should disclose that this is a potential disadvantage or negative implication of the proposed charter change,” the credit union said. Lake Michigan had also asserted in the disclosure statement that its growth after the stock offering would be more than adequate to cover its tax liabilities and the league’s Web site attacked this as well. “Their complete dismissal of the possible negative effect of losing the tax exemption seems to be based on an ambitious assumption that the credit union will raise $70 million from a stock offering and that it will be able to grow significantly as a result and that it will be able to re-invest that capital at high yields,” the MCUL wrote. “All of these assumptions are speculative and as potentially misleading to the membership as the claim that rates and fees may turn negative unless the charter conversion is approved.” The MCUL argued that if the credit union will not grow more rapidly than the 30% growth per year that has been enjoyed as a credit union, there is no basis for factoring in deposit growth as a tradeoff for the loss of the tax exemption. In this sense if Lake Michigan succeeds raising $70 million, and further assuming that all of that capital is re-invested in loans to members, the yield on that capital would be 5.85% (based on the credit union’s current yield on loans) or $4.09 million, the MCUL argued, adding: “On an after-tax basis, this would yield $2.45 million in financial benefit to the credit union. The credit union’s tax liability, based on an assumed 35% tax rate would equal about $7 million. (Present 2% ROA on $1 billion in assets times 35% tax rate).” -

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