AUGUSTA, Maine — The board of directors of the $51 million KV Federal Credit Union will decide whether to put a proposal to merge with a local mutual bank before the credit union’s members.
The leadership of the credit union and the bank involved, Kennebec Savings Bank, held a press conference for the local media in Augusta, Maine, where the two institutions couched the matter as a mutual merger between financial institutions.
“With all the changes happening in the financial services industry, this union of two long-standing and respected local financial institutions could provide the greatest opportunity for improved services and choice for residents in the Greater Kennebec Valley,” said Mark Johnston, CEO of KSB in a press statement about the possible merger.
KV’s CEO Beverly Beaucage put the merger in the context of the CU’s history in the area.
“We’ve continued to grow steadily since 1962 while maintaining a strong capital base and steadfast focus on member service,” Beaucage said. “Our board determined that the long-term goal for KV was to build and maintain a strong presence in the Kennebec Valley offering our members a wide variety of financial services. In order to accomplish this, it makes sense to consider combining our efforts with a local institution that has similar values.”
Beaucage explained that the merger-oriented focus on the situation was entirely appropriate since the credit union’s board had restricted its own discussions of the charter change to that context.
“We didn’t meet with any consultants about changing our charters or do anything like that,” Beaucage explained. “What happened was that our board launched a two-year process of looking at how the credit union could go forward and continue growing and it became very clear that it would have to be through merger.”
While credit unions in KV’s peer group have posted a more than 2.60% annualized rate of membership increase, according to NCUA data, KV’s membership growth has hovered close to no growth or slipping into negative territory.
Beaucage attributed the credit union’s difficulty growing to its smaller size and inability to stand out in an already crowded financial services market.
According to data collected by credit union consultancy Callahan and Associates, KV is the 34th largest credit union in Maine. Beaucage said she could count six to eight other financial institution branches within 3.5 miles of the credit union’s headquarters.
KV also has a history of mergers. Founded as a church-based credit union in 1962, the then St. Augustine Federal Credit Union moved several times and opened branches before concluding its first merger in 1992, changing its name to KV and concluding its second merger in 1993. KV obtained a community charter to serve the residents of Kennebec County in 2000 and added the residents of Somerset County to the field of membership in 2007.
The problem the board faced, Beaucage explained, was to find a merger partner that would both give its members the best advantage and maintain the focus on the community that Beaucage said has long marked the credit union’s history.
“We were not unhappy being a credit union,” she said. “We love being a credit union and remain deeply committed to our ideals, but we had to take a realistic look at the situation and recommend what is best for our members.”
Beaucage maintained that none of the credit unions that KV considered as possible merger partners had the same presence in the community that KV had. “None of the other potential partners we considered had their decision-making facilities in this community,” Beaucage said. She explained that while some had a presence via branches, none of them had their headquarters here.
According to the NCUA, there are five credit unions in Augusta, including KV. Three of the other four are smaller than KV and some appeared to have narrow fields of membership.
Judith Griffin, CEO of the $30 million Alliance of Maine Federal Credit Union reported that KV had never approached Alliance to talk about a possible merger.
“The field of membership restriction could have been addressed if we had talked about it,” Griffin said, adding that she felt somewhat “insulted” that KV had cast its decision in the light of not having CU partners in the area with the same roots in the community. Alliance has been chartered since 1936, she pointed out, and she has worked in credit unions for 41 years. “We are deeply committed to the credit union philosophy and ethic including community involvement,” she said.
The CU larger than KV is the $245 million Maine State Credit Union. It’s CEO, Normand Dubreuil, also said KV had never approached it about a possible merger.
“I think the important part of what they are saying is in the word ‘considered,’” Dubreuil said. “They might have considered us privately and rejected us, but they never approached us. We were all very surprised by this. If anyone here had known they were interested in a merger, we probably would have approached them,” Dubreuil said.
But John Murphy, president of the Maine Credit Union League, strongly doubted that KV could not have found another credit union with which to merge.
“We are strongly committed to the credit union charter as the best charter,” Murphy said “and we definitely believe that there was a credit union alternative to having to merge with a bank.” Murphy said he would meet with KV leaders to follow up on the merger discussion.
Both KV and KSB stressed as well that neither institution is in trouble financially.
According to NCUA records, KV has a net worth ratio of 9.65%, well over the minimum capital levels but no where near the 12.05% average for its peers. KV also has a much lower delinquency ratio than its peers and a significantly higher return on average assets. And, despite citing “comprehensive business services” as areason for the merger, KV has, so far, not made any member business loans.
For its part, KSB made $2.29 million in the second quarter of 2008, according to FDIC documents and appeared to reflect a strong financial position.
KSB CEO Johnston picked up the “merger of mutuals” theme and noted that the bank remained deeply committed to being and remaining a mutual bank. He noted that the commitment to being a mutual was part of the bank’s mission statement and had been a core part of the bank for its 137-year history.
“We are not studying or considering issuing stock, and I cannot foresee that we would,” Johnston said. “We remain committed to mutuality; our customers are our owners and they own the institution,” he said.
This commitment to mutuality is significant because KV has assured members that the bank will continue the one member-one vote credit union voting structure. Even though that has not been a part of the bank’s tradition, after it converts to a federal charter, the bank will use that format, according to Johnston.
Johnston explained that while depositors at Maine-chartered mutual banks own their institutions, they vote in bank management decisions through the use of officers called “corporators” of which KSB currently has 80.
“That structure will go away when we change to a federal mutual charter under the Office of Thrift Supervision,” Johnston said. “The corporators are a unique part of the Maine structure but we will have to let them go.”
Johnston said that the bank’s determination to switch to a federal charter pre-dated the merger, but when KSB found they could offer their owners one member-one vote, it embraced the idea.
“From our point of view it’s simpler, more efficient and fair to use a one depositor, one vote structure,” he said.
In addition, the fact that the KSB is also a mutual will mean the new bank will have easier access to the credit union’s roughly $5 million in equity, Johnston said. “The members’ equity will follow them into the new institution,” he explained.
Beaucage also stressed that KV is working hard to include the members in the decision-making process. Along with its NCUA-mandated statement about the impending board vote on its Web site (www.kvfcu.org), KV also provided a link where members can easily communicate their concerns to the board.
Sources within the Augusta CU community predicted some of the member input might be vigorous. According to numbers compiled by Datatrac, a leading financial information research firm, KV offers its members higher interest rates on its money market accounts (1. 26% for KV versus 1.10 % for KSB) and on a wide variety of certificates of deposit. Datatrac showed that KV had significantly higher interest rates on its six-month CD, as well as its one-, two-, three-, four- and five-year CDs.
For a one-year CD of $10,000, KV offered 3.30% against 2.90% for KSB. On the two-year CD the spread was 3.35% against 3.05%. The rates narrowed at the longer terms so that for a five-year CD the difference was only 4.23% for KV versus 4.20% for KSB.
Another potential concern may be revolve around whether Beaucage or other CU executives move to more lucrative executive positions as a result of the merger. Beaucage stressed that neither she nor the board stood to gain from the merger itself, but KSB did indicate that Beaucage and others KV senior staff will have executive positions at the new bank, which, at a projected $700 million in assets, will be a good deal larger than KV.
The bank said Beaucage will continue after the merger as an executive vice president and a member of its board of trustees. “She would continue to work with the KV team of employees and with members and the community as she has done in the past,” the statement said.
KSB also said that KV Chairman Rick Tardiff would also continue on as a member of the bank’s board of trustees.
Other KV directors, supervisory committee members and the credit union’s Chief Financial Officer Christine Devine would become advisory board members of the bank.