The idea to give mutual banks a greater ability to raise capital is more about providing long-term viability rather than immediate need.

Community banks face a challenge of gaining scale to justify survival. Growth, whether through acquisitions or internal efforts, requires capital. Unlike commercial banks, mutuals are limited to raising capital through retained earnings.

The American Bankers Association is pushing legislation to let mutuals raise money through a capital certificate. But the bill faces obstacles, and some industry observers say the measure doesn't go far enough to help the industry.

"It is a matter of long-term survival," says Robert Oeler, president and chief executive at Dollar Bank in Pittsburgh. "Banks may not need the capital certificate right away but we want to make sure the mutual industry stays around for another 200 years."

Mutuals, like other community banks, are struggling with increased regulation, added expenses, competition and low interest rates, says Kip Weissman, a partner at Luse Gorman. Many argue that banks must become larger to deal with these complexities. (More than 75% of respondents to a KPMG survey last year pegged $1 billion of assets as the magic number.)

"It is expensive to run a bank these days," Weissman says. "The answer for really almost all banks is growth. The question is how do you fund those challenges?"

Still, capital doesn't seem to pose an immediate concern for mutuals, which tend to be better capitalized than other banks. The median Tier 1 risk-based capital for mutuals was 22.7% at Dec. 31, compared to 15.6% at other banks, according to the American Bankers Association.

Mutuals have historically been more conservative with capital than stock-owned banks, says Richard Schaberg, a partner at Hogan Lovells. Mutuals tend to hoard capital rather than deploy it on acquisitions or other growth strategies.

Though mutuals may have saved enough capital for now, there might come a time when more is needed, industry experts say. There could always be another recession, there is a push for higher industry capital levels. This could make it harder for mutuals to use retained capital to expand.

"There's no immediate need for capital," Schaberg says. "But there is a need for planning for circumstances in the future to make sure the mutual charter is not threatened by people saying, 'If I need capital then I will convert to stock.' This gives them the option to remain in mutual form."

The American Bankers Association hopes to alleviate some of that with the Mutual Bank Choice and Continuity Act of 2014, introduced last month by Rep. Keith Rothfus, R-Pa., says Bob Davis, an executive vice president at the association.

The bill would create a mutual capital certificate, which would qualify as Tier 1 common equity. The certificates, similar to preferred shares, would be unsecured, subordinated investments that would not be redeemable for five years. A mutual's board would determine potential dividends.

"We are trying to create a different way for investors to put capital in mutuals without them taking an ownership interest," Davis says. "It would be capital that can absorb losses."

Oeler, who joined Dollar in 1973, has seen firsthand how the ability to raise capital can help a mutual. (Mutuals were once allowed to raise capital, though they rarely did, Davis says.)

The $6.7 billion-asset Dollar raised $22 million in the 1970s, helping it survive rising interest rates and deregulation, Oeler says. He has since become involved in advocating for legislation for the mutual industry, including the Mutual Bank Choice bill.

"We value mutuality and what it means to the communities we serve," Oeler says. "We've seen too many times that smaller community banks are being taken over by the large ones. As a community, if you lose an institution then you lose something."

The bill faces an uphill battle, including partisan gridlock, some industry observers say. The 112th Congress passed the fewest number of bills since it started keeping statistics in 1947.

There is another bill circulating, the Mutual Community Bank Competitive Equality Act, that offers a form of capital certificates for mutuals. That bill has numerous provisions that would provide relief for mutual banks, while Rothfus' bill is missing key elements, says Douglas Faucette, a partner at Locke Lord and Washington counsel for America's Mutual Banks. For instance, Rothfus' bill doesn't help mutuals defend against activist depositors trying to take control of the bank, he says.

"It doesn't go nearly far enough to solve many of the problems facing mutuals," Faucette says of Rothfus' bill. "If the focus is on just a few things then other issues will get left behind."

Rothfus' bill is more streamlined and, therefore, has a greater chance of passing, Davis says.

The capital certificates described in Rothfus' bill may also violate Basel III, Weissman says. They are a hybrid form of capital, similar to trust-preferred securities, which has fallen out of favor with regulators.

Also, investors may not find illiquid investments in relatively small banks appealing. "It would be great for mutuals but it has a long road ahead," Weissman says.

Still, others are confident they have a winner on their hands.

"People in general who know about mutuals feel good about them," Oeler says. "This could be a good bipartisan situation. We just need to talk it up."

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