Beset by legal and loan problems, a Massachusetts cooperative bank is seeking a way out of its capital woes through a merger-conversion.

Under the merger agreement, Bank of Taunton, a $20 million-asset mutual cooperative, will convert to a stock institution and be immediately acquired by the $232 million-asset People's Savings Bank of Brockton.

The banks, which signed the agreement last week, are awaiting state and federal regulatory approval.

Merger-conversions are controversial because the buyer receives all the assets, particularly the capital, without having to pay money to shareholders or depositors, while owners and directors often get perks for their help in the deal. That creates the perception that the owners are selling out the institution for personal profit, not for the benefit of the depositors or shareholders.

In fact, the Office of Thrift Supervision no longer approves of most merger-conversions, except in cases of failing institutions, while the Federal Deposit Insurance Corp. has only approved one application out of nine this year.

Officials at the institutions expect regulators to support the deal because Bank of Taunton is currently undercapitalized, with a leverage capital ratio of only about 2.5% at Dec. 31, according to People's Savings president and chief executive John A. Williams.

For the first nine months of last year, Bank of Taunton lost $141,000, and it still operates under an FDIC cease-and-desist order imposed two years ago.

Bank of Taunton was too small to raise capital in an initial public offering, Mr. Williams said.

The merger agreement does not include any free stock or stock options for Taunton directors. And Massachusetts law protects depositors by requiring People's Savings to set up a liquidation account for Taunton's capital. If People's Savings is ever liquidated, that capital will be divided among the Taunton depositors.

"There isn't anyone who makes a lot of money in this transaction," Mr. Williams said. "The shares that are issued are all owned by us. We get the benefit for that, but we take all the risk on the loan portfolio. There's no pot of gold here for anyone."

The agreement is not regulatory-assisted, according to Mr. Williams, but People's Savings officials hope that regulators will allow the institutions to skip the usual approval from Taunton's depositors because of its low capital.

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