[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. ----------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \2\See OTS Order No. 94-48. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \6\12 U.S.C. 1463(a)(3). --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \7\12 U.S.C. 2901. --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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). --------------------------------------------------------------------------- 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