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Credit union, bank pursue historic merger | An unorthodox plan to join a bank and a credit union sparks plenty of criticism
Photo/Brandon McKenney
Mark Johnston, president and CEO of Kennebec Savings Bank, believes merging with KV Federal Credit Union will provide more services for customers. If successful, the merger would be Maine's first between a bank and a credit union.
Photo/Brandon McKenney
Beverly Beaucage, president and CEO of KV Federal Credit Union, predicts if her institution's merger with Kennebec Savings Bank is approved, other credit unions will follow suit
Kennebec Savings Bank President and CEO Mark Johnston remembers a few years ago reading advice in a fax from a law firm trying to drum up business with his bank. It said, when looking for a merger partner, don’t forget your local credit union. The firm didn’t get his business, but at lunch later with Beverly Beaucage, he brought up what he’d read.
Beaucage is president and CEO of KV Federal Credit Union, which has a third of the employees and an asset base barely one-sixteenth of Johnston’s bank. The differences between the bank and the credit union were significant, but it was how those differences could complement one another that intrigued both Augusta-based institutions. Together, they could offer more services, like expanded Internet banking and ATM access, and access a broader territory. The two agreed over lunch: Someday a union might make sense.
Fast forward to 2007. KV directors started thinking merger. They ran down their options. And then they called Johnston.
“It was actually them that chose us,” he recalls. “It’s a little flattering, quite frankly.”
It’s also been a little controversial. A bank and a credit union have never merged before in Maine. That’s because, at their core, the founding principles of banks and credit unions are markedly different: Banks are for-profit, credit unions are not. Credit unions are member-owned, banks can be shareholder-owned. Credit unions also pick a volunteer board from among their members, while bank directors are often paid. These differences are the reason the Maine Credit Union League is opposing the move, despite insistence from both Kennebec Savings and KV that linking would best serve both institutions.
In the works seriously for a year, the proposed merger was announced in September. Both Kennebec Savings and KV will have to become federally chartered savings banks to make the merger possible. So far, it’s already been an expensive and risky process, according to Johnston.
There’s no guarantee of success and there’s “the risk that our good name gets tarnished in all this,” he said.
For instance, Johnston’s well aware of MCUL’s vocal criticism. He believes there’s been the suggestion already that Kennebec Savings and KV are trying to hide something in the course of this deal and that someone stands to gain financially from it. Johnston said neither is true.
If Beaucage’s membership approves the merger this winter, and that vote passes scrutiny from the National Credit Union Administration, the deal might be completed as soon as next September. A combined institution would have about $700 million in assets, 32,000 members and 100 employees.
“In essence we’ll have more horsepower into the future,” Johnston said. “I think it helps preserve our future.”
In addition to local headquarters and local control in an increasingly competitive market, he said the potential merger would also create a critical mass. “When it comes time to adopt technology, if you have to spread that over a smaller asset base, it’s very expensive to deploy,” Johnston said. “It will not be long before we’re at $1 billion in assets,” which makes large investments more feasible.
Other banks and credit unions are watching KV and Kennebec Savings closely to see how their proposed merger fares. Some believe that if the merger goes through, this novel pairing would not be the last in Maine.
Watching and waiting
Since November 2004, there have been 11 mergers and acquisitions between Maine banks and between Maine credit unions, five of which occurred last year, according to the Maine Bureau of Financial Institutions’ annual report to the Legislature.
Kennebec Savings and KV aren’t new to mergers. In 1992, KV merged with Messalonskee Regional Federal Credit Union, then the next year, with Kennebec Health Systems Federal Credit Union. Kennebec Savings merged with Waterville Savings & Loan in 1995.
Their latest plan, however, isn’t business as usual. There are few examples across the country of credit unions and banks merging in part because, until 20 years ago, the two were set up to be distinct entities with distinct rules, explained Chris Pinkham, president of the Maine Association of Community Banks. Credit unions, for instance, had a clearly defined membership, often only offering services to people who lived in a specific community, attended a specific parish or worked at a specific business. And banks were set up to offer more commercial services.
That changed in the 1980s and 1990s during deregulation, Pinkham said, when the differences became less rigid. “In some ways, we’ve homogenized the industry,” he said. “A checking account is a checking account no matter where you go.”
Those changes opened the door to the merger talks taking place today. Johnston said he’s looked to one such pairing in New York, where Beacon Federal Savings Bank merged with several credit unions, for guidance. Another credit union and bank merger, between Haverhill Savings Bank and Northeast Community Credit Union in Massachusetts, is set to be finalized this month, a first of its kind for that state. Like in Maine, that merger was also criticized by the credit union community.
Johnston said KV’s long-range planning committee initially “considered the logical choice of merging with another credit union. Ultimately, they decided that we were the best fit.” KV’s president Beaucage, after a brief interview, said she did not have time for further comment. But the online guide “Myths and Truths about Conversions” from the national Coalition of Credit Union Options may offer some insight into KV’s motivation — the guide claims that in becoming for-profit, credit unions benefit by being able to raise capital faster because they no longer have to rely exclusively on members’ fees and interest. They are also able to offer more loans, and have a better shot at staying competitive.
Both institutions’ boards of directors have unanimously approved pursuing the merger.
“The culture of both organizations seems very similar,” said Pinkham, whose association has not taken an official stand on the merger.
The support of both boards is important, Pinkham said, as is the fact that the new institution doesn’t duplicate branch facilities: KV has a branch office in Oakland, Kennebec Savings in Winthrop and Waterville.
“There’s a lot of interest,” Pinkham said. “There are a lot of observers on the sidelines watching how this plays out, both a lot of credit unions and mutual savings banks.”
Currently, KV is a federally chartered credit union, Kennebec Savings a state-chartered savings bank. As a new federally charted savings bank, the merged institution would be overseen by the Office of Thrift Supervision in Washington, D.C.
“Banks who have federal charters play by federal rules, banks who have state charters play by state rules,” Pinkham said. “The state of Maine loses a lot of money when you flip from state to federal charter. Our examinations are frequent, extensive and expensive.” If the merger is approved, the state loses the money it’s being paid to examine Kennebec Savings now.
Johnston said credit union members would see a number of benefits by merging with his savings bank. Kennebec Savings offers free bill pay, KV doesn’t. Kennebec Savings also has ATMs that can scan cash or check deposits and credit an account almost instantly (see “Futurama,” Dec. 10, 2007). Service charges are lower at Kennebec Savings, he said, and deposit and loan rates are comparable.
“We’re very excited about this. We’re waiting for feedback from the NCUA,” said Beaucage. “We feel, certainly, we won’t be the only credit union to go in this direction.”
But not so fast, says the Maine Credit Union League.
A new trend, or not
MCUL President John Murphy argues that members could join a savings bank now if they wanted; they’ve chosen a credit union for a reason.
KV is going strong and financially sound, he said. It doesn’t have to merge.
Members would “lose another choice in the market,” Murphy said. “I think the question is, what do their members gain? They have built an institution by them, for them and controlled by them.”
He discounted speculation that his group opposes the merger because of the loss of a dues-paying member. He said KV’s dues are less than $15,000.
The idea that these two particular institutions would be stronger in the future for the move “remains to be seen,” Murphy said.
Of the thousands of credit unions across the country, 39 have converted to a bank charter, he said. Of those, only five have merged with another bank afterward. Because so few institutions have gone that route — five out of thousands — he doesn’t think this merger, even if it’s successful, could usher in a trend in Maine.
Neither does Lloyd LaFountain, superintendent of the Maine Bureau of Financial Institutions, which oversees banks and credit unions in Maine.
“I’d be surprised if the floodgates opened after this transaction,” LaFountain said.
He remembers being surprised to hear about this particular proposal. The state isn’t involved in any part of the potential merger and isn’t taking a position on whether it ought to happen.
What’s next? Once the NCUA signs off on merger documents, KV will notify members about a vote on the merger 90 days later. Johnston said they hope that vote will happen in March.
If a majority of members approve the merger, NCUA certifies the vote and OTS approves of both becoming federally chartered savings banks, the merger would be completed in September or October, Johnston said. The new entity would be known as Kennebec Savings Bank and Beaucage would become its executive vice president.
“We keep saying this is really about two local financial institutions that are deciding to go it together instead of going it separately,” Johnston said. “This is being done for the purest of intentions and then we have to defend it.”
Kathryn Skelton, a writer in Litchfield, can be reached at editorial@mainebiz.biz.
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