Harry Doherty, the chief executive of Staten Island Savings Bank, has always described himself as the CEO of a plain-vanilla thrift.

Staten Island, which opened in 1964, is now a $1.4 billion-asset institution with 14 branches, all in Staten Island. Sixty-six percent of the institution's deposits are still in passbook savings. The assets are predominantly one- to four-family mortgages. And there is a little bit of commercial real estate on the books. With 325 full-time employees and an equity capital ratio over 9%, the company has achieved returns of 1.2% on assets and 13.8% on equity. As Harry says: plain vanilla.

No wonder my jaw dropped when Harry told me recently that Staten Island was about to acquire Gateway State Bank, a commercial bank on the island with, shockingly, a branch in Brooklyn, too.

Harry explained. A few years ago, Staten Island Savings decided to make a move to get commercial demand-deposit accounts, with only minor success. Gateway State Bank proved to be the primary competitor, doing a great job for their clients.

As soon as Harry found out last fall that Gateway had hired an investment banker, he was extremely excited about the opportunity.

By Thanksgiving weekend, Staten Island initiated due diligence, signing a letter of intent in January and a definitive agreement in March.

"How can a mutual acquire a stock institution?" I asked. "So many mutuals believe that this is not within the realm of possibility."

What Staten Island has done is to create a merger subsidiary. The cash for the Gateway purchase would be transferred from Staten Island Savings to the merger sub, and that entity would purchase shares from Gateway's holding company, which wholly owns the bank. Staten Island is buying the holding company's shares. And when that's done, they will merge the bank into their savings bank. Then Gateway's holding company disappears, Staten Island's subsidiary disappears, and the stock disappears.

This is the first mutual savings bank in New York to purchase a stock institution, and the transaction is truly innovative. The logic behind it is very sound. The two institutions share the same geographic market and have complementary lines of business. While Staten Island has the majority of its deposits in savings accounts, almost 50% of Gateway's are interest- free demand deposits. The overall cost of funds is 0.8%. In addition, Gateway generates about $2.5 million a year in fees on deposits.

Further, Gateway makes commercial loans while Staten Island makes mortgages. When interest rates go up, savings banks' margins get squeezed, but in the commercial banking environment, the situation is exactly the opposite since 70% of Gateway's loan portfolio is prime based. That countercyclical effect was very attractive to Staten Island.

"What about the culture?" I asked. "Some people say that commercial banks and thrifts are worlds apart."

"Gateway's culture is service, service, service - as is ours," says Harry. "Only they have very active business development officers who aggressively pursue the market. At Staten Island, we had started an internal sales program at the beginning of 1994. We believe that we can transfer our internal cross-selling program to Gateway's staff while they teach us to do a couple of cold calls a week."

Harry is particularly appreciative of Merton Corn, Gateway's president. "He is a great commercial banker," he says. "He started with the company 17 years ago, and he is responsible for the success that it is today. We are very fortunate that he will continue with Staten Island, bringing his commercial expertise and knowledge of this market along with him."

Notwithstanding, some layoffs are to be expected, but only in the back office. "We don't need two chief financial officers or two human resource managers," says Harry.

While the company budgeted 30% savings in overhead initially, they have now lowered their expectations to 20%, but the deal is accretive even if the number is only 15%.

I believe Staten Island set an important example to mutuals all around the country that are imploding with high capital ratios, low profitability, and worries about survival. Staten Island is showing them a way to profitable growth without compromising their ownership structure.

Ms. Bird, chairman of the New York consulting firm Finexc Group LLC, was recently named chief operating officer of Roosevelt Financial Group, St. Louis.

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