Category: Mergers

What do numbers mean?  We often interpret data to support what we believe the future will look like.  This is especially true when the debate is around scale, asset size and sustainability.  What do the largest 100 banks and credit unions suggest about the evolution of both systems?

At December 30, 2022, the largest 100 banks in the U.S. hold a combined $18.8 trillion in consolidated assets with the largest five having half that value.  The industry’s total assets were $23.6 trillion in 4,706 banks.  The top 100 are 80% of total assets. Here are the top five.

Rank	Bank / Holding Co Name	Consolidated Assets ($ Millions)
#1	JP Morgan Chase Bank	$3,267,963
#2	Bank of America	$2,518,290
#3	Citibank	$1,721,547
#4	Wells Fargo	$1,687,507
#5	US Bancorp	$590,460

 

Typically, big banks are have more access to liquidity, greater asset diversity and in many cases are viewed as “too big to fail.” Smaller or  regional banks have narrower margins for error.

Recent bank failures have reinforced both the regulatory and public perception that larger institutions are more secure.

I believe it is important to note that all of the top ten banks were the result  of significant mergers, not organic growth.  These institutions are creations of financial markets and ambitious leaders who are driven to be a dominant force in their markets.   This is not an aspiration limited to financial firms in capitalist markets.

A Forty Year History of the Top 100 Credit Unions

A perspective on today’s largest credit unions is helpful when forecasting how the ongoing consolidation might evolve.  Will the same market forces shape the credit union system similar to banking?

At yearend December 1982 there were 5,036 state and 11,631 federal credit unions in operation.  The top 100 (.5% of the 19,788 total) had total assets of $17.01 billion, or 18.9% of all credit unions.  Only Navy Federal was over $1 billion.

Public employment dominated the fields of membership.  Defense credit unions totaled 28, other federal government were 7, and three served state and three municipal employees.  Educational employees (teachers) were the primary focus of 15 charters.  The total of FOM’s serving public employees was 56.

The complete list of the largest  100 with additional financial data and growth rates is from the June 1983 Credit Union Magazine and can be found here.

Four decades later the largest 100 credit unions (2% of the 4,863) held $1.0 trillion in total assets, or 46% of the industry’s total $2.190 trillion.  The listing can be found in Callahans’ State of the Credit Union Industry report for 2022.

Concentration: The opportunities and the Risks

Does this four decade increase of asset concentration  from 19% to 46% in the top 100  mean  the cooperative system is going the way of banking with its 80% concentration in the top 100?

Most data show that larger credit unions tend to grow faster, have broader service and product profiles, and develop larger average member relationships.  In some instances, their size supports a market profile that results in naming rights or public partnerships with local sports teams.  To the extent that size also enlarges community roles and political impact, this can be a plus.

In banking, the drive for market dominance through scale is a constant ambition.  Growth increases earnings and a bank’s stock price.  While the FDIC- labelled community banks ($4.3 trillion in 4,258 firms or 90%) dominate by number, their share of total banking assets hovers between 15-20%. Their role focuses on commercial clients that align in financial size with the banks.

A Cooperative Difference

A significant difference  with banking’s top 100 is that  except for First Tech ($16.7 billion) almost all of the other credit unions have relied primarily on organic growth.  Many larger credit unions have had mergers, albeit small.   PenFed has completed over two dozen in the past decade.  But in most instances these have not been a significant factor in recent growth.  A number of the largest credit unions-SECU, Alliant. BECU, Navy, Vystar have had no mergers—all growth has come through internal expansion.

Comparing the two credit union top 100 lists forty years apart, the evolution in fields of membership is clear. Marketplace identity with a local sponsor has disappeared.  Most credit unions today have community (open) charters. Many have moved away from their legacy affiliation name to a generic identity, eg from Teachers to Everwise, or Telephone Employees to Wescom.

The Member Impact

What does this transition to larger firms with expanding market goals mean for the credit union member-owner?

The major downside is the distancing from local knowledge, identity and personal-member affiliation. The goodwill and community support in times of uncertainty becomes attenuated.

As credit unions expand their market footprints, the transition to open membership puts them increasingly on  a par, in members’ eyes, with other financial options.  Credit unions position themselves as full alternatives to their banking competitors.

This transition from member to customer is often accelerated via indirect lending models where credit unions compete for loan via third party originators.

Cooperative Destiny or Fate? Forensic Analysis Helps

Are cooperatives  destined to follow the banking  system’s increased concentration?

The value of the two credit union listings can perhaps shed some insights about this future evolution.

As I review the 1982 listing I find only seven that have merged and no longer exist, and one IBM Mid America, that converted to a mutual savings bank in the 2007.  Most have changed their names reflecting their expanding market reach.  Some have dropped out of the top 100 but are still operating.

A 93% success factor for individual institutions after 40 years of deregulation is a significant achievement. Especially as almost three quarters of the charters active in 1982 no longer exist.

A detail that readers may wish to pursue is how a credit union’s standing has changed within in this top flight. For example Patelco ranked 98^th in 1982 and is 28^th in size forty years later.  Identifying major changes within the top 100 can lead to examples of superior leadership or a loss of momentum.

A second analysis that may contribute to understanding the cooperative design’s dynamics is who is new to the top 100 in 2022 from decades earlier?  And how did they get there?  For example Apple FCU,  Canvas CU, NASA FCU or American Heritage.

How did these newcomers rise to the top of the industry?   What do their business models suggest for other credit unions?

I would encourage detailed analysis of the two listings and the changes that have taken place as a first step in thinking about how financial cooperatives succeed.

What strikes me is the stability of the largest credit unions especially compared with the banking system over these four decades.  When management’s loyalty is primarily to stockholders return and/or their own personal rewards, these priorities tend to drive one set of outcomes.   When the focus is on the member-owner’s well-being, there seems to be greater continuity in strategy.

The listings also show a wider diversity of business models. For example, Alliant’s one branch, all digital model has evolved into a financial intermediary for credit unions.  While Wright-Patt’s  traditional focus serving members living paycheck to paycheck has led to sustained growth.

This diversity can offer case studies for credit unions seeking options or even just sticking close to their knitting.

One other observation.  If a consumer were to choose from the top 100 credit unions or top 100 banks, which listing would seem more relevant?

 

According to Credit Union Magazine the top 1982 news story was the Penn Square Bank failure that involved more than 130 credit unions. (March 1983, pg 19)

The FDIC closing was over the 4^th of July weekend.  NCUA had planned its second on-the-road board meeting for Chicago the following week.  The open board meeting was to coincide with NAFCU’s Annual convention.  For Ed, Bucky and me it was also a homecoming as Illinois was where we had been responsible for regulation of state credit union activity from 1977 until going to NCUA in late 1981.

As NCUA Chair, Ed had always held a post board meeting news conference.

This time the three of us were at the table.  The first question from a reporter was to me,  I think from Larry Blanchard. “With  all the CD exposure from investments over the $100,000 FDIC insurance, would NCUA now propose a rule limiting investments to the insured  amount?”

I had prepared for lots of “what-are-you-doing now?” kinds of questions, but not his one.  I instinctively said no.  Bucky and Ed were quick to describe how the agency would respond with both examiner on site reviews plus the CLF’s lending capacity.

Questions and Democracy

For anyone in authority, whether public or private positions, answering unscripted questions is part of the job.   It is how shareholders, the press, and interested stakeholders hold leaders accountable.

Questions are not always comfortable for the recipient.  They often challenge current happenings.  But the give and take is necessary.  They are part of a leader’s responsibility to a constituency. They help make democracy possible.

Many leaders, not in a public setting (press conference), will ignore these voices, hoping they will go away or grow tired.  Meanwhile the organization’s PR machine fills the airwaves with success stories, announcements and social media posts of positive activity.  Leaders will seek a friendly setting to put out their point of view rather than engage in a public dialogue.

Just Asking

Since February of this year, Jim Blaine the former CEO of State Employees NC has published a daily website challenging the leadership and direction of country’s second largest credit union.

Six initial questions about the credit union’s direction were posed at the 2022 Annual Meeting under new business.   The three motions requesting action  were passed by voice vote of all members.  Jim started his blog when the responses became increasingly different from the reality he was hearing from current and former employees, directors and members.

The Monday, June 26^th  post describes his slow conversion to action after six years of retirement growing daffodils and chickens.  He describes his awakening as a matter of trust.

I know of no current CEO or credit union professional who openly supports Jim’s return to the fray.  Their criticisms come down to one principle:  he had his turn, now it is other’s responsibility.  Or specific defenses for the changes underway.

But this is not the Navy where when the officer of the deck takes the con, he alone is in control, unless relieved by the Captain.

Democracy is not just the careful selection of new leadership until they fill out their term and move on.  It is also a system of checks and balances on the exercise of power.   In credit unions, these checks and balances supposedly reside primarily in the board, elected by the members at every annual meeting.

However today most boards are in practice unelected.  The nomination process is controlled by incumbents.   So if a Chairman, as Jim asserts, is trying to implant a new strategic direction for the credit union, how is this plan to be presented to members for their support?

Credit union boards are not places comfortable for minority points of view.   I recall when the chair of the supervisory committee opposed the board’s vote to merge their $350 million firm, she resigned rather than make her position public. When the Chair of Cornerstone FCU overseeing the CEO selection committee nominated himself, no one objected.  Within the year this former chair, now CEO, was seeking a merger of this iconic credit union.

Credit union boards are more and more like country club elections-directors choose their friends and acquaintances to what should be a position of accountability. Marketplace competition while present, is not limiting as it is for a stock traded financial firms where performance affects price.

So when the democratic process is lacking, the one option is revolt, the public raising of questions that challenge both individual actions and direction.  For example Jim in his June 19^th post asked about a $6,568,261 payment to Andrews FCU when their former CEO Jim Hayes was selected to run SECU.

The Almost 200 Credit Union Failures

NCUA’s first quarter 2023 data shows 191 fewer charters than one year earlier.   These are charter failures.  But not from the safety and soundness events most frequently believed to be the cause.  These are failures of morale.  Leaders are putting their comfort and well being ahead of responsibility to members.   One need only look at the list of mergers of sound well run credit unions with capital in double digits.

SECU’s situation is an example of leadership shortcomings, not yet a financial problem. It is a situation where democratic accountability was set aside and is now being resurrected in response.

Cooperative democracy is both a process for accountability and respect for member-owners. This public challenge  isn’t the first time this has occurred; it won’t be the last.

 

 

 

 

 

 

 

 

 

 

 

 

Disruption is both an adjective and a noun.  A word to describe changes upsetting the status quo in a market.  And a way to compete against larger and stronger foes.

The business theory with this name was formalized by Clayton Christensen. In this interview with MIT magazine the essential ideas are laid out.  He describes the circumstances as follows:

Disruptive innovation describes a process by which a product or service powered by a technology enabler initially takes root in simple applications at the low end of a market — typically by being less expensive and more accessible — and then relentlessly moves upmarket, eventually displacing established competitors.

Disruptive innovations are not breakthrough innovations or “ambitious upstarts” that dramatically alter how business is done but, rather, consist of products and services that are simple, accessible, and affordable.

In this process identifying the “job to be done” for the consumer is an important insight.  See below for the example of a disruptive example coming at credit unions from below.

The Adjective

A second approach to understanding disruption is to identify some consequences that become visible in markets when the process is at work.   Is the credit union system being disrupted?  What would be indicators?  Who is doing it?

Author and speaker Greg Satell wrote in an April 1, 2023 article “4 Signs Your Industry is Being Disrupted.” Among the four are events that may be familiar.  Note he is not writing about credit unions or even financial services.  Some of his terminology may seem more appropriate to manufacturing, but I believe his observations are still helpful in understanding where competitors are emerging.

One sign is maturing technology.  The truth is that every major technology has a similar life cycle called an S-curve. It emerges weak, buggy and flawed. Adoption is slow. In time, it hits its stride and enters a period of rapid growth until maturity and an inevitable slowdown. That’s what’s happening now with digital technology and we can expect many areas to slow down in the years to come.

A second is consolidation, or mergers.  Yet when an industry is in decline, the forces external to the industry get the upper hand. With new market entrants and substitutes becoming more attractive, customers and suppliers are in a position to negotiate better deals, margins get squeezed and profits come under pressure.

That’s why a lot of consolidation in an industry is usually a bad sign. It means that firms within the industry don’t see enough opportunities to improve their business by serving their customers more effectively, through innovating their products or their business models. To maintain margins, they need to combine with each other to control supply (or I might call it vendor relationships). 

The third response he calls “rent seeking and regulatory capture.”

The goal of every business is to defy markets. Any firm at the mercy of supply and demand will find itself unable to make an economic profit — that is profit over and above its cost of capital. . .

That leaves entrepreneurs and managers with two viable strategies. The first is innovation. Firms can create new and better products that produce new value. The second, rent seeking, is associated with activities like lobbying and regulatory capture, which seeks to earn a profit without creating added value. In fact, rent seeking often makes industries less competitive. . .

It seems like they (rent seeking industries) are getting their money’s worth. . .Occupational licensing, (read new charters) . . . restrictions have coincided with a decrease in the establishment of new firms. If your industry is more focused on protecting existing markets than creating new ones, that is one sign that it is vulnerable to disruption.

His fourth indicator he calls the Inevitable Scandals.   He cites Thernos and WeWork as examples.

He might have included the ongoing compliance problems at Wells Fargo or the recent failures of well capitalized institutions such as Silicon Valley and Signature banks as “scandals”—although it is still unclear who all the contributors to these failures are.

Who Is Coming After Credit Unions’ Members?

Disruption is a constant factor in competitive markets.  Firms try to respond to these pressures in both self-protective ways as well as the more formal response in Christensen’s theory.

Where is credit union competition coming that  would fit both descriptions?  In many credit union consolidations scale is cited as the dominant motive, suggesting that bigger players are the greatest threat to credit unions’ future.   Apple Pay, Walmart Financials services, even some recent fintech firms such as Rocket Mortgage, SoFI or other product centric online platforms will take away critical member-product segments.

But my two favorite examples of disruptive competitors using Christensen’s analysis are Venmo’s peer to peer payment transfer and Chime, a neo bank.

Venmo was described by a 21 year old financial writer in an article last year.   The person-to-person payment application requires a depository account, but then begins to function as a broader transaction option overtime.  While it must synch with an existing account from which to draw funds, this would seem just the first step in becoming a dominant player in processing multiple kinds of consumer financial transactions.

My favorite example is Chime which describes itself as the #1 Most Loved Banking App.   The firm’s goal is to be the entry point to a person’s financial institution by making digital banking easy.  It lists some benefits as follows:

Online banking made easy

No minimum balance requirement or monthly service fees

 Manage money 24/7 with the #1 most loved banking app

 Get paid up to two days early with direct deposit

 Deposit checks from anywhere

One of the most enlightening interviews about Chime is from January 2022 in which founder Chris Britt is interviewed by the CEO of Goldman Sachs.

The whole strategy is easily followed in this 17 minute interview.   Listen carefully to how Britt describes his addressable market description (paycheck to paycheck); “we are not a bank”;  how incumbent providers pay attention to only the top 20% of users;  how direct deposit is the pathway to his customers; and designing the firm’s services to match unmet consumer needs.  Listen also to the role of core values.

Chime is a classic example of Christensen’s theory.  There is nothing in this model that credit unions could not do or have not done in the past.   I believe however that many credit unions have moved “up market.” Now firms like Chime are after the market credit unions were originally designed to serve.

Review again this disrupter’s description of financial strategy–a transaction business with a subscription service.   Note his relationship with regulators: Respect the Rules.

This model is what credit unions were designed to be.   Is Chime signaling that  we left our core members and purpose behind?

 

 

 

 

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.