By Ray Birch
BIRMINGHAM, Ala.—Field of membership expansion activity is heating up among credit unions, says Dennis Dollar, who emphasized the approach many CUs are currently employing is taking the movement “back to the future.”
And by that, Dollar explained, he means many credit unions are moving from community-based charters back to the SEG model to allow for greater expansion opportunities in response to ongoing pressures to create scale and better compete.
The former NCUA Chairman and principal partner at Dollar Associates the scale-driven FOM expansions are taking place at both the federal and state level at a pace not seen in a decade.
“Field of membership re-evaluation is taking place at credit unions of all sizes and charter types,” said Dollar. “Credit unions are wanting to position themselves for both organic growth and mergers—each of which has a field of membership component that can either make it easier or make it harder.”
Dollar said the trends in credit union field of membership expansion are two-fold, with somewhat of a “back to the future” approach.
“Credit unions that are community chartered are either looking to expand their current community as far as the rules will allow or to convert back to a SEG-based multiple common bond credit union so they can take advantage of underserved areas and associational SEGs,” Dollar explained.
It’s all about expanding the credit union’s market footprint, Dollar said.
“And without a field of membership that allows greater flexibility to qualify members seeking to join the credit union, they are finding themselves limited on long-term growth potential and particularly on becoming the merger partner of choice for other credit unions looking to merge,” Dollar said.
The Biggest Deterrent
Dollar noted the biggest deterrent to many mergers is the merging credit union and the continuing credit union must have like fields of membership for the merger to be approved by the appropriate regulators.
“A community charter cannot merge with a community charter unless they have the same community or one is encompassed within the other,” explained Dollar. “And a SEG-based credit union that merges into a community charter has to give up, in most cases, any SEGs outside the boundaries of the community. This, within itself, drives many SEG-based credit unions to merge with other SEG-based credit unions because it is a simple matter of adding their SEGs together—no geographic limitations.”
Dollar pointed out the new NCUA field of membership rules for federal charters that were upheld recently by the U.S. Supreme Court that are also being implemented by most states through their parity provisions for state charters, has enabled a significant number of community-chartered credit unions to expand their existing communities.
“Whereas moving SEG-based credit unions to community was the bulk of our FOM work over the first 10 years we were in business, now we have as many community charters either expanding their communities or converting back to SEG-based credit unions utilizing underserved areas and associational SEGs, as well as employer groups,” Dollar explained. “It is somewhat of a shift back to the SEG-based model that was prevalent before the 1990s.”
More Than 40 ‘Reversals’
Dollar said his firm worked with its first credit union wanting to convert from a community charter back to a SEG-based charter in 2008 and has subsequently helped more than 40 community credit unions reverse their FOM preference back to a SEG-based charter.
“The first one we did was in Texas to help facilitate a merger,” said Dollar. “But over the years we have a growing number of credit unions wanting the greater geographic diversification that underserved areas and associational SEGs can bring.”
Dennis Dollar
Dollar noted many community-chartered credit unions can get a broader geographic reach through a well-coordinated underserved area service initiative and, when combined with SEGs and associations that have no geographic limitation other than the credit union’s ability to serve, the SEG-based, multiple common bond model is making its comeback.
“While the community charter and rural district still have some upside under the new NCUA FOM rules and we are working with 35 such community or rural district expansions even now, we get just as many calls these days from credit unions wanting to look seriously at either expanding their SEG model or moving to a SEG model from a community charter,” Dollar said. “We have 18 such projects underway even as we speak. It is absolutely a growing trend.”
Not a Simple Process
Dollar stressed there is a lot of process involved with either model.
“But NCUA and most of the state regulators are very open to either expanded community charters or making the SEG-based model more flexible with associational SEGs and underserved geographic areas,” he explained.
The process to convert a community charter back to a SEG-based charter takes about the same time as expanding a community charter, Dollar said.
“Both actions take about nine months from start to finish, so neither one is faster than the other,” he explained. “But the bottom line is which one best meets the credit union’s strategic growth goals to build the scale necessary to better compete.”
Dollar said his firm has worked with both federal and state charters over the past 12 years to convert from a community charter back to a SEG-based charter.
“The beauty of utilizing underserved areas to build a geographic component into a SEG-based credit union’s footprint is that these qualifying underserved census tracts have been largely ignored by traditional for-profit banks and truly need the extension of lower-cost financial services,” said Dollar. “Credit unions that serve underserved areas are getting the benefit of this pent-up demand from members that will come from these geographic areas as well. At the same time the residents of these areas are getting more consumer choice and often much better rates and service.”
What About Future of FOM?
As for the future of field of membership, including the possibility the concept itself will ultimately be considered obsolete, Dollar believes that as long as there are banks and a banking lobby, there will likely be some type of FOM requirement for credit unions, as Congress will have to approve any changes to the FOM laws.
He said banks will always fight any move to eliminate FOM requirements.
“Since FOM will likely always exist in some form, the challenge for credit unions is to push to make sure the law is flexible enough so that the regulator can adjust to the times and still stay within the law,” Dollar said. “The courts have ruled quite liberally on the law over the years, so now the question comes down to NCUA and the states as to whether their FOM regulations are as flexible as possible within the law. While most credit unions would like to see the concept of FOM abolished in the law, the reality is that Congress has shown no inclination to do so."
As credit unions seek to expand by increasing the size of their markets, Dollar said CUs must also look to grow more from the members they have.
"Scale is the driving factor in credit union strategic decision-making today,” Dollar reminded. “It is impossible to compete without it. The growth that drives scale comes from two sources, neither of which is exclusive of the other.”
Turning the ‘Mere’ Into the ‘Sincere’
One “essential” source of growth is for credit unions to better penetrate their existing membership with additional products and services, Dollar said, dubbing it the processing of turning “mere” members into “sincere” members.
“The other source of growth is to expand the credit union base with new members, and that priority is totally dependent upon having a field of membership from which necessary and sufficient growth can be generated,” Dollar added.
The two sources of growth are both necessary, and they can both be sought at the same time, said Dollar.
“On the growth front, credit unions must walk and chew gum at the same time—in other words, get new members and increase the penetration of existing members, including those new ones, along the way."
The move to expand is not just limited to large credit unions, said Dollar.
"It’s interesting that more and more smaller to moderate sized credit unions are looking at FOM options,” Dollar said. “It is hard to build efficiency without scale, and it is hard to build scale without membership growth as one of its leading components. So, efficiency and scale go hand in hand with growth—and growth goes hand in hand with field of membership."