When Mutual Savings Bank in Milwaukee decided to buy an in-state rival, it lacked one key ingredient: money.

The depositor-owned institution could not pay with its own stock. Nor did it want to go public - because regulators would have forced it to become overcapitalized. So it compromised, filing to form a mutual holding company. "We realized we needed to raise some capital to do the acquisition," said Michael T. Crowley Jr., Mutual's president and chief executive officer. "But if you have too much capital, it's hard to give a desirable return to investors."

The Office of Thrift Supervision agrees. Concerned that a surge of mutual-to-stock conversions in recent years has caused problems - including proxy fights - at newly public thrifts, it plans to issue proposals this summer addressing conversion and capitalization issues.

At the same time the regulator is trying to discourage mutuals from full conversions. It is steering them instead toward the mutual holding company structure.

"We're seeing plenty of institutions going public and raising beaucoup amounts of capital," said Richard M. Riccobono, the OTS' deputy director. "Then what do you do with that capital? That becomes a regulatory concern."

It also worries investors.

Many thrifts that have recently gone public have capital-to-asset ratios in the 15% range; thrifts' national average is 8.3%. And if capital is not put to use, returns on assets and equity may fall, the stock price sputter, and the thrift venture into riskier businesses to expand, Mr. Riccobono said.

Excess-capital problems can be traced in part to the OTS' own policies.

Under current rules the regulator must determine how much capital a thrift converting to straight stock-company form must raise in an initial public offering. The rules require the extra capital as a buffer against problems that might arise after the conversion, and to ensure that thrifts have enough funds to complete their planned expansions.

Thrift executives have often complained about these rules. Not only do they encourage thrifts to raise too much capital in IPOs, bankers say, they also limit how much stock they can repurchase to improve their capitalization ratio.

Those complaints have led to a widespread expectation that the OTS will soon ease off on repurchase restrictions in straight stock-company conversions.

This is an area that "we're clearly going to fix," Mr. Riccobono said. One solution, he said, would be for the OTS to give the new stock-held thrifts more freedom to reduce excessive capital by repurchasing some of their newly issued shares.

Still, the OTS would prefer that thrifts remain mutuals or at the very least consider forming mutual holding companies, which must remain at least 51% depositor-owned.

Thrifts going wholly public, Mr. Riccobono warned, must be prepared for the additional pressure they could face from "feisty" investors.

"They're going from being mutuals - slow-paced institutions - to being public companies," he said. "Suddenly they have to listen to analysts and shareholders gripe. Every Tom, Dick, and Harry is going to tell them what to do."

Citizens First Financial Corp. in Bloomington, Ill., can attest. The $324 million-asset thrift, which went public in May 1996, spent much of the first quarter fighting off activist investors who had tried to gain seats on its board and force the company's sale. The dissidents were particularly frustrated by Citizens' inability to deploy excess capital, which flattened its earnings and stock price.

Citizens won the fight in April, but the challenge clearly took its toll. "There were plenty of times going through the proxy fight that I wished we were still a mutual and didn't have the fear of anyone coming in and forcing us to sell," CEO William C. Landefeld said.

By taking the mutual holding company route, $1.8 billion-asset Mutual Savings of Milwaukee should sidestep that worry. Depositors would own 51% of the holding company; the rest would be sold to the public. The proceeds would help fund the $133 million purchase of First Northern Capital Corp., a Green Bay, Wis., thrift company with $840 million of assets. The conversion and the purchase are expected to be completed in the third quarter.

To further enhance the holding company charter, the OTS plans to waive requirements that have forced such companies to pay dividends. The regulator said that the waiver would be especially appealing to growth-oriented mutual holding companies.

The OTS also plans to make mutual holding companies more lucrative to management and employees. Unlike those at fully converted thrifts, insiders at mutual holding companies can receive no more than 10% of outstanding shares through stock options. Mr. Riccobono said the OTS is considering raising the cap.

Even so, regulators could face a tough sell in promoting the mutual holding company charter. Many thrifts that recently went public said they considered the structure but saw too many negatives.

"We didn't go that route because it would have been a compromise, and it would have limited growth compared to doing a full conversion," said Charles J. Hamm, chairman, president, and CEO of Independence Community Bank Corp. in Brooklyn, N.Y. The company has more than doubled its assets, to $6.2 billion, since going public in March 1998.

Recruiting investors for a mutual holding company also can be an uphill fight. Potential shareholders are not to keen on investing in a company where they, by design, have little say in how it is managed.

"I'd have no interest in investing in a mutual holding company," said Eric Hovde, president of Hovde Financial LLC, a Washington investment banking firm that operates a large hedge fund. "At the end of the day, the controlling ownership of a mutual holding company is in their hands."

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