The demise of the merger-conversion of Avondale Federal Saving Bank, Chicago, into Central Resource Group, Des Moines, lays to rest one of the most controversial such deals in the country.

Central Resource of $474 million-asset Avondale said the agreement was off because of changes in federal merger conversion rules and improved business and profits among each institution.

"Since we first announced the transaction, most of the relevant regulatory climate changed," said Alfred P, Moore, Central Resource president. Meanwhile, both institutions had "gotten on with their lives," he said.

The companies wanted to merge rfor several reasons. Central Resource, a $1.1 billion-asset holding company that owns Midland Savings Bank in Des Moines, wanted to expand its presence in the Midwest. Avondale, on the other hand, wanted to pick up more products and services as well as capital.

Public Offering Suspended

Both companues improved their performance and decided to call off the merger. Central Resource even suspended its public offering.

"It's the price of success," said Robert S. Engelman Jr., president and chief executive of Avondale, a mutually owned thrigt. "As the year went on, we did better and better and our. . . value went up."

Avondale earned $2.7 million for the year endiong March 31, after a loss the previous year from a one-time restructuring charge, he said.

Avondale now plans a standard stock conversion and willf form a publicly owned holding company.

Last year, a group of Avondale depositors protested the deal, contending they would lose money if the transaction went through while management would profit. In December, the Office of Thrift Supervision heard oral arguments from both sides during a closed session.

The agency approved the merger applications in March. Later that month, the parties extended the merger argreement to mid-August and the public offering date to Oct. 15. They terminated the agreement on June 7.

In a merger conversion, a mutual thrift converts to stock while merging with an acquiring bank. Depositors can't buy the thrift's stock, but usually get a discount on the acquirer's stock.

Regulatory Changes

Since the Avondale deal was announced last August, the climate for these transactions has changed dramatically. In January, the thrift agency imposed a moratorium on such conversions to protect depositors and reduce insider profits for mutual thrift executives. Similarly, the Federal Deposit Insurance corp. instituted rules to allow regulators to block mutual thrift conversions.

However, the agency allowed Avondale and a few other existing deals to continue.

To comply, Central Resource and Avondale made several changes in the deal, including using all-new proxy votes, eliminating stock-based compensation for management, and contributing to a foundation for community housing.

But the agency's new rules also would have increased by about 50% the amount of stock Central Resource would have had to issue.

"That made the transaction so marginal financially we and Avondale made the decision amucably to stop," Mr. Moore said.

Nonetheless, the institutions together already had spent several million dollars on the deal, Mr. Moore said.

The termination had nothing to do with depositors' protests or Avondale's poor community reinvestment record, the executives said.

Depositors 'Thrilled'

Linda Stromberg, one of the most vocal depositors who protested said she was "thrilled" about the termination. The former analyst with Howe Barnes Investment, Chicago, said, "All along, I'd said Avondale was a very good franchise with strong earnings potential."

Ms. Stromberg now expects the thrift to execute a standard stock conversion, which the company had planned befopre its agreement with Central Resource.

Mr. Engelman would not speculate on the specifics of Avondale's future, but said: "We intend to continue to build the company. To do that, in my opinion, is going to require significantly more capital."

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