Bill Would Help Mutuals Raise Capital, Book Commercial Loans

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Mutual thrifts are evaluating a bill in Congress that would help them raise capital and make more commercial loans.

Most mutuals have ample capital, but proposed capital requirements under Basel III have executives at those thrifts concerned. Mutuals are also dealing with the inability to issue use trust-preferred securities to raise capital.

A bill, introduced last week, would allow mutuals to issue by creating a new type of preferred stock. The legislation would also create a new federal thrift charter that would allow mutuals to make more commercial loans.

Mutual thrifts would largely welcome those changes, says Steve Swiontek, chairman, president and chief executive of the $1.5 billion-asset Gate City Bank in Fargo, N.D.

"I am very receptive to looking at other alternatives to enhance the mutual charter and to raise capital other than through retained earnings," Swiontek says. Still, Swiontek says he would like to see the final version of the bill before committing to it.

Capital levels have stayed relatively stable at mutuals in recent years. At Dec. 31, the average Tier 1 risk-based capital ratio for mutual thrifts was 27.15%, compared to 26.04% five years earlier. The figures include privately owned mutuals and publicly traded thrifts that are majority-owned by a mutual holding company.

Basel III still has the mutual industry concerned. Under current proposals, banks cannot count trust-preferred securities as Tier 1 capital. The American Bankers Association backs a plan to let mutuals issue a new class of preferred stock, says Bob Davis, an executive vice president at the association.

"In the current world of flat margins, it takes a long time to accrete capital through retained earnings," Davis says.

The new class would be unsecured and subordinate to all other claims, Davis says. The shares would also hold no voting rights. Mutuals are worried that issuing securities with voting rights would expose them to activist investors who want to force conversions and mergers.

"It's important that the holders of these shares not have any ability to appoint a director," Richard Schaberg, a lawyer at Hogan Lovells, said at the ABA's mutual conference on Monday.

Legislators are also proposing a new federal charter to address restraints on thrifts from the federal Qualified Thrift Lender Test. The test mandates that multifamily residential mortgages, and related loans, make up at least 65% of a mutual's loan book.

The new charter would be most attractive to federally chartered mutuals that are located in states where existing thrift charters do not allow for extensive commercial lending, Davis says.

Windsor Federal Savings & Loan Association in Connecticut would consider switching to a new federal charter, says George Hermann, the $391 million-asset mutual's president and chief executive. Commercial loans make up about 10% of Windsor's $236 million loan portfolio.

"If you're a thrift, and your business model moves to a point where you can no longer qualify on the thrift test, you have no options with a federal charter," Hermann says.

Gate City, which is federally chartered, is heavily weighted toward mortgages. Less than 1% of its $1.2 billion loan book involves commercial loans. Roughly two-third of its loans are 1-to-4 family residential mortgages.

A new national charter for mutuals was part of the Dodd-Frank Act, but was removed near the end of deliberations, Robert Oeler, president and chief executive of the $6.7 billion-asset Dollar Bank in Pittsburgh, said during the ABA conference. Oeler said that he plans to back the revived measure for a new charter.

The bill to allow for a new preferred stock and federal thrift charter was introduced by U.S. Reps. Michael Grimm and Peter King, both R-N.Y., and Gregory Meeks, D-N.Y. The bill is backed by America's Mutual Banks, a trade association for mutuals.

The bill would also allow mutuals to file civil lawsuits against activists. It would also let publicly traded mutual holding companies waive their right to receive dividends. There is ongoing debate among bankers as to whether the Federal Reserve Board would approve dividend waiver requests.

ABA representatives said during the association's mutual thrift conference that they back the notion of preferred shares for mutuals and a new charter option. The association did not address the civil litigation or dividend waiver proposals on Monday.

"We are aware of the legislation and we appreciate the efforts of members to address issues of concern to mutuals," says James Ballentine, the association's executive vice president of congressional relations and political affairs. The association "will continue to monitor this legislation as it makes its way through the legislative process."

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