Curbs on conversions would hurt depositors.

Mr. Keefe sent the following letter to the Office of Thrift Supervision, the Federal Deposit Insurance Corp., and selected members of Congress on June 9.

As one of the 10 largest thrift investors in the country, we are shocked and disturbed by the various proposed changes regarding mutual conversions.

What started as an attempt to protect depositors in these institutions and to assist the industry will very Iikely have the opposite effect. We believe these changes will hurt significantly rather than help depositors and will also have serious negative effects on the industry as a whole.

Our opinion on the various changes follows:

1. Increasing appraisals to limit "pop." We agree that the appraisal is integral to the perception of fairness of the pricing of the stock of converting institutions.

We are concerned, however, that reference to the immediate postconversion trading prices could inappropriately force appraisers to overvalue the stock of converting institutions.

Remember, we are in a rising interest rate environment for only five months now, as opposed to the period of generally declining rates over the previous five years.

Any revised appraisal guidelines established by OTS should preserve sufficient latitude for appraisers to consider all relevant market factors and institutional data.

The depositors are essentially the owners of these institutions and, therefore, have a right to make a profit on these transactions. More important, it is impossible to know with any certainty where a stock will trade to in the first few days.

Potential for a Decline

If appraisers are threatened with "decertification," they will be forced to take appraisals to a level where the potential for a drop in stock price is very high. The result of deals going down, rather than up (we have recently seen a few do just that), will have numerous negative results.

First, the depositors, whom you are attempting to protect, will be hurt. Second, investor interest in these conversions will collapse, and an excellent opportunity for the industry to raise capital and continue consolidating will be lost.

Finally, when depositors make money on these conversions, they pay taxes on the profits. Given the amount of the budget deficit, we are rather surprised that an agency of the U.S. government is suggesting rules that will assure a reduction in tax revenue.

One final thought on this topic should also be considered. Most mutual thrift depositors axe, unsophisticated and in many cases, have never owned an individual stock.

These depositors view the thrift as a safe place. If the pricing is tight and the stock drops, these small, unsophisticated investors are being hurt.

2. Restrictions on buybacks. It is our belief, as shareholders, that if an institution is within capital guidelines and its stock price is fairly inexpensive, it is in the best interest of the company and its shareholders for a stock buyback to be permitted.

We fear that if prudent uses of capital are not permitted, some managements, in an effort to utilize their excess capital and better their return on equity, will use it unwisely. A review of the recent history of New England institutions tells us our fears are not unwarranted.

We believe the restrictions on buybacks provided by current OTS rules are quite sufficient.

3. 100-mile radius rule. On this matter, we simply don't think it is a very good idea to set a precedent of discrimination based on where someone lives.

This rule could result in the unfair treatment of some depositors, Also, there are some practical matters that make implementing this rule difficult.

4. Restrictions on options. We view material inside ownership as a significant positive, and we understand that in many cases options are the only way to accomplish this.

It is our opinion that when a board and management team have options that are material to them personally, management's interests are better aligned with ours, as shareholders.

5. We agree with the restriction on merger conversion and hope it will hold. Given our position as thrift investors, our fiduciary responsibility to our elients, and our devotion to the banking industry, we feel compelled to share our thoughts with you on these matters.

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