An obscure provision in the regulatory relief bill championed by Sen. Richard Shelby, R-Ala., is giving mutual holding companies hope that a threat to their business model will be removed.
Shelby's bill, the Financial Regulatory Improvement Act of 2015 would eliminate an existing requirement that mutual holding companies seek approval from the Federal Reserve Board before waiving dividends on corporate shares. Mutuals have complained that the process, which began in 2010, is cumbersome and costly.
Though the issue seems esoteric, advocates for the mutual industry said the waiver issue has important real-world consequences, arguing that it has contributed to an exodus of banks out of mutuality and into stock ownership.It's also a change that mutuals have sought since the request process sprang out of the Dodd-Frank Act.
"For the first time in a long time, we've gotten some attention," said Kip Weissman, a lawyer at Luse Gorman who represents a number of mutual holding companies. Ending dividend waiver requests "is by no means the lead item in Shelby's bill, but it could be the beginning of something good."
The Shelby bill passed its first hurdle, a vote in the Senate Banking Committee, by a party-line 12-10 margin on Thursday. As that result indicates, there are plenty of points of disagreement between Republicans and Democrats. They disagree, for example, on what the threshold for a systemically important financial institution should be. If no workable compromise is reached, the entire bill would die.
Still, mutuals are thrilled to be included in the process.
"This is the train that is leaving the station," said Douglas Faucette, counsel to America's Mutual Holding Companies, an industry advocacy group.
Created in 1987 by the Competitive Banking Equality Act, the mutual holding company structure is a hybrid. Subsidiaries are depositor-owned mutual savings banks, while the holding companies are publicly traded and are authorized to sell up to 49.9% of their shares to investors.
The appeal of being a mutual holding company lies in the fact that it provides a means of building capital beyond the simple accumulation of retained earnings. When it came time to declare dividends, many mutual holding companies opted to pay them only on shares owned by investors preserving capital at the bank.
That arrangement collapsed after Dodd-Frank transferred oversight of mutual holding companies from the now-defunct Office of Thrift Supervision to the Fed. Regulators at the Fed took a less favorable view of dividend waivers than the OTS, labeling it a conflict of interest for a company to pay dividends to shareholders while withholding them from depositors.
Fed officials backed Dodd-Frank's waiver requirement even though "there was no empirical evidence in the history of the program that there was any problem with dividends," Faucette said.
A Fed spokesman declined to comment.
In crafting regulation implementing the dividend waiver provision, the Fed required mutual holding companies that wanted to waive dividends to hold an annual vote of their depositors.
Dan Jennings, president and chief executive of the $295 million-asset Kentucky First Federal Bancorp in Frankfort called the annual vote "time-consuming and costly," though he said his company has never experienced trouble winning approval.
"About 95% vote in favor of the waivers," Jennings said. "Very few vote no."
Nevertheless, Jennings said he believes the annual election requirement has made the mutual holding company structure all but taboo for mutuals that might otherwise consider it, and the numbers seem to back him up.
Prior to March, when mutual thrifts in Massachusetts and Ohio announced plans to pursue a so-called first-step conversion, no bank had opted to become a stock-traded mutual holding company for four years.
Over the same time, many large mutual holding companies sold their majority stakes in second-step conversions that left them fully stock traded.
In April 2014, the, $1.2 billion-asset Clifton Bancorp in New Jersey completed a second-step. A month later, the $19 billion-asset Investors Bancorp in Short Hills, N.J., finished its conversion. Meridian Bancorp, the holding company for the $3.3 billion-asset East Boston Savings Bank, became a fully stock-traded company in July.
The most recent second-step conversion was completed Monday, when Kearny Financial in Fairfield, N.J., sold 93.5 million shares. In a prospectus filed in March, the $3.7 billion-asset company said that a material consideration driving its pursuit of a second-step conversion was the desire to rid itself of the election requirement.
Holding annual elections makes dividend waivers "more difficult and costly to obtain," Kearny said in its filing. The company, as a result, had suspended its dividend in recent years.
A decline in the number of mutual holding companies mirrors the downward trend affecting the mutual sector as a whole. Four years ago, according to American Bankers Association, there were 655 mutual thrifts with $273 billion in combined assets. At the end of last year, those numbers had shrunk to 556 thrifts with $249 billion of assets.