A Maryland credit union's new venture promises to make enemies out of allies and attract a strange bedfellow: banks.
Har-co Maryland Federal Credit Union, in Bel Air, plans to convert to a mutual thrift to expand its customer base. It would be the first such conversion since Coastway Credit Union's in July 2009.
While the switches can strengthen rivals, banks have long encouraged more credit unions to convert and compete on even terms as tax-paying institutions. Such conversions are rare and nearly ceased during the financial crisis. "There's a lot of opposition in the credit union world to conversion," says Kip Weissman, a partner at Luse, Gorman, Pomerenk & Schick. He calls most of the opposition "unfair" as thrifts have "a better regulator, more regulations and it's easier to raise capital."
The $186.5 million-asset Har-co will need approval from members and from the National Credit Union Administration and the Office of Thrift Supervision. "The OTS and other bank regulators make it a relatively easy process, but the NCUA makes it difficult," Weissman says. "The NCUA wants to protect its turf."
There have been 35 credit union conversions since 1995, according to consultant CU Financial Services. Data on the success rate of applications was not readily available, but the OTS said three credit unions converted to federal thrifts and four applications to the agency were withdrawn in the past five years.
The NCUA "has erected a lot of barriers for credit unions to exercise their right to be a mutual," says Keith Leggett, a senior economist at the ABA. The NCUA is trying to protect members' rights and services, such as the ability to offer higher deposit rates, observers note.
Not everyone buys the objections. "That is a big fallacy out there," says William White, president and CEO of the last converted credit union, Coastway Community Bank in Cranston, R.I. "The fact that we're growing in a very healthy manner in mortgage and business lending shows that you can be very rate competitive." White said the bank's annual taxes and assessment from the FDIC are equal to or less than what it paid the NCUA in assessments when it was a credit union. The main reason Coastway converted was because it reached the NCUA's 12.25% limit of business loans to total assets in the mid-2000s. They decided to become a thrift to open up ways to grow.
"We think a bank charter is less appealing," says Bill Cheney, CEO of the Credit Union National Association. "Studies have shown it doesn't take long before the newly converted bank lowers savings rates, raises loan rates and hikes fees—in other words, acts like a bank."