New strategies needed to raise capital
To raise capital while maintaining tradition, mutuals need new strategies for growth
By Melanie Scarborough
Mutual institutions face a conundrum: To grow, they need capital, but to get capital, they must be profitable. “The only way to raise capital right now is to earn it,” says Brian Lanigan, first executive vice-president and chief operating officer of Middlesex Savings Bank, Natick, Mass. Yet it is increasingly difficult to retain earnings as so-called reform measures curtail avenues of profit.
For instance, requirements to reduce interchange rates and provide an opt-in provision for overdraft programs are “taking capital away,” says Lanigan. “They negatively impact fee income, which for mutuals, is practically the only way to increase capital: We can increase profits or reduce expenses.”
Reducing expenses certainly is a necessary component of profitability, says Richard Schaberg, a partner in the Washington, D.C., law firm Hogan Lovells, who specializes in mutual issues. Mutuals can sell and lease back real estate, he says, or close branches that aren’t profitable.
“Outside of those, the only real [option for raising capital] is having a no-stock mutual holding company because then they can raise subordinated debt at the holding-company level and push the profit back down, where it becomes Tier 1 capital,” Schaberg explains. “And you can do it with a no-stock structure so you’re not converting and haven’t threatened your mutual existence.”
Forming a holding company also allows other options, such as issuing trust-preferred securities, but that market has virtually disappeared and may never recover. (Pending legislative changes may also affect this.)
“At the moment, the only viable solutions for raising capital include some form of stock conversion,” says Jim Clarke, principal of Clarke Consulting, Villanova, Pa. Conversion may be partial, where a minority amount of stock is sold and majority ownership retained by the MHC, or full, where the mutual becomes a stock institution.
Before exercising any option, Clarke recommends that CEOs and directors evaluate their position: “If your bank has 12% capital, you do not have a problem; therefore, forget about raising capital. Instead, focus on profitability to support capital growth in the future. If you have 7% capital, the situation is different; you may have to consider a stock offering.”
Still, before taking that final step, he urges bankers to consider options such as shrinking the bank. “Long-term profitability is the key to your success whether you remain mutual or do a conversion.”
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