[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