The $193 million HAR-CO Credit Union in Bel Air, Md., is lookingto convert to a state chartered mutual savings bank for the secondtime in four years.

In February 2012 after its members approved a conversionproposal, the suburban Baltimore credit union announced it expectedto become a mutual bank by April 1 of that year. But a conversion completion was never announced.

Earlier this year, as required by NCUA regulations, HAR-COpublished a notice of consideration in a local newspaper that itwas exploring a possible conversion.

“As a bank with the increased ability to add customers, webelieve HAR-CO would be able to generate substantially greaterrevenues,” the credit union's notice stated. “The board ofdirectors believes that greater revenues would help support andexpand the types of products and services offered to themembership.”'

NCUA financial performance reports show that HAR-CO's loanrevenues and membership have been declining over the last fiveyears.

In 2011, the credit union posted total loans of $119 million,which increased to $131 million by the end of 2013, but fell to$114 million by the end of 2015, according to NCUA financialperformance reports. What's more, its loan income dropped from $6.7million in 2011 to $5.2 million in 2015.

Membership has also been declining from 20,005 in 2011 to itscurrent membership of 16,437. Ten years ago, HAR-CO served a membership of 30,104, according to its 2006Call Report.

At the end of this year's first quarter, HAR-CO recorded totalloan revenue of $112 million, down from $116 million at the end ofthe first quarter of 2015. Loan income also fell slightly from $1.3million at the end of the first quarter of 2015 to $1.2 million atthe end of the first quarter of 2016, according to NCUA financialperformance reports.

HAR-CO's net worth at the end of 2015 was 9.32%, lower than thepeer average of 10.95%. Its ROAA was 0.27% at the end of last year,lower than the peer average of 0.54%. At the end of 2016's firstquarter, the credit union's net worth declined slightly to 9.11%and its ROAA dropped to 0.18%, according to NCUA financialperformance reports.

In its public notice, HAR-CO stated there would be no economicbenefit to senior management stemming from the proposed conversion.The credit union also noted that it would not need member approvalto compensate board members.

Under Maryland law, state chartered credit unions are allowed topay directors with the approval of their members.

Although HAR-CO does not compensate its board members, the otherfive state chartered Maryland credit unions insured by the NCUAdo pay their board members, according to their IRS 990forms.

The credit union said the conversion would give it additionalbusiness flexibility such as raising new capital.

“As a Maryland-chartered mutual savings bank, however, HAR-COwould have the option to raise additional capital by changing fromthe mutual to the stock form and selling stock to members and thepublic, although a change to stock form is not part of the currentconversion proposal,” the credit union stated. “In the event of afuture conversion to the stock form, ownership and control ofHAR-CO would be transferred from its current members to those whopurchase HAR-CO's stock, including any current members who purchaseand pay for the stock. A change to stock form would requireseparate approvals in the future from the then current HAR-COboard, HAR-CO members and bank regulator.”

However, there is plenty of competition in Maryland.

There are 46 state chartered banks in Maryland, according to thestate's Office of the Commissioner of Financial Regulation. Duringfiscal year 2015, the total assets of Maryland's banks grew by $3billion to $28.5 billion, even with the receivership of NBRSFinancial Bank in October 2014, according to the OCFR's annualreport.

The state's banking industry has improved significantly over thepast few years, according to the OCFR. Maryland state charteredbanks in aggregate have grown their total assets by 11.56%, capitalby 13.91%, deposits by 11.93% and increased profitability by 42%over fiscal year 2014.

HAR-CO also said it analyzed the impact of losing its tax-exemptstatus after converting to a state chartered mutual savingsbank.

“Based upon our analysis and meetings with consultants, theboard of directors believes that the tax impact should be more thanoffset by the enhanced earnings capacity under the mutual savingsbank charter and the ability to more effectively serve HAR-CO'scurrent and future members,” the credit union's statement read. “Wefurther believe this change would improve our ability to sustain acompetitive pricing philosophy while continuing to increase ourconvenience and service to members.”

The credit union noted that in prior credit union conversions,commentators have said rates and fees for new loans and depositshave been less favorable to members.

“However, our board believes that the conversion would notadversely affect our ability to continue to offer attractive loanand deposit rates and fees following the conversion,” the statementread.

Maryland's OCFR said it received HAR-CO's conversion applicationon April 21.

“The office will consider the effects of the proposed action onthe current members of the credit union applicant to confirm thatcurrent members will not be adversely affected by the change incharters,” Summar J. Goodman, deputy director of communications forthe Maryland regulator, said. “The application process islengthy. In addition to our review, the credit union mustobtain deposit insurance [from the Federal Deposit InsuranceCorporation] and the membership must vote to approve the change aswell.”

In its public notice, HAR-CO said members should not expect toreceive any conversion related materials from the credit unionuntil the conversion review is completed, which can take severalmonths.

James J. Meehan, who has been president/CEO of the credit unionsince 1996, did not return a phone call and email from CUTimes requesting his comments about the conversion.

HAR-CO was founded in 1955 by the Teacher's Association ofHarford County Public Schools.

The last credit union to bank conversion occurred on July 1,2013 when the $1.8 billion HarborOne Credit Union in Brockton,Mass., one of the oldest credit unions in the country, opened itsdoors as HarborOne Bank.