Mutual savings banks have been declining in number for more than a decade, but the industry’s largest mutual has a plan that may make it easier for small depositor-owned banks to stay in business.

Third Federal Savings and Loan of Cleveland, with $6.4 billion of assets, is seeking to form cooperative partnerships with smaller mutuals by bringing them under the umbrella of its mutual holding company but preserving their charters, independent boards of directors, and local management.

Marc A. Stefanski, Third Federal’s chairman and chief executive officer, came up with the idea about two years ago but did not attract his first partner until last week when Ohio Central Savings in Canton agreed to join his “mutual partnership program.”

No up-front money is involved in the partnership. However, Third Federal would pay partners for meeting a series of agreed-on business goals. The money would be put in a tax-deferred trust account to which officials of the partner bank could gain access at their discretion. Mr. Stefanski likened the arrangement to a deferred compensation plan.

Robert W. Hughes, president and CEO of $45 million-asset Ohio Central, said his thrift decided to affiliate with Third Federal because the partnership offers a means of growing without converting to a stock form of ownership.

“We could have pursued a stock conversion, but we would have outgrown that capital in another three to five years,” Mr. Hughes said. “Then our only option would have been to sell, and that just means another community bank taken off the market.”

Preserving mutual institutions is the program’s goal, Mr. Stefanski said. “We want to make sure these companies remain viable in the cities where they’ve been such a rich part of the local history,” he said.

By itself, however, Mr. Stefanski’s partnership program probably will not reverse the decline in the number of mutuals. From 1990 to 1999, the number of federally regulated mutual thrifts dropped 68%, to 427, and the total is continuing to fall.

According to Mr. Hughes, the two companies are discussing how they can share information and resources, and Mr. Stefanski has promised to make Third Federal’s technology and administrative capabilities available to Ohio Central and to future partners. “At some small mutuals, the president has to do the taxes,” Mr. Stefanski said. “We have people who can do that for him, so his time can be better spent running the bank.”

The partnership with Third Federal creates an outlet for Ohio Central’s automobile loans. Mr. Hughes said the company has long sought to sell loans on the secondary market but did not generate enough volume. “No one wants to look at a pool of auto loans unless it is $1 million a week,” he said. “We can’t generate anything close to that.”

As a Third Federal partner, Ohio Central can sell its car loans to the holding company. Third Federal, whose portfolio is mostly real estate, gains access to the commercial loan market.

This potential synergy between mortgage and automobile lenders makes Third Federal’s partnership program particularly attractive to credit unions, according to Alan Theriault, a Portland, Maine, consultant who has helped a number of credit unions convert to mutual savings banks. These include Ohio Central, which converted in June 1998. Third Federal is opening its partnership program to credit unions, but they would have to convert to mutual banks first.

“Residential real estate is the fastest-growing segment of credit unions’ portfolios, and the link with automobile lending creates a powerful consumer franchise,” Mr. Theriault said. “Every mutual in the country should open its eyes to the possibility of merging with the credit union next door.”

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