Thrifts considering a conversion from mutual to stock ownership may have a harder time giving local depositors first crack at the new shares.

The Office of Thrift Supervision ruled Dec. 17 that First Federal Savings Bank of America's local-depositor preference plan penalized customers who lived outside of the community.

The decision overturned an earlier order approving the thrift's decision to give local depositors first chance to buy First Federal's stock. It came in response to a lawsuit by the Thrift Depositors of America, a trade group that represents investors in mutual thrifts.

The group charged that directors at the Fall River, Mass., thrift have a self-interest in the local-depositor preference plan because they would get a chance to buy stock.

The provision "would have penalized those First Federal depositors who happened to live outside an arbitrarily defined region selected by First Federal's directors," said Murray A. Indick, a partner with Dechert, Price & Rhoads who represents the group.

In its Dec. 17 order, the OTS said it would need to further study the "reasonableness" of the local-depositor preference provisions. It said the thrift could file another application with more information about the plan. However, the thrift is not expected to refile, sources said.

Mr. Indick's group filed a similar suit in February after OTS approved a local-depositor protection plan for Pittsburgh-based Great American Federal Savings and Loan Association.

The lawsuit, the first legal challenge to local-depositor preference, was dismissed because stock orders from the plaintiffs were completely filled in the offering.

The OTS gave federal thrifts the option to adopt a local-depositor protection provision in mutual-to-stock conversions in 1994.

The rule was designed to address the activities of so-called professional depositors, who put money in mutual thrifts across the country in hopes of getting first dibs on stock when the institutions convert. They typically sell the stock shortly afterward, turning a quick profit.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.