New regulatory changes for banks operating under a mutual holding company are stirring major concerns within the banking industry, including here in Connecticut.
The changes, which are a direct result of the financial reform bill passed by Congress earlier this year, are forcing some banks to rethink and even change their business model.
The end game, experts say, could be the gradual phasing out of mutual holding companies altogether, as those institutions come under a new — and potentially tougher — regulator and face new restrictions on dividend payments to shareholders.
Just last week, for example, SI Financial Group in Willimantic announced that its parent company plans to convert from a mutual-holding company to a fully public institution.
Seven other U.S. banks have completed a similar conversion this year, up from two in 2009 and one in 2008. More than a half dozen other conversions are pending, analysts estimate.
Rheo A. Brouillard, SI's CEO, said SI Bancorp will sell its 62 percent stake in the bank to the public. The move is being driven by uncertainty over the new regulatory landscape, he said.
In particular, the new financial reform law consolidates the Office of Thrift Supervision, which has been the principal regulator for mutually owned lenders like Savings Institute, into the Office of the Comptroller of the Currency and provides the Federal Reserve more authority in supervising thrift-holding companies.
It's not clear if the Comptroller of the Currency or Federal Reserve will have much inclination toward mutual hold companies in general, Brouillard said, and there are concerns that during the rule-making process, the currency office may put a moratorium on future second-step conversions.
Under a second step conversion a mutual holding company sells its ownership in the bank by issuing new stock. Then a new, fully public holding company is formed with the newly raised capital.
There is also a perception that the Federal Reserve will be tougher on banks in general, including enforcing stricter capital requirements, which would force lenders to keep more cash on hand to buffer against potential losses.
"Rather than put ourselves in a position of a lot of uncertainty, we thought it would be a good time to change our corporate structure away from the mutual holding company," Brouillard said.
Another key consideration is the likelihood that under the new law, a mutual holding company's ability to pay dividends to shareholders could be restricted.
Under Office of Thrift Supervision regulations, the publicly-traded entity does not have to pay a dividend on the majority stake held by the mutual holding company. That waiver exclusion, in turn, provides a higher dividend for the public shareholders, said Mac Mathews a senior analyst with the data financial firm SNL Financial based in Virginia.
Under the new regulation, however, mutual holding companies likely will have to ask the Federal Reserve to sign off on their waiver requests. But the Fed could reject the waiver for various reasons and legal experts have indicated that the Fed is likely going to use its authority to curb future dividends, Mathews said.
"Many people are looking at what is going on and seeing that the mutual holding company format is something they should probably move away from," said Mark B. Cohen, a managing director with Stifel Nicolaus, an investment banking and financial advisory firm in New York. "People have been fleeing the mutual holding company ship."
Other mutual holding companies in Connecticut include Rockville Financial, parent to Rockville Bank with $1.6 billion in assets and 21 branches in eastern and central Connecticut.
Bill McGurk, the company's CEO, said his bank is also exploring its options, but he noted that Rockville Bank is a state-chartered institution and is not overseen by the Office of Thrift Supervision.
Even so, McGurk believes there won't be many mutual holding companies around in the future, an issue that will be part of the conversation during the company's upcoming strategic planning sessions.
"We are always looking at various options and exploring other opportunities," McGurk said.
Mutual holding companies are part of a complex financial arrangement.
When Savings Institute reorganized in 2004, for example, it established two separate parent companies including SI Bancorp, which is the mutual holding company that owns a 62 percent stake, and SI Financial Group Inc., which owns a 38 percent publicy traded stake.
As part of the conversion, the two parents will combine into a new, fully public stock holding company under the name SI Financial Group Inc. The Savings Institute Bank and Trust Co. is the subsidiary institution.
Besides hedging against financial reform, the second step conversion will also provide SI Financial more capital in an uncertain economy — possibly more than $60 million, according to regulatory filings.
Brouillard declined to say what the bank's future plans are, but the extra capital will give the bank "a lot more flexibility to look at different strategies."
Traditionally second-step conversions signal some type of merger, acquisition or growth activity.
In February, for example, Naugatuck Valley Mutual announced that it would convert from an institution partly owned by its depositors to a stock bank, a move that paved the way for its parent Naugatuck Valley Financial Corp. to acquire Southern Connecticut Bancorp.
SI's capital infusion could lead to possible acquisitions or new branch openings, said Cohen of Stifel Nicolaus.
"It gives them a lot more options," Cohen said.