Decision relative to the petition of Cambridgeport Mutual Holding Company to convert to a stock holding company.
By the Division of Banks
Cambridgeport Mutual Holding Company (the "Petitioner" or "Cambridgeport"), Cambridge, Massachusetts, has petitioned the Division of Banks (the "Division") for permission to convert from a mutual holding company to a stock holding company. The Petitioner is the holding company for Cambridgeport Bank (the "Bank"), a state-chartered savings bank in stock form which also has its main office in Cambridge, Massachusetts. Following the conversion, if approved, the Petitioner would be known as Port Financial Corp. The transaction is governed by the provisions of chapter 167H of the General Laws and the Division's mutual to stock conversion regulations.
The application was submitted on October 25, 1999, in accordance with the filing procedures of the Division. Notice of the application was posted and published pursuant to the Division's standard procedures and applicable regulations. Notice of the application was published in a newspaper of general circulation three times. The first date of publication was December 16, 1999 and the last publication was December 27, 1999. Lobby notices were posted at the Bank's main and branch offices from December 16, 1999 through January 7, 2000. The time for filing comments on the application expired at 5:00 P.M. on January 7, 2000. The one comment filed was received the last day of the comment period and signed on behalf of three entities (the "Protesters"). (The protesting commenters represent insurance/financial services, affordable housing and community development advocacy organizations.) The letter requested that the Division hold a public hearing on the matter. After publication and posting of notice, the Division held a public hearing on January 31, 2000. The period for submitting comments after the public hearing ended at the close of business on February 4, 2000.
The Division has reviewed the application and related documents and other submissions on behalf of the Petitioner, and the extensive oral and written testimony received at the public hearing and the subsequent open comment period. Comments were received from community organizations and individuals and public officials. (At the public hearing, 10 individuals representing local businesses or civic, charitable, government and trade organizations commented in support of the Petitioner's application. Numerous letters both in support and in opposition were received during the comment period including a petition signed by 22 individuals in opposition to the proposed transaction.)
Chapter 167H of the General Laws was passed in 1987 and authorized a mutual savings bank or co-operative bank to reorganize into a mutual holding company with a subsidiary banking institution in stock form. Cambridgeport became the Commonwealth's fourth mutual holding company when it reorganized on August 18, 1994. To date, there have been twenty-five such reorganizations. At September 30, 1999, Cambridgeport had consolidated assets of approximately $721.8 million. Its main function is to serve as the holding company for and hold the stock of the Bank. (A mutual holding company formed by a savings bank possesses all the rights, powers and privileges of a mutual savings bank under G. L. c. 168, except deposit taking powers, in addition to the powers granted by the enabling statute. G. L. c.167H §§6-7.) Cambridgeport's application to convert from a mutual to a stock holding company is the second such transaction. The first mutual holding company conversion was approved in 1998.
The Bank, as a result of the reorganization into a mutual holding company in 1994, is a savings bank in stock form. The Petitioner owns all of its stock. The Bank operates ten banking offices, including three supermarket branch offices. It has one branch office in addition to its main office in Cambridge and one branch office in each of the following eight municipalities: Lexington, Natick, Needham, Newton, Quincy, Wellesley, Westwood, and Winchester. At September 30, 1999, the Bank had assets of approximately $693.7 million. It is in compliance with applicable minimum regulatory capital requirements. ( See 12 CFR Part 325 (FDIC Capital Maintenance Regulations).) The Bank must also meet the requirements of the Commonwealth's Community Reinvestment Act ("CRA"), section 14 of chapter 167 of the General Laws and its implementing regulations 209 CMR 46.00 et seq. and similar federal CRA provisions. In July of 1999, the examiners of the Division examined the Bank and found that its record of performance under CRA was "Satisfactory."
Statutory Framework
The conversion of a mutual holding company to a stock holding company is expressly authorized by statute. ( See G. L.c.167H, §9.) The implementing mutual holding company conversion regulations are found at 209 CMR 33.32 through 209 CMR 33.41. They are an integral part of 209 CMR 33.00 et seq., entitled Conversion by Co-operative Banks and Savings Banks from Mutual to Stock Form (the "Conversion Regulations" or "Regulations"). These extensive regulations govern all aspects of the conversion of Massachusetts chartered banking institutions from mutual to stock form. The Regulations, which date from 1983, are directly patterned after comparable stock conversion regulations promulgated by the Federal Home Loan Bank Board (the "FHLBB"), the predecessor of the Office of Thrift Supervision (the "OTS"). ( See 12 CFR Part 563b. The Massachusetts regulation's enabling statutes, G. L. c.168, §34C and G. L. c.170. §26C, expressly mandate that the Conversion Regulations substantially conform to the FHLBB and OTS regulations. The Con version Regulation's standard conversion provisions also required legislative and gubernatorial approval in the form of a joint resolution signed by the Governor. See House Document No. 6376 (December 27, 1984).)
The conversion of a mutual holding company to a stock form bank holding company also requires approval of the Board of Governors of the Federal Reserve System (the "Federal Reserve"). Similarly, the conversion of a FDIC insured, state-chartered mutual bank requires the approval of the Federal Deposit Insurance Corporation (the "FDIC"). The review processes of both the FDIC and the Federal Reserve assess whether the proposed conversion meets the OTS's procedural and substantive requirements for federally chartered thrift institutions and mutual holding companies. (The FDIC's regulations are found at 12 CFR Parts 303 and 333. The OTS's Mutual Holding Company Regulations are found at 12 CFR Part 575.) The Federal Reserve approved the application of Cambridgeport to acquire the Bank and to convert to stock form on February 1, 2000.
The Division has carefully reviewed whether the Petitioner has met the approval standards set forth in 209 CMR 33.35. Specific grounds for approval for a mutual holding company conversion are found in 209 CMR 33.35(2). (The Regulation specifically sets out the following standard: (a) the formation of a stock holding company will be fair and not prejudicial to the depositors of all its subsidiary banking institution(s); (b) the public interest will be served by the proposed conversion of the mutual holding company to stock form; (c) approval will not result in unsafe or unsound banking practices; (d) the financial and management resources of the converting mutual holding company are satisfactory; and (e) the competence, character, and banking experience of the converting mutual holding company and its resulting subsidiary banking institutions or other bank subsidiaries, including their record of compliance with applicable laws and regulations, are satisfactory.) Alternatively, six separate grounds for disapproving a mutual holding company conversion are found in 209 CMR 33.35(3). Presumptive disqualifiers relating to the applicant's managerial resources and its post conversion business plan, which includes its ability to meet community credit needs, are found in 209 CMR 33.35(5)(a)-(b). Protesting commenters essentially argue that the application is inherently unfair to depositors and that community credit needs will not be met, unless the applicant undertakes a series of written lending and other Community Reinvestment Act related commitments.
The Division primarily looks to the Petitioner's Plan of Conversion; the independent appraisal; confidential state and federal financial safety and soundness reports of examination, including their assessment of management; its bank subsidiary's CRA public evaluations and ratings; and the Petitioner's post conversion business plan to determine whether grounds for approval under 209 CMR 33.35(2) exist. The Division focuses on the Petitioner's notice and information materials to corporators and its stock offering materials to determine whether full disclosure of the transaction and relevant investment risks have been made to the intended recipients. The Petitioner's confidential business plan, particularly its short and long-term deployment of conversion proceeds, is scrutinized from a financial safety and soundness standpoint. A related supervisory consideration is whether existing and projected regulatory capital levels are adequate to support projected growth.
The primary test for determining whether a proposed conversion is "fair to depositors" is whether the Plan of Conversion meets the substantive and procedural requirements of 209 CMR 33.36 and 209 CMR 33.37. (These regulations incorporate by reference the detailed Plan of Conversion requirements of Subpart A (governing standard bank level conversions) and Subpart C (governing the issuance of minority shares by a mutual holding company).) If a Plan of Conversion, including its mandatory and optional provisions, meet the Regulation's detailed requirements, the proposed conversion is deemed to meet the fairness to depositors requirement found in 209 CMR 33.35(2)(a). Cambridgeport's application has been reviewed under the preceding regulatory procedure.
The Protesters assert, however, that Cambridgeport's Plan of Conversion is unfair to depositors on several grounds. Those grounds include: the failure of the Plan of Conversion to adequately compensate depositors for their "ownership interests" in the mutual entity; allegations of excessive management and employee compensation provisions; and that the conversion will lead inexorably to a future sale of a local community banking organization. Public interest arguments relating to the Bank's post conversion lending and CRA performance rating also were raised. Procedural issues relating to the adequacy of notice of the pending application and the sufficiency of information provided to depositors were cited. The Division considered each of the Protesters' arguments in the context of controlling statute and regulation.
Depositor Interests
A major objective of both the Massachusetts and OTS mutual to stock conversion regulations is the protection of depositor interests. Under both regulatory structures, depositors are entitled to receive nontransferable subscription rights in the mutual institution's stock offering. ( See 209 CMR 33.05, which is applicable to a mutual holding company conversion by virtue of 209 CMR 33.36.) The regulations' extensive system of stock purchase priorities also are clearly designed to give depositors preferential status above other stakeholders, non-depositors within the community and outside investors. ( See 209 CMR 33.05(3) through 209 CMR 33.05(11); 209 CMR 33.06(1) through209 CMR 33.06(7).) A mandatory liquidation account is also established for the benefit of eligible account holders in the event of a subsequent liquidation of the converting institution. ( See 209 CMR 33.05(12).) Under existing law, this is the complete extent to which depositors' inchoate "ownership rights" are addressed in a conversion from mutual to stock form. ( See, York v. Federal Home Loan Bank Board, 624 F.2d.495, 499-500 (4 th Cir. 1980) (Depositors' limited property or ownership rights are not deprived by a federally chartered thrift converting to stock form under the FHLBB mutual to stock conversion regulations); In re City Savings Bank of Berlin, 113 N.H. 378, 309 A.2d 31 (1973) (Depositors have limited ownership rights in mutual savings banks which do not include a right to cash option upon a merger); Andover Savings Bank v. Commissioner of Revenue, 387 Mass. 229, 439 N.E. 2d 282 (1982) (Depositor ownership interests in state-chartered mutual institutions are unique and differ from stock corporations); See generally, Business Transactions Division Memorandum: Mutual Savings Associations and Conversion to Stock Form, Office of Thrift Supervision ("OTS Memorandum") May 1997, Chapter 2. (Discussion of treatment and extent of depositor ownership rights in mutual banking institutions under state and federal law and depositor distribution rights in a conversion).) Massachusetts and cognate federal banking law do not extend any other or greater rights to depositors of a converting mutual banking institution.
The Protesters, however, contend that Cambridgeport's Plan of Conversion is unfair because it does not "...transfer all the stock to the depositors according to their 'pro rata ownership in [Cambridgeport's] equity'...." ( See Memorandum in Opposition to Cambridgeport's Application to Convert to Stock, at10.) They alternatively propose a transfer or sale of the bank to a third party acquiror, who in turn would subsequently transfer all of the Petitioner's stock to depositors ( Id., at 9-10, 14. This option also was formally proposed in outline form to the Petitioner in a February 14, 2000 letter from the Protesters' counsel. Since this letter was received after the close of the public comment period it is not part of the record. The sole method for converting from mutual to stock form is the procedure set forth in the Regulations.). The Protesters' contention implicitly assumes that depositor ownership rights in a mutual banking institution include a right to receive the accumulated historical net worth of the institution in the form of free stock or cash upon conversion. Massachusetts law, as well as the federal law upon which it is based, simply does not create such a right. ( OTS Memorandum. Chapter 3 contains an in depth discussion of the historical development of the FHLBB/OTS mutual to stock conversion regulations from 1955 to 1996. In 1973, the FHLBB proposed regulations that would have used a "free distribution" model that gave depositors free stock or cash representing their pro rata interests in a converting federal thrift. After lengthy study, the final 1974 regulations rejected the "free distribution" model in favor of the sale of stock based upon a market value appraisal. This remains the basic structure of the current OTS and Massachusetts conversion regulations.)
The larger questions of who "owns" a mutual banking institution or whether the current state and federal mutual to stock conversion processes equitably allocates rights among the various stakeholders are beyond the scope of this application. (These broader policy issues were most recently raised by the FDIC in its 1994 "white paper" on mutuality . See 59 Fed. Reg. 30357 (June 13, 1994). After extensive public comment, the FDIC ultimately rejected any effort to reallocate ownership interests in converting FDIC insured state-chartered thrift institutions in its final rule, 12 CFR Parts 303 and 333, which was issued on November 30, 1994.) These broad public policy questions have been answered by 209 CMR 33.00 et seq. Accordingly, the application's depositor stock subscription rights provisions, are "fair" to depositors, as a matter of law, since it complies with the mutual holding company conversion regulations' requirements.
Management and Employee Compensation
The Protesters also allege that the conversion application's management and employee stock subscription, qualified employee stock ownership plan ("ESOP"), stock option, stock grant and compensation provisions are excessive, and therefore are unfair to depositors. They also allege that there is an inherent conflict between management and depositor interests in a conversion from mutual to stock form. Subpart D of the Conversion Regulations and the Commonwealth's banking laws address these generalized concerns. Management and employee stock subscriptions are subject to individual and aggregate limitations, which are subordinated to depositor subscriptions under the Regulations and the Petitioner's Plan of Conversion. ( See 209 CMR 33.05(4).) Moreover, management and their associates are prohibited from purchasing more than 30% of the total offering of shares. ( See 209 CMR 33.05(8), which is applicable to a mutual holding company conversion by virtue of 209 CMR 33.36.) ESOPs are subject to similar limitations and restrictions. ( See 209 CMR 33.28(1) governing aggregate purchase limitations for both qualified and nonqualified ESOPs.) Post conversion effective stock option and grant plans also are expressly authorized by statute, subject to stockholder and regulatory approval. ( See G. L.c.172, §§25-25A (These statutes govern all stock form banks. The latter statute authorizing stock grant plans imposes additional requirements on mutual banks that converted to stock form.)) Under applicable state law, such stock benefit plans, other than a qualified ESOP, may not be implemented or become effective until one year after the conversion. ( See 209 CMR 33.28(1)(u) 1-14 which are applicable to a mutual holding company conversion by virtue of 209 CMR 33.36 (List of extensive conditions required for any prior implementation).) Any changes in senior management's post conversion compensation are required to be fully disclosed in the Petitioner's application to convert. ( See 209 CMR 33.04(1)(e).) Executive compensation levels also must be fully disclosed in the offering materials.
The Regulations also address any potential conflicts of interest between management and depositor interests. The full disclosures required in the Corporator Notice and Information Materials and the Regulation's strict corporator voting requirements are designed to mitigate against any such potential conflicts. ( See 209 CMR 33.34(3)(a) (A majority vote of "independent" corporators, who must constitute at least 60% of all corporators, and a majority vote of all corporators, are required to approve a mutual holding company conversion).) The extensive review of all applications by the Division and federal bank regulatory agencies and the ongoing post conversion examination process also serve to offset any such concerns.
The management and employee stock purchase, stock benefit and compensation provisions of the application have been carefully reviewed. The Division concludes that these provisions meet all applicable regulatory requirements. Accordingly, the Division determines that management and employee benefit provisions are not unfair to depositor interests.
Post Conversion Independence
Several individuals commenting at the public hearing and in written comments expressed concern that the Petitioner's conversion to stock form would lead to its acquisition by a larger competitor. They expressed the view that Cambridgeport should remain in mutual form as a means of preserving the Bank as a community banking institution. The Protesters also allege that the Petitioner's sale is imminent and that depositors would not enjoy the benefits of any takeover premium associated with an acquisition. (The Petitioner categorically denied this allegation. See Petitioner's Supplemental Letter, dated February 4, 2000 at 7.) The Division has reviewed these general concerns.
The vulnerability to hostile takeovers of banking organizations that convert from mutual to stock form is a matter of regulatory concern. Takeover attempts could thwart a converted institution's post conversion efforts to prudently deploy conversion proceeds, to continue to serve community banking and credit needs, and to adjust to the organizational and financial demands of a publicly owned organization. Consequently, both the Massachusetts and OTS conversion regulations contain extensive post conversion anti-takeover provisions to protect against takeovers. ( See 209 CMR 33.08(6)(c); see generally, OTS Memorandum (Chapter 4 contains a discussion of the regulatory and policy reasons for limiting post conversion acquisitions in the OTS regulations.)) Moreover, the resulting stock entity may employ any corporate charter anti-takeover devise permitted under applicable banking or business corporation law. The Division also notes that the relative longevity of Massachusetts-chartered banking organizations converting from mutual to stock form does not necessarily support the premise that a converted institution invariably will be merged or acquired within a short period of time. The average age of existence of all state-chartered institutions that converted from mutual to stock form from 1983 to year-end 1996 is 9.3 years. (As of December 31, 1996, there were 48 state-chartered mutual institutions that converted to stock form. This figure excludes 13 converted stock banks that failed from 1989-1992 and 8 banks which were converted under the supervisory conversion provisions of Subpart B of the Regulations from 1985 to 1996. Four mutual institutions have converted since January 1, 1997.) Accordingly, the Division concludes that simply because a stock form banking institution, as a matter of corporate law, may be more susceptible to acquisition than a mutual form institution, is an insufficient ground to disapprove a mutual holding company conversion.
Community Reinvestment Considerations
The Division also has considered whether Cambridgeport's proposed conversion to stock form is supported by its record of performance under the CRA. A related consideration is whether community credit needs will continue to be met on a post conversion basis. The Protesters contend that the Bank's record of low to moderate income lending does not support approval of Cambridgeport's conversion to stock form. They further allege such lending will decline if the Petitioner is permitted to convert to stock form without written lending and CRA commitments being required from Cambridgeport.
The Division has carefully reviewed the Bank's lending record and its most recent CRA report of examination. Upon review, there is no evidence to support the claim that the Bank purposely reduced its lending to low- and moderate-income borrowers in preparation of its proposed conversion from mutual to stock ownership. Several factors appear to have impacted the level of lending to low- and moderate-income borrowers, including a large volume of refinanced loans, continued increased competition for all loans within its assessment area, and rising real estate values.
Moreover, the Protesters' references to the Bank's "poor lending performance" appear to be unfounded. The Bank's current CRA performance rating is "Satisfactory". This rating is supported by the fact that the Bank's loan-to-asset ratio significantly exceeds it peer. In addition, the Bank has performed better than the aggregate in lending to both low- and moderate-income individuals and within low- and moderate-income geographies. The Bank's percentage of lending to low- and moderate-income borrowers has also exceeded that of its closest peers. Consequently, the Bank's past record of low to moderate-income lending among individuals is good for an institution of its size and complexity. Its record of community development however is weak, but insufficient to offset its satisfactory rating in the "lending test" component of its CRA performance public evaluation. It also may be reasonably expected that the proceeds raised from Cambridgeport's conversion stock offering will enhance its ability to lend and invest in all areas. Accordingly, the Petitioner is expected to meet overall community credit needs on an ongoing basis.
The Division has weighed whether the Petitioner should be required, as a condition of approval, to make binding written lending, CRA performance rating and other commitments. Neither the Division nor the Board of Bank Incorporation has required such conditions for any regulatory approval in the past. Any such commitments on future lending initiatives or community development commitments are entirely voluntary and outside the regulatory process. ( See e.g., Decision Relative to the Application of Bank of Boston Corporation, Boston, Massachusetts to Acquire BayBanks, Inc., Boston, Massachusetts, (July 26, 1996) at 12 (Planned or future CRA related activities or loan and investment commitments do not substitute for a record of past CRA performance rating which is given the greatest weight in the application review process).) A Petitioner's record of future or continued lending activities throughout is assessment area, including low- and moderate-income areas, however, will continue to be measured and assessed during future CRA examinations conducted by both the Division and the FDIC. As a matter of policy, the Division urges all state-chartered financial institutions to strive for and achieve the highest CRA performance ratings.
Procedural Issues
The Protesters also raised certain issues relative to the adequacy of depositor notice and information. The record shows that Cambridgeport complied with the Division's standard application procedures, including posting and publication requirements. (Supra at 1-2.) Actual or individual notice to depositors of the petition is not mandated by regulation. The adequacy of information on Cambridgeport's Plan of Conversion and anticipated stock offering are assured by the substantive disclosure requirements of the Regulations. Cambridgeport's corporators, the decision-makers in this instance, received a full and fair disclosure of the transaction's structure, risks and other material information necessary for informed decision making through the Petitioner's Notice and Information Statement. This mandatory disclosure material also was reviewed and approved by the Division prior to its distribution to corporators. Cambridgeport's stock offering and sales materials, which will be sent to eligible depositors and investors, are subjected to a similar review standard and approval process. Accordingly, the Division concludes that the Petitioner has conformed to applicable to regulatory notice and disclosure requirements.
Conclusion
Based upon the foregoing review and the entire record before it, the Division concludes that Cambridgeport's petition to convert to stock form meets the approval standard set forth in 209 CMR 33.35(2) and that the enumerated grounds for disapproval found in 209 CMR 33.35(3) and the presumptive disqualifiers found in 209 CMR 33.35(5)(a)-(b) are inapplicable.
The Division has undertaken a complete review of the following submitted documents: (a) Certificate of minutes of Special Meeting of Corporators of the Bank held on February 2, 2000 and further related certificates thereof; (b) Appraisal Report prepared by RP Financial, LC., as of October 8, 1999 and updated as of January 7, 2000; (c) Draft of Prospectus of February 9, 2000 and supplemental changes submitted and approved as of February 14, 2000; (d) Copies of proposed marketing materials including prospect letters, advertisements, lobby poster, question and answer brochure and stock order form; and, (e) other documents submitted and filed as part of the transaction. The Division hereby determines that: (a) the Appraisal Report prepared by RP Financial, LC., is in compliance with 209 CMR 33.08(3); and (b) the draft Prospectus of February 9, 2000 as amended in certain changed pages provided to the Division, and soliciting material described above have been approved and declared effective for use in connection with the offering of stock by the Stock Holding Company pursuant to Subpart D and other applicable provisions of 209 CMR 33.00 et seq.
| February 22, 2000 Date | Thomas J. Curry Commissioner of Banks |