FDIC lets mutual thrift give stock to depositors.

WASHINGTON -- Federal regulators have agreed for the first time to allow a mutual thrift to give depositors free stock as the institution converts to public ownership.

The deal could prompt a wave of mutual thrift conversions as depositors -- lured by stock giveaways -- pressure mutuals to go public.

The Federal Deposit Insurance Corp. board voted in a closed meeting last week to allow Perpetual Savings Bank, a tiny mutual thrift in Lexington, N.C., to hand depositors up to $1.1 million, or 15% of the stock sold. Perpetual's management and outside directors will gain roughly $19,200 in the payout because they are also depositors, the FDIC said.

"If these things turn into windfall giveaways to folks, those folks will put enormous pressure on the institutions to convert, extinguishing the mutual form of charter," said Randy McFarlane, government relations director for the Savings and Community Bankers of America.

But some say that would strengthen the nation's banking system.

"Given that every taxpayer is at least indirectly an insurer of the banking system, and given that a bank that is publicly owned has to live under the vigilance of the capital markets and shareholders in addition to the regulators, the system is better off with the mutuals converting," said Nick Adams, portfolio manager of the First Financial Fund, a closed-end mutual fund that invests in small banks and thrifts.

Said Douglas H. Jones, the FDIC's acting general counsel: "I don't see this being a situation where there is going to be a groundswell of depositors" clamoring for conversions.

He said deals would be approved on a case-by-case basis. "The fact that we approved one here doesn't mean that the next one will be approved," he said.

The practice of rewarding mutual depositors gained notoriety last winter when Republic New York Corp. promised to pay depositors a special interest payment of $250 million in an effort to win support for a hostile takeover of New York's Green Point Savings Bank. New York state regulators stopped the deal, declaring Republic's offer "illegal and improper."

There are 1,144 mutual thrifts nationwide with a combined $18.7 billion in net worth, according to Philip Colaco, senior research analyst. at SNL Securities in Charlottesville, Va. If all sold stock in deals similar to Perpetual's, their depositors would reap roughly $4.2 billion in cash or free stock, according to Mr. Colaco.

Perpetual's payout is being called a "depositors' recognition plan." To be eligible, depositors must have at least $500 in their account on a certain date. The FDIC said 2,666 depositors are eligible for the cash or free stock. The thrift, currently with $38 million in assets and nearly 10% capital, will have more than 20% capital after the sale of stock. The company did not return phone calls seeking comment. The FDIC and the Office of Thrift Supervision are in the midst of rewriting their conversion rules to eliminate most of the insider benefits that were allowed in a spate of deals over the past few years.

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