A couple of Pennsylvania thrifts think they've found an unorthodox method to get around the federal ban on merger-conversions, according to a Washington banking lawyer.

Office of Thrift Supervision officials would not discuss the proposal's chances. But officials at one of the institutions are calling it a "merger of equals," not a merger-conversion. Either way, the nature of the proposed transaction is elusive.

In a typical merger-conversion, a mutual institution simultaneously converts and is acquired by a separate stock institution. The control of the resulting institution remains with the mutual's depositors, who have the chance to become shareholders.

In this case, however, a Philadelphia-based mutual holding company, FJF Financial, would merge with its 87%-owned stock thrift, Roxborough-Manayunk Federal Savings Bank. Immediately after, Roxborough-Manayunk would merge with Progress Federal Savings Bank and become a wholly owned subsidiary of Progress Financial Corp.

But despite the apparent similarity to the merger-conversion, on which the OTS and Federal Deposit Insurance Corp. have ordered a moratorium, the deal is actually structured so that Roxborough depositors would control the surviving entity. And management would be split evenly between both institutions, says Douglas P. Faucette, partner at Muldoon, Murphy & Faucette in Washington.

That might make it palatable to the OTS and reopen an avenue by which mutuals and stock institutions can combine.

"It's an exception to the merger-conversion rule," Mr. Faucette said. "It's not the gaping exception that it might appear to be at first blush."

But any exception is an exception, he observed. "You don't know what it leads to."

The two institutions filed their application with the OTS in June, but the application isn't complete, and no action has been taken, according to an OTS spokesman, who declined to comment further.

"We're trying to comply with all the regulations, not seek loopholes," said W. Kirk Wycoff, president and chief executive of Progress.

Federal regulators have placed a moratorium on merger-conversions because of concern that mutual insiders were getting a significant payoff from the deals without benefit to depositors.

Under the proposed transaction, each of the minority shares of $279 million-asset Roxborough would be exchanged for one share of $347 million- asset Progress Financial common stock. In addition, Progess would issue between $23.8 million and $32.2 million in new stock, with first dibs going to Roxborough depositors and borrowers.

Progress now has only $13.7 million in equity.

With the issuance of the new stock, Roxborough depositors would control a majority of the new entity's equity.

In fact, if Roxborough's customers failed to pick up 56% of the post- deal shares outstanding, the mutual could terminate the deal. On the other hand, if control surged above 64%, Progress could end the deal.

The deal would even benefit Progress shareholders, who would see an increase in the value of their equity investment, Mr. Faucette said.

And both institutions would have the same number of members on the holding company's 12-member board and the thrift's 16-member board.

Roxborough chairman John F. McGill Sr. is to serve as chairman of the new entity, while Mr. Wycoff would remain president and chief executive.

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