Rare Conversion Revives Debate Between Banks and Credit Unions

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 recently notified its members that it 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

Though the switches can strengthen rivals, banks have long encouraged more credit unions to convert and compete on even terms as tax-paying financial institutions.

Such conversions are rare and nearly ceased during the financial crisis. Formidable obstacles remain even though conditions have improved.

"There's a lot of opposition in the credit union world to this" kind of conversion, said Kip Weissman, a partner at Luse, Gorman, Pomerenk & Schick. He called most of 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 to get members' approval, which can be tough — especially if activist credit union groups get involved. The credit union must also seek approval from the National Credit Union Administration and the Office of Thrift Supervision.

Most lawyers dealing in such applications say that the NCUA is the main roadblock. "The OTS and other bank regulators make it a relatively easy process, but the NCUA makes it difficult," Weissman said. "The NCUA wants to protect its turf. Some have said it's regulatory over reach."

There have been 35 credit union conversions since 1995, according to consultant firm 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available, but the OTS said three credit unions converted to federal thrifts and four applications to the agency were withdrawn in the past five years.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 to make it difficult for credit unions to exercise their right to be a mutual," said Keith Leggett, a senior economist at the American Bankers Association.

The NCUA is trying to protect members' rights and services, such as the usually higher deposit rates offered by credit unions, some observers said.

"The choice of charter should be up to the credit union's members, who need all the facts so they can make a well-informed decision. From the members' perspective, we think a bank charter is certainly less appealing," said Bill Cheney, CEO of the Credit Union National Association in an e-mail. "Studies have shown it doesn't take long before the newly converted bank starts lowering savings rates, raising loan rates and hiking fees — in other words, starts acting like a bank."

The NCUA did not respond to questions.

Not every one is buying the objections. "That is a big fallacy out there," said 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 Federal Deposit Insurance Corp. are equal to or less than what it paid the NCUA in assessments when it was a credit union.

The main reason why Coastway converted was because it reached the NCUA's 12.25% limit of business loans to total assets in the mid-2000s. White said the credit union tried to work around it by becoming a loan participant and selling off other loans but they decided to become a thrift to open up ways to grow. "They were great short-term fixes but we're not in it for the short term," he said.

Har-co said in its notice of conversion letter to members that it was seeking to become a thrift in order to grow membership and "economies of scale" to ultimately support competitive pricing, branch expansion and revenue. The credit union's chief executive did not return phone calls.

Jeffrey Hare, a partner at DLA Piper in Washington, said the conversion also gives a credit union more capital-raising options while giving it an opportunity to more expanded trust services and commercial lending products, adding some competition for banks. Hare said, for the most part, they were competitors before and now that the credit union is paying taxes, creating "a level playing field."

Regardless of concerns, observers agreed that credit union-to-thrift conversions only fit select institutions and attempts would continue to trickle in, if any, at all. "Credit union conversions to banks, which averaged about two per year over the past two decades, will likely continue to be rare events," Cheney said. He expected less interest in conversions going forward.

"We think credit unions will continue to view a bank charter as unappealing, especially in light of the struggles banks have experienced since the economic downturn and in light of the higher premium costs they face to replenish the FDIC fund," Cheney said.

But Bob Freedman at Silver, Freedman & Taff, who is advising Har-co in the conversion, said he believed more credit unions would try to convert. Concern still lingers about what kind of assessments credit unions will face because of how the NCUA seized the five big corporate credit unions during the previous two years, he said.

"It all goes back to cost and their ability to operate," Freeman said.