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Mutuals discuss survival, regulation, strategy E-mail

Eastern Bank's winning formula, ABA Mutual Survey results



April 7, 2011
By Steve Cocheo, executive editor

Mutual institutions took some lumps in the making of the Dodd-Frank Act, but the many executives attending ABA’s March Mutual Community Bank Conference still see their institutions holding an important place in U.S. finance. And a story from speaker Richard Holbrook underscored that.

“We’re noted for being Main Street, not Wall Street”

—Richard Holbrook, Chairman and CEO, Eastern Bank, Boston, Mass.
Holbrook’s $7.6 billion mutual, Eastern Bank, Boston, relies on a low-cost deposit strategy. But he said he tells staff to take a cue from the story line of the classic “Miracle on 34th Street.” In that film Edmund Gwenn, playing Kris Kringle at Macy’s, advises a shopper to visit Gimbels, where an item is on sale. He nearly gets fired, but when word gets out that Macy’s so cares for customers that they’ll recommend an arch-rival, they gain.

So when customers come in noting that another bank offers a higher rate on CDs, Holbrook tells employees to advise them to take the higher rate.

“That’s what we have as a mutual industry to sell, always doing what’s in the interests of our customers.” said Holbrook. “If we don’t, we’ll be history.”

While serving the interests of customers represents a goal of all community banks, mutual institutions, built on a tradition of community without a shareholder base, occupy a special niche in U.S. finance. The ABA conference presented executives from mutuals with an opportunity to hear from leaders and trade ideas.

The mutuals face the same issues as other institutions—the direction of rates; reform and reformatting of the mortgage lending business; compensation challenges; deposit trends; figuring out what to do with social media; finding qualified commercial lenders; and more.

And they also face some unique issues, such the need to be wary of deposits placed by aggressive would-be investors and special challenges for raising capital. Underlying all the issues was recognition that the mutual portion of the industry faces evolution in regulation and environment.

The following highlights summarize a full agenda. Mutuals interested in finding out more about what ABA brings to the table for these savings institutions can visit ABA’s Mutual Solutions page. And interested readers can access multimedia materials from the conference at this resources link.

Views from the regulators
Representatives from FDIC, the Comptroller’s Office, and the departing Office of Thrift Supervision spoke about worries about the coming shifts in mutual oversight and of mutuals’ strength, for instance. OTS’ Lori Quigley, assistant deputy director, examinations, supervision, and consumer protection, pointed out that mutuals have a strong 13.2% equity capital/assets ratio.

Mutuals are new to OCC, but the agency has experience in regulating other specialty institutions, such as “nonbank banks,” said Jennifer Kelly, senior deputy comptroller for midsize/community bank supervision. Agency speakers spoke of transition efforts to adapt to mutual exams, including a series of pilots and the intent to lead each initial OCC mutual exam with a former OTS examiner. OCC has also been offering outreach efforts to help mutuals and other savings institutions to get to know the agency.

Regarding OCC being a tougher regulator, Kelly said: “Let’s make up our minds based on your own experiences, rather than listening to the stories of others.”
Strategies for deposit funding and transaction businesses
Eastern Bank’s Holbrook, quoted earlier, spoke as part of a panel tackling the issue of funding in a competitive environment that will increasingly come under a Dodd-Frank Act umbrella.

Holbrook noted that deposit holdings have always been a key factor in his institution’s acquisition strategy. For example, he said, when Eastern acquired Boston’s Wainwright Bank & Trust in mid-March of this year, “most important to us was that Wainwright had a low-cost deposit base.”

As evidenced by his “Miracle on 34th Street” story, Holbrook pointed out that keeping deposit funding costs down is critical to his institution. “Our customers like us, despite the fact that we are not overpaying for deposits,” he explained.

A key strategy for Eastern will be to continue to maintain and build market share by offering free checking. Many institutions have been exiting this in the wake of growing restrictions on overdraft service fees. Acknowledging that other institutions, especially large banks, have moved away from free checking and revised pricing in the process, Holbrook said that wasn’t the right strategy for Eastern.

“We will continue to offer free checking,” he said, sketching out a plan to keep promoting this service into the foreseeable future. This means maintaining a push to build relationships with customers that go beyond checking accounts. In fact, Eastern intends to be aggressive, stepping up advertising, including television spots, to build relationships starting with checking.

Holbrook said Eastern intends to give this strategy three years to run its course.

“Three years is a lifetime in our current regulatory environment,” he admitted. But management believes this is a viable strategy and one that it can pursue as a mutual not subject to typical public bank pressures.

Insurance is one area that Eastern has found a productive place to expand relationships into, for instance. Holbrook noted that his company has built itself into the 36th largest insurance agency in the country. “It’s a matter of finding niches that we’re good at and exploiting them,” he explained.

Eastern has taken steps to reduce costs, as well. One effort to improve its efficiency, for instance, concerns branches.

“We are shrinking the footprint of our branches,” Holbrook said, which reduces the cost of operating locations by cutting their square footage. The bank has also maintained its full-time-equivalent employee levels in spite of growing its network through acquisitions and expanding its nontraditional business, such as the insurance operation. Outsourcing has also been tapped, such as sending some of its check processing activities to outside providers.

To continue to improve customer service, in the face of not being a top depositor payer, Holbrook said that Eastern has been striving to give itself a “face” for customers. More and more customers have been assigned to a specific banker. This is not a private-banker approach, he said, but an effort to foster the relationships that the bank values. Currently about 500 customers have been assigned to bankers who will be Eastern bank, for them.

Eastern has some good indications that its strategy is working. Financially, in 2010 net income more than doubled, and ROA came to 0.9%, versus 0.41% in 2009. Funding benefited, in that wholesale borrowings have been nearly completely eliminated in favor of customer deposits. Lending saw an increase in new loans of almost 9% over 2009 origination levels (overall loans fell due to repayments, chargeoffs, etc.). And in the J.D. Power & Associates 2010 Retail Banking Satisfaction Study, the bank earned the rating “Highest Customer Satisfaction in Retail Banking in the New England Region.”

“We’re noted for being ‘Main Street’,” said Holbrook. “Not ‘Wall Street’.” In fact, in the special transition website Eastern maintains for Wainwright customers, it sells its mutuality to its new clients, with this: “As a mutual company, we are driven totally by our customers, not Wall Street. We answer to you–our customers–and that is why we are committed to providing financial services delivered with a human touch. We create a culture of service and accountability, and our dedication to superior service is our principal competitive advantage.”

(Holbrook presented a sample commercial to the audience, which ABA has posted here.)

Holbrook’s fellow panelist, Levon Mathews, also believes in aggressive advertising. Mathews, president and CEO at $750.9 million-assets First Federal Savings and Loan, Port Angeles, Wash., showed attendees ads his institution has run stressing its hometown roots. One, bearing the headline, “First Federal, the only truly local bank on the Olympic Peninsula,” showed the names of ten competitors—some large national banking companies and some closer to home—complete with their headquarters cities. One, Chase Bank, is based as far away as New York City. “How Local Is Your Bank?” asked one ad’s tagline.

In another ad, First Federal challenged with the headline, “Is your BIG Bank charging you BIG fees?”
More broadly, Mathews, who came aboard in later 2009 to help guide a turnaround, said that the S&L was planning some “serious re-engineering.”

Mutual scorecard released by ABA

Quite timely, coming after a national financial daily understated severely the size of the mutual industry, ABA’s new information card “Today’s Mutual Community Banks,” came out at the conference. It’s an update and streamlining of a lengthier report issued in the past, with the advantage of making quick points about mutuality. Highlights:

* 655 mutual institutions, including 162 mutual holding companies, held over $273 billion in assets as of Sept. 30, 2010.

* Median asset size was $211 million—216 are under $100 million.

* 55 mutuals held more than $1 billion in assets.

* Dating from the early 1800s, the mutual charter is almost as old as the U.S.

* An explanation of mutual holding companies notes that they enhance capital raising opportunities while permitting mutual banks to retain mutuality.

* A clear explanation of mutual governance is included.

* ABA’s devotion to mutuals and their issues is reviewed.

To download a fact-sheet version of the card, click here.

Perspectives on mutuality
As can be seen, these executives not only see mutuality as a practical model, but as one with staying power. Still, there are those who question the concept in today’s world, and to those parties, speaker Jim Clarke answered the question, “Is mutuality viable?” with a resounding “yes.”

Clarke, a consultant on strategy and asset liability management, suggested that those who think mutuals can’t make it have the debate by the wrong end. Yes, there are the challenges all banks face. And yes, there is the added challenge at mutuals of raising capital, which typically depends on growth in retained earnings. Thus, without earnings, a mutual can’t grow.

“If your bank isn’t profitable, mutuality isn’t the issue,” said Clarke, of Clarke Consulting, Villanova, Pa. “It’s the business model.” He pointed out that heavy concentrations in commercial real estate lending affected institutions with mutual charters and commercial charters.

The greatest threat to mutuality, said Clarke, is lack of economic scale, in the case of smaller mutuals. “Too small to survive,” can be a risk, said Clarke, who sits on the boards of a mutual bank and a commercial bank.

But, on the plus side, mutuality also gives management the position of not being bound to please shareholders from quarter to quarter, and thus being able to maintain a longer-term strategy (Eastern Bank’s three-year commitment is one such example.) “That’s the greatest advantage,” said Clarke.

In his presentation, Clarke said mutual executives assessing the future should consider two strategies:

• Examine cost structure, and overall expenses versus revenue. There are small mutual banks that perform well, he pointed out. If the fundamentals don’t look positive, ask if the bank can take steps to change the numbers--such as First Federal’s plans to reengineer processes. Clarke pointed out that smaller institutions may find it hard to afford a compliance officer up to their growing burdens.

• Consider the possibility of partnering up with another mutual

“Mutuality guarantees independence,” said Clarke, “while public ownership guarantees independence—until the price is right.”

Mutuality survey findings discussed
Robert Davis, ABA’s executive vice-president, mortgage finance, risk management, and public policy, reviewed elements of the association’s latest mutual bank survey. Davis said that 189 mutuals responded to the survey. Many of the results indicated a firm commitment to mutuality.

Among the findings:

• Standing out from the crowd. 90% reported that mutuality plays a part in their bank’s differentiation strategy (like Eastern, above). Among other means of differentiating their banks from competitors, the mutuals reported a tie, with 34% promoting safety, soundness, and stability, and 34% emphasizing their institutions’ investments in the community.

• Merger outlook. Nearly six in ten respondents considered a merger in 2010, up 11% from the previous survey. However, the survey also found that 49% felt a merger was possible, but not likely; 43% thought there was a 50-50 chance of mergers; and 8% thought a merger a certainty.

• Boardroom and staff commitment. The survey asked if the institution considered commitment to mutuality when adding new board members and staff—87% said this is a factor.

• Regulatory concerns. Davis noted that the survey had been conducted prior to the outreach programs set up by the Comptroller’s Office. He suggested some of the concerns over the merger of OTS into OCC might have been allayed, shifting the findings. For instance, three out of ten respondents say the merger was affecting their strategic plans, with more than half considering their charter options. 
[This article was posted on April 7, 2011, on the website of ABA Banking Journal, www.ababj.com, and is copyright 2011 by the American Bankers Association.]  
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