Could the mutual holding company be making a comeback?
Two mutual thrifts — the $659 million-asset Provident Bank in Amesbury, Mass., and the $126 million-asset Cincinnati Federal Savings and Loan Association in Ohio — have applied with regulators to form mutual holding companies.
Both institutions are planning to sell minority stakes to investors. Provident plans to sell up to 49.9% of the company; Cincinnati Federal will aim to sell a 45% stake.
The applications are sure to produce more than a few raised eyebrows. Most talk in recent years has been about the demise of the mutual holding company structure as more companies — including Kearny Financial in Fairfield, N.J., and MSB Financial in Millington, N.J. — look to leave it behind once they complete second-step conversions.
While more than a dozen mutuals became stock-owned banks last year, very few mutuals have sought to form holding companies in recent years. The last to do so was the $488 million-asset Oconee Federal Financial in Seneca, S.C., which formed its mutual holding company in 2011.
Still, some in the industry see value in the endangered structure.
A mutual holding company provides "the option of raising capital in smaller pieces, enough to keep growth going but not so much to put pressure on the company," said Kip Weissman, a lawyer at Luse Gorman who is advising Cincinnati Federal. Also, the thrift units of mutual holding companies keep their mutual charter, so they (unlike shareholder-owned banks) can continue to acquire other mutual institutions.
Weissman, whose firm counts mutual holding companies among its specialties, said he hopes the latest applications spark a new trend. "They offer a lot of advantages," he said. "The question is: will the investors respond?"
There are some disincentives to forming a mutual holding company, a structure created in 1987 by the Competitive Banking Equality Act. The law allows mutual thrifts to raise equity capital by selling minority stakes.
A major snag arose after the enactment of the Dodd-Frank Act, when the Federal Reserve Board established a rule making it extremely difficult for mutuals to waive dividends owed to their holding companies, which double as majority shareholder. (The Office of Thrift Supervision, which regulated mutual holding companies before Dodd-Frank, permitted such waivers.)
The Fed's stance against dividend waivers "threw a monkey wrench" into the formation of mutual holding companies, said Douglas Faucette, a lawyer at Locke Lord. Dividend waivers on majority shares allowed mutual holding companies to save capital at their thrift units, which allowed them to pay more to minority investors, he said.
Reduced dividends could temper enthusiasm from potential investors, industry experts said.
Cincinnati Federal's decision to form a mutual holding company was prompted by solid loan growth, said Joe Bunke, who has served as its president since 1998. Cincinnati Federal's loan portfolio grew by 9% in 2014, to $106 million, based on data from the Federal Deposit Insurance Corp.
"We feel we have a pretty good mortgage banking operation" Bunke said in an interview. "We have eight loan officers, and they're all good. We'd also like to increase our [commercial real estate] lending a little more."
Unfortunately, the loan growth has put pressure on the thrift's capital ratios. While by no means undercapitalized, Cincinnati Federal's Tier 1 leverage ratio was 9.14% at Dec. 31, compared to 10.1% a year earlier, according to FDIC call reports. While a nice problem to have, the loan growth is a problem nonetheless, Bunke said.
Cincinnati Federal has no plans to convert to full stock ownership. Rather, the appeal of a mutual holding company involves an opportunity to raise $5 million to $7 million in a single, "efficient" transaction, Bunke said. The 93-year-old thrift plans to use the added capital to fund future growth.
David Mansfield, Provident's chief executive, declined to comment on his institution's application and future plans.
