From Mark L. Johnston's point of view, the merger agreement that his mutual savings bank in Augusta, Maine, announced this week is not much different from any other one.
But Mr. Johnston, the president and chief executive of the $651 million-asset Kennebec Savings Bank, acknowledged that its plan to absorb KV Federal Credit Union is a rare move, one that some might consider controversial.
"I look at this as two local financial institutions that have decided they can do better and be stronger together than going it alone," Mr. Johnston said. "What's somewhat different about this is it's a credit union and a bank trying to do that, which complicates things."
This would be the first transaction of its kind in Maine, and the state has no regulatory provision that would allow the two different types of financial institutions to combine, he said.
So to facilitate the merger, Kennebec would switch its state savings bank charter to a federal one.
The stickier part of the plan is that the $51 million-asset credit union also would have to convert to a federal savings bank.
In recent years credit union conversions around the country have come under fire. Since early 2004 five credit unions that announced plans to switch to savings bank charters later withdrew their applications, four because of member opposition and one because it did not receive approval from the required supermajority.
Two other conversions succeeded only after court battles with the National Credit Union Administration.
Mr. Johnston said he doubts the plan would encounter resistance locally. He said his savings bank was founded in Augusta in 1870, and the credit union was founded there in 1962, giving both strong community ties.
"We think our customers, their members, and the general community will support the notion of us combining," he said.
But he conceded that credit union advocates from elsewhere who philosophically oppose any charter changes might try to derail the plan.
"I think where the disagreement may come from is the credit union industry potentially," he said. "There's some risk to this. We're just going to have to wait and see what happens."
Conversion opponents often contend that the real motivation for most credit unions making charter changes is greed. They argue that converted credit unions often become stock companies, enriching top executives and directors.
But Mr. Johnston said Kennebec's management and board oppose the idea of ever becoming a publicly traded company.
"Our blood is as mutual as can be," he said. "The credit union certainly feels very strongly about it, so as a combined institution, we are mutual to the core."
Mr. Johnston said KV members are expected to vote in January on whether it should convert. Because one mutual would be absorbing another, no money would change hands in the transaction.
Only eight other credit unions have merged with banks since 2000, according to Alan Theriault, the president of CU Financial Services, a Portland, Maine, consulting firm that advises credit unions on switching charters.
In the most recent such merger, Beacon Federal in East Syracuse, N.Y., acquired the $24 million-asset Marcy Federal Credit Union in January 2007. Beacon, a converted credit union itself, has absorbed four credit unions, accounting for half of the completed bank-credit union mergers. Beacon converted to a mutual savings bank in 1999 and became a publicly traded company last year. It now has $988 million of assets.
One other similar merger is pending in Massachusetts. The $100 million-asset Northeast Community Federal Credit Union in Haverhill announced last year that it would merge with the $97 million-asset Haverhill Savings Bank. Though state regulations there allow for the credit union to do so without converting to a mutual savings bank first, the deal has hit some snags with the NCUA and has yet to close.
Mr. Theriault said he would not be surprised if other small credit unions initiate talks with Kennebec after hearing about the KV deal.
He said small credit unions are contending with narrow margins and aggressive competition from both large credit unions and banks. He would not say whether he is working with KV.
If all goes well, the transaction is expected to close by mid-2009.
Kennebec has three branches and an office in a retirement community. By merging with the credit union, Kennebec would gain two branches.
All of the credit union's employees would join Kennebec, including its four executive officers, Mr. Johnston said.
Mr. Johnston said he had had "informal conversations" over the years with Beverly W. Beaucage, the credit union's president and CEO, about the idea of a merger. But the discussion only got serious after the credit union began its most recent long-range planning. "They came to the conclusion that while the credit union is doing well — they're well capitalized and profitable — looking into the future it would probably be better for their members if they affiliated with somebody."
Mr. Johnston said the credit union contacted several potential partners but ultimately decided Kennebec would be the best fit. "When you get away from the bank-versus-credit union issue — which I know is big for some people, but is not big for me — we are very similar in many respects," he said. "The way we approach business, our fundamental principles, our core values are very similar."
Ms. Beaucage did not return phone calls.
Mr. Johnston said that adding heft helps improve efficiency, and that Kennebec and KV would realize "very considerable" savings just by consolidating their operating systems. Overall he estimates the merger could boost Kennebec's return on assets by 10 basis points.
"Critical mass is important in our industry today. I think it's going to be increasingly difficult without that critical mass to be successful," he said.
