Month: December 2022

In the It’s a Wonderful Life movie classic, George Bailey is granted his wish and gets to see what life would’ve been like had he never been born. He’s shocked by the results.

There was no one to fight for market competition, equality, opportunity and ownership for the working poor and middle class.  Bedford Falls is renamed Pottersville.

Pottersville is packed with bars, strip clubs, casinos, and pawn shops. It’s full of cops and traffic and lights and noise and strangers. It’s filled with colder, harder people, with more violence, gambling, mental illness, debt, and rampant consumerism.

As George Bailey stated:

“Just remember this, Mr. Potter: That this rabble you’re talking about, they do most of the working and paying and living and dying in this community.” 

The Vermont Members’ Perspective

Yesterday’s post presented a long-standing loyal member’s critique of the Vermont State Employees (VSE) merger with New England FCU (NEFCU).  His objections included:

• Merging two competitors eliminates the choice of credit union services for both members and the Vermont public. Together they will hold 42% of the credit union market.
• The cancellation of the VSE’s state charter eliminates its community FOM open to anyone living or working in Vermont, as well as unique state authorities such as equity investments in other coops. The FCU charter is a multi-common bond composed of multiple SEGS and associations, governed by federal law and regulation.
• The members receive nothing, no bonus dividends or payouts, from their common wealth of over $100 million. Their patronage created this equity.  It is now transferred to the total control of a new board to use solely as they wish.
• The names say it all about the marketplace priority of each organization. “Vermont State” signals a focused business model, featuring environmental initiatives, creative partnerships and cooperative culture described in the September 2021 Callahan Quarterly Report. The name “New England,” formerly IBM employees, now includes groups in 4 Michigan counties, related Blue Cross Blue shield organizations throughout the state, as well as groups in ME, MASS, RI and CA.
• The Notice of merger provides no specific benefits, services or value not currently within in the capability of the VSE to do by itself.
• The future political leadership of the members’ $1.1 billion is in the control of  six NEFCU directors versus only five from VSECU. All VSECU directors, but only three NEFCU, will be up for election by members in 2023.
• The average salary in VSE’s home office, Montpelier, is $46,000 and at the 90^th percentile is $84,000. The 190 VSECU staff’s average as of September 2022 was $101,000. Independent professional careers are now “co-employees” until redundancies begin after the operational conversions are complete.
• The transaction has no financial or market-based rationale.  Had members been bank shareholders, their book value and historical performance would have warranted a payout of $150 million or more to the owners. Instead the entire franchise is transferred free to another organization.  It makes no sense.

The Motive for the Merger

How did this idea of merging two “financially strong” credit unions arise?   In a  May 2016 interview with VT Digger,  Rob Miller talks of his “learnings” after being hired to the VSE CEO position, his first job in credit  unions:

“I thought it would be boring, frankly, to work at a bank,” he said.

Then he learned about the organization’s mission, that it was a not-for-profit financial cooperative, and that anyone in Vermont could be a member.

“VSECU’s mission – to improve the lives of Vermonters – that really spoke to me.” 

“I suddenly saw an organization that had the capacity and the resources to really fulfill its mission,” he said.

His background isn’t one that typically leads to the position like he now holds, he admits.

“My first day as CEO was my first day working at a credit union. That was a big step for the board to hire outside of the industry.”

He lights up when he talks about VSECU’s latest initiative, to offer equity financing to cooperatives in Vermont, which typically only have access to debt financing. (not an FCU option)

“Coops are an important part of any regional economic development strategy,” he said. “They are locally owned, and the owners are the customers – it’s a business model that is inherently more sustainable,” he said. “It’s like paying yourself. That’s a natural incentive for success.”

“At our core, we are a cooperative. We embody people coming together to help one another,” he said.

These sentiments are certainly proper.  In light of his merger initiative, the remarks suggest that human nature cannot always be nurtured.

In contrast, the CEO of NEFCU has held the top position since 1987 (almost 36 years) and will continue in that role after merger.  Miller, as CEO of VSECU arrived in 2014, inheriting 65 years of members’ loyalty, resources and institutional success.  He will be President and COO of the newly combined operations.

Here is a 1.34 minute video of the two men talking about this “partnership” and why a new name is important to “building a new organization.”

It is easy to understand how the two CEO’s developed the transaction between themselves, and then sold it their boards and staff.  Their motivations are straight forward. It was a succession plan and capstone for the CEO nearing retirement.  For VSE’s Miller it was a personal opportunity  to take over a firm almost three times the size of his current job.   A win for both, at the members’ expense.

No one would want stop a CEO from moving to a new job at a larger credit union.  Happens all the time.  But in this case the circumstance of the CEO bringing his  credit union with him to this new job  is highly unusual.

In the video the two men talk smoothly about “building a new organization” of 500 people.  This necessitates a new name since the legacy of the old ones would hinder this process. This marketing video was part of the sales campaign.  All members need to do is just vote their approval.

If you believe this “new organization” is built on the movement’s uniqueness, listen for the number of times the words cooperative or credit union are used.  Or how this merger helps members.   Zero. There are no beliefs like those used in Miller’s  Digger awakening interview above.

This short video is professionally staged, in a garden-like setting, background theme music, the casual dress and coffee cups on the table creating an impression of shared camaraderie.  It is all  part of the grift.

Skating on Thin Ice

A transaction so shallow suggests this merger of these previously sound credit unions may not be as straight forward as presented.  Without a carefully considered roadmap, all the hard issues have been kicked down the road.

Here are several reasons why this merger, like many, may end up reducing, not enhancing member value.

1. 49% of the members who voted opposed the plan. Only 316 votes separated the yeas from those opposed out of a membership of over 71,000. No firm would proceed with an effort in which half of the “customers” who use the service, openly oppose the proposed changes.  It shows a management and board with their minds made up, blind to how members believe in their credit union.
2. The economy is reversing the tidal wave of deposits from the Covid era. It is now in a new cycle of rapidly rising rates, increasing consumer uncertainty, lower liquidity, and the prospect of recession. Whether it is the distraction of the merger effort or just market forces, both credit unions are under-performing their historical trends.

In September VSE reported $25.3 million in borrowings as 12-month share growth fell to just 1.8%.  Even with a $20 million increase in shares, the credit union’s dollar dividends to members fell 28% from the prior year. Members are paying the price for this underperformance.  The credit union reduced its average cost of funds to  just 16 basis points, even though short term rates have risen to almost 4%.  The unrealized loss on the $136 million of investments went from nil to $25 million over the past year.

3. The reason for merger in the member Notice “facing. . . the challenges of an aging Vermont population and slow to no growth” does not mean there is no more market opportunity. In fact credit unions lost 3% points ($180 million) in Vermont’s deposit market share to banks to fall to 22% as of June 30, 2022. In mortgage lending credit unions held a 24% share of the $6.2 billion total of HMDA reported loans closed in VT.

Prospects are so poor in Vermont that the plan is to take members deposits and earnings and invest those out of state.  A sure fire way to retain Vermonters loyalty!

3. There will be hundreds of thousands of dollars in new merger related costs for conversions, vendor contract cancellations and benefit plan payments. Then additional expenses to create a brand identity for the “new organization” requiring extraordinary market promotion efforts, again at members expense.   The legacy goodwill and existing reputation values are forfeited.
4.  Members will see through the thin façade of explanations and vote again-with their money. Why support a new organization with no track record of accomplishment and that destroyed the contributions they made to building their prior credit unions?

Throwing members under the bus to support an undefined merger plan is not a sustainable strategy.

Will the Potters of the World Win?

It’s a Wonderful Life portrays the eternal conflict in a market economy between self-interest and those who believe in community values and stability.  These two CEO’s are following Potter’s model, putting their futures ahead of their responsibility to members.   The two Boards bought into the shell game; the employees put their names in the merger Notice in contrast to the values they had expressed making VSE truly special.

As the shallowness of this effort becomes more exposed, it won’t just be the members who will pay the price; the employees will learn that $100,000 plus jobs are a luxury when institutional success is the primary goal.

VSE member Don Kreis  foresaw this possibility in his comment letter:  If the $1.1 billion Vermont State Employees Credit Union cannot stand alone, cannot be just as convenient as a bank while giving members more value and more control than a for-profit financial institution can, then combining with another credit union is a waste of time. 

The problem is not size or resources.  It is a market-based society’s ever-present challenge of balancing personal self interest and community.  In an earlier blog, The Tragedy of the Commons, I expressed the view that this and similar mergers were a test of whether a unique credit union system can survive:

A coop system reliant on values as a differentiator cannot long continue with coops and market capitalist wannabes side by side.  For the latter will continue to prey on the former until everyone joins in the rush to get their share of cooperative gold.

Democratic coops should deliver more than for-profit banks. We need more Don Keis’s  in the movement– people of goodwill who serve, who are pro-human and who knit together the fabric of society.

We need more Bailey-like credit unions that give, that contribute, and that cement communal stability.

Taking easy money is brutally hard on members.

It’s also hard on the soul.

This is the comment George  would have written about the Vermont State Employees Credit Union  merger proposal with New England FCU.

We all remember George Bailey from the holiday film classic set in the fictional Bedford Falls.  Here is a quick synopsis from a writer who maintains the story is a dire warning about today.  And perhaps the credit union movement?

It’s A Wonderful Life  (Jared Brock)

For those who haven’t seen the movie — no judgment, but what are you doing with your life?! — it’s a story about an angel who is sent from heaven to help a desperately frustrated businessman by showing him what life would have been like if he had never existed.

But the B-story is a prophecy about the times in which we live.

George Bailey (played by the great Jimmy Stewart) runs the Bailey Bros Buildings and Loan Association, a company that contributes to the community by building affordable homes for owner-occupiers.

Henry F. Potter hates George’s guts. Rather than contribute to the town of Bedford Falls, Potter’s full-time job is extraction — he owns the bank, the bus lines, the department stores, and plays slumlord to a tenement called Potter’s Field.

While Potter dreams of bankrupting the Baileys so he can create a housing monopoly to milk the middle class to permanent poverty, George Bailey dreams of building “airfields, skyscrapers a hundred stories high, bridges a mile long.”

But George Bailey’s day-to-day goal is singular:

To help every working family own their own home.

The Member’s Appraisal of the Merger

Donald Kreis, a long-time credit union fan, responded to VSE’s proposal  to end the credit union’s 75-year charter. His comment letter as filed with NCUA:

Greetings from New Hampshire – birthplace of the U.S. credit union movement!

From the other side of the Connecticut River, the plan to merge the Vermont State Employees Credit Union (VSECU) out of existence seems like a bad idea, and I will be voting “no” on the proposal.  Here is why.

Why I care about VSECU

VSECU – which I first joined when serving a judicial clerkship at the Vermont Supreme Court in 1997 – is one of the five credit unions to which I belong.  I have only one rule when it comes to financial services:  I don’t do business with banks, at least not voluntarily.

Investor-owned banks are in business to extract profits from their customers.  I have always wanted to share my financial resources with my neighbors (or fellow employees), and I would like them to share their resources with me.  A credit union is a financial institution that exists to help my neighbors and me do that, in a manner that we democratically control for our mutual benefit.

My First Loan

Thus, when I needed to buy my first car almost 40 years ago because my employer, Associated Press, was transferring me to a place (Portland, Maine) where I could not function without an automobile, I secured my first-ever loan from the AP Employees’ Credit Union. I was still a kid, fresh out of school, and not terribly desirable as a credit risk.

But a loan committee comprised of my fellow AP employees understood the need as well as the high likelihood that a young wire service newsperson would not renege on a promise to his colleagues.  So, I got the loan.

Unfortunately, the AP credit union is long gone. Almost every credit union to which I have ever joined since then is indistinguishable from a bank.  The neighbor-to-neighbor, colleague-to-colleague quality is gone.  The organs of democracy have atrophied, and annual elections have become an empty formality.

There is only one exception, and it’s the Vermont State Employees Credit Union.  Over the years, it has taken the idea of democratic member control seriously.  It is the only credit union to which I have ever belonged that actively and enthusiastically promotes its annual election process.

What Beats Jet-Skis and Snowmobiles?

I don’t think it’s a coincidence that the VSECU is the only one of my five credit unions that actively promotes “green” lending.  While other credit unions send me flyers and e-mails urging me to borrow money for leisure purposes (snowmobiles, jet-skis, extra cars), VSECU understands that what consumers really ought to be doing is borrowing money to make their homes both more energy efficient and self-sufficient.

This resonates profoundly for me, as the state official in New Hampshire (the Consumer Advocate) whose job is to advocate for the interests of residential ratepayers.  Electricity and fuel prices are soaring right now, a result of our over-reliance on natural gas and other fossil fuels.  But consumers are reluctant to borrow money to pay for things they can’t see, hold or drive around.

A credit union that is serious about the welfare of its member-owners will strive to educate them and encourage them to make long-term commitments to things that will make them wealthier and more secure over the long run.

The Case for the Merger – Platitudes and Generalities

Thus I was frankly shocked to learn earlier this year that the board of the VSECU had voted unanimously to merge our democracy-and-green-energy loving credit union into the much larger (and much more bank-like) New England Federal Credit Union (NEFCU).  It seemed so out of character.

Naturally I assumed there were facts and circumstances of which I was unaware.  When I inquired, I was told that to the extent I am entitled to information that would help inform my vote, the insights would be contained in the official document I then received.  It is entitled “Notice of Special Meeting of the Members of Vermont State Employees Credit Union and Plan of Merger.”

The official Notice document does indeed make a compelling case for the merger – but only if you are willing to accept platitudes and generalities.

In the section of the Notice labeled “Reasons for merger,” VSECU states that “both credit unions are financially strong” but “face many of the same obstacles and challenges, including an aging Vermont population with slow to no growth; rapid and accelerated technology changes; environmental, economic and social change; and increased competition from out-of-state financial institutions.”

Fair enough, but this begs the question of what advantages the merger would confer as the new mega-CU seeks to confront those challenges.  Answer:  having swallowed up VSECU, the former NEFCU will be “better equipped to tackle the challenges facing financial institutions in a rural state.”

The Notice goes on to promise “economies of scale and combined resources” that will lead to unspecified “further improvement and opportunities” in eight listed areas – everything from “expanded branch and ATM access,” to “improved homeownership and financing initiatives to reduce energy consumption and environmental impact,” to “favorable rates and lower fees to members.”

These justifications are unpersuasive.  Note the lack of promises or concrete examples of things that VSECU cannot simply do as a stand-alone billion-dollar credit union.

Economies of Scale and the CU Merger Frenzy

The “economies of scale” claim is especially troubling.  The usual route to merger-related economies of scale is for the newer and bigger organization to trim staff to avoid duplication of effort.  But in this instance the Notice promises that “all employees will keep their jobs and current salaries as part of the proposed merger.”

Economies of scale are indeed a ‘thing’ in the world of credit unions, but the proposed demise of the VSECU stands out.  According to the trade publication Credit Union Times, the National Credit Union Administration (NCUA) approved no fewer than 86 credit union mergers during the first half of 2022 – overall, credit unions are stampeding to combine with one another – but the proposed VSECU deal is bigger than all but one of them.  And in that biggest deal of the first half of 2022, VSECU’s New York counterpart – the $5.5 billion State Employees Credit Union – is taking over the smaller Cap Com Federal Credit Union.

Most of the credit union mergers in the current frenzy involve much smaller institutions.  And, indeed, the consensus among industry insiders is that a credit union with less than $300 million in assets should indeed consider merging with another CU in the interest of amassing the resources to confront technological change and industry competition.

A $1.1 billion institution like VSECU already has, or already should have, all the economies of scale it needs.

Not a Merger of Equals-Equity Transfer

Although VSECU claims the proposed deal is not a takeover of our CU by the NEFCU, here is how you know that claim is wrong.  If this were truly a merger of equals, then the members of both CUs would have to approve it.  Because VSECU members are surrendering control of their financial institution, they and only they get to vote.

If you don’t believe me, consider what this deal would look like if both institutions were publicly traded, investor-owned businesses.  The board of the ‘new’ credit union will have 11 members, six of which are from NEFCU.  In the for-profit would, that would be considered a surrender of control – effectively, a takeover.

The $3 billion NEFCU intends to pay no consideration whatsoever to the current owners of the VSECU for the right to control what used to be their credit union.  According to the latest 2021 balance sheet in the required Notice, VSECU members have built up $95.3 million in equity over the years – not a dime would be paid out to them in exchange for surrendering control of their credit union to its bigger and more bank-like Vermont competitor.

Such a payout would be easy enough to achieve by liquidating some of the $434 million in investments the combined credit union would have, above and beyond the $2.5 billion in loans on the books.

But, instead, the proponents of the merger are asking the members of the VSECU to surrender control of their credit union to a former competitor for free.  No board of an investor-owned business would ever dare recommend such a proposal to its shareholders.

What’s at Stake?  The Very Soul of the Credit Union Movement

In a sense, the impending vote on the takeover of VSECU should be seen as a referendum on the future of the U.S. credit union movement itself.

As I have already noted, VSECU stands out as a credit union that takes its cooperative identity seriously, along with its fidelity to the Cooperative Principles – the key principle being democratic member control.  The New England Federal Credit Union is just another credit union that is content to operate like a bank does.

Why is this so important to me?  After all, I no longer live in Vermont.  I belong to four other credit unions and I even serve on the supervisory committee of one of them.  So I could easily just sign and turn my back on VSECU.

I care about this because of something said to me by the CEO of the credit union on whose supervisory committee I serve.  When I first met the CEO, I told him about how much democratic member control, and the other six Cooperative Principles, meant to me as a volunteer credit union leader.

In response, the CEO pulled out a cell phone and waved it in my face.  The CEO mentioned an adult daughter – this executive’s go-to proxy for a typical credit union member.  “Do you know what she cares about?,” asked the CEO.  “It’s not voting.  It’s this.”

The “this” to which the CEO was referring was the credit union’s phone app that allows members to do their banking from the device they carry around with them in their pockets and purses.

If that’s truly what all of this comes down to, then I give up and so should everyone else in the credit union movement.  Credit unions can and should strive to keep up with the convenience-enabling technology deployed by the mega-banks.

But if credit unions can’t deliver value to members above and beyond the convenience that for-profit financial institutions already offer, there is no reason for them to exist.

In other words, if the $1.1 billion Vermont State Employees Credit Union cannot stand alone, cannot be just as convenient as a bank while giving members more value and more control than a for-profit financial institution can, then combining with another credit union is a waste of time.  Instead, the Board of VSECU should just pay out that $95 million in member equity and turn over its loan portfolio, its deposits, and its checking accounts to some ultra-convenient bank.

Do Not Succumb to Cynicism and Fear

Indeed, maybe we no longer deserve VSECU as we have come to know and love it.  Maybe we are unworthy of a democratically controlled financial institution.

When VSECU first announced the merger, and the skeptics began speaking out, the Board and management circled the wagons instead of treating member activism the way it deserves to be treated – as a welcome expression of commitment to the institution they collectively own.

In that sense, the leaders of VSECU are no different than the board and management of every other cooperative that has had to deal with members who flex their ‘democratic control’ muscles and question their elected representatives.

Maybe it’s just human nature – but, if so, then maybe “democratic member control,” and other Cooperative Principles like “education, training, and information” (which suggests members should be fully informed about the business realities their cooperatives confront), are just outdated platitudes.

We live in cynical times.  So, it is not surprising that, even in Vermont, both the proponents and the opponents of the buy-out of VSECU by a bigger credit union question the motives and integrity of the other side in this discussion.  I refuse to succumb to that cynicism.

Thus, I am grateful to the VSECU Board of Directors for presenting this proposed merger to us for a vote, and for making its best case for why we should ratify the deal.  They, in turn, should understand my frustration over not having access to all of the information they had at their disposal as they deliberated.

Lacking that information, or any other compelling reason to vote in favor of consigning the Vermont State Employees Credit Union and all it stands for to oblivion, I vote “no.”  I urge my fellow VSECU members to do likewise, in the hope that the VSECU of the future will look less like a bank and more like a cooperative.

If this credit union, with its commitment to cooperative culture and public service, cannot survive and thrive as an independent, community-owned, democratically controlled financial institution, then all is lost.  I refuse to believe that.

END

Donald Kreis, a “George Bailey” Credit Union member:

He has served since 2016 as New Hampshire’s Consumer Advocate, heading up a small but feisty state agency whose purpose is to advocate on behalf of the interests of residential utility customers before the state’s PUC and other bodies (including FERC).  Previously he served as general counsel at the New Hampshire PUC, as a hearing officer at the Vermont PUC, and as a professor at Vermont Law School, where he still teaches on a part-time adjunct basis. 

Prior to becoming a lawyer, he was a full time journalist for nearly a decade, first with Associated Press and then at the fabled newsweekly Maine Times.

He served for eleven years on the board of the nation’s second biggest retail food co-op (the Hanover Consumer Cooperative Society) including three years as president.  He was a nine-year trustee of what is now known as the Cooperative Fund of the Northeast, a CDFI that loans money to cooperatives.

He believes credit unions ought to live by the cooperative principles – and take democratic member control seriously.

His custom when joining a new credit union is to follow up about a week later with a request for the CU’s bylaws and express interest in seeking election to the board.  That has inevitably been met with something on the continuum between bewilderment and hostility, except at the CU that invited him to join its ALCO and Supervisory committees.