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THE MUTUAL BANK \ H.R. 36 15; ^ CONVERSION ACT .B 22/1:103-110 HEARING 3615, The Hutual Bank Conversi... BEFORE THE SUBCOMMITTEE ON FINANCIAL INSTITUTIONS SUPERVISION, REGULATION AND DEPOSIT INSURANCE OF THE COMMITTEE ON FINANCE AND BANKING, URBAN AFFAIRS HOUSE OF REPRESENTATIVES ONE HUNDRED THIRD CONGRESS SECOND SESSION JANUARY 20, 1994 Printed for the use of the Committee on Banking, Finance and Urban Affairs Serial No. 103-110 / AUG 3 /S54 U.S. GOVERNME>n' PRINTING OFFICE 75-968CC - WASHINGTON : 1994 ForsalebytheU.S.GovernmentPnntingOlTice SuperintendentofDocuments,CongressionalSalesOffice,Washington.DC 20402 ISBN 0-16-044313-X THE MUTUAL BANK H.R. 3615; \ CONVERSION ACT ;^ ,B 22/1:103-110 HEARING 3615. The flutual Bank Conversi... BEFORE THE SUBCOMMITTEE ON FINANCIAL INSTITUTIONS SUPERVISION, REGULATION AND DEPOSIT INSURANCE OF THE COMMITTEE ON FINANCE AND BANKING, URBAN AFFAIRS HOUSE OF REPRESENTATIVES ONE HUNDRED THIRD CONGRESS SECOND SESSION JANUARY 20, 1994 Printed for the use of the Committee on Banking, Finance and Urban Affairs Serial No. 103-110 AUG 3 /504 U.S. GOVERNMENT PRINTING OFFICE 75-968CC WASHINGTON : 1994 ForsalebytheU.S.GovernmentPrintingOffice SuperintendentofDocuments,CongressionalSalesOffice,Washington,DC 20402 ISBN 0-16-044313-X HOUSE COMMITTEE ON BANKING, FINANCE AND URBAN AFFAIRS HENRY B. GONZALEZ, Texas, Chairman STEPHEN L. NEAL, North Carolina JAMES A. LEACH, Iowa JOHN J. LaFALCE, New York BILL McCOLLUM, Florida BRUCE F. VENTO, Minnesota MARGE ROUKEMA, New Jeraey CHARLES E. SCHUMER, New York DOUG BEREUTER, Nebraska BARNEY FRANK, Massachusetts THOMAS J. RIDGE, Pennsylvania PAUL E. KANJORSKI, Pennsylvania TOBY ROTH, Wisconsin JOSEPH P. KENNEDY II, Massachusetts ALFRED A. (AL) McCANDLESS, California FLOYD H. FLAKE, New York RICHARD H. BAKER, Louisiana KWEISI MFUME, Maryland JIM NUSSLE, Iowa MAXINE WATERS, California CRAIG THOMAS, Wyoming LARRY LaROCCO, Idaho SAM JOHNSON, Texas BILL ORTON, Utah DEBORAH PRYCE, Ohio JIM BACCHUS, Florida JOHN LINDER, Georgia HERBERT C. KLEIN, New Jersey JOE KNOLLENBERG, Michigan CAROLYN B. MALONEY, New York RICK LAZIO, New York PETER DEUTSCH, Florida ROD GRAMS, Minnesota LUIS V. GUTIERREZ, Hhnois SPENCER BACHUS, Alabama BOBBY L. RUSH, Illinois MIKE HUFFINGTON, California LUCILLE ROYBAL-ALLARD, California MICHAEL CASTLE, Delaware THOMAS M. BARRETT, Wisconsin PETER KING, New York ELIZABETH FURSE, Oregon sa NYDIA M. VELAZQUEZ, New York BERNARD SANDERS, Vermont ALBERT R. WYNN, Maryland CLEO FIELDS, Louisiana MELVIN WATT, North Carolina MAURICE HINCHEY, New York CALVIN M. DOOLEY, California RON KLINK, Pennsylvania ERIC FINGERHUT, Ohio Subcommittee on Financial Institutions Supervision, Regulation and Deposit Insurance STEPHEN L. NEAL, North Carolina, Chairman JOHN J. LaFALCE, New York BILL McCOLLUM, Florida BRUCE F. VENTO, Minnesota JAMES A. LEACH, Iowa CHARLES E. SCHUMER, New York RICHARD H. BAKER, Louisiana BARNEY FRANK, Massachusetts JIM NUSSLE. Iowa PAUL E. KANJORSKI, Pennsylvania CRAIG THOMAS, Wyoming JOSEPH P. KENNEDY II, Massachusetts SAM JOHNSON, Texas FLOYD H. FLAKE, New YoA DEBORAH PRYCE, Ohio KWEISI MFUME, Maryland JOHN LINDER, Georgia LARRY LaROCCO, Idaho RICK LAZIO, New York BILL ORTON, Utah ROD GRAMS, Minnesota JIM BACCHUS, Florida SPENCER BACHUS, Alabama MAXINE WATERS, California MICHAEL HUFFINGTON, California HERBERT C. KLEIN, New Jersey CAROLYN B. MALONEY, New York PETER DEUTSCH, Florida THOMAS M. BARRETT, Wisconsin MAURICE HINCHEY, New York (II) CONTENTS Page Hearingheldon: January 20, 1994 1 Appendix: January 20, 1994 69 WITNESSES Thursday, January 20, 1994 Allison, John A., Chairman and Chief Executive Officer, Branch Banking & Trust Co 51 AUred, Cary D., Member of Opposition to Merger Conversion of Graham Savings Bank, Graham, NC 28 Calhoun, Mike, Esquire 35 Clark, David, Esquire 30 EHidldli,nCsa,rGle"oBrugcek"E,.,PJrre.s,iMd.eDn.t;aancdcoChmipeafniEexdecbuytiSvteevOfefnicBelra,loHcok,meEsSqauviirnegs Bank, 37 Albemarle, NC 58 Jacobsen, Robert A., Administrator, Savings Institution Division, North Caro- lina Department of Commerce; presented by Steve Eubanks, Deputy Ad- ministrator, Savings Institution Division; accompanied by David Worth, StaffCounsel, Savings Institution Division 5 Kennedy, John A., Citizens for Fairness, Forest City, NC, a Depositor Group Opposingthe MergerofFirstSavings Bank, Forest City, NC, With Centura Banks, mc 33 Newton, Juanita, City Executive, Centura Banks, Inc.; former Vice President ofFirstSavings Bank, Forest City, NC 55 Palmer Jack, Member of Opposition to Merger Conversion ofShelby Savings Bank, Shelby, NC, with Central Carolina Bank 24 Roessler, Ernest C, President and ChiefExecutive Officer, Central CaroUna Bank & Trust Co 47 Sewell, CecU, President andChiefOperatingOfficer, CenturaBanks, Inc 46 Surratt, Evelyn, Member of Opposition to Merger Conversion of Home Savings Bank, Abemarle, NC, with Branch Banking & Trust Co 36 Wilson, Larry, Esquire 26 APPENDIX Prepared statements: Neal, Hon. Stephen L 70 AlUson, JohnA 195 Alh-ed, CaryD 121 Eddins, George E.,Jr 173 HUl, Carl "Buck" 243 Jacobsen, RobertA 73 Kennedy, John A 165 Newton, Juanita 248 Pahner,Jack 105 Roessler, Ernest C 190 Sewell, Cecil 177 Surratt, Evelyn 170 (III) IV Page Additional Material Submitted for the Record Allred, Gary D.: Affidavit of Gary D. Allred in the matter of Graham Savings Bank, SSB 128 Gopy of Second Amended Request for Public Hearing in the matter of GrahamSavings Bank, SSB, byMaurice Koury and Gary D. Allred 150 Bailey, Edwin Pate, Raleigh, NG, written comments regarding merger/conver- sionsofNorth Garolina State Savings Banks 263 Jacobsen, RobertA.: Gharts 79 Letter dated December 30, 1993, from Barry Nakell, attomey-at-law re Mr. Blalock 95 Letter dated December 28, 1993, from Edward G. Winslow III re Home Savings Bank ofAlbemarle, S.S.B 97 Keen, HaroldT., Kenly Savings Bank, Kenly, NG, prepared statement 253 Miller, Michael G., Asheboro, NG, prepared statement 259 Neal, Hon. Stephen L.: Letter dated January 20, 1994, from Board of Directors, First Savings Bank ofMoore Gountv, SSB, Southern Pines, NG re H.R. 3615 267 "AcquirorGonversions,' by Ronald D. Raxter 272 Letter dated January 20, 1994, from Jim M. Morrow, Ph.D., Mooresville, NG re merger/conversions 281 H.R THE MUTUAL BANK CONVERSION 3615; ACT THURSDAY, JANUARY 20, 1994 House of Representatives, Subcommittee on FiNfANCiAL Institutions Supervision, Regulation and Deposit Insurance, Committee on Banking, Finance and Urban Affairs, Washington, DC. The subcommittee met, pursuant to notice, at 10:11 a.m., in the Aldermen's Chamber, City Hall, 101 North Main Street, Winston- Salem, NC, Hon. Stephen Neal [chairman of the subcommittee] presiding. Present: Chairman Neal and Representative Watt. Chairman Neal. I would like to go ahead and call this hearing to order at this time. It is a real pleasure to hold this hearing ofthe Financial Institu- tions Subcommittee here in Winston-Salem. It is a little unusual. As you know, most of our hearings are held in Washington, and this is an unusual opportunity, and we appreciate it. I want to thank Mayor Wood of Winston-Salem and the Board ofAldermen for letting us use these chambers today. I want to thank my colleague in the House of Representatives, and also on the Banking Committee, Congressman Mel Watt, for joining me here. This hearing is actually being held in his district, so he is our host this morning. Mel, thank you very much, I appreciate your taking the time to join us. As you may know, in the last year the once obscure issue of the conversion of mutual to stock savings banks has begun to attract some attention. In fact, my attention was drawn to it by an article that was in Business North Carolina magazine, which was sent to me by my friend and colleague in Congress, Martin Lancaster from down in the eastern part of North Carolina. That article that brought this issue to my attention and we started looking into it a little bit and thought that we should understand it better. Under our rather byzantine bank regulatory system federally and State-chartered savings and loans and federally chartered savings banks are regulated by the Office of Thrift Supervision, the OTS, but State-chartered savings banks are regulated by the Fed- eral Deposit Insurance Corporation, the FDIC. The OTS has comprehensive regulations and long experience in regulating the conversion of mutual to stock form, having overseen over 1,100 conversions. The FDIC, on the other hand, does not regulate conversions, and leaves it up to the States to do so. (1) I note in passing that Treasury Secretary Bentsen has an- nounced that he will shortly be sending to Congress a proposal to consolidate and simplify the confusing duplicative and overlapping Federal bank regulatory system. While I have some concerns with the details of his proposal, it is clear that we must do something to rationalize and simplify our bank regulatoiy system. It is a system which no one would have designed like this from scratch, but has grown ever more tangled over the past 130 years. This subcommittee will take up the issue early this year, and I hope we can reform the system, protecting safety and soundness, but cutting out unnecessary duplicative regulation which prevents banks from tending to their main job of lending to help consumers and businesses alike. But back to the immediate subject of our hearing today. Conver- sions of State savings banks is extremely popular, especially in North Carolina. At the beginning of 1992 there were no State savings banks in North Carolina. The legislature had just enacted legislation authorizing them, but none had yet been chartered. There were 61 federally chartered, and 55 State-chartered savings and loans in North Carolina. Two years later the landscape is dramatically different. There are 20 Federal and 7 State-chartered savings and loans, but 55 State-chartered savings banks. None of the 55 is a new institution. Each and every one had a savings and loans charter. Some of these conversions occurred so that institutions could avoid paying assessments to the OTS, and instead pay lower assessments to State regulators. The savings can run into tens of thousands ofdollars. Some may have wanted to avoid being called savings and loans, preferring to be called a savings bank, although they could have become a federally chartered savings bank long before North Caro- lina passed legislation, ifthat was their primary interest. But some of the conversions apparently occurred so that management could take advantage of more liberal State regulation of benefits to insiders. Our hearing today will examine the degree to which State regulation ofmutual-to-stock conversions is adequate to prevent insider abuse and protect the rights of the depositors of mutual savings banks. Opponents ofState regulation claim that lenient or lax State regulation allows insiders to profit from the sale of the institution. In so-called merger conversions, insiders are accused of selling control of the mutual institution they do not own to an acquiring bank to the detriment ofthe depositors ofthe mutual. A merger conversion is one in which a mutual savings bank con- verts to stock form, and the stock in the savings bank is acquired by another bank. The depositors of the mutual, rather than being given an opportunity to buy the stock of the mutual, are given an opportunity to buy stock in the acquiring bank, usually at a dis- count from the listed price ofthe stock. The management of the mutual savings bank often gets pay in- creases for staying on after the acquisition, and may receive stock or stock options in the acquiring bank. Often the acquiring bank makes a cash contribution to local charities in the area served by the mutual savings bank that it is purchasing. But there is a concern that a November 2, 1992 letter to all North Carolina mutual savings banks gave the signal that the State was declaring a hands-off policy on merger conversions. In the letter addressed to "Dear Manager and Board" the administrator wrote that, quote "This office remains convinced that free market forces should govern transactions such as this, and, accord- ingly, it should not impose its business judgment and/or arbitrarily limit the creativity of the marketplace. The terms of the trans- action should not be subjected to second-guessing by this office." The letter ended with a paragraph praising the institutions that the Savings Institutions Division is supposed to regulate and a cheery "Keep up the good work." I would ask unanimous consent that the entire letter be made a part ofthe record. [The letter referred to can be found in the appendix.] Chairman Neal. Mutual savings and loans in North Carolina apparently got the message. By the end of 1993, 46 North Carolina mutual thrifts had converted to State savings bank charters, 30 percent more than in any other State. The question we face is whether there is effective State regulation of State savings banks, or whether Federal regulation is needed to protect the members and owners of State mutual savings banks to the same extent that Federal regulation protects the members and owners of State mutual savings and loans. Our witnesses today will enable us to hear both sides ofthe issue as it relates to merger conversions. We will hear from depositors who believe that the directors and managers of acquired savings banks put their own interests ahead oftheir fiduciary duties to the depositors. We will also hear from managers of acquired institutions who believe that they maximized the return for depositors and acted in the best interest of the depositors and their communities. And we will hear testimony from the acquirers who will ex- plain their strategies in making the acquisitions and structuring the incentives for management, depositors, and the communities as they do. Finally, the administrator of the savings institutions will present his views on the operations of his office in reviewing and approving these transactions. At this time I would like to yield to my distinguished colleague and friend, Mr. Watt, for any comments that he may have. Mr. Watt, Thank vou, Mr. Chairman. I am delighted to be here and welcome all who are not from this area to Winston-Salem, and particularly to this part of Winston- Salem which happens to be in the 12th Congressional District, and extend mv thanks to Chairman Neal for both inviting me to partici- pate in this hearing, and for putting the hearing together on this important issue. I had a decision to make early in my tenure in Congress when I was fortunate enough to get on the Banking Committee, and that decision was whether I would try to get on the Financial Institu- tions Subcommittee, and it seemed to me that having Chairman Neal as the chairman of that subcommittee, and having both of us from the State ofNorth Carolina would create some redundancy in my being on that committee, so I opted not to get on that subcommittee, but have tried to make a concerted effort to stay abreast of the issues that that subcommittee deals with on a regu- lar basis, and that is important because of the number of banks and financial institutions which happen to be located in my congressional district. They tell me that I have more banks than any other Congressperson in the United States, with the exception of Carolyn Maloney who represents the Wall Street district in New York. The power and influence that Chairman Neal has is probably re- flected in the fact that they have shut the entire Federal Govern- ment down today so that he could conduct this subcommittee hearing in Winston-Salem, so that gives you some appreciation of the power ofa banking committee or subcommittee Chair. I agree with Steve that this is an extremely important and time- ly issue to deal with, and it is an issue that I have actually been interested in, and been following in the newspapers for some time, and had some fairly close up—experience with last year and —year before last before I was elected actually year before last now before I was elected to Congress, because in tne practice of law I had the opportunity to be involved in raising some issues. Many of the issues that are being raised about this conversion process were then being raised in the context of a mutual insurance company merger which I happened to be involved in, and essentially what was hap- pening was that the top management of the company which was being taken over had negotiated a merger or transfer of all assets into a larger company, and the interest of the mutual insured in that case, which is very similar to the depositors in the savings and loan context, were not necessarily at the forefront of that merger. So I got the opportunity to hear arguments on all sides of the issue from the management of the company that was being taken over, from the management of the company that was acquiring the North Carolina company, from the insureds in that case which would be equivalent to the depositors in this analogy, and found that there are a number ofinterests involved in a merger, or a conversion or an acquisition which must be taken into account, and so I think I have some appreciation of the fact that there has to be a balancing ofthose interests in the merger context. I am delighted to be able to be here today and to listen to witnesses who hopefully bring the perspective of all the competing interests, or all the interests that need to be accommodated in a merger, as well as can shed some light on the extent to which it would be proper or desirable to have regulation ofthat process. Again, Chairman Neal, I express my thanks to you, and look for- ward to hearing the witnesses on this important issue, and express my thanks and the public's thanks for your convening this hearing today. Chairman Neal. Thanks, Mel. — As I indicated, we have three panels, and we will start our first panel we show as being headed by Mr. Robert Jacobsen, the administrator of the Savings Institution Division of the North Carolina Department of Commerce, but I understand Mr. Jacobsen is not well this morning, so his statement will be given by Mr. Steve Eubanks, deputy administrator, Savings Institution Division, and