WASHINGTON - A Cincinnati bank is using a generous stock package to induce mutual thrift managers in three states to convert to stock ownership while simultaneously merging with the bank.

Provident Bancorp, which has $4.1 billion of assets, has been offering to give to savings bank executives in Ohio, Indiana, and Kentucky 15% of their thrifts' value if they agree to merge them with Provident.

The thrift executives' slice of the pie in these deals is larger than usual, prompting at least one federal regulator to question the fairness to the depositors and borrowers who own part of the mutual institutions.

|Arguably Unfair'

Securities and Exchange Commissioner Richard Y. Roberts, when told about Provident's 15% offer, said, "The number is high and arguably unfair."

"Possibly the commission should take a look at the disclosures" in Provident's proposed deals "to see if they have run afoul of the federal securities antifraud rules," Mr. Roberts said.

The proposed deals are called merger conversions and are made possible under new state laws governing state-chartered savings banks.

All but 19 of the 85 pending and completed merger conversions since 1989 have been in the eight states with new state savings bank laws.

If the thrifts converted under federal rules, management would be entitled to a maximum of 4% of the value of the deal.

Following the Rules

Provident's president and chief executive, Allen L. Davis, defended his offers. He said that whether the mutual thrifts "are state-chartered or federally chartered, there are rules for the conversion, and those are what we follow."

But Chris Lewis, director of banking and housing policy at the Consumer Federation of America, questioned whether the Provident deals are ethical "It may be legal, but it is just reprehensible," Mr. Lewis said. "That's pretty juicy bait to dangle in front of some directors, who would be acting in their own self-interest instead of the owners' - the depositors."

William J. Drumm, superintendent of the Ohio Division of Savings and Loans and Savings Banks, said his office expects this week to approve the first deal Provident has announced under its acquisition plan.

"I don't know of any reason why it shouldn't be" approved. Mr. Drumm said last week.

Heritage Savings Deal

Cincinnati's $55-million-asset Heritage Savings Bank, an Ohio-chartered mutual, agreed in September to merge with Provident in a deal Mr. Davis said he hopes will "serve as a model for other large mutuals we are looking at."

And Mr. Davis said the terms of the deal - including the benefits to management - will be fully disclosed in the proxies to be voted on by Heritage's depositors. "Ultimately, the members of Heritage will determine for themselves whether the transaction is in their best interests."

Jack R. Wingate, Heritage's executive vice president and managing officer, said the thrift's executives agreed to Provident's proposal because, "We thought the long-term viability of the banking industry is there," in contrast to the thrift industry. "Being a single-product type lender - we feel it is very limited," Mr. Wingate said.

Depositors in Heritage Savings would do better buying Provident's stock than they would have done owning Heritage's had it converted to stock ownership before a merger, said Mr. Drumm, the Ohio regulator.

"There is a market for Provident stock, and you have to question" whether there would have been a market for Heritage's stock, he said.

Stock Rose

Provident completed several merger conversions in July, 1992, under the less generous federal rules, and Mr. Davis said the thrifts' depositors prospered.

"We have yet to hear any complaints, however, from the members of those institutions who subscribed for Provident stock after voting to approve those transactions. Their Provident stock has appreciated in value from $18.18 to the current market price of $27.75 per share," Mr. Davis said.

Until now, North Carolina has had a reputation for allowing the most generous terms to thrift managers in merger conversions, but state regulators said they have not heard of free stock awards approaching 15% of a deal's value.

David C. Worth, North Carolina Savings Institution Division counsel, said, "We have seen some at 4% and 5% - I think we might even have seen some at 8%," Mr. Worth said. "I surely don't recall any at 15%."

No Limits on Stock

Ohio's rules for state savings banks - like North Carolina's - do not set limits on the amount of stock that can be given to management. "We try to back off and let the business decisions be made by the people in the business," said Mr. Drumm, the Ohio thrift regulator. "We would object if it is exorbitant."

But Mr. Drumm refused to be pinned down on what amount of free stock Ohio would refuse. " Provident's Mr. Davis said the bank had talked to all mutual thrifts in Ohio, Kentucky, and Indiana to see if they would be interested in a merger conversion, and had offered to give roughly 15% of the appraisal value of each thrift to its executives in the form of Provident stock.

Merger conversions are more appealing than traditional bank or thrift acquisitions because, "We can virtually get the institution for relatively nominal amounts," Mr. Davis said.

In merger conversions, the bank performing the takeover issues new stock, some of which is usually given to the thrift executives, but the rest of which is sold for cash to depositors and managers of the mutual thrift. In return, the bank gets the thrift.

To Pay About $1.5 Million

Provident appraised Heritage at $5,675,410, a bank spokeswoman said. As in most merger conversions, the bank will end up paying much less than that to buy the thrift.

In fact, Provident expects to spend roughly $1,573,866 to acquire it - the price of the 15% in free stock and the 15% discount to depositors and managers.

Mr. Davis said state regulators have given informal clearance for the deal, in which Heritage's executives will share $851,312 - 15% of the new Provident stock issued to pay for the acquisition. The executives will continue to run the thrift as a separate, wholly owned subsidiary of Provident for five years.

Provident made the same proposal that Heritage accepted to executives at American Savings in Munster. Ind.. according to a merger proposal document obtained by the American Banker that outlines the elements of Provident's proposed deals.

American Savings' president and chief executive, Clement B. "Skip" Knapp Jr., turned Provident down. "There is not enough there to retire on," said 51-year-old Mr. Knapp.

In the American Savings deal, Provident proposed to give $1.17 million in stock to the nine officers and directors at the $64 million-asset federally chartered savings bank, which would have to change its charter to a state savings bank to take advantage of the deal.

The executives would also have been given stock options worth 10% of the deal and would have been allowed to buy at a 15% discount up to 35% of the new stock that Provident would have issued to pay for the deal, according to the document.

Officers would get a five-year contract with an immediate 15% raise along with the use of a company car, a country club membership, and other benefits. The six directors - the CEO is also a director - would receive a 20% increase in their $550-a-month directors fees, along with other benefits.

Mr. Knapp is considering converting to a stock thrift under federal rules, but is not interested in a merger conversion. "We are doing it just because we think it is the right thing to do, not because we can get more money in our pockets," he said.

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