Mutual-to-Stock Conversions of State Nonmember Savings Banks

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 333

RIN 3064-AB44

Mutual-to-Stock Conversions of State Nonmember Savings Banks

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Proposed rule.

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SUMMARY: The proposed rule would require FDIC-insured mutual state-

chartered savings banks that are not members of the Federal Reserve

System (State Savings Banks) 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 proposed rule is to assure

that certain aspects of mutual-to-stock conversions of FDIC-regulated

institutions do not engender safety-and-soundness concerns, breaches of

fiduciary duty or other violations of law.

DATES: Written comments must be received by the FDIC on or before July

13, 1994.

ADDRESSES: Written comments shall be addressed to the Office of the

Executive Secretary, Federal Deposit Insurance Corporation, 550 17th

Street, NW., Washington, DC 20429. Comments may be hand-delivered to

Room F-400, 1776 F Street, NW., Washington, DC, on business days

between 8:30 a.m. and 5 p.m. (FAX number: (202) 898-3838). Comments

will be available for inspection in room 7118, 550 17th Street, NW.,

Washington, DC between 9 a.m. and 4:30 p.m. on business days.

FOR FURTHER INFORMATION CONTACT: Robert H. Hartheimer, Acting Director,

Division of Resolutions (202/898-8879), John G. Finneran, Jr., Acting

Deputy General Counsel, Legal Division (202/898-3766), Robert F.

Miailovich, Associate Director, Division of Supervision (202/898-6918),

Robert W. Walsh, Manager, Planning and Program Development Section,

Division of Supervision (202/898-6911), Joseph A. DiNuzzo, Counsel,

Legal Division (202/898-7349), Federal Deposit Insurance Corporation,

Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I. Paperwork Reduction Act

The collection of information contained in this proposed rule has

been submitted to the Office of Management and Budget (OMB) for review

and approval pursuant to the Paperwork Reduction Act of 1980 (44 U.S.C.

3501 et seq.). Comments regarding the accuracy of the burden estimate,

and suggestions for reducing the burden, should be addressed to the

Office of Management and Budget, Paperwork Reduction Project (3064-

0117), Washington, DC 20503, with copies of such comments sent to

Steven F. Hanft, Assistant Executive Secretary (Administration), room

F-400, FDIC, 550 17th St. NW., Washington, DC 20429.

The collection of information in this proposed rule is found in

Sec. 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 proposed rule is summarized as follows:

Number of Respondents: 40

Number of Responses per Respondent: 1

Total Annual Responses: 40

Hours per Response: 20

Total Annual Burden Hours: 800

Regulatory Flexibility Act

The Board hereby certifies that the proposed rule would 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 and 604) do not apply

here.

II. Recent FDIC Regulatory Initiatives on Mutual-To-Stock Conversions

In recent years numerous mutually owned State Savings Banks have

converted to stockholder-owned State Savings Banks. Many of the

institutions that converted from mutual to stock form first converted

from federal or state mutual savings associations regulated by the

Office of Thrift Supervision (OTS) to State Savings Banks. One

consequence of these conversions to State Savings Banks is that the

FDIC replaces the OTS as the institution's primary federal regulator.

Mutual-to-stock conversions of State Savings Banks are generally

subject to the rules and entitled to the protections of the applicable

state law.1

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\1\Some federal laws also apply, such as the anti-fraud

provisions of the federal securities law. E.g., 15 U.S.C. 78j.

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Conversion rules under state law are not identical to and in some

cases are less stringent than OTS regulations. The absence of

consistent treatment under state laws and the lack of some federal

oversight of State Savings Bank mutual-to-stock conversions present an

opportunity for inconsistency and abuse.

Because of concerns about prior and potential abuses in the

conversion process, on February 1, 1994, the FDIC issued for public

comment a proposed policy statement on the conversions of State Savings

Banks from mutual to stock ownership (Proposed Policy Statement). 59 FR

4712. 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.

The areas of FDIC concern identified in the Proposed Policy Statement

were: (1) Proper appraisal of the institution to be sold; (2) proper

pricing of the stock sold in the conversion; (3) fair apportionment of

the stock subscription rights; (4) adequate disclosure of information

needed to make an informed investment decision; and (5) non-abusive

compensation and benefits provided to insiders.

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 were caused by several recent and pending mutual-to-stock

conversions of State Savings Banks that had given rise to questions

related to management abuse and excessive enrichment of insiders,

fairness to depositors and general safety and soundness concerns. These

conversions have recently been the subject of Congressional hearings

and numerous news articles and reports. The FDIC also had received (and

continues to receive) 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 (to be

published at 12 CFR 303.15) 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 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

documentation 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.

In a proposed merger/conversion, the FDIC pays particular attention to

the value offered to depositors of the converting institution and the

compensation packages offered to management.

As indicated in the Interim Rule, the FDIC generally expects

proposed conversions to substantially satisfy the standards found in

the mutual-to-stock conversion regulations of the OTS (12 CFR Part

563b). Any variance from those regulations is closely scrutinized. As

also indicated in the Interim Rule, however, compliance with OTS

requirements is not necessarily sufficient for FDIC regulatory

purposes. The Interim Rule specifies that the FDIC will look to the OTS

rules ``currently in effect'' at the time the FDIC reviews the proposed

conversion. As indicated below, the OTS recently revised its mutual-to-

stock conversion regulations. Thus, upon the issuance of the OTS

revised regulations on May 3, 1994 (59 FR 22725), the FDIC began taking

into account the extent to which proposed conversions of State Savings

Banks conform with the various provisions of the OTS' revised

regulations. The Interim Rule remains effective during the pendency of

this proposed rulemaking.

III. Comments Received on the Proposed Policy Statement and Interim

Rule

In developing and issuing this proposed rule it was helpful for the

FDIC staff and the Board to consider the comments received on the

Proposed Policy Statement and the Interim Rule. It is anticipated that

the Board will again consider those comments when taking final action

on the Proposed Policy Statement and the Interim Rule. Some issues

identified and discussed in the comments are not germane to the

proposed rule, but may be relevant when the Board takes final action on

the Proposed Policy Statement and Interim Rule; thus, although they are

mentioned briefly in the summary of comments provided below, those

issues are not otherwise discussed in the context of this proposed

rulemaking.

In the Proposed Policy Statement and the Interim Rule the FDIC

specifically requested comment on, among other issues: 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.

A summary of the comments received on the Proposed Policy Statement

and Interim Rule is provided below.

IV. Need for the Proposed Rule

Recently the OTS revised its mutual-to-stock conversion regulations

primarily to address immediate concerns about excessive management

remuneration and inadequate depositor participation in conversions of

savings associations (59 FR 22725 (May 3, 1994)) (OTS Revisions). In

essence, the new regulations attempt to prevent management abuses by

strengthening the rights of depositors.

The FDIC believes that the OTS Revisions are a necessary, sound

first step in correcting certain abuses stemming from conversions and

that the absence of some federal oversight of mutual-to-stock

conversions of State Savings Banks presents an opportunity for

inconsistency and abuse. Thus, the FDIC thinks it may be necessary and

appropriate to adopt regulations similar to the OTS Revisions. For

these reasons, as discussed below, the FDIC is issuing this proposed

rule.

Because the fundamental problem concerning the distribution of

existing economic value in mutual-to-stock conversions is not addressed

by the OTS Revisions, however, the Board believes other forms of abuse

may still arise. The FDIC believes that it is necessary to re-examine

the conversion process to explore whether the existing economic value

of a converting mutual institution can be better distributed directly

to those who should receive it.

The FDIC is particularly concerned about the appraisals of

converting institutions. The FDIC believes that under the current

process it may be difficult to prepare an appraisal of a well

capitalized mutual institution which accurately reflects ``pro forma

value'' while at the same time reflecting the appraised value cogently

in a business plan of the institution. The incidence of significant

appreciation in the stock price immediately after the initial public

offering, which tends to exceed the stock appreciation of initial

public offerings in other industries, suggests that appraisals may be

too low. As a possible consequence of underpricing the institution,

insiders may be able to acquire more shares than they are entitled to;

moreover, a low appraisal may deprive an institution of the additional

capital it should receive in the sale of conversion stock.

To address the possible need for fundamental changes to the mutual-

to-stock conversions process, concurrently with the publication of this

proposed rule, the Board also is publishing a request for comments on

ways to address concerns about the overall conversion process (Request

For Comments). The Request For Comments is a separate notice contained

elsewhere in this issue of the Federal Register.

V. Explanation of the Proposed Rule

1. Overview

The proposed rule would impose several specific requirements upon

State Savings Banks that propose to undergo mutual-to-stock

conversions. The proposed requirements are similar to the OTS

Revisions. Currently and during the pendency of this proposed

rulemaking, 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. As noted above and in the

Interim Rule, this FDIC review includes an analysis of whether the

proposed conversion would comply with current OTS mutual-to-stock

conversions rules. Subsequent to the adoption of a 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 proposed rule.

Among other things, the proposed rule also would indicate that the

requirements thereof apply, to the extent appropriate, to the

reorganization of State Savings banks to the mutual holding company

form of ownership. The FDIC also is 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.

As discussed below, preliminarily, the FDIC believes that each of

the requirements in the proposed rule is necessary to satisfy specific

FDIC concerns about safety and soundness and/or breaches of fiduciary

duty 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 below, many of the comments that the

FDIC received on the Proposed Policy Statement and the Interim Rule

expressed agreement with the FDIC's federal oversight role in mutual-

to-stock conversions of State Savings Banks, but several also suggested

that deference be paid to states' rights on issues outside the FDIC's

areas of concern.

With the issuance of the proposed rule, the Board is attempting to

strike the proper balance in this regard. In particular, the proposed

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 proposed 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 would

have to 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.

As noted above, recently the OTS revised its regulations on mutual-

to-stock conversions of savings associations. OTS' 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 proposed rule

incorporates most of the same requirements recently adopted by the OTS.

The proposed rule would: Require 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;

require a depositor vote on all mutual-to-stock conversions of State

Savings Banks and prohibit 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, require

that any management recognition plans or stock option plans be

implemented only after shareholder approval is received, require 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 prohibit MRPs

funded by conversion proceeds; require 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; require 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); require that

employee stock ownership plans (ESOPs) not have a priority over

subscription rights of ``eligible depositors'' (as defined in the

proposed rule); require 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;

and prohibit stock repurchases within one year following the

conversion.

2. Discussion of Each Proposed Requirement

The following is a discussion of each of the requirements in the

proposed rule. Many of the requirements are engendered by the Board's

concerns about bank management's proper exercise of its fiduciary

duties. As discussed in the preamble to the Interim Rule, the duties

and obligations of 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 obligate 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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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 trustees 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 Interim Rule, also requires the trustees 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. Publicized insider abuse (and the

lawsuits that such abuses may engender) may have a sufficiently

significant impact upon the reputation of a bank to affect its

continued viability and, thus, its safety and soundness, resulting in a

regulatory violation.

As indicated above, the requirements in the proposed rule are

rooted in concerns about safety and soundness, breaches of fiduciary

duty and/or other violations of law.

A. Submission of a Full Appraisal Report

The proposed rule would require State Savings Banks that propose to

convert to stock ownership to 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. Many of the

states require that a converting mutual savings banks sell its capital

stock at a total price equal to its estimated pro forma market value,

based on an independent valuation. The purpose of this requirement is

to assure that the converting institution receives the full value for

the conversion stock sold. As indicated above and in the Request For

Comments, the FDIC has identified what may be significant problems with

the overall conversion process.

As discussed in detail in the Request For Comments, many recent

mutual-to-stock conversions have exhibited significant increases in the

immediate post-conversion trading market for the stock. The FDIC is

concerned that such increases have resulted from appraisal reports

(submitted in connection with these recent conversions) that have set

the pro forma market value significantly below the true value of the

converting institution. 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; in addition,

the deposit insurance fund is provided with less of a capital cushion

than would have resulted if the stock was based on a proper and

adequate appraisal. Also, an underpriced appraisal could entice

insiders to undertake a conversion (in order to acquire shares below

their fair value) that may not be in the best interests of the

institution. Sophisticated investors also are able to benefit,

undeservedly, from the sale of underpriced conversion stock.

For these reasons, the proposed rule would require that a full

appraisal be provided to the FDIC in a proposed mutual-to-stock

conversion of a State Savings Bank. The appraisal report would have to

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. This would include 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 would require 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 would 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 generally has been disappointed with the appraisal reports

it has reviewed in connection with proposed conversions. As noted

above, many appraisals have set the pro forma market value of the

converting institution significantly below the true value of the

institution as derived from its peer group. Reasons for this have

included inappropriate peer-group selections, inconsistencies between

the analysis in the appraisal report and the business plan submitted

with the conversion notice and continued unfounded justification for

new issue discounts in stock issuances that have been well

oversubscribed.

The FDIC has noted that appraisals lack specific detail on the

inclusion of peer group members regarding particular information on:

the markets within which they operate; the adjustments made to

normalize their earnings or design comparable pro forma earnings; and

the price appreciations experienced by each member since its

conversion. Converting institutions are almost always considered

inferior to the peer group--a fact which raises questions about the

composition of the peer group. Little or no analytical evidence is

typically given in appraisals for the discounts suggested for the

converting institution compared to the peer members. In addition, every

appraisal contains a new issue discount without any analytical support

for exactly how much that discount should be or why it is needed. Our

analysis indicates market activity where virtually every conversion has

traded up over the last few years. Finally, when subscription offerings

are completed and oversubscriptions have occurred (in some case, quite

substantially) appraisers have not justified why the original appraisal

should not be increased beyond the ``supermax'' but rather in virtually

every case confirm the original valuation.

Many appraisals that the FDIC has reviewed contain only cursory

analysis of the expected future earnings of the institution. The FDIC

believes that buyers of conversion stocks need to analyze institutions

with much more financial sophistication than what appears in the

appraisal and, therefore, appraisals should be augmented. Earnings

rarely reflect a true expected use of conversion proceeds and others

are understated by investments in low-rate securities. Earnings are

rarely estimated in conjunction with the converting institution's

future business plan--a fact that the FDIC finds inconsistent and

unacceptable.

During the pendency of this rulemaking and subsequent to the

adoption of a final rule, the FDIC will continue to review appraisal

reports to ensure that converting institutions and the conversion stock

are properly valued. The FDIC will continue to object to proposed

conversions supported by unacceptable appraisal reports.

B. Depositor Voting Requirement and Prohibition on the Use of Running

Proxies

The Board believes that, in order for a board of 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 trustees (or similar

group) approve the plan of conversion and do not require a vote of

members.

As discussed below, several of the comments on the Interim Rule

voiced opposition to ``voting rights'' for depositors in states that do

not provide such rights. In preliminary response to those comments, and

subject to others that the FDIC hopes to receive on this issue, the

Board thinks that it is necessary and appropriate for the FDIC to

require a depositor vote on proposed conversions. Such a requirement

would not necessarily contradict state laws (that do not require a

depositor vote), but supplement the state law by requiring the member

vote. The FDIC's concern is with the board of trustees' proper exercise

of its fiduciary duties of loyalty and care to the bank and its

depositors. Preliminarily, 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 foregoing 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 proposed rule, therefore, would require a

depositor vote in favor of the proposed conversion of a State Savings

Bank to stock form. Unless otherwise prescribed by the applicable state

law, the required vote would be a majority of the bank's depositors and

other stakeholders of the bank who the bank's trustees reasonably

determine are entitled to vote on the conversion.

In the same vein, the Board 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 believes, preliminarily, that given the material change in

structure represented by the bank's conversion to stock form, it is

imperative that depositors be permitted to vote separately on the

proposed conversion and that the most effective manner to assure that

depositors are fully informed of the proposed conversion and have an

opportunity to participate fully in the conversion would be to prohibit

the use of running proxies in such transactions. This is in keeping

with the FDIC's concern that the management of a State Savings Bank

fulfill its fiduciary responsibilities by assuring that the depositors

are in agreement with the proposed conversion. Thus, the proposed rule

would prohibit the use of running proxies in the mutual-to-stock

conversion process.

C. Restrictions on Management Stock Benefit and Recognition Plans

(MRPs)

The OTS Revisions prohibit MRPs in conversions of federal and state

savings associations. Currently, however, the regulations and policies

of some state banking and thrift regulators permit MRPs to purchase a

certain percentage of the stock sold in a mutual-to-stock conversion of

a bank or savings association depending on the institution's capital

position. Under some of these regulations and guidelines, management

also may be granted stock options up to a certain percentage of the

shares issued in the conversion. Based on a review of numerous proposed

conversions, the Board believes that some bank insiders may be

sacrificing 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 recent years has been substantially higher than the

conversion price, creates the impression that insider enrichment may be

the main reason for the conversion.

These factors 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.

As discussed below, the FDIC received several comments on the

Proposed Policy Statement and the Interim Rule about management

compensation in the conversion process. Many of these comments argued

that the management of converting institutions should 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. The Board does not disagree

with this general point of view. While the Board believes that

management and trustees would have increased responsibilities as a

public company, preliminarily, the Board believes that, in most cases,

market-based management compensation should be determined by the

stockholders after the conversion is completed.

In particular, the proposed rule would provide 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 was 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.

The proposed restrictions on MRPs do not include specific

percentage limitations. Preliminarily, the FDIC believes that the

proposed restrictions would adequately safeguard against potential

management self-interest in mutual-to-stock conversions. Also, pursuant

to the Interim Rule, the FDIC would 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. In addition, the FDIC believes that

specific percentage limitations on MRPs may be too rigid and not serve

to stem management abuses in every situation. The Board requests

specific comments on whether MRP percentage limitations should be

specified in the FDIC's regulations and, if so, what those percentages

should be.

D. Eligibility Record Date, Priority to Depositors Residing in the

Bank's Local Community, Priority of Employee Stock Ownership Plans

(ESOPs)

The OTS Revisions require, among other things, that the record date

established by a converting institution to determine which depositors

will be afforded a priority in obtaining subscription rights in the

conversion stock be set at no less than a year prior to the board of

director's approval of the conversion. The Board believes,

preliminarily, that, in order for a board of 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 numerous comments we have received thus far

and from our own review of proposed and completed conversions, it is

apparent that so-called professional depositors, who place funds in

mutual banks and savings associations throughout the country 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 would help assure that longer-term

depositors are more likely than professional depositors to benefit from

the stock purchase priority. Thus, the proposed rule would require that

the eligibility record date be no less than one year prior to the date

the board of trustees approves the plan of conversion. The FDIC

requests specific comment on whether the one-year period is sufficient

and on whether the date chosen should be based on the board of

trustees' first consideration of whether the bank should be converted

to the stock form of ownership.

In a further effort to mitigate the exploitation of the mutual-to-

stock conversion process by professional depositors, the proposed rule

would provide a stock purchase preference to eligible depositors in the

bank's ``local community'' or within 100 miles of a home or branch

office of the converting bank. The term ``local community'' would be

defined as all counties in which the converting bank has its home

office or a branch office, each county's standard metropolitan

statistical area or the general metropolitan area of each of these

counties and such other area(s) as provided for in bank's plan of

conversion. The Board believes that it is likely that the double

requirement (for a stock purchase priority) of having a depositor

relationship with the bank for at least one year prior to the date of

the board's adoption of the plan of conversion and of having to reside

in the bank's local community would decrease the participation of

professional depositors in conversions of State Savings Banks.

The Board is mindful, however, that there may be depositors,

particularly long-term depositors, of a State Savings Banks who are not

``professional depositors,'' but happen to live outside the ``local

community'' or the 100-mile area designated by the proposed

requirement. Thus, the FDIC requests specific comment on whether and

how such depositors can be included within the proposed stock purchase

preference for ``local depositors.'' One possible alternative would be

to expand the definition of ``local depositor'' to include all

depositors who have had a deposit relationship with the bank for, say,

three or five years prior to the board of trustees' adoption of the

plan of conversion. The Board is interested in comments on all aspects

of the proposed priority requirement for local depositors, including

views on whether the requirement is necessary, sufficient and/or

equitable.

In the same vein, the Board believes that ESOPs (tax-qualified or

otherwise) should not be accorded higher purchase priority rights than

long-term depositors. The Board believes that general principles of

fiduciary duty require that the board of trustees of a State Savings

Bank put the interest of long-term depositors ahead of the interests of

management and employees. Thus, the proposed rule would require that

ESOPs not be accorded a higher subscription right priority than

``eligible depositors.'' The term ``eligible depositors'' would be

defined as a depositor 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 trustees. The FDIC requests specific comment

on whether the one-year period is sufficient and on whether the period

chosen should be based on the board of trustees' first consideration of

whether to convert to stock ownership.

E. Submission of Business Plans

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 a reasonable return on their investment. As

discussed in the preamble to the Interim Rule, in the past some

institutions, in leveraging capital raised through a conversion and

reaching for a return on equity, have vigorously competed for loans and

unduly liberalized underwriting standards. Such practices led to loan

losses that in many instances depleted more capital than was raised

through conversion and, in some cases, failures and losses to the Bank

Insurance Fund.

For these reasons, the proposed rule would require State Savings

Banks that propose to undergo a mutual-to-stock conversion to 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 returns resulting from the plan, and

the justification for any intended stock repurchases.

F. Post-conversion Stock Repurchases

As indicated above, the proposed rule would require that the

business plan submitted to the FDIC in connection with a proposed

mutual-to-stock conversion include a detailed discussion of how the

capital acquired in the conversion will be utilized, including, among

other things, a justification for any proposed stock repurchases. The

FDIC is concerned that substantial buyback programs begun immediately

after the bank's conversion to stock form may not have a legitimate

business purpose. Such repurchases also raise issues about whether the

conversion stock was appropriately valued. In addition, the FDIC is

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. To protect against these

potential problems, the proposed rule would prohibit stock repurchases

for one year following the conversion. Stock repurchases after that

period would be considered on a case-by-case basis under section

18(i)(1) of the FDI Act (12 U.S.C. 1828(i)(1)) which prohibits state

nonmember banks from reducing or retiring capital without the prior

consent of the FDIC.

VI. Merger/Conversions

In some cases, mutual institutions convert to stock ownership in

the course of 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 trustees of a State Savings

Bank must assure that value of the converting institution is fairly

distributed. This means not only guarding the interests of long-term

depositors against insiders and professional depositors, but against

acquiring institutions. Based on the proposed conversions we have

reviewed in the recent past and other merger conversions we have

studied, the Board has observed that, in virtually every merger

conversion, the acquiring institution captures a large portion of the

value of the converting institution. It is also not uncommon in merger/

conversions for the management of the converting mutual institution to

receive extremely generous compensation and benefit packages. The OTS

Revisions prohibit merger/conversions.

As indicated in the preamble to the OTS Revisions, there is an

issue whether the management of a mutual institution is opting for a

merger/conversion, instead of a standard conversion, 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, there have been numerous

complaints recently 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 interest ahead of

the interests of the converting bank and its depositors.

For the foregoing reasons, the Board believes 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. At this time, however, the

Board does not propose to impose a blanket prohibition on non-

supervisory merger/conversions. The FDIC will continue to review

proposed merger/conversions with an emphasis on whether the fair value

of the State Savings Bank would be delivered to the rightful

recipients. The FDIC is requesting specific comment on this topic and

specifically whether a moratorium should be placed on merger/

conversions involving sufficiently capitalized State Savings Banks.

VII. Comparison With OTS Regulations

As noted above, the requirements imposed by the proposed rule would

essentially parallel the OTS Revisions. There are numerous other

provisions in the OTS' mutual-to-stock conversion regulations (12 CFR

part 563b), however, that are not included in either the FDIC Interim

Rule or the proposed rule. Those OTS regulations impose upon converting

savings associations 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.

Preliminarily, the FDIC believes that the requirements imposed by

the proposed rule, coupled with the requirements of the Interim Rule,

would enable the FDIC to monitor the conversions of State Savings Banks

for issues involving safety and soundness, fiduciary duty and other

violations of law. Pursuant to the Interim Rule, the FDIC uses the OTS

regulations as a frame of reference in reviewing proposed mutual-to-

stock conversions of State Savings Banks. The FDIC also looks to the

applicable state law and regulations in reviewing proposed conversions.

To date, the FDIC has not identified a need to adopt a more

comprehensive set of regulations addressing all aspects of the mutual-

to-stock conversion process. It has been suggested, however, that in

order to achieve greater uniformity with the OTS' conversion

regulations the FDIC's conversion regulations should be expanded to

match the scope and depth of the OTS rules. Thus, the Board

specifically requests comment on whether the FDIC's regulations should

be expanded to include provisions similar to those of the OTS

regulations that are not already included in either the Interim Rule or

the proposed rule.

VIII. Convenience and Needs Requirement

The OTS has issued a proposed rule that would add a requirement to

its mutual-to-stock conversion regulations that, in determining whether

to approve such a conversion transaction, the OTS would consider the

convenience and needs of the community served by the converting

institution. 59 FR 22764 (May 3, 1994.) 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 the FDIC already is required to (and

does) apply a convenience and needs test. The Board requests comment on

whether the FDIC could and should also consider imposing such a

requirement in connection with the mutual-to-stock conversions of State

Savings Banks.

IX. Summary of Comments on the Proposed Policy Statement and Interim

Rule

The FDIC 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.

1. FDIC Oversight Role

The comments did not focus on describing recent abuses in mutual-

to-stock conversions. They generally acknowledged that there had been

notable examples of insider abuse in the recent past and then suggested

how future potential abuses could be avoided. Many of those who

commented recommended that the FDIC play an oversight role in the

mutual-to-stock conversions of State Savings Banks. One state stock

savings bank that is owned by a mutual holding company 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.'' One

state savings association 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 thrift regulator

noted that the FDIC had issued 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 State 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 national banking industry 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', 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 noted 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. 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 Interim Rule is

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.''

2. Transferable Subscription Rights

The FDIC received many comments on the issue whether conversion

rules should be modified to require converting institutions to provide

depositors with transferable subscription rights to purchase the stock

issued in the mutual-to-stock conversion. This issue was not addressed

in either the Proposed Policy Statement or the Interim Rule. In recent

Congressional testimony the FDIC Chairman has indicated that the FDIC

may consider whether depositors and other stakeholders of converting

institutions should receive transferable subscription rights so they

can participate more equitably in the conversion process and receive

benefits from the conversion without having to purchase conversion

stock to do so. With one exception, all the comments received on this

issue opposed the idea. One mutual savings bank stated that ``we are

outraged that any governmental body would consider provisions such as

depositor subscription rights that could enable speculators to force a

mutual bank to convert to a stock bank. Such a provision would not just

endanger this bank, but destroy it, along with many other community

institutions.'' A national banking industry trade group echoed these

sentiments, noting that ``permitting or requiring transferable

subscription rights would undermine the integrity of conversions by

generating intense pressures to convert mutuals to stock form. All

mutuals would be put into play.''

Many mutual savings and cooperative banks in Massachusetts

expressed their objection to ``mandatory depository transferable/

saleable subscription rights'' noting that ``they could subject our

depositors to professional flippers [out-of-area depositors who are

just interested in short-term investment gains], attorneys and

investment firms who may bring pressure to force a mutual-to-stock

conversion.'' A shadow regulatory group expressed the opposite view,

arguing that subscription rights should be transferable to provide an

incentive for depositors to exercise their subscription rights.

3. Contributions to the Community/FDIC

Most of those who commented on the issue expressed opposition to

requiring converting institutions to contribute part of the conversion

proceeds directly to their communities. Many noted such a requirement

would impose a ``social tax'' on converting institutions. A state

savings bank stated that ``a capital giveaway wouldn't further the

FDIC's legitimate goal of preserving safety and soundness.'' Another

state savings bank noted that such a ``social tax would jeopardize the

safety and soundness of the bank and would negatively affect credit

availability to local consumers and small businesses. These are not

public funds.'' One of the numerous savings banks in Massachusetts who

commented negatively on this issue asserted that ``a social tax would

replace insider greed with a form of outsider greed.''

Some commenters, however, suggested that the FDIC should share in

conversion proceeds. A regulatory ``shadow'' group stated that the FDIC

should receive at least 50 percent of [the transferable subscription]

rights [issued in a mutual-to-stock conversion], which it would sell in

the market. The group argued that: ``the taxpayer, through the FDIC,

has the strongest claim on the existing surplus of converting mutual

institutions. The taxpayer has taken the risk of loss that is usually

borne by the stockholder. The public, that had to pay for the loss of

failed thrifts, should reap some of the benefits that all usually go to

the stockholder.'' A state bank commented that ``windfall appreciation

from stock conversions should accrue to the FDIC. The FDIC has provided

protection for thrifts over the years and deserves the benefit.''

4. Merger/Conversions

An individual who commented on the Proposed Policy Statement and

Interim Rule stated 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 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 law firm commented that

the problems with merger/conversions could be ``reduced substantially

if the OTS revised its policy to encourage a discount in the acquirors'

stock as offered to depositors of the acquired institution.'' 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 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.''

5. Depositor Voting/Running Proxies

Several commenters stated that the FDIC should not provide ``voting

rights'' to depositors in connection with conversions of mutual savings

banks in states that do not provide such voting 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

banking and thrift regulator (of a state that does not provide a

depositor voting right) 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. A

national banking and thrift industry trade group noted that the use of

general proxies is reasonable under the OTS' rules.

6. Management Benefits

Many of the commenters discussed the issue of management benefits

in conversions. 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 banking and thrift 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 bank and thrift 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.''

7. Appraisals

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 ``qualified'' OTS staff] to perform a definitive

analysis of institution 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. An individual commented that the FDIC

should not regulate the offer price for healthy mutuals because those

conversions do not place the insurance fund at risk. An individual

suggested that the applicable regulator should retain its own appraiser

to assure fair valuation of the converting entity. A state bank and

thrift regulator stated that appraisal rules required by the FDIC

should be specifically stated in the Interim Rule.

8. Other Comments

An attorney commented that the Interim Rule should allow depositors

full access to all papers filed in connection with proposed merger/

conversions, as well as standard conversions. He also suggested that

depositors be permitted to file with the FDIC objections to such

proposed transactions.

A few commenters noted that the FDIC should clarify that the

Interim Rule applies to mutual holding company formations and merger/

conversions.

An individual suggested that, to protect the insurance fund, a

converting institution should prepare a business plan regarding the

proposed use of the new capital. The plan should be reviewed by the

applicable state; however, if the FDIC feels state review will be

insufficient, the FDIC is empowered by the Federal Deposit Insurance

Act (FDI Act) to assume jurisdiction.

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.

Request for Public Comment

The FDIC is hereby requesting comment during a 30-day comment

period on all aspects of this proposed rule.

List of Subjects in 12 CFR Part 333

Banks, banking, Corporate powers.

The Board of Directors of the Federal Deposit Insurance Corporation

hereby proposes to amend part 333 of title 12 of the Code of Federal

Regulations as follows:

PART 333--EXTENSION OF CORPORATE POWERS

1. 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).

2. 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, this section does 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) Definitions. For purposes of this section:

(1) Local community includes all counties in which the converting

bank has its home office or a branch office, each county's standard

metropolitan statistical area or the general metropolitan area of each

of these counties and such other area(s) as provided for in the plan of

conversion, acceptable to the FDIC; and

(2) 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 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) The subscription offering of the stock to be offered or sold in

the conversion shall provide a stock purchase priority to eligible

depositors, other depositors and others entitled to vote on the bank's

proposed conversion residing in the bank's local community or within

100 miles of a home office or branch of the converting bank;

(2) Employee stock ownership plans shall not have priority over

subscription rights of eligible depositors;

(3) Any direct community offering by the converting bank shall give

a purchase priority to natural persons residing in the bank's local

community or within 100 miles of a home office or branch of the bank;

(4) The proposed conversion shall be approved by a vote of at least

a majority of the bank's depositors and other stakeholders of the bank

who the bank's trustees reasonably determine 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;

(5) Management shall not use proxies executed outside the context

of the proposed conversion to satisfy the voting requirement imposed in

paragraph (d)(4) of this section; and

(6) 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

utilized, expected returns 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. Any stock

repurchases after the one year period 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. 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 soliciting

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 and no sooner than the first

annual meeting following 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

and no sooner than the first annual meeting 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 31st day of May, 1994.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Acting Executive Secretary.

[FR Doc. 94-14007 Filed 6-10-94; 8:45 am]

BILLING CODE 6714-01-P