AUGUSTA, Maine -- The board of directors of the $51 million KVFederal Credit Union will decide whether to put a proposal to mergewith 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 mediain Augusta, Maine, where the two institutions couched the matter asa mutual merger between financial institutions.

"With all the changes happening in the financial servicesindustry, this union of two long-standing and respected localfinancial institutions could provide the greatest opportunity forimproved services and choice for residents in the Greater KennebecValley," said Mark Johnston, CEO of KSB in a press statement aboutthe possible merger.

KV's CEO Beverly Beaucage put the merger in the context of theCU's history in the area.

"We've continued to grow steadily since 1962 while maintaining astrong capital base and steadfast focus on member service,"Beaucage said. "Our board determined that the long-term goal for KVwas to build and maintain a strong presence in the Kennebec Valleyoffering our members a wide variety of financial services. In orderto accomplish this, it makes sense to consider combining ourefforts with a local institution that has similar values."

Beaucage explained that the merger-oriented focus on thesituation was entirely appropriate since the credit union's boardhad restricted its own discussions of the charter change to thatcontext.

"We didn't meet with any consultants about changing our chartersor do anything like that," Beaucage explained. "What happened wasthat our board launched a two-year process of looking at how thecredit union could go forward and continue growing and it becamevery clear that it would have to be through merger."

While credit unions in KV's peer group have posted a more than2.60% annualized rate of membership increase, according to NCUAdata, KV's membership growth has hovered close to no growth orslipping into negative territory.

Beaucage attributed the credit union's difficulty growing to itssmaller size and inability to stand out in an already crowdedfinancial services market.

According to data collected by credit union consultancy Callahanand Associates, KV is the 34th largest credit union in Maine.Beaucage said she could count six to eight other financialinstitution branches within 3.5 miles of the credit union'sheadquarters.

KV also has a history of mergers. Founded as a church-basedcredit union in 1962, the then St. Augustine Federal Credit Unionmoved several times and opened branches before concluding its firstmerger in 1992, changing its name to KV and concluding its secondmerger in 1993. KV obtained a community charter to serve theresidents of Kennebec County in 2000 and added the residents ofSomerset County to the field of membership in 2007.

The problem the board faced, Beaucage explained, was to find amerger partner that would both give its members the best advantageand maintain the focus on the community that Beaucage said has longmarked the credit union's history.

"We were not unhappy being a credit union," she said. "We lovebeing a credit union and remain deeply committed to our ideals, butwe had to take a realistic look at the situation and recommend whatis best for our members."

Beaucage maintained that none of the credit unions that KVconsidered as possible merger partners had the same presence in thecommunity that KV had. "None of the other potential partners weconsidered had their decision-making facilities in this community,"Beaucage said. She explained that while some had a presence viabranches, 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 someappeared to have narrow fields of membership.

Judith Griffin, CEO of the $30 million Alliance of Maine FederalCredit Union reported that KV had never approached Alliance to talkabout a possible merger.

"The field of membership restriction could have been addressedif we had talked about it," Griffin said, adding that she feltsomewhat "insulted" that KV had cast its decision in the light ofnot having CU partners in the area with the same roots in thecommunity. Alliance has been chartered since 1936, she pointed out,and she has worked in credit unions for 41 years. "We are deeplycommitted to the credit union philosophy and ethic includingcommunity involvement," she said.

The CU larger than KV is the $245 million Maine State CreditUnion. It's CEO, Normand Dubreuil, also said KV had neverapproached it about a possible merger.

"I think the important part of what they are saying is in theword 'considered,'" Dubreuil said. "They might have considered usprivately and rejected us, but they never approached us. We wereall very surprised by this. If anyone here had known they wereinterested 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 unionwith which to merge.

"We are strongly committed to the credit union charter as thebest charter," Murphy said "and we definitely believe that therewas a credit union alternative to having to merge with a bank."Murphy said he would meet with KV leaders to follow up on themerger discussion.

Both KV and KSB stressed as well that neither institution is introuble 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 ratiothan its peers and a significantly higher return on average assets.And, despite citing "comprehensive business services" as areasonfor the merger, KV has, so far, not made any member businessloans.

For its part, KSB made $2.29 million in the second quarter of2008, according to FDIC documents and appeared to reflect a strongfinancial position.

KSB CEO Johnston picked up the "merger of mutuals" theme andnoted that the bank remained deeply committed to being andremaining a mutual bank. He noted that the commitment to being amutual was part of the bank's mission statement and had been a corepart of the bank for its 137-year history.

"We are not studying or considering issuing stock, and I cannotforesee that we would," Johnston said. "We remain committed tomutuality; our customers are our owners and they own theinstitution," he said.

This commitment to mutuality is significant because KV hasassured members that the bank will continue the one member-one votecredit union voting structure. Even though that has not been a partof 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-charteredmutual banks own their institutions, they vote in bank managementdecisions through the use of officers called "corporators" of whichKSB currently has 80.

"That structure will go away when we change to a federal mutualcharter under the Office of Thrift Supervision," Johnston said."The corporators are a unique part of the Maine structure but wewill have to let them go."

Johnston said that the bank's determination to switch to afederal charter pre-dated the merger, but when KSB found they couldoffer their owners one member-one vote, it embraced the idea.

"From our point of view it's simpler, more efficient and fair touse a one depositor, one vote structure," he said.

In addition, the fact that the KSB is also a mutual will meanthe new bank will have easier access to the credit union's roughly$5 million in equity, Johnston said. "The members' equity willfollow them into the new institution," he explained.

Beaucage also stressed that KV is working hard to include themembers in the decision-making process. Along with itsNCUA-mandated statement about the impending board vote on its Website (www.kvfcu.org), KV also provided a link where members caneasily communicate their concerns to the board.

Sources within the Augusta CU community predicted some of themember input might be vigorous. According to numbers compiled byDatatrac, a leading financial information research firm, KV offersits members higher interest rates on its money market accounts (1.26% for KV versus 1.10 % for KSB) and on a wide variety ofcertificates of deposit. Datatrac showed that KV had significantlyhigher 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% forKSB. On the two-year CD the spread was 3.35% against 3.05%. Therates narrowed at the longer terms so that for a five-year CD thedifference was only 4.23% for KV versus 4.20% for KSB.

Another potential concern may be revolve around whether Beaucageor other CU executives move to more lucrative executive positionsas a result of the merger. Beaucage stressed that neither she northe board stood to gain from the merger itself, but KSB didindicate that Beaucage and others KV senior staff will haveexecutive positions at the new bank, which, at a projected $700million in assets, will be a good deal larger than KV.

The bank said Beaucage will continue after the merger as anexecutive vice president and a member of its board of trustees."She would continue to work with the KV team of employees and withmembers and the community as she has done in the past," thestatement said.

KSB also said that KV Chairman Rick Tardiff would also continueon as a member of the bank's board of trustees.

Other KV directors, supervisory committee members and the creditunion's Chief Financial Officer Christine Devine would becomeadvisory board members of the bank.

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