(a) Findings of Federal Home Loan Bank Board. (1) The regulations contained in this part are promulgated to provide rules by which mutual insured institutions may convert to the stock form of organization on an equitable basis. In determining the equity of conversion standards and procedures, the Board, both directly and as operating head of the Corporation, finds that it is necessary to consider the effects of various standards and procedures that might be adopted, not only on an individual applicant but also on the entire system of insured institutions. Indeed, the Board believes that it has a public responsibility also to consider the effects on financial institutions which are not thrift institutions and on thrift institutions which are not subject to the Board's regulatory jurisdiction. If a particular method of conversion would unacceptably threaten the financial stability of such institutions, or a substantial portion of them, the Board cannot consider such method of conversion to be on an equitable basis. Further, if a particular method of conversion would tend to force individual mutual insured institutions to convert to the stock form irrespective of whether such institutions or the communities they serve would be benefited thereby, the Board cannot consider such a method of conversion to be on an equitable basis.

(2) The Board has determined that a method of conversion which provides a so-called "windfall" distribution to the account holders of a converting mutual insured institution would create strong incentives for significant shifts of savings funds among insured institutions and other financial institutions and that such shifts of savings funds would unacceptably threaten the financial stability of such institutions. The Board has also determined that a method of conversion which provides so-called

"windfall" distribution would tend to force individual mutual insured institutions to convert to the stock form irrespective of whether such institutions or the communities they serve would be benefited thereby. The Board therefore finds that no method of conversion can be considered equitable unless such "windfall" distribution is virtually eliminated. The Board further finds that such "windfall" distribution is not virtually eliminated by methods of conversion

under which the control of such distribution is intended to be effected by systems of averaging or weighting deposits, by restricting transferability of the capital stock of converted insured institutions, by placing such stock in escrow or trust, by delayed distribution of such stock or its equivalent in cash by placing such stock in escrow or trust, by delayed distribution of such stock or its equivalent in cash, or by segregating the net worth accounts of converted insured institutions and proportionally allocating the future income of such institutions to such accounts, or by any of the foregoing methods taken in combination. The Board also finds that, in order for conversion regulations to be effective against the undesirable results of such "windfall" distributions, the basic provisions of such regulations must operate with substantial uniformity with respect to mutual insured institutions on a national scale.

(3) The regulations contained in this part, while providing the account holder with rights to a share in the equity of the converting mutual insured institution in the event of a subsequent complete liquidation, are designed virtually to eliminate the "windfall" aspect of conversion and the resulting disruptive effect on the economy. Accordingly, the Board finds that these regulations provide a means by which mutual insured institutions may convert to stock form on an equitable basis.

(b) General requirements. No application for preliminary approval of conversion shall be approved by the Corporation if

(1) The plan of conversion adopted by the applicant's board of directors is not in accordance with the provisions of this part;

(2) The conversion would result in any reduction of the Federal insurance reserve or would cause the applicant to fail to meet any net worth requirement of § 563.13 of this subchapter;

(3) The conversion may result in a taxable reorganization of the applicant under the Internal Revenue Code of 1954, as amended; or

(4) The converted institution would not have its accounts insured by the Corporation.

(c) Required provisions in plan of conversion. The plan of conversion shall:

(1) Provide that the converting insured institution shall issue and sell shares of its capital stock at a total price

equal to the estimated pro forma market value of such shares in the converted insured institution, based on an independent valuation, as provided in § 563b.7, less any discount permitted under the plan pursuant to paragraph (d) of this section.

(2) Provide that each eligible accountholder shall receive, without payment, nontransferable subscription rights to purchase entitlement shares, subject to the following conditions:

(1) The subscription price per share shall be the price fixed in accordance with § 563b.7, less any discount permitted under the plan pursuant to paragraph (d) of this section;

(ii) The maximum number of entitlement shares which an eligible account holder may subscribe for under this subdivision (2) shall be the greater of:

(A) 100 shares; or

(B) Such number of shares as shall be equal to the quotient (rounded down to the next whole number) obtained by dividing the amount of the qualifying deposit of the eligible account holder by the subscription price per share;

(iii) In the event of an oversubscription for entitlement shares, the shares shall be allocated among the subscribing eligible account holders as follows:

(A) Each eligible account holder shall first be permitted to purchase such number of entitlement shares as shall be equal to the product (rounded down to the next whole number) obtained by multiplying the total number of shares of capital stock to be issued by a fraction of which the numerator is the amount of the qualifying deposit of the eligible account holder and the denominator is the total amount of qualifying deposits of all eligible account holders in the converting insured institution.

(B) Any shares not allocated in accordance with paragraph (c) (2) (iii) (A) of this section shall next be allocated among subscribing eligible account holders so as to permit each such account holder, to the extent possible, to purchase a number of shares sufficient to make his total allocation (including the number of shares allocated in accordance with paragraph (c) (2) (iii) (A) of this section) equal to 100 shares.

(C) Any shares not allocated in accordance paragraph (c) (2) (iii) (A) and (B) of this section shall be allocated among the subscribing eligible account holders on such equitable basis, related to the amounts of their respective sub

scriptions, as may be provided in the plan of conversion.

(3) Provide that each eligible account holder shall also receive, without payment, nontransferable subscription rights to purchase additional shares of capital stock, to the extent that such shares are available after satisfying the subscriptions provided for under paragraph (c) (2) of this section, subject to the following conditions:

(i) The subscription price per share shall be the price fixed in accordance with § 563b.7 without any discount;

(ii) The number of shares which an eligible account holder may subscribe for under this paragraph (c) (3) may be made subject to a limit of not less than 1 percent of the total offering of shares for each eligible account holder or group of eligible account holders affiliated with each other or otherwise acting in concert; and

(iii) In the event of an oversubscription for such additional shares, the shares available shall be allocated among the subscribing eligible account holders on a pro rata basis.

(4) Provide that all shares not purchased upon exercise of subscription rights shall be sold at the price determined in accordance with § 563b.7; and specify the underwriting or other marketing arrangements to be made to assure the sale of all unsubscribed entitlement shares.

(5) Provide that each savings account holder of the converting insured institution shall receive, without payment, a withdrawable savings account or accounts in the converted insured institution equal in withdrawable amount to the withdrawal value of such account holder's savings account or accounts in the converting insured institution.

(6) Provide for the establishment and maintenance of a liquidation account for the benefit of eligible account holders in the event of a subsequent complete liquidation of the converted insured institution, in accordance with the provisions of paragraph (f) of this section.

(7) Provide for an eligibility record date, which shall be not less than 90 days prior to the date of adoption of the plan by the converting insured institution's board of directors.

(8) Provide that the holders of the capital stock of the converted insured institution shall have exclusive voting rights, unless State law requires savings account holders and/or borrowers of the

converted insured institution to have voting rights, in which case the charter of the converted insured institution shall (i) limit such voting rights to the minimum required by State law, and (ii) provide for the management of the converted insured institution to solicit proxies from such savings account holders and/or borrowers in the same manner as it solicits proxies from its shareholders.

(9) Provide that the plan of conversion adopted by the applicant's board of directors may be substantively amended by such board of directors as a result of comments from regulatory authorities or otherwise prior to the solicitation of proxies from members to vote on the plan and at any time thereafter with the concurrence of the Corporation; and that the conversion may be terminated by such board of directors at any time prior to final approval by the Corporation and at any time thereafter with the concurrence of the Corporation.

(10) Provide that all shares of capital stock purchased by directors and officers without a discount on original issue, either directly from the insured institution (by subscription or otherwise) or from an underwriter of such shares, shall be subject to the restriction that such shares shall not be sold for a period of not less than one year following the date of purchase, except in the event of death of the shareholder.

(11) Provide that, in connection with shares of capital stock subject to restriction on sale for a period of time:

(i) Each certificate for such stock shall bear a legend giving appropriate notice of such restriction:

(ii) Appropriate instructions shall be issued to the transfer agent for the converted insured institution's capital stock with respect to applicable restrictions on transfer of any such restricted stock; and

(iii) Any shares issued as a stock dividend, stock split or otherwise with respect to any such restricted stock shall be subject to the same restriction as may apply to such restricted stock.

(12) Contain no provision which the Corporation shall determine to be inequitable or detrimental to the applicant, its savings account holders or other insured institutions or to be contrary to the public interest.

(d) Optional provisions in plan of conversion. The plan of conversion may provide any or all of the following:

(1) That each eligible account holder exercising subscription rights to purchase entitlement shares shall be required to purchase up to a minimum of 25 shares to the extent such shares are available (but the aggregate price for any minimum share purchase shall not exceed $500).

(2) That eligible account holders exercising subscription rights to purchase entitlement shares shall receive a discount of not more than 10 percent of the price fixed in accordance wth § 563b.7, subject to a restriction that such shares shall not be sold for a period of not less than six months following the date of purchase, except in the event of death of the shareholder.

(3) That savings account holders and/ or borrowering members of the converting insured institution, other than those who are eligible account holders, shall receive, wthout payment, nontransferable subscription rights to purchase shares of capital stock, to the extent that shares are available after satisfying the subscriptions of eligible account holders provided for under paragraph (c) (2) and (3) of this section, subject to the following conditions:

(i) Each such account holder and/or borrowing member shall be entitled to subscribe for the purchase of up to 100 shares at a subscription price per share equal to the price fixed in accordance with § 563b.7, less such discount, not in excess of the discount provided for entitlement shares under paragraph (c) (2) of this section, as may be provided in the plan of conversion;

(ii) Each such account holder and/or borrowing member may also be given rights to subscribe for additional shares of capital stock at a subscription price per share equal to the price fixed in accordance with § 563b.7, without any discount, subject to a reasonable limitation on the number of shares which may be purchased by any person or group of affiliated persons or group of persons acting in concert;

(iii) In the event of an oversubscription for shares under the provisions of this subdivision (3), the shares available shall be allocated among the subscribing account holders and/or borrowing members on such equitable basis, related to the amounts of their respective subscriptions, as may be provided in the plan of conversion; and

(iv) If any shares purchased under the provisions of this paragraph (d) (3) are

purchased at a discount, such shares shall be subject to the restriction that such shares shall not be sold for a period of not less than six months following the date of purchase, except in the event of death of the shareholder.

(4) That director, officers, and employees of the converting insured institution, as part of the subscription offering, shall be entitled to purchase shares of capital stock, to the extent that shares are available after satisfying the subscriptions of eligible account holders provided for under paragraph (c) (2) and (3) of this section and the subscriptions of other savings account holders and/or borrowing members provided for under paragraph (d) (3) of this section, subject to the following conditions:

(i) The plan of conversion may contain the provisions permitted by this paragraph (d) (4) only if the plan also provides that other savings account holders and borrowing members, under the provisons permitted by paragraph (d)(3) of this section, may each subscribe for the purchase of up to 100 shares of capital stock;

(ii) The subscription price per share shall be the price fixed in accordance with § 563b.7, less such discount as may be provided in the plan of conversion; but no such discount may be so provided unless discounts not less in amount are provided for subscriptions under paragraphs (c) (2) and (d) (3) (i) of this section;

(iii) The total number of shares which may be purchased under this paragraph (d) (4) shall not exceed 20 percent of the total number of shares to be issued in the case of a converting insured institution with total assets of less than $50 million or 10 percent in the case of a converting insured institution with total assets of $500 million or more; in the case of a converting insured institution with total assets of $50 million or more but less than $500 million, the percentage shall be no more than a correspondingly appropriate number of shares based on total asset size (for example, 15 percent in the case of a converting insured institution with total assets of approximately $275 million);

(iv) The shares shall be allocated among directors, officers, and other employees on an equitable basis such as by giving weight to period of service, compensation and position, subject to a reasonable limitation on the amount of shares which may be purchased by any

person or group of affiliated persons or group of persons acting in concert; and

(v) All shares purchased by directors and officers at a discount under this paragraph (d) (4) or under paragraphs (c) (2) or (d)(3) of this section and all shares purchased by employees at a discount under this paragraph (d) (4) shall be subject to the restriction that such shares shall not be sold for a period of not less than two years following the date of purchase, except in the event of death of the shareholder.

(5) That management employment contracts may be authorized and a qualified stock option plan may be adopted at the meeting at which the plan of conversion is voted upon by the members of the converting insured institution.

(6) That the converted insured institution shall issue and sell, in lieu of shares of its capital stock, units of securities consisting of capital stock and longterm warrants or other equity securities, in which event any reference in the provisions of this part to capital stock shall apply to such units of equity securities unless the context otherwise requires.

(e) Determination of amount of qualifying deposit; predecessor and successor accounts. (1) Unless otherwise provided in the plan of conversion, for the purposes of this section, the amount of the qualifying deposit of an eligible account holder shall be the total of the deposit balances in the eligible account holder's savings accounts in the converting institution as of the close of business on the eligibility record date. However, the plan of conversion may provide that any one or more of the following optional provisions shall apply in determining the amount of the qualifying deposit:

(i) Any savings accounts with total deposit balances of less than $100 (or any lesser amount) shall not constitute a qualifying deposit.

(ii) The amount of the qualifying deposit shall be the average of the total of the deposit balances in the eligible account holder's savings accounts as of the close of business on the eligibility record date and not more than four of the previous quarterly earnings distribution dates.

(iii) If the total of the deposit balances in the eligible account holder's savings accounts as of the close of business on the date of adoption of the plan of conversion by the institution's board of directors is less than the total of the deposit balances on the eligibility record

date (or the average of the total of the deposit balances determined in accordance with paragraph (e) (1) (ii) of this section), the amount of the qualifying deposit shall be the total of the deposit balances (if any) as of the close of business on the date of adoption of the plan.

(2) As used in this section, the term "savings account" includes a predecessor or successor account of a given savings account which is held only in the same right and capacity and on the same terms and conditions as the given savings account. However, the plan of conversion may provide for lesser requirements for consideration as a predecessor or successor account.

(f) Liquidation account. (1) Each converted insured institution shall, at the time of conversion, establish a liquidation account in an amount equal to the amount of net worth of the converting insured institution as of the latest practicable date prior to conversion. For the purposes of this paragraph, the insured institution may use the net worth figure set forth in its latest statement of financial condition contained in the proxy statement. The function of the liquidation account is to establish a priority on liquidation and, except as provided in paragraph (g) (2) of this section, the existence of the liquidation account shall not operate to restrict the use or application of any of the net worth accounts of the converted insured institution.

(2) The liquidation account shall be maintained by the converted insured institution for the benefit of eligible account holders who maintain their savings accounts in such institution. Each such eligible account holder shall, with respect to each savings account held, have a related inchoate interest in a portion of the liquidation account balance ("subaccount").

(3) In the event of a complete liquidation of the converted insured institution (and only in such event), each eligible account holder shall be entitled to receive a liquidation distribution from the liquidation account, in the amount of the then current adjusted subaccount balances for savings accounts then held, before any liquidation distribution may be made with respect to capital stock. No merger, consolidation, purchase of bulk assets with assumption of savings accounts and other liabilities, or similar transaction, in which the converted institution is not the surviving institution,

is considered to be a complete liquidation for this purpose. In such transactions, the liquidation account shall be assumed by the surviving insured institution.

(4) The initial subaccount balance for a savings account held by an eligible account holder shall be determined by multiplying the opening balance in the liquidation account by a fraction of which the numerator is the amount of qualifying deposit in the savings account and the denominator is the total amount of qualifying deposits of all eligible account holders in the converting insured institution. Such initial subaccount balance shall not be increased, and it shall be subject to downward adjustment as provided in paragraph (f) (5) of this section.

(5) If the deposit balance in any sayings account of an eligible account holder at the close of business on any annual closing date subsequent to the eligibility record date is less than the lesser of (i) the deposit balance in such savings account at the close of business on any other annual closing date subsequent to the eligibility record date or (ii) the amount of the qualifying deposit in such savings account, the subaccount balance for such savings account shall be adjusted by reducing such subaccount balance in an amount proportionate to the reduction in such deposit balance. In the event of such a downward adjustment, the subaccount balance shall not be subsequently increased, notwithstanding any increase in the deposit balance of the related savings account. If any such savings account is closed, the related subaccount balance shall be reduced to zero.

(g) Restrictions on repurchase of stock and payment of dividends. Any approval of a conversion by the Corporation under this part shall be subject to the following conditions:

(1) No converted insured institution shall repurchase any of its capital stock from any director, officer, former director or officer, or associate thereof, except in the case of an offer to repurchase on a pro rata basis made to all shareholders of such institution and except for the repurchase of qualifying shares of a director.

(2) No converted insured institution shall declare or pay a cash dividend on. or repurchase any of, its capital stock if the effect thereof would cause the net worth of the converted insured institu