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Chip Filson: Is credit union merger the end of a movement?


This commentary is by Chip Filson, who was supervisor of Illinois credit unions, director of the office of programs for the federal credit union regulator, and then president of the Central Liquidity Facility. He is cofounder of Callahan & Associates, a credit union data and analytics firm. Since retiring, he writes about credit union issues in a daily blog,

Our blog Nov. 11 described the multiple losses should the merger of Vermont State Employees Credit Union with New England Federal Credit Union proceed on January 1, 2023. (On Nov. 8, VSECU members voted 7,622 to 7,304 to approve the merger.)

The members lose their credit union; 190 employees their career paths and individual agency; local communities, their partnerships; the state of Vermont, its leading cooperative financial institution; and the overall credit union system, another public example of purpose compromised by leaders’ self-interest.

The tragedy of the commons occurs when persons in positions of responsibility exploit the common resources of the community which they oversee for personal gain.

Should credit union leaders continually seek to acquire and merge sound, long-serving credit unions, like VSECU, to fulfill their individual ambitions, I believe this will lead to the demise of the cooperative credit union movement.

VSECU’s example and innovative track record were so successful that it was the subject of a 15- page analysis by Callahan’s September 2021 Quarterly Report. Several of these accomplishments were republished in five articles in January 2022 on cu.com, for example, this description responding to the Covid crisis.

As of Sept. 30, 2022, the credit union reported $1.1 billion in assets; 71,625 members and nine branches; $6.5 million in YTD net income and $102 million in equity. Average salary and benefits per employee exceeded $100,000.

Against this documented track record of long-term innovative performance, VSECU’s merger information offered nothing about the future. The credit union was already more than full service; it had pioneered special initiatives pursing a “greener” environment.

The continuing credit union’s leaders at NEFCU made no commitments to VSECU’s 71,000 credit union members who hold $922 million in loans and $980 million in savings. These members will be under the full sway of a board they did not elect and management that has no connection with their firm.

So undefined is this transaction that both CEOs admitted in this witter post the consolidation would take over a full year to conclude and will require a completely new brand identity and name.

The back-office conversions, product/service alignments and leadership selections will be the top priority at a time when members of both credit unions face economic uncertainty and anxiety from decades-high inflation.

In the Calling All Members website, the opponents point out that the two credit unions have very different fields of membership, histories, and market focus:

The continuing federal credit union’s field of membership will not be based on geography or residency. It will be numerous employer groups and organizations located in Vermont, Massachusetts, Maine, Rhode Island, Connecticut, Michigan, and even groups headquartered in San Diego and San Francisco. Our statewide cooperative built by Vermonters for Vermonters will be gone forever.

Why should credit unions care?

Two typical industry reactions to this latest example of a successful credit union being acquired by another include: “Not my problem” and “Didn’t the members approve?”

I believe this pattern of sellouts and acquisitions by cooperative leaders will ultimately lead to the end of a cooperative financial system in America. Here’s why.

The foundation of every credit union is member relationships. Almost all credit unions were started with no capital. They earned the loyalty of members by promising to be a different kind of financial firm.

Member-owners were invited to put their trust in their leaders and board. The affirmation of this process is the democratic one-member, one-vote design. This merger now places VSECU’s relationships under the direction of strangers.

The action is based on the illusion that size is all that matters. Credit unions have never competed on size. It is a unique co-op fantasy that co-ops can marry two mice and produce an elephant.

When size is the dominant goal, it becomes a trap of endless growth, not creation of member value.

VSECU’s members have continually contributed more than sufficient resources to continue a long-term vision of hope empowered by local control and focus. The credit union has become a financial “sanctuary” established by members’ belief and trust.

Now their leaders (senior management and board) have abandoned them for the “Golden Calf” of “instant mass,” not substance. There has been no planning or discernment with those that built the institution and who own it.

The process of voting is nothing but an administrative fig leaf completely under the control and oversight of those temporarily in power and who have a vested conflict of interest. 

Only 21% of members voted. Of the total membership, just 316 votes (0.4%) is the difference between those supporting and those opposing. This was certainly no vote of confidence in charter cancellation.

It would seem foolhardy to decide the fate of a 75-year-old, high-performing co-op with such a micro-thin margin of owner approval. It also raises the question of how the voting was managed by those who advocated only their side of the issue.

Regulators abdicate

Regulators continue turning a blind eye and washing their hands of responsibility.

Mergers are the wild west of today’s financial markets — second only to Crypto transactions, until that industry’s implosion is over. Co-op CEOs and boards are literally buying and selling millions of member relationships to firms with no connections, increasingly out of state, and who are unconstrained with what they can do with them. 

These kinds of hollow transactions and disclosures would normally attract the intense scrutiny of an SEC or FTC regulator if these were stock-owned institutions.

Co-op regulators would rather talk about inflation, consumer protection, fintech, DEI or other current topics rather than the elephant in their room.

Contrary to their assertion that this is just the free market at work, these are back-room deals, negotiated in private, devoid of transparency and without any public attempt to find the “best” deal for members.

Regulators avert their gaze, pretending to be deaf, dumb and mute as they oversee the disintegration of the coop system.

VSECU’s leaders betrayed the trust members gave them. Credit unions embody the spirit of community. This action dissolves this special bond built by three generations of members.

The merger destroys the fundamental foundation of a cooperative, leaving a financial eunuch in its place. It has no cooperative character or roots. Unlike a stock transaction, it lacks the credibility of a market-affirming price. In these transactions, co-ops have devolved into purely private entities, controlled by individuals acting to consolidate and accrete their own power.

These are not people helping people; rather, these mergers demonstrate CEOs helping themselves.

One can understand why NEFCU’s CEO wants control of 71,000 member accounts with average combined member loan and savings balances of over $43,000. And to be given over $100 million of their collective savings while eliminating this vigorous, innovative competitor. No more “free” market choice for either firm’s members, or the general public.

This kind of transaction has no economic rationale or “market”-driven basis. There is not a firm anywhere in America, co-op or otherwise, that would not line up to accept such a generous “gift.”

VSECU’s leaders had embraced the Global Alliance for Banking Values vision of “Finance at the service of people and the planet for the real economy.”

Their collective decision to transfer their fiduciary responsibilities to another firm show that corporate and personal values need not align. It certainly refutes the biblical adage that a person cannot serve God and mammon at the same time.

The members will respond

Self-interest may appear to succeed in the short term, but in the long term, it fails as a strategy. When the vision of the cooperative is “all I want is everything” personal ambition will fail for what only a community can sustain.

People are not stupid or uninformed about these sham transactions. Most members follow their personal financial situation as a top priority. It is a heightened concern, especially in a time of rising rates. When member generosity and loyalty are compromised by self-interested mergers, their support will fade away.

These transactions will end the unique public role for credit unions. Acting like banks, they will be treated like their for-profit competitors.

Regulators who have approved these pillages of common wealth for private gain will find themselves thrown in with all other financial overseers. The playing field will indeed be level. There will be no credit unions on it. No tax exemption. Just wealth-seeking institutions led by similarly motivated individuals.

Nothing will stop this pattern of private theft until persons of courage and confidence step up to call out this rapacious behavior. If this fails to occur, then as predicted on the Calling All Members site, the national system of cooperatives, just like VSECU, will be gone forever.

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