BY MATTHEW STONE

Staff Writer

For years, banks in Maine and across the country have merged in efforts to boost efficiency and claim a greater share of their local markets. Such mergers have become commonplace, with hundreds taking place annually in recent years.

But the news last week that Kennebec Savings Bank and KV Federal Credit Union planned to combine inspired questions about whether the two Augusta financial institutions are ushering in a new trend in banking.

The proposed merger between the two institutions -- one a credit union and the other a mutual savings bank -- is the first of its kind in Maine. Nationally, the companies have few examples to follow.

"It's been done, so we have a path to follow in doing this," Kennebec Savings Bank President Mark Johnston said Tuesday when announcing the proposed merger.

But the path is not yet well traveled.

The bank-credit union merger, some experts say, is the sign of a mature, competitive market that offers few opportunities for growth.

"The rationale for this sort of thing is the market is sort of limited," said Atul Gupta, a finance professor at Bentley College in Waltham, Mass. "If you merge, you save some money, become a little bit bigger."

Officials from KV Federal Credit Union and Kennebec Savings Bank last week said a merged institution would be able to claim more Augusta-area business by combining the two companies' product offerings.

The credit union specializes in shorter-term consumer loans while Kennebec Savings Bank specializes in mortgage lending.

Combined, the bank would count approximately $702 million in assets and employ 100 people. It would have offices in Augusta, Oakland, Waterville and Winthrop.

Both companies face a series of hurdles before their merger can take effect. Johnston said the institutions set a "loose target" of June 30, 2009, for completing the combination.

KV Federal Credit Union directors in October will take up the proposal to convert the credit union into a mutual savings bank and merge with Kennebec Savings Bank. They are expected to review comments about the merger that credit union members are submitting over the next few weeks.

If the credit-union directors OK the merger proposal, members will have a chance to accept or reject the move.

As the credit union attempts to convert, Kennebec Savings Bank -- currently a state-chartered bank -- will pursue a federal charter. While the charter would allow the bank to conduct business outside of Maine, officials have said they have no intentions of expanding beyond their current service area in Kennebec and Somerset counties.

The companies' merger plans must also stand up to the muster of federal regulators, who will evaluate whether the merged bank would be a stable one and determine the union's effect on competition in Augusta- and Waterville-area banking.

In the end, officials from the two companies are sure other banks and credit unions will follow their example.

"I'm betting this won't be the last in Maine," Johnston said.

Gupta, the finance professor, said the bank-credit union combination could become most common in the country's smaller banking markets.

"Merging with another institution in the local area just makes them more viable so I think in the smaller markets around the country, it may well pick up," he said.

Both KV Federal Credit Union and Kennebec Savings Bank are the products of mergers. KV acquired Messalonskee Regional Federal Credit Union in 1992 and Kennebec Health Systems Federal Credit Union in 1993. In 1995, Kennebec Savings Bank merged with Waterville Savings and Loan.

Today, said Christopher Pinkham, president of the Maine Association of Community Banks, bank and credit union officials exploring a merger should be prepared to find their best partner is not an institution of the same type.

"I think in this day and age, it behooves management to keep all their options open," he said.

KV Federal Credit Union President Beverly Beaucage said KV officials first considered merging with another credit union before deciding on Kennebec Savings Bank.

"The capital we have at our institution we feel should go back to our community, our local community, that it should not go to Portland, or to some other place," she said.

When Northeast Community Credit Union of Haverhill, Mass., set out to find a merger partner, the credit union settled on a bank in the same city after considering fellow credit unions. Now, Northeast and Haverhill Bank are awaiting an October vote on the merger by credit union members.

"Because of the rarity, we had to negotiate a process with the federal regulators," Haverhill Bank President Thomas Faulkner said. "That's what's taken the time."

The two companies announced plans to merge in August 2007. The combined bank in Haverhill would count $260 million in assets.

While more in the industry appear open to crossing the line to merge with a different sort of institution, Maine Credit Union League President John Murphy said, it is too early to say a new trend is taking hold.

The Maine Credit Union League is the trade association representing Maine's credit unions and voiced opposition this week to KV's merger with Kennebec Savings Bank.

"For people who refer to this as a trend, I would tend to differ," Murphy said.

Since 1995, 39 credit unions across the country have become for-profit banks, according to CU Financial Services, a Portland firm that assists credit unions converting into banks. Jon Paradise of the Maine Credit Union League estimates fewer than five of those converted credit unions immediately merged with banks.

"Thirty-nine out of 8,300 credit unions (nationwide) doesn't make a trend," Murphy said. "I think the banking community would like to see more of that happen, but I don't believe that's going to be the case."

Matthew Stone -- 623-3811, Ext. 435

mstone@centralmaine.com