ENVIRONMENTAL PROBLEMS have thwarted the takeover of an Indiana savings bank by $11 billion-asset Fifth Third Bancorp, Cincinnati.

Fifth Third, which was about to buy $59 million-asset Shelby County Bancorp, Shelbyville, Ind., backed off Sept. 24, citing tests showing pollution at the company's branch in St. Paul, Ind.

"We were sure left standing at the altar," says Shelby's CEO, Rodney L. Meyerholtz.

But the flight of Fifth Third will be the least of the worries for Mr. Meyerholtz if further tests show serious groundwater pollution. And his bank already is holding the bag.

In 1988, Shelby County Savings Bank, the company's only subsidiary, purchased a shutdown gasoline station in St. Paul, tore it down, and set up a mobile branch,

Contamination Was Never Considered

"The gas tanks were dug out back in 1980, and we just didn't think to test the soil," says Mr. Meyerholtz. "We just never gave a thought to contamination." The site has since been paved for a parking lot that serves a permanent office the banking company has since built on adjacent property.

As required by Indiana's Responsible Property Transfer Act, Mr. Meyerholtz informed Fifth Third that there had been underground gasoline tanks at the site.

That was in May. On Aug. 10, Fifth Third started taking the soil samples, which eventually led to the busted deal.

Robert Niehgus, a senior vice president at Fifth Third, would not say what the tests determined. "We don't own the property, and I don't think we should comment on it."

'I Don't Know How Bad It Is'

Mr. Meyerholtz says: "I think what scared them off is that as they drilled deeper -- down to 25 feet -- contamination got worse. But I don't think that's deep enough.

I think you'd have to go another 60 feet to hit the water table. We'll be meeting with the firm that did the tests, but to this day I don't know how bad it is."

Patrick Morrison, spokesman for the Indiana Department of Environmental Management, says it appears that Shelby County Bancorp will be liable for a cleanup of the site.

Moreover, "it does not seem like they'd qualify for Leaking Underground Storage Tank funds." Mr. Morrison adds.

"The fund is paid for by fees paid by tank owners who registered their tanks as of 1986. If those St. Paul tanks were out of the ground before then, then they haven't paid into the fund -- and only those who have are entitled to tap the fund."

Shallow Pockets

Mr. Morrison adds that provisions in the underground tank law enable the Environmental Management Department to pursue as responsible parties the original owners of the gasoline station. But Mr. Meyerholtz says the individual who sold the gasoline station does not have any money.

Tom Williams, director of government relations for the Indiana Bankers Association, says Shelby County Bancorp is is the first Indiana bank, to his knowledge, which has been hurt by buying contaminated land.

However, Mr. Meyerholtz says, "I've seen a lot of banks take over old filling stations for branches. The lots are the right size, and they often have desirable locations."

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