Mutual-to-Stock Conversions of State Nonmember Savings Banks

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