Chip Filson
Former NCUA Board Secretary Rosemary Hardiman, Public Affairs Officer, Joan Pinkerton, Executive Director and General Counsel, Bucky Sebastion and Director, Office of Programs and CLF President Chip Filson reunite for Bucky’s 80th Birthday on the President’s holiday weekend.
Once upon a time there was a tavernWhere we used to raise a glass or twoRemember how we laughed away the hoursThink of all the great things we would do?
Fees are now front and center as a political and hence regulatory topic, not just a business decision. Chairman Harper has said he intends to shed some light on the practice in credit unions by collecting data.
AT SECU (NC) the credit union developed an approach to this money management issue that was designed to help the member, not create a borrowing dependency.
Here is Jim Blaine’s description of the program which I assume is still in place. If you read his following day’s blog, he describes SECU’s $5.0 billion draw of the Federal Reserve’s Bank Term Lending Program (BTLP). The analysis includes the other top five credit unions by assets and their use/nonuse of this option.
Yesterday’s board meeting had one primary topic, the state of the NCUSIF and the related responsibility of setting the NOL.
Unfortunately the live stream broadcast cut out during Harper’s initial comments and then permanently as board member Otsuka began her comments.
The NCUSIF had its best year in a very long time. Record net income, no insurance losses, rising income and an NOL at 1.3%. All that was missing was a dividend for the owners.
There were two disappointing aspects. CFO Schied said the increase of credit unions in CAMELS 3 category was due to “liquidity, interest rate risk and risk management.” He then announced that the latest portfolio maturity of $700 million would be invested in two tranches-50% in overnights and the rest in the traditional ladder out to 7 or 10 years.
Since December 2021 the NCSIF’s portfolio has been underwater. The earnings of the NCUSIF have suffered greatly from this robotic IRR approach to portfolio management.
But no one apparently has learned anything from this ongoing underperformance, now in its third year. The board members just nodded in tandem as this decision would produce a “good source of future income.” The board’s inability to even address their IRR oversight was a failing to take proper care at best; or at worst irresponsible.
The second shortcoming was the failure to review and reset the fund’s Normal Operating Level(NOL). This has been the standard bpard process every December. The board would review staff’s five-year model with its various scenarios and then approve a cap for the next year.
Not this year. Schied who presented the modeling in year’s past, made an excuse about staff needed to do “more analysis.” Harper who controls the agenda, obviously did not want the NOL to be reviewed as all the data would show the traditional 1.3% cap was more than sufficient. If reset this historical limit would likely provide a dividend for credit unions in 2024 given the much higher earrings from the fund.
Hauptman in the December 2022 board meeting in responding to Hood’s suggestion that the level should be 1.3% said it wouldn’t make any difference. He implied the fund could not possibly reach or exceed that level, so it didn’t matter whether it was 1.3 or 1.33.
This year his approach was even more cavalier. He failed to note for the record that the staff had did not present their standard analysis of the NOL, the first time since 2017. Then in a series of flippant remarks said in effect “I don’t know what the right number should be. Is it 1.34? of 1.35 or 1.36?”
Since 1984 NCUA board members have had no difficulty setting a limit, a decision well understood and documented for forty years. This cap limit really matters to credit unions now. Each basis point above 1.3% equals $175 million that could potentially be paid in dividend to credit unions.
Hauptman did not call out the chair’s failure to put the item on the agenda and just let the current cap slide through. His dismissal of the staff process which he supported in prior years suggests either a lack of conviction or courage, or both.
In the end it probably doesn’t matter that the livestream went out. There wasn’t any real engagement on matters of substance before the lights went out.
Yesterday’s 2023 yearend industry analysis by Callahans was a very useful summary of the sound state of the industry. There were the standard summary slides showing macro trends. These reflected a slower growing system.
The presentation included a new effort to show how larger credit union’s dominance of averages can be better understood by including the mean outcome for every ratio.
Finally there were several slides with a 20-year time horizon that demonstrated the inherit cyclicality of performance such as delinquency or share growth.
The full set of slides and the recording can be downloaded here. https://go.callahan.com/rs/866-SES086/images/2023_Trendwatch_SlideDeck.pdf?version=0
The recording: https://creditunions.com/webinars/trendwatch-4q23/
The centerpiece of today’s NCUA’s board agenda is a review of the NCUSIF’s 2023 performance. Three areas are most important:
The 2023 insured share growth was published in the audit preamble, so the NOL cap for yearend 2024 is the outstanding board determination.
This annual NOL review was a commitment by Chairman McWatters when the two-person board first raised the historic 1.3% cap in the NCUSIF in 2017. This change was to retain the inflow of funds from the merger of the TCCUSF. Credit unions uniformly questioned this process and urged a return to the 1.3% as soon as possible. It has been seven years.
The 2023 net cash losses in the NCUSIF were minuscule, just $1.0 million. In comparison the banking system has paid the FDIC $761 billion in premiums for “receivership costs” through September 2023.
CFO Schied stated in his board update last fall: Since the last taxi failure on October 2018, actual SIF losses are a total of $53.8 million or .0031% (.31 bps) of insured shares as of June 30, 2023.
With the full 2023 results now in, this annual loss rate is less than .10 basis point per year. A remarkable record during five years of economic ups and downs.
The NCUSIF’s yearend $209 allowance account is 1.2 basis points of insured savings or 12 times this annual loss rate. Or five times the total for all dollar losses in the past five years.
CFO Schied told the board that this reserve amount is determined using a macroeconomic model. Will the numbers, assumptions and calculations in this model be available so users of the statements know how it works and its factual validity?
The $22.4 billion (book value) in total NCUSIF investments is the only revenue source for the fund, unless the Board chooses to assess a premium. This has occurred only four times in the past forty years.
Since December 2021 the portfolio’s market value has been less than book.
This means the portfolio is not earning current market rates. At yearend 2023 the NCUSIF’s term portfolio had a yield of just 1.4%; the $5.2 billion in overnight funds earned 5.4%. The combined yield for all 2023 was just over 2.0%.
During 2023 the buildup of portfolio cash reduced the Fund’s weighted average yield by a full year, from 3.33 years to 2.30 years. This change reduces interest rate risk. This number is the approximate time it would take the portfolio’s reinvestments from maturing securities to reprice if rates normalized at their current level.
In last fall’s presentations to the NCUA board, the CFO indicated that the Fund’s investment policy had not changed. And that having achieved the initial cash target ($4.0 billion), the committee would begin considering extending out the curve—even though the interest rate curve continues to be inverted.
Interest rate risk is the primary threat to be managed consistent with optimizing earnings. This is what I believe an NCUA examiner would write about the current Board oversight. The wording is borrowed from a CAMELS code 3 exam of a multibillion dollar credit union:
Risk: Strategic Degree of Risk: High
CAMELS Effect: Management, ALM, Earnings, Capital
Reason for rating: A capital planning discipline is not in place to manage the interest rate risk (IRR) that is commensurate with the size and complexity of (credit union). . . and the exposure presented to the NCUSIF.
The Credit union’s ALM (investment) policy establishes guidelines related to capital, net income, and net economic value of equity, but does not contain specific, established interest rate risk limits.
Examination Requirements: Matters requiring Board attention.
The board should further develop, document, and implement a policy to measure and monitor interest rate risk. The revised policy and plan should include the following actions at a minimum:
I could not have suggested a better approach for the Board’s attention.
Since 2008, 93% of the operating expenses of the fund are from NCUA’s overhead allocation of its expenses via the Overhead Transfer rate. The OTR ranged from a low of 52% (2008) to 73.1% (2016). For 2023, NCUSIF’s operating expenses increased 12.6% using an OTR of 62.4%.
From 1979 through 1984, the percent of NCUA’s expenses paid by the NCUSIF, were never higher than 26% (pg 39 NCUSIF 84 Annual Report). Until 2001, the transfer rate had been fixed at 50%.
The current expense level equals approximately 1.3 basis points of insured shares. In terms of yield on the entire portfolio, this requires the fund to earn 1%. Operating expenses are a fixed cost, right off the top of revenue. If not controlled they take resources away from the Fund’s primary insurance resources.
With the audit numbers and the total of insured shares from December call reports in hand, the equity to insured shares ratio can be computed at yearend. NCUA says the NOL number is 1.3%.
This ratio determines the prospect for a dividend when the fund’s net income raises retained earnings above the NOL upper cap. This cap is set by board action each December.
The 2022 board meeting kept the 2023 upper limit at 1.33 even though one member expressed the view that it should revert to the historical 1.3% which had existed until from 1984 through 2017.
When will the board make this determination for 2024?
The meeting starts at 10:00 AM. For a full review of credit union’s financial performance, Callahan & Associates presents their quarterly Trend Watch analysis at 2:00.
Late yesterday NCUA released the independent CPA audits of the four credit union funds it manages.
The one that matters most for credit unions is the NCUSIF’s performance. Plumbing through the opaque federal accounting presentation reveals much good news.
Bear in mind when reviewing the highlights below that the FDIC is struggling to increase its insurance ratio. It has assessed increased premiums to pay for the hundreds of millions of bank failures in 2023.
In the December’s 2022 board meeting, NCUA set an NOL upper cap of 1.33% for the NCUSIF. Board member Hood had urged that the historical .3% upper limit be restored.
This upper cap matters. All income above this limit in a year must be distributed as a dividend to the Fund’s owners, the credit unions. This is the fundamental promise in return for credit union’s open-ended 1% deposit underwriting.
To date I have seen no upper cap set for 2024. Hopefully this means the long term, historically validated limit will be in place for this year.
Restoring this 1.3% cap would make this the perfect Valentine for the credit union system’s uniquely successful cooperative Fund. Isn’t it time NCUA shared a little love with credit unions?
This week NCUA will report on the 2023 financial audit of the NCUSIF in two days. This will be the 42th external, independent certified audit of the fund.
Multiple financial events have presented numerous stress tests for the NCUSIF since 2008. These include 2008/9 Great Recession followed by quantitative easing and a period of abnormally low rates. Then came the COVID national economic shutdown. The current inflation has been countered by the Federal Reserve’s rate increases, the most rapid in 40 years.
Through all these scenarios, one trend line demonstrates the Fund’s resilience. The chart below is the ratio of retained earnings to insured shares for this 14-year period.
The blue line shows the Fund’s equity at or above the historical .3% upper cap. The orange line adds the allowance account balance, which are additional reserves already expensed from equity.
The uniqueness of the fund is more than a steady earnings base growing in tandem with insured risk.
This cooperative funding model aligns with the values, culture and balance sheet structure of the credit union system. Every member contributes 1 cent of every $1 share for this collective insurance. In turn it is a resource available to assist any credit union that needs cash or other 208 assistance if facing insurmountable challenges.
The unique NCUSIF design works; however the history may not be known to current board members or to some credit union leaders. Credit unions need to remind all of this important story and what this stability has meant for their members.
Outside audits were not the practice from the NCUSIF’s founding in 1971 through 1981. GAO had performed an audit every two years; the report came six months or more after the audit date. The 1982 NCUSIF Annual Report described this change from GAO to a private independent firm implementing GAAP accounting standards:
“To ensure the Fund’s statements are examined in the most timely manner and to seek an assessment of accounting procedure, the NCUA contracted for the first independent audit ever conducted of the Fund’s balance sheet by an outside accounting firm.
In the years prior to fiscal 1982, the Fund recorded losses from financially troubled credit unions at the time these credit unions were ultimately merged or liquidated. Additionally, losses on asset guarantees . . . were recorded at the time that payments were made under guarantee agreements.
Beginning in 1982 the Fund began the process of conforming its accounting for losses from credit unions to GAAP. (These) principles require that the fund record losses at an earlier point in time than had previously been the Fund’s practice. In this respect the Fund recorded estimated losses under the cash assistance program of $14.1 million and of $15.6 million on outstanding asset and merger guarantees.
In addition, GAAP generally required that the Fund record estimated potential loss accruals for credit unions identified as experiencing financial difficulties but not receiving cash assistance. . . The Fund did not attempt to estimate these additional losses for fiscal 1982 because it was not practicable to accumulate the information needed to make the estimates.
Equally as important as the change in accounting methods were the improvements to the fund’s records. Ernst & Whinney worked with the Fund’s accounting staff identifying areas that were not properly recorded . . . As a result the Fund is now publishing monthly statements which will help all interested parties monitor the financial results.” (pages 7-8 NCUSIF 1982 Annual Report)
The Report’s remaining 20 pages gave details of cash assistance, guarantees and merger costs along with an overview of all insurance programs and credit union trends. Transparency in every respect was essential for confidence in the Fund’s management.
Chairman Callahan’s view was that, “We believe our “full and fair” disclosure should be no less than what we expect insured credit unions to give their members.”
In the 1984 audit, Ernst & Whinney gave the Fund its first ever clean opinion “in conformity with generally accepted accounting principles applied on a consistent basis.”
Without this three-year effort (1982-1984) to improve the timeliness (monthly board reports), accuracy (GAAP accounting) and transparency, the credit union system might not have supported the radical redesign of the NCUSIF. This new approach required perpetual 1% deposit underwriting.
This cooperative model was passed by Congress in 1984 with full credit union support. To implement the 1% underwriting, 15,303 federally insured credit unions deposited $845 million into the fund by January 1985.
The result was that the NCUSIF instantly became the strongest and, through time, the most stable of the then three federal deposit insurance funds.
The NCUSIF never looked back or across the aisle. The FSLIC merged with the FDIC. The FDIC has reported negative net worth and periods of ever increasing premiums, such as now, to try to meet its minimum ratio level.
NCUA’s graph of this change in the standing of the three funds from page 37, NCUSIF’s 1985 Annual Report.
In a speech to credit union managers and the press following the 1984 recapitalization, Chairman Callahan gave the following “pitch”(his word):
“Don’t set it up and forget about it. It’s unique. It’s a better way. But just as important, it’s yours to monitor—it’s your responsibility to keep it working—because if you don’t it’ll go just like everything else the government touches. When government gets more money, it wants to spend more. Our goal is to spend less (on insurance). You’ll have to hold us to that promise.”
Then in 2010 there came a change in how the NCUSIF’s financials were presented.
The NCUSIF’s GAAP presentation was a financial format that all credit unions knew and followed. This GAAP audit is the only format used in NCUA’s Operating Fund and the CLF since they were both audited by independent accounting firms beginning in 1982.
On June 23, 2010 Credit Union Times printed a story with the headline, Auditors Fault NCUA’s Accounting. The article in part:
“KPMG gave the NCUA an unqualified audit but found material weaknesses in the reporting and documentation methods. . . NCUA Chairman Debbie Matz said the 2008 and 2009 audits (released on June 14, 2010) had been delayed because of the problems facing the corporate credit unions. . . According to the KPMG report, the NCUSIF does not have sufficiently comprehensive policies and procedures that document control activities and monitoring functions that should be embedded and/or performed within the financial and reporting process.”
In a June 17, 2010 Agency bulletin, the NCUA board announced it had adopted Federal GAAP accounting for the newly authorized TCCUSF. The same bulletin had this statement:
The National Credit Union Share Insurance Fund (NCUSIF) is required by the Federal Credit Union Act to follow U.S. generally accepted accounting principles (GAAP). The General Counsel’s opinion concluded that “section 105 of the GCC Act, as interpreted by the General Accounting Office, does not preclude NCUSIF from using an alternative set of accounting rules such as FASAB in preparing the NCUSIF’s financial statements.”
Shortly thereafter there was a change as reported in this footnote in the NCUSIF’s 2010 yearend audit: Basis of Presentation The NCUSIF historically prepared its financial statement in accordance with generally accepted accounting principles (GAAP) based on standards issued by FASB, the private sector standards setting body. On September 16, 2010, the NCUA board authorized the NCUSIF to adopt the FASAB standards for financial reporting, effective from January 1, 2010. Accordingly, this is the first year of the presentation of the NCUSIF financial statements in accordance with FASAB.
However, FASAB’s form and content are very different from private GAAP. The account titles, presentation and interpretation are intended for reporting entries that rely on governmental funding. The NCUSIF is totally dependent on credit union funding. The FASAB format is completely alien to the accounting presentations familiar to and used by credit unions and CUSO’s.
Some of the NCUSIF’s balance sheet accounts that are completely novel under federal GAAP include:
Balance Sheet headings and account categories: Intergovernmental. With the public; Insurance and guarantee program liabilities;(Loss reserve); Net Position, and its cumulative results of operations (not the same as retained earnings)
The traditional Income Statement is replaced with two other presentations. The first is, “Statements of Net Cost”. This includes Gross Costs followed by Less Exchange Revenues and concludes with a bottom line Net cost of Operations (which is not net income).
The second Statement is Changes in Net Position. This includes net unrealized loss or gain on investments, and interest income, the primary revenue source for the NCUSIF.
In standard GAAP, Statements of Cash Flows is replaced with the governmental “appropriations terminology”: Statement of Budgetary Resources. This includes subtotals for Total Budgetary Resources, Status of Budgetary Resources and Outlays Net.
These accounting concepts are far removed from any of NCUSIF’s actual operations. When staff gives the board’s NCUSIF quarterly update, it converts the income and balance sheet statement to the traditional GAAP format. However the monthly postings are not converted. They remain in the idiosyncratic federal GAAP Accounting format.
The NCUSIF’s federal presentation is misleading in its factual representation of transactions which suggests that the NCUSIF is a governmental appropriated fund.
Certain critical concepts and terms are absent. The most important is “retained earnings.” One looks in vain for the number which is used to compute the NCUSIF’s normal operating level. Another concept is “fiduciary assets” which means AMC assets are not fully recognized on the NCUSIF balance sheet.
Eternal vigilance is hard when numbers are presented in a federal disguise. At a minimum, the NCUA board should request the auditor also represent the yearend audit numbers in private GAAP format. Staff should also present the monthly updates in this standard.
Then users of the statements can easily understand the trends. More importantly they can fulfill the challenge from a previous NCUA chair for credit unions: it’s yours to monitor—it’s your responsibility to keep it working.
Restoring easily understood transparency to the NCUSIF’s financial presentation would be an important step forward for the NCUA Board in its upcoming annual review.
Bucky Sebastian has reached yet another, notable milestone. On February 12, Lincoln’s Birthday, Mr. Sebastian will be rolling the oldometer over one more notch to 80! Eighty years of success in all endeavors: regulator, business entrepreneur, credit union/philanthropy CEO, husband, father, grandfather, fierce friend, free spirit.
Reared in Illinois with 7 siblings – 5 older! – it is surprising that Sebastian survived childhood. The older kids tried to make sure Bucky knew “his place” in the world – last at the table, remain silent until asked, remember you exist only to serve – us! Given the circumstances, Bucky learned early how to fight, regardless of the odds; was imbued with a servant’s heart; but never fully overcame his bashfulness and reluctance to speak.
After high school, Bucky decided to become a priest, but the Jesuits wouldn’t have him. The Jesuits evidently found Bucky a bit too “over the top”, too evangelical!. Perhaps they feared a devil’s advocate? At that age – or at any age for that matter – subtlety was not Bucky Sebastian’s best trait.
Bucky also had some difficulty with the Jesuit vows of “poverty, chastity, and obedience”. He could accept poverty, would work on chastity, but obedience – well he seemed to lack that gene. Anyway, he didn’t like the limited prospect of preaching only once a week! Having decided he couldn’t work for God, Sebastian made the next best choice; he decided to play at being God…and went to Loyola to become a lawyer. The Jesuits tried to hide their disappointment!
Having graduated, and having his never-really-lacking self-confidence reaffirmed with the law degree; Bucky was now even more convinced: that he knew what was right, he knew what you needed, and he was determined to make sure you knew what you needed. So, his next career choice was also entirely logical; he became a financial regulator, ending up at the NCUA. Regulators like telling folks what to do; and, most importantly to Bucky, can usually speak at length without fear of interruption.
At NCUA, Sebastian became an oratorical outrage – and an immediate problem. A bane to pomposity and self-importance, Mr. Sebastian taunted the status quo and all infestations of mindless, conventional wisdom. He was a mischievous mocker, a red hot provocateer. Sebastian invented the novel idea at NCUA that a regulator should listen first and speak last – still reluctantly used.
Bucky Sebastian’s thinking has always been expansive, his mouth more so – with profoundly, positive results! He made folks uncomfortable, prodding them to say what they thought, explain why, and then challenging their thinking. Stand and deliver, prove your point or die trying. Fatalities were not infrequent. But in doing so, he changed minds, he changed hearts – for the better.
But, Bucky Sebastian’s impact was profound even when in error. In 1982, Mr. Sebastian opined that federal credit unions could pretty much forget having any limits on their membership. A bench of Lawyers Supreme said, “un-huh”. An all-hands-on-deck credit union movement effort was required to convince Congress to bail Mr. Sebastian out – which they did, creating a new, brighter future for credit unions.
Sebastian, if you know the man, to this day still asserts that the Lawyers Supreme erred in that decision; claims that Lincoln was born on his birthday, not vice-versa; and that when President Lincoln led off his most famous speech with “Four score…”, Lincoln was simply trying to say…
Happy Birthday, Wendell “Bucky” Sebastian!
(… wouldn’t try to argue with him about it, if I were you!)
From Greylock Federal Credit Union:
We have officially welcomed over 100,000 Members! We are deeply proud to be the hometown financial institution of choice by so many in our community and we want to say THANK YOU!
From Springfield High School’s student newspaper on the school play:
. . .One of the important aspects of high school is the opportunity to be a part of something bigger than yourself. Being involved in the production process, like Hashmi stated, has allowed students to contribute to the creation of a captivating performance. It is a chance to collaborate with a team of talented individuals and learn new skills along the way. Plus, there’s a unique sense of camaraderie that comes with being part of a play. So, if you enjoy the idea of working behind the scenes and being a crucial part of bringing a story to life, the fall play is definitely worth considering!
This short video “story” from Thailand should be required viewing for every credit union board that has ever contemplated the merging of their long- serving coop. It is a stunning example you won’t forget. It disproves the capitalist adage, “Everybody has a price.”
(https://www.youtube.com/watch?v=1HtaYMhDr4k)
This week has seen another bank’s stock price fall by over half from $10 to $4 per share.
From Yahoo finance: The Pressure on NYCB is Not Letting Up. At yearend 2023 the bank reported $116 billion in assets and $10.8 billion in total equity.
Its history in brief: New York Community Bancorp, Inc. (NYCB), headquartered in Hicksville, New York, is a bank holding company for Flagstar Bank. In 2023, the bank operates 395 branches in New York, Michigan, New Jersey, Ohio, Florida, Arizona and Wisconsin under multiple local brands acquired via multiple acquisitions.
Einstein’s explanation of the credit union advantage, especially in times of crisis, is simple-Time: The only reason for time is so that everything doesn’t happen at once.
The cooperative member-owner structure gives management and the owners time to straighten things out when problems occur. Let markets cycle through their phases. However, there is no respite in the winner-take-all world of competition when a market owned firm falls from grace.
In my recent look back on several mergers, I reached out to a participant from several years ago. Had the members seen any change for the better? The reply: it’s just another bank without heart or soul or members, just customers…but then, we might just be American Idiots …
If we’re honest, culture forms us as much as our statements of personal values.
Human beings can live without many things, but not with an absence of meaning. In our “free” market driven economy dominated by for-profit firms, cooperative CEO’s and boards will continue to cloth self-interested actions in moralisms and myths.
Fortunately, members are not idiots.
On November 9, 2021 the results of one of the most contested credit union merger elections were announced. The members of Vermont State Employees (VSE) had approved a merger with New England FCU. The final tally was 7,622 for and 7,304 against, a margin of 318 votes. Approximately 21% of the members voted, an unusually high participation.
I wrote a number of blogs about the contest. The opposition put up a website Calling All Members led by the former CEO and previous board directors. It presented powerful arguments against ending VSE’s independence. For these longtime VSE supporters, the outcome was a surprise and disappointment. However, they chose not to challenge the results. Since the merger date of January 1, 2023, VSE has operated as a division of New England FCU. A new name/brand is promised for the future.
John Kennedy once said, “Victory has a thousand fathers; defeat is an orphan.” In this case victory has a mother.
I recount this story from a much longer article about her efforts. This insider’s account raises the question what the outcome might have been had this approach been revealed during, not 8 months after the vote.
In July 2023 this VSE senior executive who directed the merger campaign was the subject of a long account by Joel Berg. It is posted in full on the Financial Brand website, Tactics from a Nail-Biter Merger That Every Bank Marketer Can Use.
This lengthy, first-person story of the voting campaign centers on Yvonne Garand, VSE’s chief marketing manager. The article includes examples of the mailings and other promotions from the campaign which are not included here.
Writer Berg describes Garand’s communications strategy as the “make-or-break factor.” These included messaging to target segments at critical points in what ended up being conducted like a “political campaign” including hiring a consultant expert in political elections.
The author believes this case “offers lessons for other institutions concerned about how customers will react to a change in ownership.” Also an example of tactics necessary to win. He says the fundamental challenge in any merger or purchase-even if members vote: “the customers or members coming on board didn’t choose to bank with the acquirer on their own.”
The critical communication tactic was segmentation. Identify key groups and prepare different messages, tone and style for each subsector.
The two credit unions had different histories and business priorities. Both were community charters but VSE’s (1947) legacy was its state employee origins. New England’s roots were as an IBM chartered credit union (1961) with members outside the state from the beginning. These two Vermont based credit unions had created different business models, cultures, and brands.
Garand called her communications strategy a “human-centric approach” that ensured the “messages were empathetic.” In this short video link in the article she summarizes her approach with this point–the campaign couldn’t be a typical merger story about greater scale and efficiency.
“All of those things are important. But that’s our inside jargon. And we knew that if we came out with messaging and communications that sounded like that, people might not understand it, and it might even feel a little intimidating.”
(https://www.youtube.com/watch?v=Xtc2GWunoZY&t=55s)
Several key segments included “digital natives,” environmentally minded members, and those located around New England’s branch structure in Burlington.
But the most group was VSE members who lived near the state capital of Montpelier. As the longest tenured members, “We knew that this was probably the segment that would feel the greatest sense of loss because they grew up with VSECU. We really wanted this group to know that they were still going to have the same experiences that they have today.”
As Berg notes in the article, “knowing many “no” votes would come from the state capital area, the credit union focused on reaching potential voters in other areas of Vermont who might be more receptive to the merger plan.” He quotes Garand: “We strategically focused on the Burlington market — Chittenden County — as well as other smaller regions in Vermont, to encourage those members to vote. And it worked.”
Garand’s reaction to the opposition, “It did take us off guard just a little bit, how effective this opposition was in the central Vermont area.”
The independence effort was led by Steven Post the former CEO of 26 years and other directors and senior executives. Their website offered multiple, thoughtful reasons for sustaining VSE’s unique values based, Vermont-centric model. I wrote several blogs presenting their position that VSE’s continuation was in the members’ best interest.
The Vermont State Employees’ Association and the Vermont Retired State Employees’ Association, opposed the merger. Given this backing, “we thought we were going to win,” says Post the previous long term CEO.
What made the difference? The opponents say it was VSE’s resources used to promote the merger. If one looks at the increase in marketing and professional services spending in 2022 versus the prior year, it would seem to confirm one critic’s estimate that over $1.0 million was used to convince members to support management’s decision.
From Berg’s article, “If we had had money to put ads on TV, I don’t have any doubt that the outcome would have been different,” says Jerome W. Diamond, the state AG from 1975 to 1981 and a former chair of the credit union’s board.”
As the opposition organized Garand changed tactics from a traditional company marketing-messaging effort to a political campaign. Even bringing in outside consultant with election expertise.
Berg’s article includes more details with marketing collateral. This is an insider’s account of her role to persuade members to support VSE’s termination. She avoids debates about member benefits, rather the member communications focus on “feel good” concepts: “Better Together,” “Leading from the Future,” and “Enriching the Quality of Life.”
Garand rejects traditional business logic for mergers-scale, efficiency, innovation- to solicit votes. Recognize the opposition, but don’t engage with the critics.
The credit union controls the communication channels to reach the members including branch signage and multiple message marketings. Focus on advertising a potential bright future not on whether members should give up control over all the resources, relationships and community focus they have created and own.
Once eliminated via merger, there is no going back to resuscitate a vital legacy over 75 years in the making. When reporting on the outcome I described the losses that occurred not only for VSE members, but the state credit union system and its citizens.
New England FCU’s acquisition not only eliminated its principal competitor, it also created one credit union controlling 47% of the state’s credit union assets and 40% of members at the merger date. A big egg for one basket.
Tomorrow I will look at the results of the merger one year out. How are members responding? What are the financial trends? It is especially important for a look back while the events and points of view are still remembered.
We can change the future if we are willing to learn from the past. And then take seriously the differing judgments about the event’s consequences. One group lost an election about a credit union’s future role.
However everyone loses when the event is merely another successful example of the power of propaganda, or marketing, whichever interpretation best fits this recounting.
Yesterday’s Marketplace program on NPR had a brief report on the investments two of America’s five largest banks are making to improve their competitive position.
Technology? New Ventures? Greater staff skills? Social Marketing Influencers? Third party-fintech-origination partners? More acquisitions? All are factors, but not the newest priority.
JPMorgan Chase announces brick-and-mortar bank expansion in a digital age
Several of the relevant paragraphs from the story:
In the year 2024, when you think banking, you think mobile apps, online deposits, digital future, right? Not so fast. JPMorgan Chase, the country’s largest bank, announced today it’s opening more than 500 new brick-and-mortar branches and renovating another 1,700.
This follows an expansion by Bank of America last summer. So, what’s the value of banking in person in the digital age?
You don’t usually think of a bank as having a living room. But Jason Patton of JPMorgan Chase says they’ll be a staple in a handful of the bank’s new branches, which are meant to be places where people chat. . . (in cu’s this is called serving members)
“Some of these branches, we’re opening up in places where we’re not as well known,” he said. “So, in many cases, people don’t know what we have to offer.”
And it’s important to see and be seen by those people if banks are going to drum up new business, said Jaime Peters, a finance professor at Maryville University in St. Louis.
“By going and building these new branches, and having that placard on the side of the road that people pass every day, that is brand awareness, that is trust building,” she said. . .
The Only Growth Option Is Organic
Big banks have another incentive to add branches: The ones that hold more than 10% of the nation’s deposits are generally prohibited from acquiring other banks, said Michael Rose, a managing director in equity research for Raymond James.
“So because you’ve removed the ability for them to actually acquire other banks, they have to grow essentially organically,” he said.
After posting the latest video from White Fish CU, I received a link from Jason Lindstrom CEO of Evergreen CU in Maine. This new video has a similar community theme, but different subject matter. It is an homage to Maine’s forests and the people who maintain and enjoy them.
In addition to branches, “local” means that a credit union is authentically “home-grown,” not merely a local outpost of an out-of-state or national financial firm. Bank of America or JP Morgan Chase branches are not being grown (drummed up) from the natural environment. Rather they are an invasive species, trying to replace the local habitat.
This is Evergreen’s mission, “keeping Maine wild.”
(https://youtu.be/ocJ5PGR8FM8?si=VF46w9L01uk_tEj4)
Credit unions can be inventive when communicating their special nature. Here are three different approaches.
This traditional view of success is from the yearend numbers of an exceptional coop. This CEO’s team focuses on the 5 key performance indicators (KPI’s) in 2023 as shown below.
| metrics | goal | actual | |
| member growth | 5.10% | 4.10% | |
| net earnings | 1.00% | 1.23% | |
| service quality | 82.25 | 83.3 | |
| P&S per member | 4.64 | 4.61 | |
| deposit growth | 10.00% | 12.80% | |
These along with many others not shown (net worth, loan growth etc.) would be outstanding in any year. However in this year of flat to down trends overall, they are extraordinary. How was it accomplished?
This credit union implements the most traditional and important strategic advantage credit unions enjoy–“relationship banking.” It provides stable deposits, long term members and intense focus on their community and its well being.
The organization does this by putting people first. The CEO tells employee and member care stories as a central part of his monthly updates. Not words, but deeds, sometimes confessing honest shortcomings.
The credit union leadership has set boundaries, what to do well and what not to attempt. No mergers, no bank buys. They are in a market dominated by a super coop competitor ten times their size.
For those who believe scale is necessary for success, this credit union grew to over $700 million in 2023. It did so while recording the fifth consecutive year of lowering its operating expense to average assets ratio. In this five years the ratio has fallen every year going from 3.08% to 2.55%.
That result is lower than the majority of credit unions over $5 billion. It is because they know who they are as a credit union.
For any credit union striving to communicate its role in the communities served, I would urge you to look at this latest video from Whitefish Credit Union in Montana.
It is from Josh Wilson, Senior Vice President for Marketing. The video centers around people in all walks of life serving their community in local food banks.
It is a moving documentary. So powerful it should be entered in the Sundance film festival. The stories honor those who serve and are being served. It is a tribute to the small rural towns and the natural environment in which the credit union operates.
Watching it makes you feel good about this example of caring for others. There is not a word about Whitefish’s financial services, which says everything you need to know about the credit union. Enjoy.
(https://youtu.be/9t7xl3IQRw4)
Yesterday I linked to a song by the rock group Green Day. A fan, Bob Bianchini, sent me their latest video from two weeks ago. It is a real picker-upper to start your day.
You might ask who is Bob Bianchini? He is the only League President who simultaneously served in the state legislature. That was in an era when credit union leaders knew how to get things done.
This video reminded me of Rex Johnson’s exhortation to the credit union audiences who attended his many lending symposiums. He would close by telling them, “your job is to treat your members so well that they become fans for your credit union.”
Here is what genuine fandom looks like-in a New York subway station from Bob and Green Day.
https://www.youtube.com/watch?v=EiF28zBaOlI
(https://www.youtube.com/watch?v=EiF28zBaOlI)