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Client Alert

Wisconsin's Mutual Thrifts Have Bright Future...and Options

August 14, 2014

Recently, our firm served as counsel for the merger of two mutual thrifts located in Wisconsin. That strategic business combination caused us to reflect about the future of Wisconsin’s 17 remaining mutual thrifts, including the challenges they face and the advantages and strategic opportunities that they have. Our experience also made us realize that the needs of Wisconsin’s mutual thrifts are very unique and often do not get the attention they deserve from legislators, regulators and certain industry experts. As a result, we have compiled this client alert specifically geared towards Wisconsin’s federal and state mutual thrifts.

To begin, it is important to note that the mutual thrift charter—both federal and state— remains alive and well. In Wisconsin, about 7 percent of all banks continue to have mutual charters. After the Office of Thrift Supervision (OTS) was merged into the Office of the Comptroller of the Currency (OCC) as a result of the Dodd-Frank Act, many industry observers surmised that it signaled the "beginning of the end" for the federal mutual charter. Nothing could be further from the truth. Over the past several years, the OCC has invested significant resources into learning how to better supervise and serve federal mutuals. For example, in January 2013 it continued the OTS’ tradition of convening the Mutual Savings Association Advisory Committee made up of federal mutual thrift executives from across the country. Since then the committee has held several meetings to discuss current trends and concerns important to mutuals, and the OCC has even issued guidance in direct response to issues raised at those meetings. (See, for example, OCC Bulletin 2014-35 issued on July 22, 2014).

In addition, the OCC and FDIC hosted a joint mutual forum in Washington, D.C. on July 24, 2014, for executives of mutual depository institutions and stock depository institutions in a mutual holding company structure. The fact that the prudential federal regulators for both federal and state mutuals joined together for such a forum reinforces the fact that mutuals continue to be viewed as valuable financial service providers. Thomas Curry, the Comptroller of the Currency, made this clear in his remarks at the forum and suggested (with respect to federal mutuals) that Washington should pare back the Qualified Thrift Lender test and expand mutuals’ ability to engage in commercial lending in order to allow mutuals to further diversify their businesses and be more competitive.

The OCC has recognized that mutual thrifts, which do not have shareholder pressure to maximize profits, often operate differently (and with more conservative goals and objectives) than stock chartered thrifts, and that this difference should be taken into account in the agency’s risk assessment process. The OCC noted that a mutual thrift’s management’s and board’s perspectives on customer service and community involvement tend to be more long-term than a stock-chartered thrift. Finally, the OCC stated that mutual thrifts tend to have higher capital levels, and lower but more stable earnings, than stock-chartered thrifts.

Congress is also paying attention to the unique differences in a mutual thrift’s organizational structure. In 2013 and 2014, two separate bills were introduced in the U.S. House of Representatives to provide relief to mutual thrifts. Currently, the American Bankers Association is pushing the 2014 bill, called "The Mutual Bank Choice and Continuity Act of 2014", introduced by Rep. Keith Rothfus (R-PA). This bill would, among other things, (i) create a new mutual national bank charter that would give federally-chartered mutuals the same powers as national banks, and (ii) significantly, authorize a new capital raising instrument for mutuals that would qualify as Tier 1 common equity. While Rep. Rothfus’ bill is not likely to pass anytime soon given the gridlock in Congress, this legislation nevertheless shows that the interests and special requirements of mutual thrifts are being taken seriously in Washington.

There is much less public discussion regarding Wisconsin’s state chartered mutual thrifts, and the Wisconsin Department of Financial Institutions has not publicly taken any position on the future of state chartered mutuals. Anecdotally, we have heard of situations where state chartered mutuals have been encouraged to explore a stock conversion as a possible option, but we also understand that the state mutual charter remains a viable banking model in Wisconsin that no state regulator has publicly challenged. We believe that the appropriateness of a state mutual charter depends on the individual circumstances of the thrift, and the decision to remain a mutual should be supported by appropriate board discussions and strategic planning focused on capital augmentation, profitability and management succession.

So for those boards that desire to continue their long traditions as a mutual charter, such a vision appears to be realistic in the current regulatory environment. On the other hand, mutual thrifts face many of the same challenges as other stock-chartered community banks. For example, with the increasing complexity of the banking industry and the continued pressure on net margins and spending on new technology, some mutuals may be feeling the need to do "something" to alleviate their regulatory weariness, such as combining with another institution. Some institutions may focus on earnings pressure or may want additional capital or a larger legal lending limit in order to act on opportunities. Still others may not have a realistic succession plan in place.

However, mutuals’ strategic options are limited due to their charter. For example, they cannot sell stock to raise capital to fund growth and capitalize on an opportunity; they cannot easily find a strategic partner willing or able to acquire them because of their charter; and they have no stock to use as "acquisition currency" to acquire another stock institution. The cost of hiring an additional compliance officer could significantly impact net income, and skilled compliance officers are highly sought after and difficult to recruit. Attracting the top talent in all areas is challenging for a mutual because there can be no equity component to compensation plans (although the use of phantom stock is an option).

We understand that some consultants, investment bankers, and "boutique" conversion lawyers say that a stock conversion is the "only solution" for mutuals to many of these challenges. For some mutuals, conversions have proven to be a good strategy for management, depositors and customers, and for the continued viability and success of the thrift. As of August 12, 2014, there were eight mutual conversions in the pipeline in the United States. Three mutual-to-stock conversions have been completed by federal and state mutual thrifts located in Wisconsin over the past two years. But conversions to a stock charter are complex and expensive, take substantial amounts of management time, and result in very significant changes, especially for mutual thrifts that like operating under their existing charters and do not want a complete paradigm shift that results from becoming a public company, such as reporting the top executives’ compensation annually for all to see in public filings.

For management teams who want to keep their mutual charters but realize that mounting challenges are making life too difficult on their institutions and their employees, what are the alternatives? One often overlooked possibility is combining with another mutual to grow the organization. Because there is no cash or stock exchanged, these types of mergers tend to be relatively simple from a financial and legal perspective. The real challenge, as in any business combination, is often trying to resolve the social, political and cultural issues between the two combining mutuals. For example:

  • What will the name of the merged thrifts be?
  • What will the composition of the board be?
  • Who will the president and chairman be?
  • Will there be employee layoffs or can any downsizing be done through attrition?
  • What departments may be most efficiently combined?
  • Do the two organizations share similar cultures and philosophies?
  • Will the combined organization continue its same philanthropic commitments in the communities it serves?

We have recently seen how successful the combination of two mutual thrifts with similar visions can be. In the right circumstance, a merger of mutuals can solve succession issues, generate more lending capacity, increase technological capabilities, expand products and services for customers, and result in more resources to deal with the regulatory challenges facing many financial institutions. These are compelling synergies that can set two or more combining mutuals up for long term stability, profitability and growth, without losing their identities as mutual charters and without the time, complexity and expense of a stock conversion and subsequent public company reporting requirements.

To be clear, it is our opinion that for some mutual thrifts, there is no compelling reason to convert or merge. Many mutuals have strong capital levels and earnings, thoughtful succession and strategic plans, and high performing operational systems to continue thriving in today’s environment. For those mutuals, "staying the course" may be the right answer for the board of directors.

We encourage boards of directors of all Wisconsin mutual thrifts to think strategically about where you want your institution to be five years from now. Mutual thrifts continue to be poised for bright futures in Wisconsin and they also have options to consider as they plan for the future.

We welcome your thoughts and comments on this article. Please contact Pete Wilder at 414.287.9609 or or Jim Sheriff at 414.287.9390 or

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