Author: Chip Filson

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.