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September 9, 2011 l Vol. 3, No. 7 ABA NOMINATES TWO MUTUAL BANKERS FOR BOARD OF DIRECTORS FOR 2011-2012 The American Bankers Association’s Nominating Committee has selected the official slate of candidates for ABA officers for election at the association’s annual convention to be held in San Antonio October 23-26. They include two mutual bankers who currently serve on ABA’s Mutual Institutions Council Administrative Committee. They are: Richard E. Holbrook, chairman, president and CEO, Eastern Bank Corporation, Boston, Massachusetts; and Stanley D. Jenks, president and CEO, Security Savings Bank, Monmouth, Illinois. Jenks also serves currently as the chairman of ABA’s Mutual Institutions Council. They will be joining current board member and fellow mutual banker Stephen G. Crowe, who is ABA treasurer and president and CEO, MountainOne Financial Partners, MHC, North Adams, Massachusetts. FED PROPOSES PHASE-IN FOR HOLDING COMPANY REPORTS The Federal Reserve has published its proposed plans to integrate OTS regulations governing Savings and Loan Holding Companies (“SLHCs”) with FRB regulations. The August 22 proposal would also implement other changes under the Dodd-Frank Act. There are several issues of interest for both Mutual Holding Companies (“MHCs”) and SLHCs. The SLHC regulations are collected in new Regulation LL, and the MHC regulations are collected in new Regulation MM. The comment deadline on the Federal Reserve proposal is November 1. Summary Impact of the Proposed MHC Regulations Regulation MM transfers the old OTS rules regarding mutual holding reorganizations without significant changes. One proposed change is in prior practice and rules of the OTS which required offering circulars, forms of proxy and proxy statements for MHCs to be approved and declared effective by the agency. The FRB will continue to require MHCs and their subsidiary holding companies to file offering circulars on Form OC and proxy statements on Form PS in the context of an application to the Board. The Board will not declare offering circulars effective and will not approve proxies or proxy statements. The FRB may require changes to any of the documents. This is because the FRB expects all securities offering documents will be governed by the regulations and policies of the SEC, a state securities regulator and the Board as appropriate. The FRB is seeking comment on whether there are circumstances in which an MHC or subsidiary holding company’s offering circular would not be reviewed or declared effective by the SEC or approved by a state securities regulator. In addition, the FRB is seeking comment on whether the proxies need to be submitted to the FRB or whether a simple statement that proxy statements must conform to state and federal securities laws, rules and regulations is sufficient. It also seeks comment on whether submission on the SEC forms as opposed to OTS forms would suffice if the securities materials are subject to SEC review. Biggest Changes Affect MHCs That Have Issued Minority Shares As many MHCs that issued minority shares anticipated, the FRB has taken a strict approach toward MHC dividend waivers. Without section 625 of the Dodd-Frank Act, it is unlikely the FRB would have permitted any waiver of dividends for MHCs and would have considered the previous waiver of dividends in a full conversion, significantly reducing the value of the shares held in the subsidiary stock holding company or savings association. Section 239.8(d) of Regulation MM implements Section 625 of the Dodd Frank Act to establish the conditions under which an MHC may waive its right to receive dividends declared by a subsidiary of the MHC. Dividend waivers are permissible if: 1. No insider of the MHC, associate of an insider, or tax-qualified or non-tax-qualified employee stock benefit plan of the MHC holds any share of the stock in the class of stock to which the waiver would apply, or 2. The MHC gives written notice to the Board of its intent to waive its right to receive dividends not later than 30 days before the date of the proposed date of payment of the dividend, and the Board does not object to the waiver. There is a distinction between those MHCs that waived dividends
prior to December 1, 2009, (“Grandfathered MHCs”) and those that did not
(“non-Grandfathered MHCs”). For the Grandfathered MHCs, the statute provides that the Board may not object to a waiver of dividends if: 1. The waiver would not be detrimental to the safe and sound operation of the savings association; and 2. The MHC’s board of directors expressly determines that a waiver of dividends by the MHC is consistent with the fiduciary duties of the board of directors to the MHC’s mutual members. The FRB is requiring strict compliance with the statutory wording. The Grandfathered MHC must provide the dividend waiver notice to the FRB and include a copy of the MHC board of directors’ resolution, in the form and substance as the FRB may determine. Because the FRB believes that waiving dividends is “an inherent conflict of interest,” the regulations require that the resolution contain certain elements designed to disclose and mitigate that conflict of interest. These elements include: 1. Description of the conflict of interest that exists because of an MHC director’s ownership of stock in the subsidiary declaring dividends and any actions that the MHC and board of directors have taken to eliminate the conflict of interest, “such as the directors waiving their right to receive dividends.” 2. An affirmation that a majority of the mutual members
eligible to vote have, within the 12 months prior to the declaration date of
the dividend, voted to approve the waiver of dividends. Any proxy
concerning the waiver of dividends may only be used for a 12 month period
from the date it is given. This does spell the end of running proxies
for this purpose and eliminates most of the minority voting. 3. Any proxy statement used in connection with the member vote must include disclosure of any MHC director’s ownership of stock in the subsidiary along with a detailed description of the proposed waiver of dividends by the MHC and the reasons the board of directors requested the waiver of dividends. Most importantly, the FRB is requesting comment concerning the substance of the MHC board resolution and whether any additional provisions should be required to ensure that the fiduciary duties of the directors have been satisfied. For Grandfathered MHCs, the Board will not consider waived dividends in determining an appropriate exchange ratio in the event of a full conversion to stock form. For non-Grandfathered MHCs, the FRB is taking the position that HOLA is silent on the standards applicable to dividend waivers and that the FRB has no limitations on its ability to deny such waivers. Regulation MM applies all of the requirements for Grandfathered MHCs to non-Grandfathered MHCs and imposes additional conditions that must be satisfied before the FRB will approve a request to waive dividends. Among these include:
Not satisfied that the above is sufficient, the FRB specifically requests comment on whether the conditions “sufficiently address concerns regarding the inherent conflict of interest with dividend waivers.” Also, waived dividends are excluded from the capital accounts of the subsidiary holding company or savings association for purposes of calculating any future dividend payments. The non-Grandfathered MHC must appropriately account for all waived dividends in a manner that permits the FRB to consider the waived dividends in evaluating the proposed exchange ratio in the event of a full conversion of the MHC to stock form. And, the MHC must comply with “such other conditions as the Board may require to prevent conflicts of interest or actions detrimental to the safe and sound operation of the savings association.” Less
than one in four formerly OTS MHCs have a waiver issue because they have not
issued stock. Some that have issued stock may qualify for a continuing
waiver. Generally, MHCs that were previously Fed-regulated do not have
a dividend waiver issue. INTERVIEW
WITH ABA MUTUAL INSTITUTIONS COUNCIL
CHAIRMAN STAN JENKS
ME: Why are you a mutual banker? Stan: I am a banker, and like ABA Chairman Steve Wilson, I am proud to be a banker. While the mutual form of ownership is important to this bank, we consider our being a “community” bank very important to providing financial services to our communities. I have been a part of this bank since 1975, and was mentored by people who taught me the value of community service, high ethical business standards, commitment to the customer and the reliance and importance of a top notch bank team. The mutual form of ownership underscores our overall commitment to our customers and the communities we serve. ME: What are the key challenges of mutuality today and how are you dealing with them? Stan: The key challenges to a mutual bank are the same as any community bank. The resources, both human and financial, that we are devoting to keep up with regulatory matters have affected our time and efforts for what we do best: serve our customers. And the process of examination by best practice rather than regulation has added undue stress to the banking/regulator relationship. Our philosophy of doing what’s best for the customer is as strong today as it was when the bank was founded in 1882. We protect our customers and must do so to stay in business. We are concerned that legislators and regulators do not fully realize the importance of community banking to our communities and to the nation. ME: How does your community benefit from the presence of a mutual bank? Stan: Community service has always been a focal point of this bank. We encourage the staff to serve on committees and boards of local organizations. This is one way we have of giving back to the communities that have supported us. Mutuality fosters this engagement because we are committed to the larger customer base. Mutual banks have a long history in their communities which has developed strong bonds between the bank and community, especially in terms of contributions to local organizations and loans to individuals and businesses. ABA ANNUAL CONVENTION—OCTOBER 23-26, 2011, SAN ANTONIO, TX If you have not already done so, please make your plans now to attend our annual convention next month in San Antonio. Our Mutual Institutions Council meeting will be held Sunday, October 23 from 2:00 p.m. – 4:00 p.m., and will include discussions with FDIC and OCC staff and other experts. We expect the Council meeting to be well-attended and lively. This
year’s convention program also will include a session to review the OTS/OCC
Integration process with Jennifer Kelly, Senior Deputy Comptroller for
Midsize/Community Banks and ABA leadership bankers. This email bulletin is a service of the American Bankers Association. ABA Members: To unsubscribe and to manage your subscriptions, please visit ABA E-Mail Bulletins and check or uncheck the appropriate boxes. Or send your request to ABA Mutual Exchange. For other inquiries, please contact ABA’s Alex Maroulis-Cronmiller or 1-800 BANKERS. American Bankers Association, 1120 Connecticut Avenue NW, Washington, DC 20036
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