Conn. thrift sets 5% cap on stock purchases.

In a move that tells large banks they can look but can't touch, a Connecticut thrift has imposed a 5% limit on stock share purchases to prevent any ownership change that would cut back a hefty tax credit.

While snuggling through New England's recession, $479-million-asset Farmers and Mechanics Bank accrued more than $9 million in credits, amounting to more than $5.50 per share.

That's about one-third of the current book value of the Middletown-based thrift, currently at about $17 per share. Book value could climb to as much as $23 if the entire credit is used. "It represents one of the company's major assets," said H.C. Wainwright analyst Jeffrey Cohn.

First Albany Corp., an Albany, N.Y.-based brokerage firm, said Farmers is an "attractive acquisition candidate for an institution looking to fill in an existing network" because of its steady recovery and strong marketshare. The tax credit could also lure a buyer, although it would be reduced in an acquisition.

A quirk of federal law cuts the overall benefit or limits the annual amount when there is a change in ownership, to prevent outside investors from taking advantage of a bank's past losses.

The Internal Revenue Code defines an ownership change as the purchase of more than 5% of shares by an individual or company when that increases the new investor ownership of a bank or thrift to more than half in a three-year period.

When Farmers and Mechanics went public in December, it limited new investors in the first three years unless the board of directors gave special approval.

Analysts say the move could help stave off acquirers for acquirers for a few years. It will also give the thrift more time to work through its remaining bad assets so it can raise its earnings and take advantage of the tax credits, they said.

Thrift officials don't know when they'll be able to cash in, said Farmers president John Beckert.

"A turnaround can take a year or two," Mr. Cohn said. "That's what they need."

Most of the tax credits will last at least until 1998. "It's unlikely that you could get it all at once," Mr. Beckert said, referring to the tax credit. He added that the faster Farmers gets rid of bad assets and builds earnings, the sooner it will be able to recognize

[INCOMPLETE-TEXT FROM ORIGINAL PUBLICATION]

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