Conversions From Mutual to Stock Form; Mutual Savings and Loan Holding Companies

SUMMARY: The Office of Thrift Supervision (OTS) proposes to amend its

regulations governing mutual to stock conversions and stock issuances

by savings association subsidiaries of mutual holding companies (MHC

stock offerings). The proposed amendment requires the OTS, in

connection with its review of conversion applications and MHC stock

offering applications, to consider the extent to which the transaction

will affect the convenience and needs of the communities to be served

by the applicant. Under the proposal, in determining whether to approve

these types of applications, the OTS will consider the applicant's

record of compliance with the Community Reinvestment Act (CRA) and

other factors relating to the convenience and needs of the communities

served by the applicant.

DATES: Comments must be received on or before July 17, 1994.

ADDRESSES: Interested parties are invited to submit written comments on

this proposal to: Director, Information Services Division, Public

Affairs, Office of Thrift Supervision, 1700 G Street, NW., Washington,

DC 20552, Attention: Docket No. 94-49. These submissions may be hand-

delivered to 1700 G Street, NW., from 9 a.m. to 5 p.m. on business

days, or may be sent by facsimile transmission to FAX number (202) 906-

7755. Comments will be available for inspection at 1700 G Street, NW.,

from 1 p.m. until 4 p.m. on business days. Visitors will be escorted to

and from the Public Reference Room at established intervals.

FOR FURTHER INFORMATION CONTACT: Michael P. Vallely, Senior Attorney

(202) 906-6241, Kevin A. Corcoran, Assistant Chief Counsel, (202) 906-

6962, Corporate and Securities Division, Chief Counsel's Office; Diana

L. Garmus, Deputy Assistant Director, (202) 906-5683, Corporate

Activities Division, Office of Thrift Supervision, 1700 G Street, NW.,

Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

Background

The OTS recently has undertaken a comprehensive review of its

conversion regulations. By Order No. 94-48, dated April 7, 1994, the

OTS adopted significant amendments to its mutual to stock conversion

regulations, 12 CFR part 563b, and mutual holding company regulations,

12 CFR part 575, to revise, update and clarify the regulations in a

number of areas. In connection with its review of the conversion

regulations, one of the issues the OTS considered was whether the

convenience and needs of the local communities should be a factor in

determining whether to approve these conversions.

The reasons for mutual associations' conversion to stock form have

changed over the years. During the 1980s, most mutual savings

associations were marginally capitalized and many were insolvent.

During this period, conversion transactions were a primary method for

undercapitalized savings associations to raise capital and avoid being

closed by the regulators. The conversion enabled an association to stay

in business and continue to serve the community's credit needs.

Now, however, most mutual associations are healthy. While a

relatively small number of capital deficient mutual associations

undertake conversions primarily to recapitalize, most healthy mutual

thrifts now convert for other reasons. These reasons include financing

the expansion of their operations and taking advantage of the benefits

available to a public company, such as the ability to establish stock

benefit plans for management and employees.

The OTS is aware that account holders and consumer groups recently

have voiced significant concerns regarding the conversion of well-

capitalized associations, particularly in light of the compensation and

stock benefits that management typically receives in such transactions.

Such groups also have expressed concerns regarding the proper

deployment of conversion proceeds, i.e., the extent to which the

capital raised in such transactions should be used to support credit

and loan programs and related services tailored to the community's

credit needs. In addition, management of many well-capitalized

converting associations recently have expressed concern to the OTS that

their institutions do not need--or are unable efficiently to deploy--

substantial amounts of the capital required to be raised under current

regulations.\1\ Managers of such associations also have voiced concern

about the negative impact of what they view as ``excess capital'' on

the price/earnings ratio of the converted association's stock.

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\1\The conversion regulations require that stock be sold in the

amount of the converting association's pro forma market value. See

12 CFR 563b.7(f).

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The OTS is responding to these concerns by issuing an interim final

regulation that, among other things, restricts management benefit plans

and requires converting institutions to file with the OTS a business

plan that adequately addresses the deployment of conversion

proceeds.\2\ The interim rule, which appears elsewhere in this issue of

the Federal Register, solicits public comment on the conversion

regulations, both as to the amendments adopted there and the issues on

which comment is specifically sought, and as to any other current

provisions of the conversion regulations as they relate to the interim

rule.

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\2\See OTS Order No. 94-48.

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As noted in the interim final rule, a convenience and needs

standard has not, to date, been applied to mutual stock conversions of

savings associations. Similarly, a convenience and needs standard

generally has not been applied to MHC stock offerings.\3\ Upon review

of this area, however, the OTS is proposing to apply a convenience and

needs standard to these transactions for the reasons discussed below.

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\3\A convenience and needs standard is already being applied to

mutual holding company reorganizations because these transactions

require the OTS's approval under the Bank Merger Act (BMA). See 58

FR 44105 (August 19, 1993) (adopting part 575 governing mutual

holding company reorganizations and related stock issuances). The

BMA requires that the responsible agency consider the convenience

and needs of the community to be served in acting on any BMA

application. See 12 U.S.C. 1828(c)(5). Because mutual holding

company reorganizations and stock issuances to date generally have

been effected simultaneously as a two part transaction, the OTS has,

as a practical matter, reviewed the entire transaction under a

convenience and needs standard.

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First, the OTS has broad authority under sections 5(i)(1) and

5(i)(2) of the Home Owners' Loan Act (HOLA) to regulate mutual to stock

conversions by savings associations, and under section 10(o)(7) of the

HOLA to regulate mutual holding companies.\4\ These authorities give

the agency considerable discretion in reviewing a conversion

application or MHC stock offering application. For example, the OTS has

exercised this authority to determine whether a transaction is in the

best interests of depositors, the association and the Savings

Association Insurance Fund.\5\ The OTS believes that inherent in this

broad grant of authority is the ability to assess the impact of a

proposed transaction on the convenience and needs of the communities to

be served by a savings association.

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\4\See 12 U.S.C. 1464(i)(1), 1464(i)(2) and 1467a(o)(7). See

also Charter Federal S. & L. Ass'n. v. Office of Thrift Supervision,

912 F.2d 1569 (11th Cir. 1990).

\5\See Charter Federal; York v. Fed. Home Loan Bank Bd., 624

F.2d 495 (4th Cir. 1980), cert. denied, 449 U.S. 1043 (1980).

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Second, section 4(a)(3) of the HOLA supports the adoption of the

proposed regulations addressing housing credit needs.\6\ Section

4(a)(3) of the HOLA provides that the Director ``shall exercise all

powers granted to the Director under this chapter so as to encourage

savings associations to provide credit for housing safely and

soundly.'' The powers granted to the Director include the general

regulatory authority under sections 5(i)(1), 5(i)(2), and 10(o)(7) of

the HOLA mentioned above. Because savings associations are

predominantly housing lenders, the admonition in section 4(a)(3) of the

HOLA that the Director use his or her statutory powers to encourage

savings associations to provide credit for housing provides a

substantial additional basis for the Director to assess community needs

when reviewing applications.

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\6\12 U.S.C. 1463(a)(3).

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Third, the OTS believes it is appropriate to apply a convenience

and needs standard to conversion transactions and MHC stock offerings

as a part of the OTS's responsibility to consider the ongoing CRA

performance of savings associations. The CRA expresses Congress's

judgment that regulated financial institutions must demonstrate that

their deposit facilities serve the convenience and needs of the

communities in which they are chartered to do business and that

regulated financial institutions have continuing and affirmative

obligations to help meet the credit needs of those local

communities.\7\

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\7\12 U.S.C. 2901.

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In this regard, the federal banking agencies recently conducted a

comprehensive review of their CRA regulations in order to provide

clearer guidance to financial institutions on the nature and extent of

their CRA obligations, the methods by which their performance will be

assessed, and the manner in which the CRA will be enforced. This review

was undertaken in response to the President's July 1993 request that

the federal financial institution supervisory agencies reform the CRA

examination and enforcement system. The President asked, among other

things, that in undertaking this effort, the regulators seek to promote

consistency and even-handedness, to improve CRA performance evaluations

and to institute more effective sanctions against institutions with

consistently poor CRA performance.\8\ The addition of a convenience and

needs factor to the mutual to stock conversion standards and the

standards for MHC stock offerings is wholly consistent with the larger

Presidential and regulatory initiatives on the CRA.\9\ The OTS's

assessment of the CRA performance record of each association that is

subject to the regulations promulgated under sections 5(i) and 10(o) of

the HOLA furthers its responsibility under section 4(a)(3) of the HOLA

to encourage thrifts to provide housing credit safely and soundly.\10\

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\8\To implement the President's initiative, the four agencies

held a series of seven public hearings across the country, and

amendments to the agencies' CRA regulations were proposed on

December 21, 1993. See 58 FR 67466 (December 21, 1993).

\9\In connection with its review of the CRA and its implementing

regulations, the OTS also concluded that the CRA, by its terms,

requires the OTS to consider the CRA record of an association

proposing to convert from mutual to federal stock form because the

association must receive a new federal stock charter to replace its

previous mutual charter. See 12 U.S.C. 2902(3)(A) and 2903 and 12

CFR 563e.8(a) (1993).

\10\See also section 5(a) of the HOLA, 12 U.S.C. 1464(a).

Section 5(a) of the HOLA provides that the lending and other powers

conferred on federal savings associations under section 5 are

intended to encourage provision of credit for housing safely and

soundly.

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The proposed convenience and needs standard, like the convenience

and needs standards governing transactions subject to the Bank Merger

Act,\11\ certain holding company applications,\12\ and certain non-

routine corporate transactions under current OTS regulations,\13\ is

intended to encourage savings associations to devote their resources to

lending programs and related customer services that are designed to

address the credit needs of their local communities, including low- and

moderate-income communities, consistent with safety and soundness. Such

programs and services are an integral part of a mutual association's

traditional role of providing ``credit for housing,'' as envisioned by

section 4(a)(3) of the HOLA. Thus, the OTS believes the proposed

regulations will enhance the OTS's ability to ensure that savings

associations undertaking these transactions recognize their

responsibility to consider their community's credit needs.

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\11\See 12 U.S.C. 1828(c).

\12\See 12 U.S.C. 1467a(e)(2).

\13\See 12 CFR 563.22(c) and 571.5(b)(4) (1993).

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Proposed Amendments

The proposal would add a new Sec. 563b.11 to the OTS conversion

regulations that would require the OTS, in reviewing a conversion

application, to examine the extent to which the proposed conversion

will affect the convenience and needs of the communities to be served

by the converted savings association.

As part of this examination, the OTS will review the applicant's

record under the CRA regulations at 12 CFR part 563e and related CRA

policies. Under the proposal, the OTS would give substantial weight to

an applicant's previous CRA record, consistent with the long-standing

policy of the OTS.\14\ For example, if an applicant in its most recent

CRA examination received a rating of ``substantial noncompliance,''\15\

the OTS likely would not approve the application.

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\14\See 54 FR 13742 (April 5, 1989) (joint CRA policy statement

of the federal financial supervisory agencies).

\15\See 55 FR 18163 (May 1, 1990) (adopting revised CRA

guidelines and assessment rating system).

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Under the proposal, the OTS also would scrutinize the business

plans of the applicant. Applicants must demonstrate that their plans

for deployment of proceeds will help meet the credit and lending needs

of the communities served by the applicant. Under the proposed

convenience and needs standard, where an applicant's business plan does

not adequately address this issue, the OTS may deny the application or

impose additional conditions of approval. While commitments in an

applicant's business plan to allocate resources to community

development projects or credit-related programs generally indicate

responsiveness to the convenience and needs of the community, the OTS

will not necessarily view such commitments as remedying CRA-related

deficiencies. Performance under those commitments, however, would be

considered in evaluating the association's CRA record. The OTS also

will consider other relevant factors relating to the association's

performance in meeting the convenience and needs of the community.

The proposal also would add a new Sec. 575.7(a)(7) to the OTS's

mutual holding company regulations, and renumber current

Sec. 575.7(a)(7) as 575.7(a)(8). The proposed new section would set

forth an additional approval requirement for stock issuances by a

savings association subsidiary of a mutual holding company, requiring

that the transaction meet the convenience and needs standard of

proposed Sec. 563b.11.

Solicitation of Comments

The OTS solicits comment on all aspects of the proposed

regulations. The OTS particularly invites comments on whether the

proceeds from conversions or MHC stock offerings should be directed to

specific types of activities and, if so, what portion should be used

for what types of activities.

Regulatory Flexibility Act

Pursuant to section 605(b) of the Regulatory Flexibility Act, it is

certified that this proposal will not have a significant economic

impact on a substantial number of small entities. Accordingly, a

Regulatory Flexibility Analysis is not required.

Executive Order 12866

The OTS has determined that this rule does not constitute a

``significant regulatory action'' for purposes of Executive Order

12866.

List of Subjects

12 CFR Part 563b

Reporting and recordkeeping requirements, Savings associations,

Securities.

12 CFR Part 575

Capital, Holding companies, Reporting and recordkeeping

requirements, Savings associations, Securities.

Accordingly, the Director of the OTS hereby proposes to amend parts

563b and 575, chapter V, title 12, Code of Federal Regulations, as set

forth below:

SUBCHAPTER D--REGULATIONS APPLICABLE TO ALL SAVINGS ASSOCIATIONS

PART 563b--CONVERSIONS FROM MUTUAL TO STOCK FORM

1. The authority citation for part 563b is revised to read as

follows:

Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 2901; 15

U.S.C. 78c, 78l, 78m, 78n, 78w.

2. Section 563b.11 is added to subpart A to read as follows:

Sec. 563b.11 Convenience and needs considerations.

In reviewing an application under this subpart, the Office will

examine the extent to which the conversion will affect the convenience

and needs of the communities to be served by the converted savings

association. The Office will review the applicant's record under part

563e of this subchapter. In addition, the Office will scrutinize the

business plan of the applicant. Each applicant must demonstrate that

the proposed deployment of proceeds contained in its business plan will

help meet the credit and lending needs of the communities served by the

applicant. Also, the Office will consider other relevant factors

relating to the association's performance in meeting the convenience

and needs of the community. Based on an assessment of the applicant's

record under part 563e of this subchapter, the applicant's business

plan and other relevant factors, the Office may approve the

application, deny the application, or approve the application on the

condition that the applicant improve certain aspects of its CRA

performance record or address particular credit or lending needs of the

communities that it serves.

PART 575--MUTUAL SAVINGS AND LOAN HOLDING COMPANIES

3. The authority citation for part 575 is revised to read as

follows:

Authority: 12 U.S.C. 1462, 1462a, 1463, 1464, 1467a, 1828, 2901.

4. Section 575.7 is amended by redesignating paragraph (a)(7) as

paragraph (a)(8), and by adding a new paragraph (a)(7) to read as

follows:

Sec. 575.7 Issuances of stock by savings association subsidiaries of

mutual holding companies.

(a) Approval requirements. * * *

* * * * *

(7) The proposed stock issuance would fail to meet the convenience

and needs standard of Sec. 563b.11 of this subchapter.

* * * * *

Dated: April 8, 1994.

By the Office of Thrift Supervision.

Jonathan L. Fiechter,

Acting Director.

[FR Doc. 94-9980 Filed 5-2-94; 8:45 am]

BILLING CODE 6720-01-P