Vermont’s Largest CUs Stand at the Controversial Crossroads of a Proposed Merger

Is the proposed merger of Vermont’s largest credit unions a referendum on the financial cooperative movement itself/? Or is consolidation the best way to help the credit union movement survive and thrive well into the future in the Green Mountain State?

After eight months of public debate, members of the $1 billion Vermont State Employee Credit Union in Montpelier are currently voting on whether to consolidate its 75-year-old organization that serves 71,028 members with the $1.9 billion New England Federal Credit Union in Williston that serves 96,661 members.

From the perspective of Donald M. Kreis, the impending decision by VSECU members should be seen as a referendum on the future of the credit union movement itself. But from the perspective of VSECU and NEFCU, it’s about combining the strengths of both financial institutions to meet the dynamic demands of current and future members.

“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,” said Kreis, who is a long-time VSECU member and also a member of four other credit unions. “The New England Federal Credit Union is just another credit union that is content to operate just like a bank does.” If credit unions can’t deliver on the inherent values of the cooperative model to members above and beyond the convenience that for-profit financial institutions already offer, he added, there is no reason for credit unions to exist.

However, the boards of directors of VSECU and NEFCU, said that the merger means keeping and promoting the cooperative identity to serve Vermonters, while combining the resources of the financial cooperatives to compete now and well into the future. The current marketplace is challenged by an aging Vermont population with slow to no growth in addition to environmental, economic, social changes and accelerated technology challenges that require huge investments to retain and attract new members.

VSECU and NEFCU said many local Vermont banks have been acquired by large out-of-state banks over the last decade and that they expect this trend to continue because costs are going up and income is under pressure. Larger banks can gain an advantage by spreading fixed costs over greater asset and customer bases to offer better rates, lower fees and more delivery options, the credit unions argued.

“The Chases of the world and other regional or mega-banks are indeed making inroads into our small state,” VSECU Vice Chair Michael J. Hogan said. “Consider that in 2021, banks controlled 77% of deposits in Vermont and out of-state banks controlled 40.6% of those Vermont deposits.”

Currently, there are 18 credit unions and 11 banks based in Vermont according to Deposits.com. If the merger is approved, the combined credit union will manage more than $3 billion in assets and will become, by far, the largest financial institution in the state. The largest Vermont-based bank is the $1.4 billion Northfield Savings Bank, and the second largest is the $1.1 billion Union Bank in Morrisville. What’s more, the consolidation will make the combined financial cooperatives the fourth largest credit union within New England’s six states: Maine, New Hampshire, Massachusetts, Connecticut, Rhode Island and Vermont.

Calling All Members, which was organized to oppose the consolidation by former VSECU CEO Steven Post and former board members, argued the way to defeat big banks has always been to create a unique brand, and deliver quality products and exceptional service.

“That is what VSECU achieved over the years with much success,” the group said on its website. “The notion that bigger is always better and that bigger is stronger, is a fallacy that Vermonters have dismissed for years.”

Nevertheless, economies of scale do have some advantages, including the most important one, cost reductions, because they can provide more possibilities for organizations to reduce their price structure and gain more sales, according to the Lean Business Concepts website. The site is managed by Rusith Yapabandara, a corporate project manager who has worked for big banks and Hitachi Digital Payment Solutions. But Yapabandara also noted that prices can increase after an organization reaches a specific level of production output when the processes start to become less efficient. This will ultimately increase the costs and the organization will have to increase prices to bear that cost.

Beyond the potential operational and product price reductions from economies of scale, VSECU and NEFCU point out that in addition to having greater investment resources to deliver high-in-demand digital banking products and services, the combined organization could become one of Vermont’s leading employers.

This is especially important because staffing is a pressing challenge at both credit unions, as most prospective employees who live in Vermont have the option to work for large out-of-state companies.

“Simply put, scale produced by combined resources enhances the ability to attract talented workers,” the credit unions said.

The Calling All Members group contended the merger won’t produce any new products or operational capabilities because every financial institution offers different versions of the same basic banking products. The group predicted that if the merger is approved, Vermonters will have fewer options for banking services and VSECU’s distinctive, state-wide field of membership and focus will be lost because NEFCU plans to expand to areas and groups outside of the state. In addition to its Vermont members, NEFCU serves members from New Hampshire and select employee groups in Michigan and Ohio.

The Calling All Members group stated there are alternatives to a merger that can achieve operational efficiencies. For example, many credit unions around the country have maintained their independence by forming CUSO partnerships that can address banking challenges.

About a month after the merger was announced in February, the Calling All Members group has been encouraging members to vote against the consolidation through their website and social media channels, while VSECU has been promoting the benefits of the merger to the membership on its website and social media, and hosted forums across the state. In addition, both sides have posted a variety of op-eds on local media news sites.

Post said he doesn’t know how many members support his group’s cause to reject the consolidation, but he noted the trustees of the Vermont State Employees Association and the Vermont Retired State Association have publicly stated they oppose the merger.

Post said he believes the best argument in convincing members to vote against the merger is VSECU’s strong reputation as a local institution that can continue to grow and thrive over the next 75 years, as it has over the past 75 years.

“I basically finished up my years there believing that I had laid the foundation for a long-term Vermont institution to be present,” Post said. “When that possibility disappeared over this merger news, I was very upset. And I think a lot of members are upset, too.”

From his standpoint, Post said New England FCU made the “obvious decision” that it wants to use the scale it gains from VSECU to expand its business beyond Vermont.

As Calling All Members pointed out, if the merger is approved it means New England FCU will be getting one of its major competitors for free, including $90 million of VSECU members’ equity, millions of dollars in real estate, more than 71,000 members and $1 billion in assets.

Through a spokesperson, VSECU CEO Robert Miller and NEFCU CEO John Dwyer said they would not be available for an interview until after the Nov. 8 special meeting of the VSECU membership. When the voting ends on that date at 5 p.m., the credit union said it will announce the final outcome of the vote to its members within 48 hours.