Decision Relative to the petition of Georgetown Savings Bank, Georgetown, Massachusetts to surrender its charger from The Commonwealth in order to accept a Federal Savings Bank Charter
By the Division of Banks
Georgetown Savings Bank (the "Petitioner" or the "Bank"), Georgetown, Massachusetts has petitioned the Board of Bank Incorporation (the "Board") pursuant to Massachusetts General Laws chapter 168, section 36 for authority to surrender its charter from the Commonwealth in order to accept a federal savings bank charter (hereinafter, the "charter conversion"). Accordingly, the Petitioner has adopted a Plan of Charter Conversion pursuant to which the Bank will convert to a federal savings bank. A minority stock offering is part of this multi-step transaction. Thereafter, and pursuant to the terms of a Plan of Reorganization and Stock Issuance Plan, the Bank will form a federally chartered mutual holding company and mid-tier stock holding company, and convert to a federal stock savings bank. The Board's jurisdiction extends only to the Bank's application to convert its charter. Upon conversion to a federal savings bank charter the Bank will be subject to the jurisdiction of the Office of Thrift Supervision ("OTS"), a federal bank regulatory agency.
The Board recognizes the existence of the dual banking system in the United States and acknowledges that financial institutions have within that system, pursuant to statutory provisions, the ability to select a state or federal charter and to convert from one charter to another. Although there is some overlap between the two systems as well as in federal and state laws, it does remain that there are two separate systems. In Massachusetts, there have been state-chartered banks which converted to federal institutions as well as federally-chartered banks which converted to state-chartered institutions. It remains the position of the Board that the applicable provision of Massachusetts law governing a charter conversion from a state-chartered savings bank to a federal savings bank is Massachusetts General Laws chapter 168, section 36. The Board recently addressed numerous issues on the conversion to a federal charter by a savings bank in its Decision Relative to the Petition of Westfield Bank, Westfield, Massachusetts to Surrender its charter from the Commonwealth in Order to Accept a Federal Savings Bank Charter, June 28, 2004 (the "Westfield Decision").
Notice of the petition was published as directed by the Board thereby affording opportunity for interested persons to submit comments. A public hearing on the matter was held before the Board on August 25, 2004. At the hearing, representatives of the Petitioner appeared and offered testimony. The subsequent period for filing comments ended on September 3, 2004.
The Petitioner operates from a main office in Georgetown and maintains a branch office in Rowley, Massachusetts. As of March 31, 2004, it had assets of approximately $121 million. The Bank provides a variety of financial services to individuals and small businesses in Georgetown and the surrounding communities. It operates one wholly-owned subsidiary, Georgetown Security Corporation, which engages in the buying, selling, and holding of securities. The Bank's deposits are insured, to the maximum allowable limits, by the Federal Deposit Insurance Corporation ("FDIC"). As a Massachusetts chartered savings bank, its deposits in excess of those limits are insured, in full, by the Depositors Insurance Fund ("DIF"), a private deposit insurance fund established by Chapter 43 of the Acts of 1934.
In connection with this transaction, the Division of Banks completed a comprehensive review of the Notice and Information Statement describing the proposed transaction to the Corporators of the Bank. The focus of this review was to ensure that the Corporators were given fair and meaningful disclosure of the state and federal treatment of each issue addressed in the Information Statement. The charter conversion, as well as the reorganization to a mutual holding company and mid-tier holding company structure, and the associated minority stock issuance, was approved by the Board of Trustees and by the Corporators present at a special meeting on June 15, 2003 and July 22, 2004, respectively.
The Petitioner contends that the proposed charter conversion will have minimal impact on the Bank's daily operations. In this regard, it advises that, as a federal savings bank, it will continue to operate under the same name, from the same locations, with the same officers and employees, and will be subject to all the rights, obligations, and liabilities of the Bank prior to the conversion. Although the charter conversion will result in the Bank losing its eligibility for excess deposit insurance through the DIF, the Petitioner points out that as a federally-chartered bank its deposits will continue to be insured, to the maximum allowable limits, by the FDIC. The Petitioner further maintains that it will continue to serve the financial needs of its local community in the same manner as prior to the charter conversion. The Board has noted that the Bank received a "Satisfactory" rating on its most recent Community Reinvestment Act ("CRA") examination.
In this matter, the Petitioner cites the principal reasons for the charter conversion as reduced regulatory burden including the assertion of federal preemption, ease of interstate branching, a wide range of lending and investment powers, depositor voting rights in a federal savings bank, and dividend waivers by the mutual holding company. However, by the Petitioner's own admission, preemption of state consumer protection laws is not a major concern. Certainly a conversion would reduce the number of regulators over the Bank, although regulatory fees would increase significantly. Interstate branching by a federal savings bank would require only the approval of the federal bank regulator, however, Massachusetts banks have interstate branching authority as well. Finally, the Board is aware that Massachusetts-chartered savings banks have a comparable range of lending and investment powers similar to those of a full-service commercial bank. In addition, Massachusetts law allows savings bank to perform any activity or make any investment authorized to a federally-chartered bank or a bank chartered by another state, subject to regulations or approval by the Commissioner of Banks.
A review of corporate transactions available to a mutual holding company are also similar at the state and federal levels and Massachusetts mutual holding companies have consummated various actions. To date the Board in conjunction with the Division of Banks have approved thirty-six mutual holding company reorganizations, including nine mid-tier holding companies. Three Massachusetts mutual holding companies subsequently converted to stock, one as part of a simultaneous acquisition. Four mutual holding companies issued minority stock. There have been three mergers of mutual holding companies with another merger pending before the Board. Records of the Board and Division reflect other actions by mutual holding companies.
The one remaining advantage identified by the Petitioner as having a substantive impact on the Bank would be the ability of a newly created federal mutual holding company to waive dividends without a required subsequent dilution in the event of a future full conversion to stock ownership. This action has been authorized as a result of policy changes by the OTS. This complex issue is succinctly defined in the following discussion taken, in part, from the notice to Corporators:
"Following the Charter Conversion, and upon completion of the MHC Reorganization, the Bank would be a subsidiary of a federal mutual holding company. There are several differences to operating as a mutual holding company under OTS regulations as compared to Massachusetts regulations. Some view the OTS regulations as being favorable to management and investors. One such federal provision would allow the mutual holding company to waive receipt of dividends without causing dilution to the ownership interests of minority stockholders upon a second-step full conversion to stock form by the mutual holding company.
"Generally, OTS regulations with respect to dividend waivers are more advantageous to investors while the Massachusetts regulations may be more favorable to depositors. Massachusetts regulations do allow for dividend waivers; however Massachusetts requires the subsequent dilution in the interests of minority stockholders related to any such waived dividends for fiduciary reasons. The Massachusetts position on dividend waivers is consistent with the policy of the Federal Deposit Insurance Corporation. By contrast, the Federal Reserve Board, as a matter of policy, has not permitted mutual holding companies to waive the receipt of dividends and management of the Bank does not believe that this Federal Reserve Board policy will change in the foreseeable future. If a mutual holding company waives receipt of dividends without causing dilution to the ownership interests of minority stockholders, the aggregate value of stock offered for sale to depositors in a second-step full conversion to stock form will be less than if no dividends were waived or if the interest of the minority stockholders was diluted to account for the waiver of such dividend."
Removal by the OTS of the requirement that minority shares be diluted allows management the opportunity to enrich minority stockholders, most often including themselves, at the expense of the majority, which is comprised of depositors. Furthermore, given the elevated degree of scrutiny being paid to alleged insider and other corporate governance abuses in the current larger business environment, the non-dilution of minority shares during a second stage full conversion is arguably inappropriate. Accordingly, the Board believes that neither regulatory nor public policy has been advanced by the OTS to justify the shift in the regulatory focus of its revised conversion rules from depositor protection to the interests of minority stockholders.
The Board believes strongly that the dual banking system is a significant benefit to the regulated financial institutions and the banking public. In recognition of that belief, the Board has over the past few decades granted several state-chartered savings banks the authority to convert to federal charters. The Board understands that in at least three cases in the past twenty years those same banks converted back to the state-chartered system. That action reflects the ongoing changes that occur within each system.
The differences between state and federal laws, regulations and directives are recognized by the regulated financial institutions and bank regulatory agencies as well as the Board. Often those differences are minimal. Similarly, the options available for numerous corporate transactions exist in both systems but the processes for those transactions may differ. The Board realizes that any of these differences may exist only until the next statutory amendment is passed or the newest parity regulation is promulgated.
The totality of the differences between state and federal laws on public convenience and advantage for a charter conversion is not conclusive to the Board in this case or likely in any other application. Citizens and business entities on their own have chosen to do their banking business with federally-chartered banks which operate in the Commonwealth. They would not make that choice initially or continue that relationship later to their own detriment. To the contrary, each of those decisions reflects some convenience or advantage found, however small.
Upon review and consideration of all matters, the Board could find that the adverse impact of the assertion of federal preemption of consumer protection laws or a mutual holding company's waiver of dividends without subsequent dilution do not outweigh the minimal advantages in processing for interstate branching or by the reduction in regulatory oversight or the other reasons cited by the Petitioner. The Board, however, chooses not to tip the scales based on ever-changing facts in a way that would jeopardize the dual banking system for state-chartered savings banks. Rather, the Board finds that public convenience and advantage exists by the ability to convert a charter. Accordingly, absent a finding on a case-by-case basis of an applicant's infirmity based on an existing problem on financial safety and soundness, or compliance with applicable laws or a negative public rating of performance under the Community Reinvestment Act, the Board will find that an applicant savings bank will meet the statutory test under section 36 of chapter 168 of the General Laws.
Having considered the entire record established on this application, the Board has found that the applicable statutory and administrative criteria have been met. Accordingly, the Board hereby approves the Petition subject to the condition that the Petitioner accepts a federal charter within one year from the date of this decision . Upon acceptance of a federal charter, the Petitioner's state charter shall become void.
The Petitioner is the second savings bank to recently come before the Board to convert to a federal charter. After hearing and considering all matters raised by the applicants, the OTS regulation on dividend waivers without the dilution of minority stockholders at a second step conversion is given as the greatest emphasis for the conversion. The Board, however, like the Division of Banks, firmly believes that the OTS revised rules are misguided and should be reconsidered.
| Steven L. Antonakes ___________________________ Commissioner of Banks | |
| Alan L. LeBovidge ___________________________ Commissioner of Revenue | Board |
| Timothy P. Cahill ___________________________ Treasurer and Receiver General | |
| October 15, 2004 _____________________ Date |