[Federal Register Volume 59, Number 229 (Wednesday, November 30, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-29240]
[[Page Unknown]]
[Federal Register: November 30, 1994]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Parts 303 and 333
RIN 3064-AB34
Mutual-to-Stock Conversions of State Nonmember Savings Banks
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Final rule and confirmation of interim rule.
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SUMMARY: The final rule requires FDIC-insured mutual state-chartered
savings banks that are not members of the Federal Reserve System (State
Savings Banks) that propose to convert to stock ownership to file with
the FDIC a notice of intent to convert to stock form and to comply with
new substantive provisions of the FDIC's regulations when proposing to
convert to the stock form of ownership. The intended effect of the
final rule is to assure that mutual-to-stock conversions of FDIC-
regulated institutions do not raise safety-and-soundness concerns,
breaches of fiduciary duty or other violations of law. The final rule
confirms, with modifications, an interim rule that has been in effect
since February 15, 1994.
EFFECTIVE DATE: January 1, 1995.
FOR FURTHER INFORMATION CONTACT: Robert F. Miailovich, Associate
Director, Division of Supervision (202/898-6918), Joseph A. DiNuzzo,
Counsel, Legal Division (202/898-7349) or Garfield Gimber III,
Examination Specialist, Planning and Program Development Section,
Division of Supervision (202/898-6913), Federal Deposit Insurance
Corporation, Washington, D.C. 20429.
SUPPLEMENTARY INFORMATION:
I. Paperwork Reduction Act
The collection of information contained in the final rule has been
reviewed and approved by the Office of Management and Budget (OMB)
under control number 3064-0117 pursuant to the Paperwork Reduction Act
of 1980 (44 U.S.C. 3501 et seq.). The collection of information in this
final rule is found in Secs. 303.15 and 333.4(d) and takes the form of
materials related to a State Savings Bank's proposed conversion from
the mutual to stock form of ownership. The information will be used to
enable the FDIC to identify and address issues involved in the proposed
conversion relating to the safety and soundness of the bank, any
abusive management practices and potential violations of applicable
law.
The estimated annual reporting burden for the collection of
information requirement in this final rule is summarized as follows:
Number of Respondents: 50
Number of Responses per Respondent: 1
Total Annual Responses: 50
Hours per Response: 20
Total Annual Burden Hours: 1,000
II. Regulatory Flexibility Act
The Board hereby certifies that the final rule will not have a
significant economic impact on a substantial number of small entities
within the meaning of the Regulatory Flexibility Act (5 U.S.C. 601 et
seq.). Therefore, the provisions of that Act regarding an initial and
final regulatory flexibility analysis (Id. at 603 & 604) do not apply
here.
III. The Proposed Rule and Other Recent FDIC Regulatory Initiatives on
Mutual-to-Stock Conversions
1. The Proposed Rule
In June 1994 the FDIC issued a proposed rule to add specific
substantive requirements to its mutual-to-stock conversion regulations
(Proposed Rule) (59 FR 30316 (June 13, l994)). The requirements were
similar to the interim final regulations issued by the Office of Thrift
Supervision (OTS) the prior month (59 FR 22725 (May 3, l994)) (OTS
Interim Final Rule). The OTS, with whom the FDIC has coordinated on the
substantive provisions of the final rule, has informed the FDIC that it
intends to finalize the OTS Interim Final Rule (OTS Final Rule) at or
about the same time as the FDIC publishes this final rule. The OTS
Interim Final Rule and OTS Final Rule are referred to herein
collectively as the ``OTS Revisions''.
The Proposed Rule would have: Required the submission of a full
appraisal report, including a complete and detailed description of the
elements that make up an appraisal report, justification for the
methodology employed and sufficient support for the conclusions reached
therein; required a depositor vote on all mutual-to-stock conversions
of State Savings Banks and prohibited management's use of previously
executed (or ``running'') proxies to satisfy depositor voting
requirements; for one year following the date of the conversion, among
other things, required that any management recognition plans (MRPs) or
stock option plans be implemented only after shareholder approval is
received, required that stock options (if any) be granted at no lower
than the market price at which the stock is trading at the time of
grant and prohibited MRPs funded by conversion proceeds; required that
the record date for determining depositors eligible to receive rights
to participate in the subscription offering of the conversion stock not
be less than one year prior to the date of adoption of the plan of
conversions by the converting bank's board of trustees; required that
the subscription offering provide a preference to eligible depositors
and others in the bank's ``local community'' (as defined in the
proposed rule) or within 100 miles of the bank's home office or
branch(es); required that employee stock ownership plans (ESOPs) not
have a priority over subscription rights of ``eligible depositors'' (as
defined in the proposed rule); required the submission of a business
plan, including, among other things, a detailed discussion of how
management intends to deploy the capital raised through the sale of
stock in the conversion; prohibited stock repurchases within one year
following the conversion.
2. The Proposed Policy Statement and Interim Final Rule
The FDIC had taken other regulatory actions in this area prior to
the issuance of the Proposed Rule. Because of concerns about prior and
potential abuses in the conversion process, in February l994, the FDIC
issued a proposed policy statement on the conversions of State Savings
Banks from mutual to stock ownership (Proposed Policy Statement). 59 FR
4712 (Feb. 1, l994). The general purpose of the Proposed Policy
Statement was to solicit public comment on the issues involved in
mutual-to-stock conversions and whether and how the FDIC should
regulate this activity.
Subsequent to the issuance of the Proposed Policy Statement the
Board of Directors of the FDIC (Board) determined that, during the
pendency of the Proposed Policy Statement, it was necessary for the
FDIC to review applications filed by State Savings Banks with their
respective state banking regulator and any other applicable state and
federal banking and/or securities regulators to determine whether the
proposed conversions contain any safety and soundness issues and/or
issues of insider abuse that reflect negatively on the integrity and
competence of the management of the converting institution. The Board's
concerns had been caused by several mutual-to-stock conversions of
State Savings Banks that gave rise to questions related to management
abuse and excessive enrichment of insiders, fairness to depositors and
general safety and soundness concerns. Those conversions had been the
subject of Congressional hearings and numerous news articles and
reports. The FDIC also had received direct complaints from depositors
of State Savings Banks about unfair treatment and insider abuse in
mutual-to-stock conversions.
Thus, on February 15, 1994, the FDIC issued an interim final rule
adding a new section to Part 303 of the FDIC's regulations prohibiting
State Savings Banks from converting to stock form without complying
with the requirements of the interim rule (Interim Rule). 59 FR 7194.
The Interim Rule, which remains in effect until the effective date of
the final rule, requires State Savings Banks that propose to convert to
stock ownership to file with the FDIC a notice of intent to convert to
stock form consisting of a description of the proposed conversion
accompanied by a copy of all documents and application materials filed
with the applicable state and federal regulators. Pursuant to the
Interim Rule, the FDIC currently reviews all conversion materials
regarding State Savings Banks with a special interest in: the use of
the proceeds from the sale of stock, as prescribed in the business
plan; the adequacy of the disclosure materials; the participation of
depositors in approving the transaction; the form of the proxy
statement required for the vote of the depositors/members on the
conversion; any increased compensation and other remuneration
(including stock grants, stock option rights and other similar
benefits) to be obtained by officers and trustees of the bank in
connection with the conversion; the adequacy and independence of the
appraisal of the value of the mutual savings bank for purposes of
determining the price of the shares of stock to be sold; the process by
which the bank's trustees approved the appraisal, the pricing of the
stock and the compensation arrangements for insiders; the nature and
apportionment of stock subscription rights; and the extent of any
existing and planned contributions to or investments in the community.
3. The Notice and Request for Comments
On the same date as the FDIC issued the Proposed Rule it also
issued a notice and request for comments (Notice) on the possible need
for fundamental changes to the mutual-to-stock conversion process. 59
FR 30357 (June 13, 1994). The comment period on the Notice ended on
August 12, 1994. The Notice indicated that--despite recently initiated
remedial actions taken, or proposed to be taken, by the FDIC, the OTS,
or state bank supervisory agencies--in the view of some, the current
design of the mutual-to-stock conversion process encouraged management
abuses and windfalls, flawed and sometimes disingenuous appraisal
methodology, and under-deployment of capital. The general purpose of
the Notice was to elicit an open and free discussion on a range of
issues involving mutual-to-stock conversions.
In particular, the Notice included a suggestion to provide
``rightholders'' of converting mutual institutions with certain stock
subscription rights (or ``value'') which would only be provided after a
legitimate decision to convert had been made by the trustees or
directors of a converting institution. The Notice acknowledged that
such a proposed approach likely would require specific legislative
authorization from the Congress and the FDIC was thus assessing whether
it would be in the public interest for it to pioneer such a proposed
approach by recommending legislative action.
In an effort to obtain information about whether the public
concurred in both the assessment of these fundamental problems and the
suggested solution, the Notice requested comments on 9 specific issues.
In response to the Notice, over 1,000 comments were submitted by mutual
institutions, financial industry groups, state banking or thrift
supervisory agencies, municipalities, state legislators, members of
Congress, industry attorneys and individuals. Commenters generally
opposed the ``creation'' of the suggested ``rightholders''' interests
as a matter of public policy. It was also argued that mutuality would
be threatened because depositors, armed with the prospect of new
rights, would pressure and force management of a mutual to convert to
stock form--a situation leading to the eventual extinction of
``mutuality'' for insured depository institutions. Several commenters
also specifically noted that complex tax and accounting issues would be
raised by the creation of such rights.
Only a relatively small percentage of the comments received,
however, focused on the 9 specific issues targeted for comment, though
an overwhelming majority of the comments remarked that recent
regulatory initiatives taken by the FDIC, OTS, and state bank
supervisory agencies were more than adequate to prospectively curb
potential management abuses and windfalls and appraisal deficiencies.
The comments received by the FDIC on the Notice were helpful and
informative. In all, the FDIC believes that the Notice was a useful
means for the FDIC to obtain views from industry members and others on
the issues surrounding mutual-to-stock conversions. The FDIC will
continue to monitor the conversion process and will continue to be
mindful of potential abuses; however, in light of comments received on
the Notice, the Board has decided not to further pursue the suggestions
in the Notice or any other avenues to address the issues discussed in
the Notice. The Board believes that:
(1) Any fundamental re-design of the conversion process should
involve the appropriate legislative bodies, Congress or State
legislatures; and
(2) The industry and associated interests should offer their own
solutions to any flaws in the current conversion process.
IV. Summary of Comments and Discussion of Issues
The FDIC requested public comment on each of the specific
requirements in the Proposed Rule and on other issues individually
identified in the Proposed Rule. In the Proposed Policy Statement and
the Interim Rule the FDIC requested comment on more general issues,
including: What abuses are prevalent in mutual-to-stock conversions and
why the FDIC should take action against such abuses; whether federal
oversight in conversions of State Savings Banks is necessary; whether
the FDIC should issue a regulation closely following the OTS conversion
regulations or the FDIC should take a less formal approach; whether the
FDIC should seek Congressional action in this area; and the mechanics
and substantive provisions of the Interim Rule.
The FDIC received 65 comments on the Proposed Rule: 29 from banks,
savings banks, cooperative banks and savings associations; 11 from
consultants, law firms and conversion agents; 9 from banking and thrift
industry trade groups; 7 from state banking and thrift regulators; 6
from consumer groups and individuals; 2 from United States Senators;
and 1 from a delegation of 10 United States Congressmen. In addition,
the FDIC had received 85 written comments on the Proposed Policy
Statement and Interim Final Rule: 60 from banks, savings banks,
cooperative bank and saving associations; 7 from bank and thrift
industry trade groups; 6 from state banking and thrift regulators; 5
from individuals; 5 from law firms; 1 from a bank holding company; and
1 from a regulatory ``shadow'' group.
The following is a combined summary of the comments received on the
Proposed Rule, Interim Final Rule and Proposed Policy Statement1
and a discussion of the related issues.
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\1\ This discussion does not include comments received on the
Notice (and the theories discussed therein).
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1. The FDIC's Oversight Role
In general, the comments acknowledged that there had been notable
examples of insider abuse in mutual-to-stock conversions of State
Savings Banks in the recent past and suggested how future potential
abuses could be avoided. Many of those who commented recommended that
the FDIC continue to play an oversight role in the mutual-to-stock
conversions of State Savings Banks, noting that federal oversight will
continue to safeguard the integrity of the process. One noted that
``present abuses in several recent and proposed conversions have
demonstrated the need for the FDIC to maintain oversight of the
conversion process, to ensure that issues of both safety and soundness
and of fiduciary care are identified and adequately addressed''. A
trade group commented that ``with recent publicity over some apparent
abuses in the [conversion] process and resulting Congressional
concerns, * * * it is most appropriate and important for the FDIC to
assert regulatory jurisdiction over conversions by state nonmember
banks''. One state regulator noted that the Interim Final Rule was an
``excellent set of rules'' with a ``very conservative, realistic
approach to a situation which could have gotten out of hand if left to
go unchecked''. One savings bank said simply that ``past abuses [in
mutual-to-stock conversions] support the need for FDIC oversight''.
Several commenters suggested that the FDIC have oversight authority
of State Savings Bank mutual-to-stock conversions, but with prescribed
limitations. For example, a trade group noted that it ``deplores
instances in which it can be demonstrated that insiders involved in
mutual-to-stock conversions received benefits so large that they bear
no reasonable relationship to the institution's performance * * *.
Unjustifiable windfall profits, depletion of capital without concern
for safety and soundness and manipulation of the value of the
institution to benefit limited interests are practices that deserve
close scrutiny and action by the appropriate authorities * * *. In
responding to these issues, the FDIC should act quickly and decisively
in concert with the state authorities''. The trade group further
commented that the ``cornerstone'' for the FDIC's response to issues
arising from the mutual-to-stock conversion issue is the state
regulatory authorities. One state thrift regulator expressed support
for FDIC oversight of conversions if such involvement assures
``reasonableness and relative uniformity of benefits for both state-
and OTS-regulated institutions * * * and allows state variation from
OTS requirements if such variations benefit the institution and the
depositors''.
One mutual savings bank noted that the FDIC should focus on broad
safety-and-soundness issues and that detailed regulations, like the
OTS's, are not necessary. Another state mutual savings bank said that
the FDIC should be involved in conversion oversight, but only in terms
of setting minimum standards rather than superseding state regulation.
Many savings banks in Massachusetts and a banking trade association in
that state commented that the FDIC should issue conversion regulations
similar to the OTS and Massachusetts mutual-to-stock conversion
regulations, noting that the FDIC has broad statutory authority to
regulate issues that affect safety and soundness. They commented that
the FDIC's focus should be to eliminate abuses in stock evaluation,
depositor disclosures, depositors' ability to purchase stock at
conversion and insider compensation programs. They also asserted that
state statutory and regulatory conversion rules should not be
superseded by federal law. Some who commented in this vein said that
exemptions from FDIC regulation should be granted on a state-wide (not
bank-by-bank) basis for conversions subject to regulation by states
that have adequate conversion laws and rules. One mutual savings bank
noted that promulgating federal laws or regulations ``should not be
allowed when it is determined that state requirements are generally
consistent or more stringent than existing federal rules''.
Some commenters contended that state regulation was sufficient in
the area of mutual-to-stock conversions and that the requirements in
the Interim Rule and Proposed Rule are not necessary. One mutual
savings bank asserted that the ``averments made by the FDIC in support
of the Interim Rule that it is needed for safety and soundness reasons
and to protect the interest of depositors are without merit and are
being offered only to support continued federal intrusion into issues
which are primarily the concern of state law and regulation.'' One
state mutual savings bank stated that the ``proposed policy statement
is overkill'' and that ``state regulation can handle insider abuse
issues.'' One state banking and thrift regulator asserted that state
regulators are not to blame for insider abuses in conversions and that
``states' rights should not be tramped on''. The regulator suggested
that a committee of state and federal regulators work together to
address issues and concerns.
All those who commented on the issue expressed objection to
Congressional legislation to address current issues in mutual-to-stock
conversions. One mutual savings bank commented that ``if the FDIC does
not act, Congress will--in an uninformed manner''. Another mutual
savings bank noted that ``regulation is far preferable than
legislation''. A national banking industry trade group noted that the
``FDIC has full statutory authority in the conversion area to ensure
the integrity of the conversion process and no new legislation is
necessary to address these issues''.
The Board has determined that each of the requirements in the final
rule is necessary to satisfy specific FDIC concerns about safety and
soundness, breaches of fiduciary duty and other violations of law in
connection with mutual-to-stock conversions. At the same time, the FDIC
believes that it is essential to consider the existence of state
regulation and supervision in determining the proper role in the
conversion process for the FDIC as the primary federal regulator of
State Savings Banks. As discussed above, many of the comments that the
FDIC received on the Proposed Policy Statement, the Interim Rule and
the Proposed Rule expressed agreement with the FDIC's federal oversight
role in mutual-to-stock conversions of State Savings Banks, but several
also suggested the FDIC have a limited role in conversions of State
Savings Banks and that deference be paid to states' rights on issues
outside the FDIC's areas of concern.
With the issuance of the final rule, the Board is attempting to
strike the proper balance in this regard. In particular, the final rule
includes a provision stating that, in the event that a State Savings
Bank proposing to convert determines that compliance with any provision
of the final rule would be inconsistent or in conflict with applicable
state law, the bank may file with the FDIC a written request for waiver
of compliance with the provision. The request must demonstrate that the
requested waiver would not be detrimental to the safety and soundness
of the bank, entail a breach of fiduciary duty by the bank's
management, or otherwise be detrimental or inequitable to the bank, its
depositors, any other insured depository institution(s), the federal
deposit insurance funds or the public interest. In this connection, the
Board does not believe that state-wide exemptions from the requirements
of the final rule are appropriate or practical. Establishing exemption
criteria and applying those criteria equitably and consistently would
prove very difficult, if not unrealistic. The Board prefers the case-
by-case approach contained in the final rule.
The OTS's concerns about avoiding insider abuses in mutual-to-stock
conversions of federal and state savings associations are the same as
the FDIC's concerns about insider abuses in conversions of State
Savings Banks. Thus, as noted above, to the extent necessary and
appropriate, the FDIC's final rule and the OTS Revisions include most
of the same requirements.
As indicated in the Proposed Rule, many of the requirements of the
final rule are prompted by the Board's concerns about bank management's
proper exercise of its fiduciary duties. As discussed in the preambles
to the Interim Rule and the Proposed Rule, the duties and obligations
of directors/trustees and officers of mutual savings banks are
identical to the responsibilities the FDIC has historically enunciated
and enforced concerning directors and officers of commercial
banks.2 The two principal duties of care and loyalty that
directors and officers of commercial banks must exercise on behalf of
the institution and its constituencies (i.e., depositors, creditors and
shareholders) also apply to directors/trustees of mutual savings banks.
Both duties have long antecedents in the common law of corporations and
financial institutions.3
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\2\See e.g., Statement Concerning the Responsibilities of Bank
Directors and Officers (FDIC Legal Division, December 3, 1992);
Pocket Guide for Directors (FDIC 1988).
\3\Greenfield Savings Bank v. Abercrombie, 211 Mass. 252, 97
N.E. 897, 39 L.R.A.n.s. 173 (1912) provides a detailed discussion of
liability of trustees of a savings bank.
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Directors/trustees (as well as officers) of mutual savings
institutions are held to the same standard of care and loyalty as
directors and officers of stock banks. Thus, the directors/trustees and
officers of mutual State Savings Banks must fulfill their duty of
loyalty to the institution by administering its affairs with the utmost
candor, personal honesty and integrity. They are prohibited from
advancing their own personal or business interests or those of others
at the expense of the bank. This general fiduciary duty has been
frequently interpreted to include an element of fairness and good faith
which, in the context of mutual-to-stock conversions, affords
protection to the various stakeholders (particularly depositors) of
mutual savings banks.
The FDIC, through the final rule, also requires the directors/
trustees and officers of mutual savings banks to adhere to the same
standards of loyalty and care that are required of directors and
officers of stock institutions in order to prevent insider abuse.
As indicated throughout, the requirements in the final rule are
rooted in concerns about safety and soundness, breaches of fiduciary
duty and/or other violations of law.
2. Appraisals
The Proposed Rule included a requirement that State Savings Banks
intending to convert to stock ownership submit to the FDIC, along with
the other required materials, a full appraisal report on the value of
the converting bank and the pricing of the conversion stock. As
discussed in the Proposed Rule, many states require that a converting
mutual savings bank sell its capital stock at a total price equal to
its estimated pro forma market value, based on an independent
valuation. Despite this requirement, many converted institutions have
exhibited significant increases in the immediate post-conversion
trading market price for the stock.
As explained in detail in the Proposed Rule, the FDIC is concerned
that the history of increases in market prices resulted from appraisal
reports (submitted in connection with these conversions) that
significantly undervalued the stock--the effect of which has several
ramifications. If an appraisal is too low and the shares of stock are
underpriced, the institution receives less of an increase in capital
than it should from the sale of conversion stock and the deposit
insurance fund is provided with less of a capital cushion than would
have resulted if the stock sales price was based on a proper and
adequate appraisal. Also, an underpriced appraisal enriches the
insiders who purchase or are granted a significant interest in the
converting institution by enticing them to undertake a conversion (in
order to acquire shares below their fair value) that may not be in the
best interest of the institution. Sophisticated investors also are able
to benefit, undeservedly, from the sale of underpriced conversion
stock.
As also noted in the Proposed Rule, appraisers historically have
set the pro forma market value of the converting institution at a
significant discount to a defined peer group. This gives rise to
problems involving selection of an inappropriate peer-group,
inconsistencies between the assumptions in the appraisal report and the
business plan and unfounded justification for substantial new-issue
discounts in stock offerings that have been well oversubscribed.
For these reasons, the FDIC proposed requiring that a full
appraisal be provided to the FDIC in a proposed mutual-to-stock
conversion of a State Savings Bank, and that the appraisal report be
prepared by an independent appraiser and include a complete and
detailed description of the elements that make up the report,
justification for the methodology employed and sufficient support for
the conclusions reached therein.
The FDIC received several comments on the proposed appraisal
requirements. Most who commented on this issue favored the required
submission of a full appraisal report. Some expressed concern, however,
that an over-emphasis on immediate post-conversion share price
increases might force appraisers to overvalue the stock of converting
institutions, resulting in a detriment to the institution and its
stockholders. They also suggested that there must be some expectation
of an early increase in stock price to entice investors to purchase
stock of a converting mutual. A few of those commenting said the FDIC
should publish the standards it will use in judging appraisals. One
suggested that the OTS and the FDIC should issue joint appraisal
standards.
A state savings association noted that one of the basic problems
with conversions is the appraisal of the institution. It stated that
``the FDIC needs to be satisfied that the various states are as well
equipped [as the OTS staff] to perform a definitive analysis of the
appraisals as well as know with certainty that the appraiser is
qualified to assess a financial institution's value''. The commenter
also noted that fairness and moderation are the keys to governing stock
conversions.
Based on the comments received and the FDIC's view that the proper
valuation of a converting mutual savings bank is a crucial factor in
assuring an equitable mutual-to-stock conversion, the Board has decided
to adopt the appraisal requirements in the Proposed Rule. Thus, the
FDIC will continue to review appraisal reports to ensure that
converting institutions are properly valued and will continue to object
to proposed conversions supported by unacceptable appraisal reports. In
reviewing appraisal reports, the FDIC also will continue to consider
the appraisal standards and guidelines, if any, of the applicable state
and/or the appraisal guidelines issued by the OTS. The FDIC believes
that it is unnecessary to develop and implement a separate set of
appraisal guidelines inasmuch as the various state and the OTS
guidelines are sufficient to provide the depository institutions' and
the appraisal industry with parameters necessary to prepare and furnish
an acceptable appraisal report. In addition, the FDIC is aware of the
Uniform Standards of Professional Appraisal Practice (USPAP),
especially Standards 9 and 10 which relate to business appraisals. The
Business Valuation Committee of the American Society of Appraisers
commented that the USPAP standards are an appropriate frame of
reference for mutual-to-stock-conversion appraisals especially when
such transactions directly impact safety and soundness or involve
issues of fundamental fairness to depositors and other stakeholders in
insured institutions. Adherence to those standards is expected in the
appraisal process.
One specific issue that the FDIC received comments on is whether
the appraiser employed to value a State Savings Bank also should be
permitted to serve as underwriter or selling agent in the bank's
mutual-to-stock conversion. The main concern is the possibility of a
conflict of interest if the appraiser, or its affiliate, also is
involved in the sale of conversion stock. In reviewing the comments the
Board has determined that the appraisal process and the independence of
the appraiser should not be tainted by an actual or even an appearance
of a conflict of interest. Thus, under its appraisal review the FDIC
will object to appraisals prepared by an appraiser, or its affiliate,
who also will serve as an underwriter or selling agent in the same
mutual-to-stock conversion. The FDIC will not raise this objection,
however, where procedures have been implemented and representations are
made to ensure that an appraisal subsidiary is truly separate from the
selling agent subsidiary and the selling agent does not make
recommendations on, or in any other way have an impact upon, the
appraisal.
3. Voting Requirement/Prohibition Against Running Proxies
The Proposed Rule included a requirement that depositors and other
stakeholders of a State Savings Bank vote in favor of a mutual-to-stock
conversion in order for the FDIC not to object to the proposed
conversion. It also proposed a prohibition on the use of running
proxies in mutual-to-stock conversions of State Savings banks.
As discussed in detail in the Proposed Rule, the Board believes
that, in order for a board of directors or trustees of a mutual savings
bank to properly exercise its fiduciary responsibilities to the bank
and its depositors, the board should obtain a vote of depositors in
favor of the proposed conversion before the proposed conversion is
completed. Most states, but not all, require a depositor vote for
mutual-to-stock conversions. The OTS also requires both federal and
state savings associations to obtain a majority vote of association
members as one of the pre-conditions to converting. Some states,
however, require only that the board of directors or trustees (or
similar group) approve the plan of conversion and do not require a vote
of members.
As also discussed in the Proposed Rule, in the same vein, the Board
also believes that a proxy specifically designed for the proposed
conversion should be used to obtain a depositor vote on the conversion.
In some states the management of converting banks and savings
associations, subject to certain conditions, may use so-called
``running proxies'' (proxies obtained when a depositor opened his or
her account with the institution) to vote in favor of the proposed
conversion. The former OTS mutual-to-stock conversion regulations also
permitted the use of running proxies, under certain circumstances.
Running proxies are prohibited by the OTS Revisions.
The FDIC received numerous comments on these related issues.
Several of the comments voiced opposition to ``voting rights'' for
depositors in states that do not provide such rights. One state bank
asserted that ``voting rights should be left to state law. To impose
some sort of depositor approval requirement in a state that does not
have depositor voting could lead to expanded ownership claims by
depositors that could operate to the detriment of mutuals''. One state
regulator asserted that ``any FDIC requirement of a depositor vote in a
mutual-to-stock conversion * * * [would be] wholly unsupported by any
expressly preemptive federal statute''. Many banks in Massachusetts
commented that any depositor voting right requirements imposed by the
FDIC would put undue pressure on mutuals in that state to convert to
stock ownership.
An individual noted that general proxies should be prohibited and
that all conversions should be subject to a special proxy, or proxies
should be entirely eliminated in favor of a majority-rules scheme.
Others commented that the proposed voting requirement and prohibition
against running proxies would increase the cost of mutual-to-stock
conversions.
In response to these comments, the Board continues to believe that
it is necessary and appropriate for the FDIC to require a depositor
vote on proposed conversions. Such a requirement will not necessarily
contradict state laws (that do not require a depositor vote), but will
supplement the state law by requiring the member vote. The FDIC's
concern is with the board of directors'/trustees' proper exercise of
its fiduciary duties of loyalty and care to the bank and its
depositors. The Board believes that the proper exercise of such duties
requires that depositors, as stakeholders of the bank, have the
opportunity to approve or disapprove the proposed conversion. This
requirement is, in part, rooted in the concern that bank insiders often
benefit personally from bank conversions. This almost inherent conflict
of interest (between self interest and the interests of the bank) may
be mitigated by the existence of a depositor vote on the proposed
conversion. The Board also believes that any additional expense caused
by the voting requirement and prohibition against running proxies is
outweighed by the need to ensure the proper participation of depositors
and other stakeholders in the proposed conversion. The final rule,
therefore, adopts the requirement in the Proposed Rule for a depositor
vote in favor of the proposed conversion of a State Savings Bank to
stock form.
The Board notes, however, that under the final rule the Board may
grant exceptions, for good cause shown, from the requirements of the
final rule. In response to comments on this issue, on a case-by-case
basis the Board will consider waiving the depositor voting requirement
if it is demonstrated, to the Board's satisfaction, that the
alternative voting mechanism established under the applicable state law
satisfies the concerns expressed above about the need for a vote on the
conversion by parties that are not insiders and do not have a potential
conflict of interest in reviewing the proposed conversion.
The Board also continues to believe that, given the material change
in structure represented by the bank's conversion to stock form, it is
imperative that any vote on the proposed conversion be made on the
basis of full and current information on the proposed transaction. For
that reason, the final rule prohibits the use of running proxies in
such transactions. This is in keeping with the FDIC's interest in
assuring full disclosure of all information on the proposed conversion
in order to assure that approval of the proposed conversion is fully
informed. Thus, the final rule adopts the prohibition in the Proposed
Rule on the use of running proxies in the mutual-to-stock conversion
process.
4. Restrictions on Management Stock Benefit and MRPs
The Proposed Rule included certain restrictions on insider benefits
in mutual-to-stock conversions of State Savings Banks. In particular,
no converted savings bank would be permitted, for one year from the
date of the conversion, to implement a stock option plan or management
or employee stock benefit plan, other than a tax-qualified employee
stock ownership plan, unless: Each of the plans is fully disclosed in
the proxy solicitation and conversion stock offering materials; all
such plans are approved by a majority of the bank's stockholders, or in
the case of a recently formed holding company, its stockholders, prior
to implementation and no sooner than the first annual meeting following
the conversion; in the case of a savings bank subsidiary of a mutual
holding company, all such plans are approved by a majority of
stockholders other than its parent mutual holding company prior to
implementation and no sooner than the first annual meeting following
the stock issuance; for stock option plans, stock options are granted
at no lower than the market price at which the stock is trading at the
time of grant; and for management or employee stock benefit plans, no
conversion stock is used to fund the plans.
These proposed restrictions were prompted by the FDIC's concerns
about abuses in many past mutual-to-stock conversions. As indicated in
the Proposed Rule, based on a review of numerous proposed conversions,
the Board believes that some bank insiders may sacrifice the interests
of their institutions and depositors in order to acquire significant
amounts of conversion stock and other benefits more advantageously than
depositors. Also, in some instances, the issuance of conversion stock
to an MRP decreases the opportunity for depositors to obtain conversion
stock. Moreover, the issuance of stock options at the conversion price,
rather than at the aftermarket trading price, which in many cases has
been substantially higher than the conversion price, creates the
impression that insider enrichment may be the main reason for the
conversion.
These factors can reflect negatively on management's fulfillment of
its fiduciary obligations. In fact, it may be an inherent conflict of
interest for management to decide to convert the bank to stock form
when, as part of the proposed conversion, management will reap
significant benefits. Independent business judgment is essential to the
proper carrying out of a manager's obligations. This judgment may be
severely clouded when MRPs are provided as part of the conversion
transaction.
The FDIC received many comments on the issue of management benefits
in conversions and on the proposed FDIC restrictions. Several of them
stated that insiders should share in the benefits of conversions
because the insiders managed the institution in a safe-and-sound
manner. One state thrift regulator (and other commenters) suggested
that MRPs be based on the size of the institution and not on ``straight
across-the-board percentages''. One national industry trade group noted
that ``avoiding the use of across-the-board percentages for MRPs and
tailoring their availability more to the size of the institution and
their specific business plan objectives and needs would be a reasonable
approach''. One mutual savings bank noted that MRPs, stock option plans
and employee stock ownership plans ``all encourage more stock ownership
and cement an identity among outside shareholders and those who run and
work for the company''. It also noted that OTS rules are workable in
this regard and should be adopted by the FDIC. Another savings
association commented that conversions should not be permitted where
there is excessive compensation for insiders, but ``without benefits to
insiders there will be no conversions''.
An individual commented that the FDIC should not regulate director
remuneration in conversions of healthy mutuals because those
conversions do not place the insurance fund at risk and shareholders'
votes are dispositive under the ``corporate waste'' doctrine. A law
firm, commenting on behalf of a state thrift industry trade group, also
noted that compensation benefits are not a safety-and-soundness concern
if the institution meets the applicable capital requirements. In
addition, it stated that a ``uniformity of benefits between state- and
OTS-regulated conversions'' is necessary to assure the end of
``regulatory arbitrage''. A state regulator (and several other
commenters) suggested that the FDIC and OTS publish joint MRP
guidelines permitting or prohibiting MRPs, along with specific rules
therefore. It noted that ``proper resolution of the MRP issue will have
a substantial impact on fairness to depositors in conversions''. One
savings bank commented that ``when an institution contemplates going
public for the right reasons (expansion, market share, competitive
advantage) the benefits should go to those willing to risk their
careers (board and management team) or their capital (shareholders) not
to the faceless non-entity group known as the existing depositors''. A
consumer group stated that the FDIC should impose specific limits on
MRPs and stock options.
Upon consideration of the comments, the Board has decided to
include in the final rule the requirements in the Proposed Rule on
insider benefits. The Board does not disagree that management of
converting institutions should receive reasonable benefit from the
conversion because such insiders are responsible for the bank's success
and will undertake additional and perhaps more difficult challenges
upon the bank's conversion to stock form. While the Board believes that
management and directors/trustees would have increased responsibilities
as a public company, the Board believes that, in most cases, market-
based management compensation should be determined by the stockholders
after the conversion is completed. Such a determination is required by
the final rule.
As noted above, the Proposed Rule would have required that all MRPs
be approved by a majority of the bank's stockholders, or in the case of
a recently formed holding company, its stockholders, prior to
implementation and no sooner than the first annual meeting following
the conversion. The FDIC received several comments questioning whether
stockholder approval could be obtained at a special meeting, instead of
an annual meeting.
They noted that, with the existence of securities and corporate law
requirements, there is no need for the FDIC to regulate either the
timing or type of the shareholder meeting at which shareholders vote on
proposed insider benefits. In response to these comments, the Board has
determined that such approval may be obtained at any duly called
meeting of shareholders, either annual or special, to be held no sooner
than six months after the completion of the conversion. The FDIC
believes that the six-month period will give the marketplace sufficient
time to obtain and consider the financial data and the shareholders
sufficient time to become familiar with the finances and operations of
the converted bank in order to make an informed decision in voting to
adopt such plans.
The restrictions in the final rule on MRPs do not include specific
percentage limitations. The FDIC believes that the restrictions in the
final rule will help safeguard against potential management self-
interest in mutual-to-stock conversions. The FDIC also will continue to
look to MRP percentage limitations in the OTS regulations, as well as
in the applicable state law and regulations, as a frame of reference
for reviewing proposed conversions of State Savings Banks. The FDIC
will presume that MRPs that do not conform with the applicable OTS MRP
limitations constitute excessive insider benefits and thereby evidence
a breach of the board of directors' or trustees' fiduciary
responsibility. Bank management would have the burden of convincing the
FDIC otherwise.
5. Eligibility Record Date, Priority to Depositors Residing in the
Bank's Local Community (Local Depositor Preference), Priority of ESOPs
A. Eligibility Record Date
The Proposed Rule included a requirement that the eligibility
record date for determining the stock subscription purchase priority
for depositors of a State Savings Bank be set at no less than one year
prior to the date of the board of directors'/trustees' adoption of the
plan of conversion (from mutual to stock form). As indicated in the
Proposed Rule, the Board believes that, in order for a board of
directors/trustees of a State Savings Bank to carry out its fiduciary
responsibilities to the bank and its depositors, the board must assure
an equitable and lawful conversion process. From the numerous comments
received and from a review of proposed and completed conversions, it is
apparent that so-called ``professional depositors'', who place funds in
mutual banks and savings associations in order to gain a purchase
priority if the institution converts to stock form, have reaped
substantial profits on conversions of mutual institutions. A proper
exercise of fiduciary responsibilities toward the bank and its longer-
term depositors dictates that ``professional depositors'' not be
allowed to experience windfall gains in conversions. Requiring that the
eligibility record date be no less than one year prior to the board's
adoption of the plan of conversion will help assure that longer-term
depositors are more likely than professional depositors to benefit from
the stock purchase priority.
Many of those who commented on this issue expressed support for it.
A state banking commissioner and a consumer group each commented that a
one-year eligibility record date would help curb insider abuses. One
person said the FDIC should not set an eligibility record date. Another
person expressed support for the one-year eligibility requirement but
suggested that it might not weed out professional depositors because
many of them have deposits with savings banks for over a year. Another
state regulator said a 90-day eligibility requirement might be
sufficient. One bank said 180 days might be sufficient.
The Proposed Rule requested specific comment on whether the one-
year period would be sufficient and on whether the date chosen should
be based on the board of directors'/trustees' first consideration of
whether the bank should be converted to the stock form of ownership. In
general, those who commented on these issues were against extending the
record date beyond one year and relating it to a board of directors'/
trustees' first consideration of whether the bank should convert to
stock form.
Based on the comments received on this issue, the Board has
determined that the one-year period is sufficient and that, given the
factual nature of the requirement, attempting to establish a starting
period based on when a bank's board of directors/trustees first
considered whether to convert to stock ownership would be very
difficult to implement and regulate. Thus, the Board has decided to
adopt the eligibility record date requirement of the Proposed Rule
because, as stated in the comments, it properly protects the legitimate
interests of core depositors and provides sufficient assurance that
long-term supporters of an institution are given priority. Also, as
stated in the Proposed Rule, the one-year period is a minimum time
period. Converting State Savings Banks are encouraged to designate
longer time periods if appropriate to encompass longer-term depositors
in the local communities served by the bank.
B. Local Depositor Preference
The Proposed Rule also included a required stock purchase
preference for eligible depositors in the bank's ``local community'' or
within 100 miles of a home or branch office of the converting bank. The
FDIC proposed the Local Depositor Preference requirement to promote
local community participation by long-term depositors in the conversion
process and to ensure that the opportunity for local depositors to
fully participate in the subscription offering in a mutual-to-stock
conversion is not diminished by large purchases made by ``professional
depositors''.
The FDIC received numerous comments on this proposed requirement.
Thirteen expressed support for the rule, contending that the preference
would rightfully promote local control of the bank and limit the
participation of ``professional depositors'' in conversions. They also
noted that the Local Depositor Preference would give depositors in the
local community a more meaningful opportunity to participate in the
conversion and reduce the problem of outside investors tending to put
undue pressure on management to achieve a higher stock value more
rapidly than may be feasible through safe and sound operations.
Eight of those who commented on the proposed requirement opposed
it, asserting that the rule constituted an unlawful geographic
discrimination. They contended that all depositors have ownership,
voting and liquidation rights and, thus, a subscription purchase
priority should not be related to where a depositor lives. Several of
those who commented said that the rule should at least be modified to
provide for long-term depositors who moved away from the bank; they and
others criticized the 100-mile rule as unworkable.
After a review of the comments and an internal review of the issue,
the Board has decided to defer to the judgment of the converting bank's
board or directors or trustees and the applicable state law on whether
a stock purchase priority is provided to local depositors. The FDIC
continues to believe, generally, that local depositors, collectively,
should be granted a preference because they typically have made
significant long-term contributions to the financial success of the
converting State Savings Bank, in contrast to certain non-local
depositors who have made deposits solely in anticipation of a
conversion. The FDIC also believes, however, any potential abuse by
professional depositors can and should be handled on a case-by-case
basis by the converting bank's management, under the applicable state
law. Thus, the final rule does not require the local depositor
preference contained in the Proposed Rule. The FDIC will consider, on a
case-by-case basis, the reasonableness of any local depositor
preference included in a proposed conversion. In that connection, the
Board notes that it will not object to a local depositor preference
based on the definition of ``local community'' contained in the OTS
Revisions.
C. Priority for ESOPs
The proposed rule included a provision requiring that ESOPs not be
accorded a higher subscription right priority than ``eligible
depositors''. As noted above, the term ``eligible depositors'' was
defined as depositors holding qualifying deposits at the bank as of a
date designated in the bank's plan of conversion that is not less than
one year prior to the date of adoption of the plan of conversion by the
converting bank's board of directors/trustees. This proposed
requirement was prompted by the Board's belief that ESOPs (tax-
qualified or otherwise) should not be accorded higher purchase priority
rights than long-term depositors. This is in keeping with the principle
of fiduciary duty requiring that the board of directors/trustees of a
State Savings Bank put the interest of long-term depositors ahead of
the interests of management and employees.
The FDIC received several comments on this proposed requirement. In
essence, they were evenly divided between those for and against the
proposal. Those in favor of the requirement argued that eligible
depositors of a converting State Savings Bank should be accorded the
first priority in purchasing stock in the conversion. Those opposed
asserted that the employees make the bank successful and, thus, should
be accorded the first subscription priority. One group commented that
ESOP participants and eligible depositors should share priority on a
pro rata basis.
The Board does not disagree that ESOPs promote greater employee
productivity and motivation and that the employees of a State Savings
Bank should be permitted to benefit, through the purchase of
subscription stock by an ESOP, in the bank's mutual-to-stock
conversion. The Board continues to believe, however, that, under
general principles of fiduciary duty, ESOPs should not be accorded
higher purchase priority rights than long-term depositors. Thus, the
Board has decided to include in the final rule the requirement that
``eligible depositors'' be accorded a higher subscription priority than
ESOPs.
6. Business Plans
The Proposed Rule included a requirement that State Savings Banks
that propose to undergo a mutual-to-stock conversion submit a business
plan including, among other things, a detailed discussion of how
management intends to deploy the capital raised through the sale of
stock in the conversion, expected earnings resulting from the plan, and
the justification for any intended stock repurchases. The FDIC received
five comments on this proposed requirement. All agreed that a business
plan should be required in connection with a proposed mutual-to-stock
conversion of a State Savings Bank.
As indicated in the Proposed Rule, for safety and soundness
purposes the FDIC must know the institution's business plan for post-
conversion operation, growth and investment of any newly injected
capital. The reason is that institutions converting from mutual form
undertake a major restructuring that possibly could lead to significant
changes in the nature or volume of business conducted. Converted
institutions become answerable to shareholders for the first time, and
the shareholders are concerned with obtaining reasonable earnings on
their investment.
For these reasons and upon consideration of the comments, the Board
has adopted in the final rule the business plan requirements of the
Proposed Rule.
7. Stock Repurchases
The Proposed Rule included a provision to prohibit State Savings
Banks from repurchasing stock for one year following the bank's
conversion to stock form. After that period the FDIC would consider
such proposed repurchases on a case-by-case basis under section
18(i)(1) of the FDI Act (12 U.S.C. 1828(i)(1)) (Section 18(i)). Section
18(i) prohibits state nonmember banks from reducing or retiring capital
without the prior consent of the FDIC.
The FDIC received several comments on this issue, the majority of
which opposed stock repurchase restrictions. Those against it asserted
that the inability to repurchase stock for one year would constitute an
unnecessary and inappropriate restriction on the ability of officers
and trustees to carry out their duty to maximize the value of the
shares of the bank. Those for the restriction stated that it would help
prevent insider abuse. One state regulator said any such restriction
should be determined by the bank's primary regulator.
As indicated in the Proposed Rule, the Board is concerned that a
substantial stock buyback program begun immediately after the bank's
conversion to stock form may not have a legitimate business purpose and
would raise issues about whether the conversion stock was appropriately
valued. The Board is also concerned that a recently converted
institution have a capital base adequate to safeguard against possible
unexpected losses that may occur under the new organizational
structure. Thus, upon consideration of the comments, the Board has
decided to implement the one-year restriction. To allow for some
flexibility in this respect, however, the final rule modifies the
restriction to allow limited stock repurchases up to 5 percent during
the first year where compelling and valid business reasons are
established. This would give the FDIC the explicit ability to permit
repurchases during the first year after the conversion where it is in
the best interests of the bank and its shareholders. All proposed stock
repurchases by State Savings Banks are considered by the FDIC on a
case-by-case basis under section 18(i).
8. Merger/Conversions
In some cases mutual institutions convert to stock ownership
simultaneously with a merger or acquisition transaction with another
depository institution or holding company. This is generally known as a
merger/conversion. In merger/conversions depositors of the converting
institutions obtain the right to purchase stock in the acquiring
institution and not the converting savings bank. In exercising its
fiduciary responsibilities the board of directors/trustees of a mutual
State Savings Bank must assure that:
(1) The value of the converting institution is fairly determined;
and
(2) That value is distributed to the proper constituents of the
bank.
As indicated in the Proposed Rule, based on the proposed
conversions the FDIC has reviewed in the recent past and other merger
conversions it has studied, the Board has observed that, in virtually
every merger conversion, the acquiring institution has captured a large
portion of the value of the converting institution. It has not been
uncommon in merger/conversions for the management of the converting
mutual institution to receive extremely generous compensation and
benefit packages. Thus, an apparent conflict of interest exists:
whether the management of a mutual institution is opting for a merger/
conversion, instead of a standard conversion or no conversion at all,
based on the best interests of the institution and its depositors or in
response to the level of benefits offered to management by the
acquiring entity. As noted in the preamble to the Interim Rule and in
the Proposed Rule, there have been numerous complaints by depositors
and others that permitting healthy mutual savings banks to be acquired
by means of a merger/conversion has resulted in some savings bank
insiders putting their interests ahead of the interests of the
converting bank and its constituents.
In the Proposed Rule, the FDIC requested specific comment on this
topic and specifically whether a moratorium should be placed on merger/
conversions involving sufficiently capitalized State Savings Banks.
Most of those who commented on the issue said the FDIC should not
prohibit merger/conversions and that the FDIC should review such
proposed transactions on a case-by-case basis. A bank holding company
commented that merger/conversions are desirable because they increase
competition in the industry and support safety and soundness. It noted
that state law is the ``proper authority'' to regulate management
compensation issues in merger/conversions. A state banking and thrift
regulator suggested that the FDIC and OTS collaborate in a joint
determination on whether merger/conversions will be approved in the
future and, if so, adopt specific requirements to provide parity among
savings associations and savings banks. A state banking and thrift
industry trade group recommended that merger/conversions be permitted
only in the case of undercapitalized institutions or at the discretion
of the regulators on a case-by-case basis. A law firm commented that
the FDIC should publish the criteria that it intends to use in
evaluating proposals. Another suggested that the OTS and the FDIC take
the same approach to merger/conversions.
Others expressed general opposition to merger/conversions. A
national consumer group said merger/conversions should be prohibited.
An individual commented that merger/conversions should not be allowed
because they ``only serve management's interests and not the
depositors''. He suggested that any merger take place only after an
initial ``free-standing'' standard conversion. A national banking and
thrift industry trade group said it would not oppose a ``regulatory
pause by the FDIC to evaluate its rules governing merger/conversions''.
Upon consideration of the comments and based on the factors
discussed above, the Board continues to believe that merger/conversions
should, in most cases, be permitted only in situations where a State
Savings Bank is ``undercapitalized'' ``significantly undercapitalized''
or ``critically undercapitalized'', as defined in the FDIC's capital
maintenance regulations. The Board still believes, however, that it is
unnecessary at this time to impose a blanket prohibition on non-
supervisory merger/conversions. Such merger/conversions may be
considered in situations where the value of a State Savings Bank is
determined in a fair manner and that value is delivered to the rightful
recipients, as determined by the directors/trustees of the bank in the
proper exercise of their fiduciary responsibilities under the
applicable state law. In no instance will an acquiring institution be
considered a rightful recipient.
In response to comments requesting that the FDIC specify, in its
mutual-to-stock conversion regulations, the terms and conditions of a
merger/conversion that would be acceptable to the FDIC, the FDIC notes
only the general criteria that: (1) The value of the converting
institution be fairly determined, and (2) the value be proposed to be
distributed to the proper constituents of the bank. Industry innovation
is encouraged in this regard. State law factors also are an important
consideration. As noted above, because historically merger/conversions
have been a source of considerable insider abuse, the FDIC will
continue to closely scrutinize such proposed transactions, particularly
for potential breaches of fiduciary duty.
Owing to the same historical concerns in this area, the OTS
Revisions continue to prohibit non-supervisory merger/conversions. In
response to the comment that the FDIC and the OTS adopt similar
regulations on merger/conversions, the FDIC notes that, in its
conversion regulations, the OTS retains its general waiver authority to
permit a merger/conversion under the appropriate circumstances. Thus,
the OTS approach (that it would not prohibit a non-supervisory merger/
conversion in certain circumstances) is consistent with the FDIC's
approach of considering merger/conversions on a case-by-case basis.
9. Convenience and Needs
As specified in the Interim Final Rule, one of the factors the FDIC
currently considers in reviewing proposed conversions of State Savings
Banks is ``the extent of any existing and planned contributions to or
investments in the community''. In the Proposed Rule, the Board
requested specific comment on whether the FDIC could and should
consider imposing a convenience-and-needs requirement in connection
with the mutual-to-stock conversions of State Savings Banks.
The FDIC received eight comments on this issue. Generally, they
were evenly divided. Some argued that a convenience-and-needs
requirement should not be imposed because a conversion involves only a
financial recapitalization and not a change in services. Others said
they favored such a requirement. Two comments that opposed the proposal
questioned the FDIC's legal authority to impose such a requirement.
They also noted that the FDIC has ample opportunity to review a savings
bank's CRA performance in the context of a post-conversion CRA
evaluation. One commenter suggested that it was a legislative, not a
regulatory, matter.
Based on the comments received and an internal review of this
issue, the Board has decided to consider, as part of its review of
proposed mutual-to-stock conversions of State Savings Banks, how the
bank intends to serve, or continue to serve, the convenience and needs
of its community. This provision adds a convenience-and-needs component
to the factors the FDIC considers in reviewing proposed conversions of
State Savings Banks, but does not impose a convenience-and-needs or CRA
requirement upon banks proposing to convert. In that regard, the FDIC
will review the bank's business plan to determine how the bank intends
to serve, or continue to serve, the needs of its community. The final
rule amends the applicable provision in the Interim Final Rule to state
that the FDIC will ``consider the bank's plans to fulfill its
commitment to serving the convenience and needs of its community''. To
avoid confusion about whether a converting bank is required to use
conversion proceeds for community purposes, the reference in the
Interim Final Rule to ``planned contributions or investments in the
community'' is deleted.
Also, as indicated in the Proposed Rule, the ``convenience and
needs of the community to be served'' by the applicant is one of the
statutory factors required to be considered by the Board in acting on
applications for deposit insurance (12 U.S.C. 1816). Thus, in
connection with the review of mutual holding company reorganizations of
insured depository institutions--in which a deposit insurance
application is required to be filed with the FDIC--the FDIC already
does, and will continue to, apply a convenience-and-needs test.
10. Comparison With OTS Regulations
The requirements imposed by the final rule essentially parallel the
OTS Revisions. As indicated in the Proposed Rule, there are numerous
other provisions in the OTS' mutual-to-stock conversion regulations (12
CFR 563b) that are not included in either the FDIC Interim Rule or the
Proposed Rule. Those OTS regulations include specific and detailed
requirements on, among other things: Items to be included in the plan
of conversion, stock purchase priorities, percentage limitations on
stock purchases and MRPs, proxy solicitation and the form and content
of proxy statements, the form and content of offering circulars,
accounting rules, liquidation accounts, notices of filing, availability
of conversion documents and pricing and sale of securities. In the
Proposed Rule the FDIC requested specific comment on whether, in order
to achieve greater uniformity with the OTS's conversion regulations,
the FDIC's conversion regulations should be expanded to match the scope
and depth of the OTS rules.
The FDIC received very few comments on this issue. One argued that,
because conversions overall are a matter of state law, the FDIC should
not issue detailed, OTS-type regulations. A national consumer group
argued that the FDIC regulations should be as encompassing as the OTS'.
A law firm commented that the FDIC regulations should include the anti-
takeover provisions in the OTS rules.
The Board continues to believe that the requirements imposed by the
final rule will enable the FDIC, in accordance with its governing
statutes, to monitor the conversions of State Savings Banks for issues
involving safety and soundness, fiduciary duty and violations of law.
Under the final rule, the FDIC will continue to use the OTS regulations
as a frame of reference in reviewing proposed mutual-to-stock
conversions of State Savings Banks. The FDIC also will continue to look
to the applicable state law and regulations in reviewing proposed
conversions. The FDIC has a different statutory basis for exercising
its authority in this area than does the OTS and has not identified a
need to adopt a more comprehensive set of regulations addressing all
aspects of the mutual-to-stock conversion process.
11. Mutual Holding Companies
The Proposed Rule provided that the FDIC's mutual-to-stock
conversion regulations also would apply, to the extent appropriate, to
reorganizations of State Savings Banks into the mutual holding company
form of ownership. The FDIC received few comments on the applicability
of the Proposed Rule to mutual holding company reorganizations and
corresponding issuances of stock. One said that the final rule should
either provide special rules for mutual holding companies or defer to
state laws on such reorganizations/conversions. Another person noted
that the Proposed Rule was unclear to what extent, if any, the FDIC
would rely on OTS regulations regarding mutual holding company
reorganizations. The FDIC also received three comments that mutual
holding companies should not be prohibited from waiving rights to
dividends paid by the subsidiary State Savings Bank.
The final rule retains the statement included in the Proposed Rule
that the FDIC's mutual-to-stock conversion rules apply, where
appropriate, to mutual holding company reorganizations of State Savings
Banks. The Board continues to believe that the FDIC's rules on mutual-
to-stock conversions of State Savings Banks should apply, where
applicable, when a State Savings Bank reorganizes into the mutual
holding company form of ownership. The valuation and insider benefits
issues in mutual holding company reorganizations are essentially the
same issues present in standard mutual-to-stock conversions. Thus, the
FDIC has the same concerns about safety and soundness, breaches of
fiduciary duty and other violations of law in the context of mutual
holding company reorganizations as it does regarding traditional
mutual-to-stock conversions. In this connection, the FDIC will use the
applicable state law and the regulations issued by the OTS (12 CFR 575)
as a frame of reference for reviewing proposed State Savings Bank
mutual holding company reorganizations and (contemporaneous and post-
reorganization) stock issuances.
The FDIC also is directly involved in the mutual holding company
reorganizations of federal and state savings associations. That
involvement entails FDIC action on the application for deposit
insurance required to be filed with the FDIC in such transactions for
the de novo stock depository institution organized to facilitate the
reorganization. In acting on applications for deposit insurance the
FDIC must consider the factors listed in section 6 of the Federal
Deposit Insurance Act (12 U.S.C. 1816), one of which is the ``general
character and fitness of the management of the depository
institution''. In the course of that review the FDIC considers, among
other things, the same issues of fiduciary duty that it considers in
reviewing proposed mutual-to-stock conversions of State Savings Banks.
Because of the typical interrelationship between the management of
a mutual holding company and its subsidiary bank, the FDIC will closely
scrutinize for potential conflicts of interest mutual holding company
reorganizations of State Savings Banks and stock issuances simultaneous
with or subsequent to a mutual holding company reorganization.
In that connection, as noted above, the FDIC received 3 comments
that a mutual holding company should not be prohibited from waiving
rights to dividends paid by its subsidiary insured depository
institution. Retaining at the insured institution level dividends that
otherwise would go to the mutual holding company increases the
ownership interests of the minority owners of the depository
institution. Conversely, the owners of the mutual holding company lose
an interest in dividends that otherwise would be paid to them. This
raises a conflict-of-interest issue where the directors/trustees of the
mutual holding company, who request the dividend waiver, also are the
minority shareholders of the subsidiary depository institution inasmuch
as they will personally benefit from the waiver.
The Board believes that an effective way to address this apparent
conflict of interest is to condition the FDIC's decision not to object
to a proposed mutual holding company reorganization (of a State Savings
Bank) or deny a deposit insurance application (in proposed mutual
holding company reorganizations of savings associations) on such waived
dividends not being available for any distribution to minority
shareholders. The FDIC intends to consider, on a case-by-case basis,
imposing such a condition in all mutual holding company reorganizations
of State Savings Banks, as well as in all deposit insurance
applications filed in connection with mutual holding company
reorganizations.
12. Securities Disclosure and Proxy Statement Issues
The FDIC received a few comments suggesting that the FDIC indicate
the standards it uses in reviewing the securities disclosure documents
and proxy materials involved in conversions of State Savings Banks. The
Board believes that full and meaningful disclosure to all parties is a
critical element underlying the fairness of a proposed conversion.
Existing depositors and potential investors should be provided with
readily understandable disclosures of material facts and information as
a basis for reaching an informed decision to vote or participate in the
conversion.
It is the responsibility of the State Savings Bank proposing to
convert to stock form to prepare offering and proxy materials in
accordance with acceptable disclosure standards for the industry. At a
minimum, the notice of proposed conversion filed with the FDIC should
include offering and proxy materials that disclose the facts and
considerations sufficient to allow an interested recipient to make
informed decisions on voting on the plan of conversion and/or
purchasing stock in the conversion. The State Savings Bank may choose
whether to provide to the FDIC the minimum disclosures in separate
documents or in a ``wrap around'' form with the proxy statement
attached.
The disclosure materials provided to the FDIC generally should
consist of: (1) A proxy statement to solicit proxies for a depositors'
or members' special meeting to vote on the plan of conversion, and (2)
an offering circular to be used in a subscription and community
offering of the newly created stock institution's common stock. In
addition, the FDIC staff reviews financial disclosures to check
conformance with generally accepted accounting principles.
Also, the FDIC reviews disclosure materials for several different
types of mutual-to-stock conversions and mutual holding company
reorganizations. These include:
(1) The formation of a new stock financial institution which is the
successor to the mutual financial institution, and which conducts a
subscription and community offering of its common stock;
(2) The formation of a stock holding company which is the owner of
a newly created successor stock financial institution and which
conducts a subscription and community offering of the holding company's
common stock; and
(3) The formation of a mutual holding company which owns a majority
interest in a newly created successor stock financial institution and
which generally conducts a subscription and community offering of a
minority interest in such subsidiary's common stock.
13. Other Comments
Two law firms suggested that the FDIC's review time on conversion
notices be reduced from 60 days to 45 days because of the potential
that financial information might become ``stale'' under rules issued by
the Securities and Exchange Commission and the converting institution
would have to go through the expense of producing updated financial
statements.
Since the issuance of the Interim Final Rule in February 1994 the
FDIC has considered numerous proposed conversions. Its experience to
date indicates, generally, that the time periods of Sec. 303.15 do not
conflict with the conversion-review time periods of other applicable
state and federal regulators. The FDIC will continue to process notices
of proposed mutual-to-stock conversions as expeditiously as possible,
but will retain the current 60-day time periods in Sec. 303.15. As
discussed below, the final rule also includes an alternative time limit
of up to 20 days after the last applicable state or other federal
regulator has acted on the proposed transaction.
V. Explanation of the Final Rule
1. Overview
The final rule adopts, with certain modifications, the provisions
of the Interim Final Rule and the Proposed Rule. Thus, it imposes
certain substantive and procedural requirements upon State Savings
Banks that propose to undergo mutual-to-stock conversions. The Board
has decided that it is necessary to issue the final rule to safeguard
against potential safety-and-soundness problems, breaches of fiduciary
duty and other violations of law in mutual-to-stock conversions of
State Savings Banks. As part of the issuance of the final rule, the
Board is withdrawing the Proposed Policy Statement. That issuance
served as a vehicle for the FDIC to obtain public comment on issues
involved in mutual-to-stock conversions and the appropriate role for
the FDIC in the process.
The final rule will apply to all notices of proposed conversions
(and mutual holding company reorganizations) filed with the FDIC on and
after January 1, 1995. Until that time, the FDIC intends to continue to
use the case-by-case methodology explained in the Interim Rule in
reviewing notices of proposed conversions of State Savings Banks. Under
the final rule the FDIC intends to continue to use a case-by-case
approach in reviewing aspects of proposed conversions that are outside
the scope of the specific requirements in the final rule. As part of
that review the FDIC will consider the applicable state laws and
regulations and relevant OTS regulations. The overall determinant in
the FDIC's consideration of proposed conversions of State Savings Banks
will be whether the proposal raises concerns about safety and
soundness, breaches of fiduciary duty and violations of law.
2. Notice Requirements
As required by the Interim Final Rule, the final rule requires
State Savings Banks that propose to convert to stock ownership to file
with the FDIC a notice of intent to convert to stock form consisting of
a description of the proposed conversion accompanied by a copy of all
documents and application materials filed with the applicable state and
federal regulators. The notice may be in letter form and must be
provided to the FDIC (along with copies of the application materials)
at the same time the application materials are filed with the
institution's primary state regulator. State Savings Banks are
prohibited from converting to stock form without complying with the
substantive and procedural requirements of the final rule.
The FDIC will continue to review all conversion materials regarding
State Savings Banks with a special interest in: the use of the proceeds
from the sale of stock, as prescribed in the business plan; the
adequacy of the disclosure materials; the participation of depositors
in approving the transaction; the form of the proxy statement required
for the vote of the depositors/members on the conversion; any increased
compensation and other remuneration (including stock grants, stock
option rights and other similar benefits) to be obtained by officers
and directors/trustees of the bank in connection with the conversion;
the adequacy and independence of the appraisal of the value of the
mutual savings bank for purposes of determining the price of the shares
of stock to be sold; the process by which the bank's directors/trustees
approved the appraisal, the pricing of the stock and the compensation
arrangements for insiders; the nature and apportionment of stock
subscription rights; and the bank's plans to fulfill its commitment to
serving the convenience and needs of its community.
The FDIC generally expects proposed conversions to substantially
satisfy the standards found in the mutual-to-stock conversions
regulations of the OTS (12 CFR Part 563b). Any variance from those
regulations will be closely scrutinized. Compliance with OTS
requirements will not, however, necessarily be sufficient for FDIC
regulatory purposes.
A bank's notice to the FDIC will not be deemed complete until the
State Savings Bank provides the materials required by the final rule,
including any materials specifically requested by the FDIC after the
bank's initial submission. The FDIC will notify the institution when
the notice is complete. The FDIC will issue to the converting bank a
notice of intent not to object to the proposed conversion, if the FDIC
determines that the proposed conversion would not pose a risk to the
safety and soundness of the bank, violate any law or regulation or
present a breach of fiduciary duty.
The Interim Final Rule currently provides that when the FDIC
intends to object to a proposed mutual-to-stock conversion of a State
Savings Bank it must do so within 60 days of receiving a complete
notice of the proposed conversion. The FDIC, in its discretion, may
extend the initial 60-day period by another 60 days. The Interim Final
Rule also provides that, if the FDIC fails to object to a proposed
conversion within those prescribed periods, an institution may
consummate the proposed conversion.
Upon consideration of numerous proposed conversions since the
issuance of the Interim Final Rule, the Board has found that, in some
cases, the maximum 120-day period prescribed in the Interim Final Rule
is about to expire before the applicable state or other federal
regulator(s) (who also must act on the proposed transaction) has or
have acted on the proposed conversion. In order to provide the FDIC
with sufficient time to act on a proposed conversion, the Board has
included in the final rule an alternative time limit of up to 20 days
after the last applicable state or other federal regulator has acted on
the proposed transaction.
3. Appraisals
The final rule requires that a full appraisal be provided to the
FDIC in a proposed mutual-to-stock conversion of a State Savings Bank,
and that the appraisal report be prepared by an independent appraiser
and include a complete and detailed description of the elements that
make up the report, the justification for the methodology employed and
sufficient support for the conclusions reached therein. This includes a
full discussion of the applicability of each peer group member and
documented analytical evidence supporting any variance (above or below)
the converting institution may have from the peer group statistics.
The FDIC requires a complete analysis of the institution's pro
forma earnings which should include the bank's full potential once it
fully deploys the new capital pursuant to its business plan. In
reviewing appraisal reports the FDIC will continue to consider the
appraisal standards and guidelines, if any, of the applicable state
and/or the appraisal guidelines issued by the OTS and the USPAP.
4. Voting Requirement and Prohibition on the Use of Running Proxies
The final rule requires that a proposed conversion be approved by a
vote of at least a majority of the bank's depositors and, as reasonably
determined by the bank's directors or trustees, other stakeholders of
the bank who are entitled to vote on the conversion, unless the
applicable state law requires a higher percentage, in which case the
higher percentage must be used. The final rule also prohibits the use
of running proxies in mutual-to-stock conversions of State Savings
Banks.
5. Restrictions on Management Stock Benefit and MRPs
The final rule provides that no converted savings bank shall, for
one year from the date of the conversion, implement a stock option plan
or management or employee stock benefit plan, other than a tax-
qualified employee stock ownership plan, unless: each of the plans is
fully disclosed in the proxy solicitation and conversion stock offering
materials; all such plans are approved by a majority of the bank's
stockholders, or in the case of a recently formed holding company, its
stockholders, prior to implementation at a duly called meeting of
shareholders, either annual or special, to be held no sooner than six
months after the completion of the conversion; in the case of a savings
bank subsidiary of a mutual holding company, all such plans are
approved by a majority of stockholders other than its parent mutual
holding company prior to implementation at any duly called meeting of
shareholders, either annual or special, to be held no sooner than six
months after the stock issuance; for stock option plans, stock options
are granted at no lower than the market price at which the stock is
trading at the time of grant; and for management or employee stock
benefit plans, no conversion stock is used to fund the plans.
The MRP restrictions do not include specific percentage
limitations. The FDIC will continue to look to MRP percentage
limitations in the applicable state law and regulations, as well as in
the OTS regulations, as a frame of reference for reviewing proposed
conversions of State Savings Banks. The FDIC will presume that MRPs
that do not conform with the applicable OTS MRP limitations constitute
excessive insider benefits and thereby evidence a breach of the board
of directors' or trustees' fiduciary responsibility. Bank management
would have the burden of convincing the FDIC otherwise.
6. Eligibility Record Date and Priority of Employee Stock Ownership
Plans (ESOPs)
A. Eligibility Record Date
The final rule requires that the eligibility record date for
determining stock subscription rights be no less than one year prior to
the date the board of directors/trustees approves the plan of
conversion to convert from the mutual to stock form of ownership.
B. Priority for ESOPs
The final rule requires that ``eligible depositors'' be accorded a
higher subscription priority than ESOPs. ``Eligible depositors'' are
defined as depositors holding qualifying deposits at the bank as of a
date designated in the bank's plan of conversion that is not less than
one year prior to the date of adoption of the plan of conversion by the
converting bank's board of directors/trustees.
7. Submission of Business Plans
The final rule requires that State Savings Banks that propose to
undergo a mutual-to-stock conversion submit a business plan which must
include, in part, a detailed discussion of how the capital acquired in
the conversion will be used, expected earnings resulting from the plan
and a justification for any proposed stock repurchases.
8. Post-Conversion Stock Repurchases
The final rule provides that an insured mutual state savings bank
that has converted from the mutual to stock form of ownership may not
repurchase its capital stock within one year following the date of its
conversion to stock form, except that stock repurchases of no greater
than 5% of the bank's outstanding capital stock may be repurchased
during this one-year period where compelling and valid business reasons
are established, to the satisfaction of the FDIC. Any stock repurchases
are subject to the requirements of Section 18(i).
9. Mutual Holding Companies
The final rule retains the statement included in the Proposed Rule
that the FDIC's mutual-to-stock conversion rules apply, where
appropriate, to mutual holding company reorganizations of State Savings
Banks. The FDIC will use the applicable state law and the regulations
issued by the OTS (12 CFR 575) as a frame of reference for reviewing
proposed State Savings Bank mutual holding company reorganizations and
(contemporaneous and post-reorganization) stock issuances.
List of Subjects
12 CFR Part 303
Administrative practice and procedure, Authority delegations
(Government agencies), Bank deposit insurance, Banks, Banking,
Reporting and recordkeeping requirements, Savings associations.
12 CFR Part 333
Banks, Banking, Corporate powers.
Accordingly, the interim rule amending 12 CFR Part 303 which was
published at 59 FR 7194 on February 15, 1994, is adopted as a final
rule with changes and 12 CFR Part 333 is amended as follows:
PART 303--APPLICATIONS, REQUESTS, SUBMITTALS, DELEGATIONS OF
AUTHORITY, AND NOTICES REQUIRED TO BE FILED BY STATUTE OR
REGULATION
1. The authority citation for Part 303 continues to read as
follows:
Authority: 12 U.S.C. 378, 1813, 1815, 1816, 1817(a)(2)(b),
1817(j), 1818, 1819 (``Seventh'', ``Eighth'' and ``Tenth''), 1828,
1831e, 1831o, 1831p-1(a); 15 U.S.C. 1607.
2. Section 303.15 is revised to read as follows:
Sec. 303.15 Mutual-to-stock conversions of mutually owned state-
chartered savings banks.
(a) Prior notice requirement. In addition to complying with the
substantive requirements in Sec. 333.4 of this chapter, an insured
state-chartered mutually owned savings bank that proposes to convert
from mutual to stock form shall file with the FDIC a notice of intent
to convert to stock form and copies of all documents filed with state
and federal banking and/or securities regulators in connection with the
proposed conversion. An institution that is in the process of
converting to stock form that has filed a proposed stock conversion
application with the applicable state and federal regulators (or
otherwise has initiated a stock conversion) prior to the effective date
of this section shall file the required materials with the FDIC as soon
as practicable. An insured mutual savings bank chartered by a state
that does not require the filing of application materials to convert
from mutual to stock form that proposes to convert to the stock form
shall notify the FDIC of the proposed conversion and provide the
materials requested by the FDIC.
(b) Content and filing of notice--(1) Content of notice. The notice
required to be filed under paragraph (a) of this section shall provide
a description of the proposed conversion and include a copy of all
notices or applications concerning the proposed conversion, including
all attachments or appendices thereto, that have been filed with any
state and federal banking and/or securities regulators. Copies of all
agreements entered into as part of the mutual-to-stock conversion
between the institution, its officers, directors/trustees and any other
institution and/or its successors also must be provided.
(2) Filing of notice. Notices shall be filed with the regional
director (DOS) in the region in which the institution seeking to
convert is headquartered at the same time as the conversion application
materials are filed with the institution's primary state regulator.
(c) Review by FDIC. (1) The FDIC shall review the materials
submitted by the institution seeking to convert from mutual to stock
form. The FDIC, in its discretion, may request any additional
information it deems necessary to evaluate the proposed conversion and
the institution shall provide such information to the FDIC
expeditiously. Among the factors to be reviewed by the FDIC are:
(i) The use of the proceeds from the sale of stock, as prescribed
in the business plan;
(ii) The adequacy of the disclosure materials;
(iii) The participation of depositors in approving the transaction;
(iv) The form of the proxy statement required for the vote of the
depositors/members on the conversion;
(v) Any increased compensation and other remuneration (including
stock grants, stock option rights and other similar benefits) to be
obtained by officers and directors/trustees of the bank in connection
with the conversion;
(vi) The adequacy and independence of the appraisal of the value of
the mutual savings bank for purposes of determining the price of the
shares of stock to be sold;
(vii) The process by which the bank's trustees approved the
appraisal, the pricing of the stock and the compensation arrangements
for insiders;
(viii) The nature and apportionment of stock subscription rights;
and
(ix) The bank's plans to fulfill its commitment to serving the
convenience and needs of its community.
(2) In reviewing the materials required to be submitted under this
section, the FDIC will take into account the extent to which the
proposed conversion conforms with the various provisions of the mutual-
to-stock conversion regulations of the Office of Thrift Supervision (12
CFR Part 563b), as currently in effect at the time the FDIC reviews the
required materials related to the proposed conversion. Any non-
conformity with those provisions will be closely scrutinized.
Conformity with the OTS requirements, however, will not be sufficient
for FDIC regulatory purposes if the FDIC determines that the proposed
conversion would pose a risk to the institution's safety and soundness,
violate any law or regulation or present a breach of fiduciary duty.
(d) Notification of completed filing of materials. The FDIC shall
notify the institution when all the required materials related to the
proposed conversion have been filed with the FDIC and the notice is
thereby complete for purposes of computing the time periods designated
in paragraphs (e) and (g) of this section.
(e) Notice of intent not to object. If the FDIC determines, in its
discretion, that the proposed conversion would not pose a risk to the
institution's safety and soundness, violate any law or regulation or
present a breach of fiduciary duty, then the FDIC shall issue to the
bank seeking to convert, within 60 days of receipt of a complete notice
of proposed conversion or within 20 days after the last applicable
state or other federal regulator has acted on the proposed conversion,
whichever is later, a notice of intent not to object to the proposed
conversion. The FDIC may, in its discretion, extend by written notice
to the institution the initial 60-day period by an additional 60 days.
(f) Letter of objection. If the FDIC determines, in its discretion,
that the proposed conversion poses a risk to the institution's safety
and soundness, violates any law or regulation or presents a breach of
fiduciary duty, then the FDIC shall issue a letter to the institution
stating its objection(s) to the proposed conversion and advising the
institution that the conversion shall not be consummated until such
letter is rescinded. A copy of the letter of objection shall be
furnished to the institution's primary state regulator and any other
state or federal banking and/or securities regulator involved in the
conversion. The letter of objection shall advise the institution of its
right to petition the FDIC for reconsideration under Sec. 303.6(e).
Such action shall not, in any way, prohibit the FDIC from taking any
other action(s) that it may deem necessary.
(g) Consummation of the conversion. An institution may consummate
the proposed conversion upon either:
(1) The receipt of a notice of intent not to object; or
(2) The expiration of the 60-day period following acceptance of a
complete notice by the FDIC or the 20-day period after the last
applicable state or other federal regulator has acted on the proposed
conversion, whichever is later, unless the FDIC issues a notice of
objection before the end of that period and, in which case, the
conversion shall not be consummated until such letter is rescinded. The
FDIC may, in its discretion, extend by written notice to the
institution the initial 60-day period by an additional 60 days.
PART 333--EXTENSION OF CORPORATE POWERS
3. The authority citation for Part 333 is revised to read as
follows:
Authority: 12 U.S.C. 1816, 1818, 1819 (``Seventh'', ``Eighth''
and ``Tenth''), 1828, 1828(m), 1831p-1(c).
4. Section 333.4 is added to read as follows:
Sec. 333.4 Conversions from mutual to stock form.
(a) Scope. This section applies to the conversion of insured mutual
state savings banks to the stock form of ownership. It supplements the
procedural and other requirements for such conversions in Sec. 303.15
of this chapter. This section also applies, to the extent appropriate,
to the reorganization of insured mutual state savings banks to the
mutual holding company form of ownership. As determined by the Board of
Directors of the FDIC on a case-by-case basis, the requirements of
paragraphs (d), (e), and (f) of this section do not apply to mutual-to-
stock conversions of insured mutual state savings banks whose capital
category under Sec. 325.103 of this chapter is ``undercapitalized'',
``significantly undercapitalized'' or ``critically undercapitalized''.
The Board of Directors of the FDIC may grant a waiver in writing from
any requirement of this section for good cause shown.
(b) Conflicts with state law. In the event that an insured mutual
state savings bank that proposes to convert to the stock form of
ownership finds that compliance with any provision of this section
would be inconsistent or in conflict with applicable state law, the
bank may file a written request for waiver of compliance with such
provision by the FDIC. In making such request, the bank shall
demonstrate that the requested waiver, if granted, would not result in
any effects that would be detrimental to the safety and soundness of
the bank, entail a breach of fiduciary duty on part of the bank's
management or otherwise be detrimental or inequitable to the bank, its
depositors, any other insured depository institution(s), the federal
deposit insurance funds or to the public interest.
(c) Definition of Eligible Depositor. For purposes of this section,
eligible depositors are depositors holding qualifying deposits at the
bank as of a date designated in the bank's plan of conversion that is
not less than one year prior to the date of adoption of the plan of
conversion by the converting bank's board of directors/trustees.
(d) Requirements. In addition to other requirements that may be
imposed by the applicable state statutes and regulations and other
federal statutes and regulations, including Sec. 303.15 of this
chapter, an insured mutual state savings bank shall not convert to the
stock form of ownership unless the following requirements are
satisfied:
(1) Eligible depositors shall have higher subscription rights than
employee stock ownership plans;
(2) The proposed conversion shall be approved by a vote of at least
a majority of the bank's depositors and, as reasonably determined by
the bank's directors or trustees, other stakeholders of the bank who
are entitled to vote on the conversion, unless the applicable state law
requires a higher percentage, in which case the higher percentage shall
be used. Voting may be in person or by proxy;
(3) Management shall not use proxies executed outside the context
of the proposed conversion to satisfy the voting requirement imposed in
the previous paragraph; and
(4) In addition to the materials to be submitted to the FDIC
pursuant to Sec. 303.15(c) of this chapter, the bank must submit to the
FDIC:
(i) A full appraisal report on the value of the converting bank and
the pricing of the stock to be sold in the conversion. The report must
be prepared by an independent appraiser and must include a complete and
detailed description of the elements that make up an appraisal report,
justification for the methodology employed and sufficient support for
the conclusions reached therein, including a full discussion of the
applicability of each peer group member and documented analytical
evidence supporting any variance (above or below) the institution
proposing to convert may have from the peer group statistics and a
complete analysis of the institution's pro forma earnings which should
include its full potential once the institution fully deploys its new
capital pursuant to its business plan; and
(ii) A business plan which must include, in part, a detailed
discussion of how the capital acquired in the conversion will be used,
expected earnings resulting from the plan and a justification for any
proposed stock repurchases.
(e) Restriction on repurchase of stock. An insured mutual state
savings bank that has converted from the mutual to stock form of
ownership may not repurchase its capital stock within one year
following the date of its conversion to stock form, except that stock
repurchases of no greater than 5% of the bank's outstanding capital
stock may be repurchased during this one-year period where compelling
and valid business reasons are established, to the satisfaction of the
FDIC. Any stock repurchases shall be subject to the requirements of
section 18(i)(1) of the Federal Deposit Insurance Act (12 U.S.C.
1828(i)(1)).
(f) Stock benefit plan limitations. The FDIC will presume that a
stock option plan or management or employee stock benefit plan that
does not conform with the applicable percentage limitations of the
regulations issued by the Office of Thrift Supervision constitutes
excessive insider benefits and thereby evidences a breach of the board
of directors' or trustees' fiduciary responsibility. In addition, no
converted insured mutual state savings bank shall, for one year from
the date of the conversion, implement a stock option plan or management
or employee stock benefit plan, other than a tax-qualified employee
stock ownership plan, unless each of the following requirements is met:
(1) Each of the plans was fully disclosed in the proxy solicitation
and conversion stock offering materials;
(2) All such plans are approved by a majority of the bank's
stockholders, or in the case of a recently formed holding company, its
stockholders, prior to implementation at a duly called meeting of
shareholders, either annual or special, to be held no sooner than six
months after the completion of the conversion;
(3) In the case of a savings bank subsidiary of a mutual holding
company, all such plans are approved by a majority of stockholders
other than its parent mutual holding company prior to implementation at
a duly called meeting of shareholders, either annual or special, to be
held no sooner than six months following the stock issuance;
(4) For stock option plans, stock options are granted at no lower
than the market price at which the stock is trading at the time of
grant; and
(5) For management or employee stock benefit plans, no conversion
stock is used to fund the plans.
By the order of the Board of Directors.
Dated at Washington, D.C., this 22nd day of November, 1994.
Federal Deposit Insurance Corporation.
Robert E. Feldman,
Acting Executive Secretary.
[FR Doc. 94-29240 Filed 11-29-94; 8:45 am]
BILLING CODE 6714-01-P