WASHINGTON - Banking industry trade groups last week credited the Office of Thrift Supervision with softening its stance on mutual-to-stock conversions, but complained that the agency still would require too much red tape, which would stifle these controversial deals.

Some of the application requirements of a proposal issued in July "may be unduly burdensome and may be viewed as a barrier to conversion," Thomas J. Sheehan, president of the Independent Community Bankers of America, wrote in a letter to the agency on Nov. 7.

Under the proposal, a thrift owned by its depositors that seeks to convert to a shareholder-owned company would have to form a so-called mutual holding company. The depositors would own at least 51% of the holding company, with the remaining stake sold to investors in a public stock offering.

The plan stems from the agency's frequently repeated concern that if a mutual thrift becomes completely stockholder owned, it would lose its community focus and would be subject solely to the interests of investors who may be too quick to sell to a larger entity. Roughly 40% of the 1,079 OTS-supervised thrifts, or 419 institutions, are mutual companies.

The agency is expected to issue a final rule by late March. Comment letters were due Nov. 9.

Anticipating negative reaction, the OTS included items meant to make mutual holding companies more palatable by modeling them after financial holding companies. For example, the mutual holding companies would be permitted to underwrite securities and insurance.

In 19 comment letters, trade group officials and executives said some of the sweeteners offered by the agency were welcomed, but insufficient. The criticism focused primarily on some of the application requirements, saying they would slow down already complicated deals.

Under the proposal, thrifts would have to submit a conversion business plan to regulators detailing how they would deploy capital, how feasible the plan is, the risks of converting, management's success in implementing prior growth strategies, and how they can get a reasonable return on equity.

Charlotte M. Bahin, director of regulatory affairs for America's Community Bankers, wrote that a proposed requirement for a pre-application meeting with regulators, followed by a business plan review that could last as many as 30 days, "would unnecessarily lengthen a conversion timeline that already averages several months."

She urged that such meetings be made voluntary, and opposed a separate business plan approval.

Ms. Bahin also disagreed with the proposal that if management did not have prior success expanding the thrift's business, regulators would discourage conversion. This would hurt thrifts in markets that have experienced little or no growth, she wrote.

"We believe the standard proposed by the OTS is unduly subjective and allows the agency to decide arbitrarily what is 'sufficient' or 'favorable' management experience, circumventing what essentially is an appropriate business decision," she wrote. "At best, the standard is protectionist; at worst, it replaces an institution's obvious right to choose its future with agency edicts."

The American Bankers Association and the ICBA, both of which are increasingly courting thrifts, also criticized some of the stringent business plan requirements.

C. Dawn Causey, the ABA's director of financial institution affairs, wrote that the new initiatives should not add hurdles to the conversion process. For instance, she and others complained that the proposal would require the thrifts to deliver a minimum return on equity higher than its rates on long-term certificates of deposit.

The OTS should set a more realistic rate of return, and let institutions include stock repurchases after one year in the return rate, Ms. Causey wrote.

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