An Indiana mutual thrift is planning to convert to stock ownership and use the excess capital generated to buy a controlling interest in a local commercial bank.

Madison First Federal Savings and Loan last week disclosed its strategy for pulling off the deal for Citizens National Bank of Madison, which was announced in December. The thrift has not yet filed applications with regulators, however.

The price of the cash deal has not been disclosed.

The thrift agreed to acquire 95% of the outstanding shares of $50 million-asset Citizens directly from a shareholder. Deals in which a newly converted thrift buys control of a commercial bank are rare.

"The main challenge as far as the regulatory side is going to be the fact that this isn't done every day," said James E. Fritz, the $85 million- asset thrift's president, who expects the deal to be completed by yearend.

"I think we had a very unusual set of circumstances that led to this," said S. Joe DeHaven, executive director of the Community Bankers Association of Indiana.

Part of the uniqueness is that Madison First is buying a controlling interest from a principal shareholder who isn't involved with either the board of directors or the day-to-day management of the bank.

The December announcement apparently came as a surprise to the bank's management. "Their response initially was a little bit of shock," Mr. Fritz said.

Citizens National president Bob Hoban could not be reached for comment.

Mr. Fritz declined to name the bank's controlling shareholder. A local newspaper, The Madison Courier, said it was Eloise Durocher, the widow of the previous majority owner of the bank.

To make the purchase, Madison will convert to stock and form a holding company for the bank and thrift, which it initially will keep separate, Mr. Fritz said.

That strategy differs a bit from other similar transactions. For instance, one New York mutual thrift has applied to similarly convert, then acquire another thrift. And another mutual holding company paid cash for a bank and merged it into its savings bank, eliminating the stock institution.

Madison will use part of the proceeds from its stock sale to buy the bank's shares, though Mr. Fritz did not yet know how much the offering could raise.

"The thing that's exciting about it is ... this is a situation where they're using the capital immediately to make an acquisition," said Madison First's attorney, Claudia Swhier, of the law firm of Barnes & Thornburg, Indianapolis. Many thrifts that convert have excess capital. "It's something I think more and more thrifts will look at."

Observers saw various hurdles Madison may have to surmount to complete the deal.

For instance, because the institutions are in the same market, the Justice Department might have to consider antitrust issues in the community of 14,000.

Some also questioned whether Madison would move thrift deposits into the bank to avoid Savings Association Insurance Fund assessments.

"That's not the reason for the transaction," Ms. Swhier said. "The reason for it is to grow the institution."

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