[Federal Register Volume 59, Number 21 (Tuesday, February 1, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-2235]


[[Page Unknown]]

[Federal Register: February 1, 1994]


=======================================================================
-----------------------------------------------------------------------

FEDERAL DEPOSIT INSURANCE CORPORATION

 

Proposed Statement of Policy on Mutual to Stock Conversions

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Notice of Proposed Policy Statement.

-----------------------------------------------------------------------

SUMMARY: The FDIC solicits comments on a proposed policy statement 
setting forth guidance with respect to the conversion from mutual to 
stock ownership of State chartered savings banks and the FDIC's 
supervisory concerns on the matter.

DATES: Comments must be received by March 18, 1994.

ADDRESSES: Send comments to the Executive Secretary, FDIC, 550 17th 
Street, NW., Washington, DC 20429. Comments may be hand delivered to 
room F-400, 1776 F Street NW., Washington, DC on business days between 
8:30 a.m. and 5 p.m. [Fax number (202) 898-3838]. Comments will be 
available for inspection and photocopying in room 7118, 550 17th 
Street, NW., Washington, DC between 9 a.m. and 4:30 p.m. on business 
days.

FOR FURTHER INFORMATION CONTACT: Robert F. Miailovich, Associate 
Director (202-898-6918), Garfield Gimber III, Examination Specialist 
(202-898-6913), Division of Supervision, or Walter P. Doyle, Counsel 
(202-898-3682), Legal Division, FDIC, 550 17th Street, NW., Washington, 
DC 20429.

SUPPLEMENTARY INFORMATION:

I. Request for Public Comment

    The FDIC is considering adoption of a policy statement on 
conversion from mutual to stock form of ownership. Comment is requested 
on all aspects of the subject and, in particular, the proposed policy 
statement.
    All state authorities provide some degree of oversight over mutual 
to stock conversion transactions involving institutions under their 
jurisdiction, and a number of statutes exist that deal with securities 
disclosure and changes of management and/or control and acquisitions. 
With respect to state oversight, comment is requested on whether or not 
such oversight is sufficiently uniform and adequate across states to 
protect the interests of the public, or whether federal oversight is 
necessary.
    In light of existing federal and state securities laws and state 
conversion laws, comment is requested on what abusive practices are 
prevalent or likely and whether and why the FDIC should take action. If 
so, should the focus of FDIC attention be on the long-standing 
accountholders/members or are other interests, such as those of 
borrowers, trustees, management and employees, also important?
    Comment is requested on whether the following proposed policy 
statement contains enough specificity to be effective in providing 
worthwhile guidance and preventing potentially objectionable practices. 
If the proposed or even a strengthened policy statement providing 
guidance to the industry is not considered adequate, should mutual to 
stock conversions be governed by an enforceable regulation? If so, 
should such a regulation closely follow the existing regulation of the 
Office of Thrift Supervision on this subject, with specific percentage 
limitations, such as on insider investments, or should a regulation 
more closely resemble a guidance format as embodied in the proposed 
policy statement? Should the FDIC seek or support congressional action 
in this matter?

II. Background

    In recent years a number of state chartered mutual savings banks 
have converted to stockholder owned state savings banks. Many of these 
institutions first converted from federally chartered mutual savings 
associations to state chartered savings banks. In some cases, the 
conversion results in an acquisition by or merger into another 
institution, with accountholders/members obtaining stock in the 
acquiring institution and not the converting savings bank.
    One consequence of these conversions to state charter is that the 
FDIC may replace the Office of Thrift Supervision as the primary 
federal regulator. The mutual to stock conversion process is then 
subject to the rules and protections of state law. The Office of Thrift 
Supervision regulations governing conversions from mutual to stock form 
were enacted in 1974 in reaction to instances of abusive conversion 
transactions wherein insiders and their interests captured a large 
share of the converting institution's capital stock for considerably 
less than fair market value. The Office of Thrift Supervision 
regulation was structured to protect the interest of the converting 
mutual's accountholders/members in the current equity and perceived 
future value of the institution against abusive insiders and 
opportunistic depositors.

III. Reasons for FDIC Policy

    Conversion rules under state law are not identical to and may be 
less stringent than Office of Thrift Supervision regulations. Absent 
effective state laws or some federal oversight over state mutual 
savings banks converting to capital stock form, the opportunity for 
inconsistency and abuse is ever present.
    The areas of particular concern for potential abuse in conversion 
include: (1) Pricing the shares, (2) Apportioning the stock 
subscription rights, and (3) Disclosure of information needed to make 
an informed investment decision.
    Offering the shares at too low of a price may unjustly enrich the 
recipients, increase the temptation by insiders to acquire more shares 
than they are fairly entitled to, and deny the institution all of the 
additional capital it should receive to protect depositors and the 
insurance fund. Setting the share price too high may result in poor 
investment decisions by accountholders/ members that may lack 
investment expertise.
    In some conversion transactions insiders may appear to have 
received preferential treatment over the interests of accountholders/
members who have supported the mutual savings bank. Management and 
directors, it can be argued, should not be preempted from receiving a 
fair portion of the stock rights since they have contributed to the 
value of the institution and should properly be induced to remain with 
the institution. However, management and directors also will continue 
to receive salaries and fees for their services to the institution.
    In addition, mutual savings banks that convert to stock form 
undertake a major restructuring that possibly can lead to significant 
changes in the nature or volume of business conducted. In the past, 
some institutions, in leveraging capital raised through a conversion 
and reaching for a return on equity, have vigorously competed for loans 
and liberalized underwriting standards which led to loan losses that in 
many instances depleted more capital than was raised through 
conversion. Because of this potential, the FDIC feels the need to know 
at an early date the institution's business plan for post-conversion 
operation, growth and investment of any newly injected capital.

IV. Statement of Policy

Proposed Statement of Policy on Mutual To Stock Conversions By State 
Chartered Banks

    State chartered mutual savings banks converting to capital stock 
ownership should afford adequate protection to the interests of long-
standing accountholders/members in the current equity and perceived 
future value of the institution against insiders and opportunistic 
depositors. Such protection should include: (1) Correctly pricing the 
shares, (2) Equitably apportioning the stock subscription rights, and 
(3) Adequately and timely disclosing all relevant and pertinent 
information needed to make an informed investment decision.
    A thorough independent appraisal by a qualified appraiser is 
appropriate in order to establish and justify a fair offering price for 
the shares of stock in the converted institution. The appraisal should 
include consideration of earnings projections, future prospects for a 
rate of return including any new capital, other recent stock offerings 
and conversion transactions, and the historic and current relationship 
of market price to book value and price/earnings ratio for nearby and 
similar sized institutions.
    Accountholders/members who have supported the mutual savings bank 
over some reasonable period should be given considerable deference in 
the apportionment of stock subscription rights. Management and 
directors who are accountholders/members are entitled to the same 
rights as non-insider accountholders/members. Any additional deference 
accorded to insiders, including employment contracts and other benefits 
in an acquisition or merger into another institution, should be only as 
part of an adequate compensation program and thus be limited, justified 
and documented. Apportioning that leads to individual windfall gains 
should be avoided. Directors are reminded of their duty of loyalty to 
the converting institution.
    The holders of stock subscription rights should be adequately and 
timely notified of their rights to buy. Offering the shares through a 
firm that is independent of the converting institution's insiders and 
their interests is one way to help insure that this takes place. Full 
disclosure of all relevant information should be made. Accountholders/
members should be able to easily use funds on deposit to fund their 
purchases. In addition, accountholders/members should be fully informed 
of the risk inherent in purchasing stock. If stock sales are conducted 
on the institution's premises, care should be exercised to make sure 
accountholders/members clearly understand that stock purchases are not 
deposits and are not insured by FDIC.
    State chartered mutual savings banks that contemplate converting to 
stock form are requested to notify the FDIC region in which the head 
office is located at an early date and submit for comment all the 
relevant terms and conditions, financial information and documents 
inherent in the conversion, including a business plan for post-
conversion operation, growth and investment of any newly injected 
capital. The FDIC will work closely with the state authority in 
preparing any comments.
    The FDIC review of transactions on a case-by-case basis will 
include consideration of whether the directors and management of the 
institution have fairly and effectively discharged their fiduciary 
duties of due care and loyalty to the institution and its 
accountholders/members.
    Should the FDIC determine that the proposed conversion may raise 
safety and soundness concerns, or otherwise subject the bank to 
substantial legal liability, it may request additional information from 
the bank and/or may seek appropriate modifications in the terms and 
conditions of the proposal to alleviate those concerns. In situations 
where abusive insider self-dealing, fraud or other violations are 
suspected, stronger enforcement measures may be considered.
    Depending on the terms and outcome of the transaction, the 
conversion may require formal federal approval under the Bank Holding 
Company Act or the Bank Merger Act, or appropriate notice under the 
Change in Bank Control Act.
    Conversions to stock form, involving undercapitalized institutions, 
at the direction or control of a regulatory authority are sometimes 
called ``supervisory conversions''. This FDIC statement applies equally 
to such conversions.

    By order of the Board of Directors. Dated at Washington, DC this 
day of January, 1994.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Acting Executive Secretary.
[FR Doc. 94-2235 Filed 1-31-94; 8:45 am]
BILLING CODE 6714-01-P