Mutual Conversions Taking New Route - Via Liquidation Sale

There's a new breed of mutual deal.

Easier and less expensive than a merger-conversion, this new beast - some call it a liquidation-purchase - has surfaced recently in the states of Maryland and Washington.

It works like this: A mutual voluntarily dissolves, following procedures in the rulebooks since the 1930s. A bank or thrift then buys the loans and deposits, and the mutual's depositors get the leftover capital.

The technique has clear benefits for both the acquiring institution and the depositors of the acquired one. Mutual executives have less to gain, but regulators are starting quietly to push them to accept such deals.

The first regulatory approval came in November, when the Office of Thrift Supervision allowed the voluntary dissolution of $23-million asset Cowenton Federal Savings and Loan Association of White Marsh, Md., and the transfer of all its deposits to Mercantile Safe Deposit and Trust Co. of Towson, Md.

"Conceptually, what this means is that if federal regulators want to get rid of smaller mutuals, this might be the way to do it," said Christopher J. Zinski, a partner in the Chicago law firm of Schiff Hardin & Waite. "It really is extraordinary from the standpoint of the policy position of the OTS."

Mr. Zinski found out about the deal recently, distributed a memo about it to clients and said he has since been besieged by calls from bankers interested in acquiring mutuals.

"This transaction has great appeal to bankers," he said.

That appeal is not lost on Guy Pinkerton, chief executive officer of Washington Federal Savings in Seattle.

Washington Federal announced in March 1994 that it had signed an agreement for a merger-conversion of West Coast Mutual Savings Bank of Centralia, Wash. A few months later, however, the parties involved decided that a voluntary dissolution of the $35 million-asset mutual, followed by a transfer of its assets and liabilities, would work better. The deal has been approved by the Washington Division of Financial Institutions, which regulates West Coast Mutual, and is due to close June 30.

"It's a lot less costly, it makes sense for the depositors, and it's a more direct route than going through Wall Street," Mr. Pinkerton said.

Who came up with the idea? "It was a combination between our regulators, us, and our attorneys," Mr. Pinkerton said. "It just kind of seemed to evolve."

The idea had a different genesis in Maryland. The officers of Cowenton Federal were fed up with regulation and the direction of the industry, and "we just said the heck with it," said Terry Neifeld, the mutual's president and CEO.

They decided to take the dissolution route, Mr. Neifeld said, because that was the best deal for the mutual's depositors.

"It's not our money, yet most chief executives and boards come to think it is theirs to protect," he said. "They forget it's the depositors'."

Cowenton's depositors came out of the dissolution with a capital distribution that amounted to a 13.5% payout on their money. If they keep their accounts at Mercantile for a year, they will get another 1% premium.

The mutual's loans were sold to another Baltimore-area thrift, Rosedale Federal Savings and Loan Association. Its office will be closed, and Neifeld and the one other employee are out of jobs.

"This was actually structured in such a way that no one got a big windfall and no one got a big gyp," said Diana Garmus, assistant director for corporate activities at the thrift regulator. "We have suggested to some mutuals that they might want to consider voluntary dissolution; management hasn't been that interested because they want a windfall."

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