Bram Berkowitz
It’s not often that the effects of a federal court decision can be immediately seen at the local level. But when a district court in Washington D.C. struck down parts of a rule that would have made it much easier for federally-chartered credit unions to expand membership, two local credit unions were forced to abandon merger efforts and chart a new path.
The nearly $600 million asset, federally-chartered Merrimack Valley Credit Union announced in early March it would merge with and absorb the more than $350 million asset, state-chartered Bridgewater Credit Union. The deal would have made the new entity one of the top 10 largest credit unions in the commonwealth.
The transaction was also noteworthy because it would have combined two credit unions in completely different geographic parts of the state. Lawrence-based MVCU is north of Boston, with two branches in New Hampshire, while BCU is in the southern part of Massachusetts, with branches as far as Quincy and Plymouth.
Shortly after the announced merger in late March, a federal court handed down a decision on a rule imposed by the National Credit Union Administration that would have given greater flexibility for how credit unions could expand membership.
The American Bankers Association – not thrilled to see credit unions expanding – had previously sued the NCUA, claiming the organization had overreached on its authority with the rule. The court ended up striking down two of the four provisions in the NCUA rule, a partial victory for both the ABA and NCUA.
The decision, however, resulted in complications for MVCU and BCU, as the two organizations in May withdrew their merger application from the Massachusetts Division of Banks.
“The court case invalidated portions of the NCUA regulation that provided for geographic field of membership definitions that were very expansive,” Kevin Handly, a Boston-based banking lawyer that has previously worked on credit union mergers, told Banker & Tradesman. “If those are invalid, then there would not be a permissible way for Bridgewater and Merrimack to combine because they would not be regarded in the same designated section of the country, and would not qualify for geographic eligibility definition.”
The Court Decision
The NCUA field of membership rule, which was first issued in December 2015, had four main provisions.
The rule would have automatically qualified a combined statistical area or a contiguous portion of it with fewer than 2.5 million people to be a local community. The rule also would have increased population limits for rural districts to 1 million people, even if the district crossed state lines.
The other two provisions in the NCUA rule gave credit unions the ability to serve core-based statistical areas without serving the urban core that defines the area, and the ability to add “adjacent areas” to existing well-defined local communities on a case-by-case basis.
The federal court ruling struck down the first two provisions, but it was likely the court’s decision on the first provision regarding local communities that led to the withdrawal of the MVCU and BCU application.
The court in its ruling, according to an analysis by the global law firm Nixon Peabody, said that a combined statistical area with 2.5 million people was beyond the definition of a local community. This is because contiguous communities could be “linked to their neighbors but have nothing to do with those at the other end of the chain,” the court said.
The example the court used in its ruling was a thin rectangular strip stretching from Doylesburg, Pennsylvania, in the north, to Partlow, Virginia, in the south.
Even though residents of Doylesburg and Partlow live about 200 miles from each other, they would fall within the same 2.5-million-person rectangle in a combined statistical area.
Quincy and Andover, the two closest coverage areas between MVCU and BCU, are more than 30 miles away, while Derry, New Hampshire and Dartmouth, Massachusetts, the two farthest coverage areas between the two entities are more than 100 miles away from one another.
Moving Forward
Despite withdrawing the merger application in May, MVCU and BCU still appear to be interested in merging.
“As discussed, other options are being pursued and I will reach out to you shortly to complete our conversation pursuant thereof,” BCU’s President and CEO John Howard wrote to the Massachusetts Division of Banks in an email on May 4 that was obtained by Banker & Tradesman through a public records request. “I look forward to continue working with you closely in the coming months.”
MVCU in early August applied to convert from a federally-chartered credit union to a state-chartered credit union, an unusual move, but one that would make a merger between the two credit unions much more feasible.
If MVCU becomes a state-chartered credit union, the merger with BCU would be governed by field of membership rules set by the Massachusetts Division of Banks and the NCUA court ruling would not apply.
“Massachusetts has pretty liberal credit union branching provisions. Field of membership in Massachusetts is focused not so much on a common bond as it is on a clear definition – who is eligible? Who is not?” said Handly. “If the objective for them (MVCU and BCU) is to combine, this is probably the best way to do it.”
