[Federal Register Volume 59, Number 84 (Tuesday, May 3, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-9980]
[[Page Unknown]]
[Federal Register: May 3, 1994]
VOL. 59, NO. 84
Tuesday, May 3, 1994
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
12 CFR Parts 563b and 575
[No. 94-49]
RIN 1550-AA74
Conversions From Mutual to Stock Form; Mutual Savings and Loan
Holding Companies
AGENCY: Office of Thrift Supervision.
ACTION: Proposed rule.
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SUMMARY: The Office of Thrift Supervision (OTS) proposes to amend its
regulations governing mutual to stock conversions and stock issuances
by savings association subsidiaries of mutual holding companies (MHC
stock offerings). The proposed amendment requires the OTS, in
connection with its review of conversion applications and MHC stock
offering applications, to consider the extent to which the transaction
will affect the convenience and needs of the communities to be served
by the applicant. Under the proposal, in determining whether to approve
these types of applications, the OTS will consider the applicant's
record of compliance with the Community Reinvestment Act (CRA) and
other factors relating to the convenience and needs of the communities
served by the applicant.
DATES: Comments must be received on or before July 17, 1994.
ADDRESSES: Interested parties are invited to submit written comments on
this proposal to: Director, Information Services Division, Public
Affairs, Office of Thrift Supervision, 1700 G Street, NW., Washington,
DC 20552, Attention: Docket No. 94-49. These submissions may be hand-
delivered to 1700 G Street, NW., from 9 a.m. to 5 p.m. on business
days, or may be sent by facsimile transmission to FAX number (202) 906-
7755. Comments will be available for inspection at 1700 G Street, NW.,
from 1 p.m. until 4 p.m. on business days. Visitors will be escorted to
and from the Public Reference Room at established intervals.
FOR FURTHER INFORMATION CONTACT: Michael P. Vallely, Senior Attorney
(202) 906-6241, Kevin A. Corcoran, Assistant Chief Counsel, (202) 906-
6962, Corporate and Securities Division, Chief Counsel's Office; Diana
L. Garmus, Deputy Assistant Director, (202) 906-5683, Corporate
Activities Division, Office of Thrift Supervision, 1700 G Street, NW.,
Washington, DC 20552.
SUPPLEMENTARY INFORMATION:
Background
The OTS recently has undertaken a comprehensive review of its
conversion regulations. By Order No. 94-48, dated April 7, 1994, the
OTS adopted significant amendments to its mutual to stock conversion
regulations, 12 CFR part 563b, and mutual holding company regulations,
12 CFR part 575, to revise, update and clarify the regulations in a
number of areas. In connection with its review of the conversion
regulations, one of the issues the OTS considered was whether the
convenience and needs of the local communities should be a factor in
determining whether to approve these conversions.
The reasons for mutual associations' conversion to stock form have
changed over the years. During the 1980s, most mutual savings
associations were marginally capitalized and many were insolvent.
During this period, conversion transactions were a primary method for
undercapitalized savings associations to raise capital and avoid being
closed by the regulators. The conversion enabled an association to stay
in business and continue to serve the community's credit needs.
Now, however, most mutual associations are healthy. While a
relatively small number of capital deficient mutual associations
undertake conversions primarily to recapitalize, most healthy mutual
thrifts now convert for other reasons. These reasons include financing
the expansion of their operations and taking advantage of the benefits
available to a public company, such as the ability to establish stock
benefit plans for management and employees.
The OTS is aware that account holders and consumer groups recently
have voiced significant concerns regarding the conversion of well-
capitalized associations, particularly in light of the compensation and
stock benefits that management typically receives in such transactions.
Such groups also have expressed concerns regarding the proper
deployment of conversion proceeds, i.e., the extent to which the
capital raised in such transactions should be used to support credit
and loan programs and related services tailored to the community's
credit needs. In addition, management of many well-capitalized
converting associations recently have expressed concern to the OTS that
their institutions do not need--or are unable efficiently to deploy--
substantial amounts of the capital required to be raised under current
regulations.\1\ Managers of such associations also have voiced concern
about the negative impact of what they view as ``excess capital'' on
the price/earnings ratio of the converted association's stock.
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\1\The conversion regulations require that stock be sold in the
amount of the converting association's pro forma market value. See
12 CFR 563b.7(f).
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The OTS is responding to these concerns by issuing an interim final
regulation that, among other things, restricts management benefit plans
and requires converting institutions to file with the OTS a business
plan that adequately addresses the deployment of conversion
proceeds.\2\ The interim rule, which appears elsewhere in this issue of
the Federal Register, solicits public comment on the conversion
regulations, both as to the amendments adopted there and the issues on
which comment is specifically sought, and as to any other current
provisions of the conversion regulations as they relate to the interim
rule.
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\2\See OTS Order No. 94-48.
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As noted in the interim final rule, a convenience and needs
standard has not, to date, been applied to mutual stock conversions of
savings associations. Similarly, a convenience and needs standard
generally has not been applied to MHC stock offerings.\3\ Upon review
of this area, however, the OTS is proposing to apply a convenience and
needs standard to these transactions for the reasons discussed below.
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\3\A convenience and needs standard is already being applied to
mutual holding company reorganizations because these transactions
require the OTS's approval under the Bank Merger Act (BMA). See 58
FR 44105 (August 19, 1993) (adopting part 575 governing mutual
holding company reorganizations and related stock issuances). The
BMA requires that the responsible agency consider the convenience
and needs of the community to be served in acting on any BMA
application. See 12 U.S.C. 1828(c)(5). Because mutual holding
company reorganizations and stock issuances to date generally have
been effected simultaneously as a two part transaction, the OTS has,
as a practical matter, reviewed the entire transaction under a
convenience and needs standard.
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First, the OTS has broad authority under sections 5(i)(1) and
5(i)(2) of the Home Owners' Loan Act (HOLA) to regulate mutual to stock
conversions by savings associations, and under section 10(o)(7) of the
HOLA to regulate mutual holding companies.\4\ These authorities give
the agency considerable discretion in reviewing a conversion
application or MHC stock offering application. For example, the OTS has
exercised this authority to determine whether a transaction is in the
best interests of depositors, the association and the Savings
Association Insurance Fund.\5\ The OTS believes that inherent in this
broad grant of authority is the ability to assess the impact of a
proposed transaction on the convenience and needs of the communities to
be served by a savings association.
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\4\See 12 U.S.C. 1464(i)(1), 1464(i)(2) and 1467a(o)(7). See
also Charter Federal S. & L. Ass'n. v. Office of Thrift Supervision,
912 F.2d 1569 (11th Cir. 1990).
\5\See Charter Federal; York v. Fed. Home Loan Bank Bd., 624
F.2d 495 (4th Cir. 1980), cert. denied, 449 U.S. 1043 (1980).
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Second, section 4(a)(3) of the HOLA supports the adoption of the
proposed regulations addressing housing credit needs.\6\ Section
4(a)(3) of the HOLA provides that the Director ``shall exercise all
powers granted to the Director under this chapter so as to encourage
savings associations to provide credit for housing safely and
soundly.'' The powers granted to the Director include the general
regulatory authority under sections 5(i)(1), 5(i)(2), and 10(o)(7) of
the HOLA mentioned above. Because savings associations are
predominantly housing lenders, the admonition in section 4(a)(3) of the
HOLA that the Director use his or her statutory powers to encourage
savings associations to provide credit for housing provides a
substantial additional basis for the Director to assess community needs
when reviewing applications.
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\6\12 U.S.C. 1463(a)(3).
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Third, the OTS believes it is appropriate to apply a convenience
and needs standard to conversion transactions and MHC stock offerings
as a part of the OTS's responsibility to consider the ongoing CRA
performance of savings associations. The CRA expresses Congress's
judgment that regulated financial institutions must demonstrate that
their deposit facilities serve the convenience and needs of the
communities in which they are chartered to do business and that
regulated financial institutions have continuing and affirmative
obligations to help meet the credit needs of those local
communities.\7\
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\7\12 U.S.C. 2901.
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In this regard, the federal banking agencies recently conducted a
comprehensive review of their CRA regulations in order to provide
clearer guidance to financial institutions on the nature and extent of
their CRA obligations, the methods by which their performance will be
assessed, and the manner in which the CRA will be enforced. This review
was undertaken in response to the President's July 1993 request that
the federal financial institution supervisory agencies reform the CRA
examination and enforcement system. The President asked, among other
things, that in undertaking this effort, the regulators seek to promote
consistency and even-handedness, to improve CRA performance evaluations
and to institute more effective sanctions against institutions with
consistently poor CRA performance.\8\ The addition of a convenience and
needs factor to the mutual to stock conversion standards and the
standards for MHC stock offerings is wholly consistent with the larger
Presidential and regulatory initiatives on the CRA.\9\ The OTS's
assessment of the CRA performance record of each association that is
subject to the regulations promulgated under sections 5(i) and 10(o) of
the HOLA furthers its responsibility under section 4(a)(3) of the HOLA
to encourage thrifts to provide housing credit safely and soundly.\10\
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\8\To implement the President's initiative, the four agencies
held a series of seven public hearings across the country, and
amendments to the agencies' CRA regulations were proposed on
December 21, 1993. See 58 FR 67466 (December 21, 1993).
\9\In connection with its review of the CRA and its implementing
regulations, the OTS also concluded that the CRA, by its terms,
requires the OTS to consider the CRA record of an association
proposing to convert from mutual to federal stock form because the
association must receive a new federal stock charter to replace its
previous mutual charter. See 12 U.S.C. 2902(3)(A) and 2903 and 12
CFR 563e.8(a) (1993).
\10\See also section 5(a) of the HOLA, 12 U.S.C. 1464(a).
Section 5(a) of the HOLA provides that the lending and other powers
conferred on federal savings associations under section 5 are
intended to encourage provision of credit for housing safely and
soundly.
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The proposed convenience and needs standard, like the convenience
and needs standards governing transactions subject to the Bank Merger
Act,\11\ certain holding company applications,\12\ and certain non-
routine corporate transactions under current OTS regulations,\13\ is
intended to encourage savings associations to devote their resources to
lending programs and related customer services that are designed to
address the credit needs of their local communities, including low- and
moderate-income communities, consistent with safety and soundness. Such
programs and services are an integral part of a mutual association's
traditional role of providing ``credit for housing,'' as envisioned by
section 4(a)(3) of the HOLA. Thus, the OTS believes the proposed
regulations will enhance the OTS's ability to ensure that savings
associations undertaking these transactions recognize their
responsibility to consider their community's credit needs.
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\11\See 12 U.S.C. 1828(c).
\12\See 12 U.S.C. 1467a(e)(2).
\13\See 12 CFR 563.22(c) and 571.5(b)(4) (1993).
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Proposed Amendments
The proposal would add a new Sec. 563b.11 to the OTS conversion
regulations that would require the OTS, in reviewing a conversion
application, to examine the extent to which the proposed conversion
will affect the convenience and needs of the communities to be served
by the converted savings association.
As part of this examination, the OTS will review the applicant's
record under the CRA regulations at 12 CFR part 563e and related CRA
policies. Under the proposal, the OTS would give substantial weight to
an applicant's previous CRA record, consistent with the long-standing
policy of the OTS.\14\ For example, if an applicant in its most recent
CRA examination received a rating of ``substantial noncompliance,''\15\
the OTS likely would not approve the application.
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\14\See 54 FR 13742 (April 5, 1989) (joint CRA policy statement
of the federal financial supervisory agencies).
\15\See 55 FR 18163 (May 1, 1990) (adopting revised CRA
guidelines and assessment rating system).
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Under the proposal, the OTS also would scrutinize the business
plans of the applicant. Applicants must demonstrate that their plans
for deployment of proceeds will help meet the credit and lending needs
of the communities served by the applicant. Under the proposed
convenience and needs standard, where an applicant's business plan does
not adequately address this issue, the OTS may deny the application or
impose additional conditions of approval. While commitments in an
applicant's business plan to allocate resources to community
development projects or credit-related programs generally indicate
responsiveness to the convenience and needs of the community, the OTS
will not necessarily view such commitments as remedying CRA-related
deficiencies. Performance under those commitments, however, would be
considered in evaluating the association's CRA record. The OTS also
will consider other relevant factors relating to the association's
performance in meeting the convenience and needs of the community.
The proposal also would add a new Sec. 575.7(a)(7) to the OTS's
mutual holding company regulations, and renumber current
Sec. 575.7(a)(7) as 575.7(a)(8). The proposed new section would set
forth an additional approval requirement for stock issuances by a
savings association subsidiary of a mutual holding company, requiring
that the transaction meet the convenience and needs standard of
proposed Sec. 563b.11.
Solicitation of Comments
The OTS solicits comment on all aspects of the proposed
regulations. The OTS particularly invites comments on whether the
proceeds from conversions or MHC stock offerings should be directed to
specific types of activities and, if so, what portion should be used
for what types of activities.
Regulatory Flexibility Act
Pursuant to section 605(b) of the Regulatory Flexibility Act, it is
certified that this proposal will not have a significant economic
impact on a substantial number of small entities. Accordingly, a
Regulatory Flexibility Analysis is not required.
Executive Order 12866
The OTS has determined that this rule does not constitute a
``significant regulatory action'' for purposes of Executive Order
12866.
List of Subjects
12 CFR Part 563b
Reporting and recordkeeping requirements, Savings associations,
Securities.
12 CFR Part 575
Capital, Holding companies, Reporting and recordkeeping
requirements, Savings associations, Securities.
Accordingly, the Director of the OTS hereby proposes to amend parts
563b and 575, chapter V, title 12, Code of Federal Regulations, as set
forth below:
SUBCHAPTER D--REGULATIONS APPLICABLE TO ALL SAVINGS ASSOCIATIONS
PART 563b--CONVERSIONS FROM MUTUAL TO STOCK FORM
1. The authority citation for part 563b is revised to read as
follows:
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 2901; 15
U.S.C. 78c, 78l, 78m, 78n, 78w.
2. Section 563b.11 is added to subpart A to read as follows:
Sec. 563b.11 Convenience and needs considerations.
In reviewing an application under this subpart, the Office will
examine the extent to which the conversion will affect the convenience
and needs of the communities to be served by the converted savings
association. The Office will review the applicant's record under part
563e of this subchapter. In addition, the Office will scrutinize the
business plan of the applicant. Each applicant must demonstrate that
the proposed deployment of proceeds contained in its business plan will
help meet the credit and lending needs of the communities served by the
applicant. Also, the Office will consider other relevant factors
relating to the association's performance in meeting the convenience
and needs of the community. Based on an assessment of the applicant's
record under part 563e of this subchapter, the applicant's business
plan and other relevant factors, the Office may approve the
application, deny the application, or approve the application on the
condition that the applicant improve certain aspects of its CRA
performance record or address particular credit or lending needs of the
communities that it serves.
PART 575--MUTUAL SAVINGS AND LOAN HOLDING COMPANIES
3. The authority citation for part 575 is revised to read as
follows:
Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1828, 2901.
4. Section 575.7 is amended by redesignating paragraph (a)(7) as
paragraph (a)(8), and by adding a new paragraph (a)(7) to read as
follows:
Sec. 575.7 Issuances of stock by savings association subsidiaries of
mutual holding companies.
(a) Approval requirements. * * *
* * * * *
(7) The proposed stock issuance would fail to meet the convenience
and needs standard of Sec. 563b.11 of this subchapter.
* * * * *
Dated: April 8, 1994.
By the Office of Thrift Supervision.
Jonathan L. Fiechter,
Acting Director.
[FR Doc. 94-9980 Filed 5-2-94; 8:45 am]
BILLING CODE 6720-01-P