washington watch
Is Mutuality Viable?
Some observations on the Massachusetts experience
e have all heard
the naysayers—
mutual thrifts are
dinosaurs. They cannot access the capital markets and
therefore are limited in their
ability to grow and remain
independent. Stock conversion, they say, gives the
converted bank the incalculable advantage of capital to
fuel greater growth and assure survival in difficult
times.
But is this really true? Mutually owned institutions that
convert to stock-owned institutions seem less likely, not
more, to remain independent than
institutions that maintain their mutual charters. So we decided to do a
little research on Massachusetts’s
thrift banks between 1982 and 2004
to see what the facts really were.
To find out what happened, we
compiled information relating to all
Massachusetts thrifts in existence in
1982, the year in which Massachusetts’s thrifts were first allowed to
convert to stock. We tracked the deposit and asset growth of these thrifts
(along with a new one chartered in
1985) from Oct. 31, 1982 to March
31, 2004. We also looked at what
happened to these thrifts—whether
they survived, failed or were
acquired.
Most of the conversions in Massachusetts occurred during the 1980s,
shortly after the change in the law
that permitted them. Since 1990
only 19 mutual thrifts in Massachusetts have converted to stock
W
by Stanley V. Ragalevsky
and Sean P. Mahoney
A thrift
that remains
mutual is
poised to grow
at strong and
steady rates
over the
long term.
The Mutual Advantage
Perhaps the least surprising revelation was the low rate of survival for
those banks that converted to stock.
Of the 81 Massachusetts thrifts that
converted to stock after Oct. 31,
1982 and before March 31, 2004
only 13 remain independent today.
This represents a 16 percent “survival” rate (not including the two
converted thrifts that announced
plans to be acquired after March 31,
2004).
February 2005
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(including partial conversions) compared to the 62 thrifts that converted
from 1983 to 1990. Comparing
those banks that converted to those
that remained mutual, we found
that thrifts that remained mutual actually were more likely to remain
independent; grew at stronger,
steadier rates; and that size was not
a good indicator of future
independence.
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washington watch
February 2005
But what was far more surprising was the ultimate acquirer of
each one of those thrifts. Of the
67 thrifts that had converted to
stock and were acquired, Bank of
America purchased 25, while
Citizens Bank of Massachusetts,
Bank-North or Sovereign Bank
ultimately acquired another 34.
In fact, 59 of 67 acquired thrifts
that had previously converted to
stock were ultimately acquired
by one of these four large banks,
none of which was present in
Massachusetts prior to 1982.
One could say that the conversion of mutual thrifts in the
1980s and early 1990s was one
factor that fueled consolidations
and, in a sense, resulted in a privatization of a large portion of
the mutual thrift industry in
Massachusetts.
By contrast, 73 percent of the
mutual thrifts existing on Oct.
31, 1982 that remained mutual
still exist as independent institutions today. The 49 mutual
thrifts that were acquired by other banks were acquired by a
more diverse group of acquirers,
although Bank of America, Citizens Bank of Massachusetts,
BankNorth and Sovereign ultimately acquired 19 of those
thrifts through subsequent
acquisitions.
Growth Advantage
We were also surprised to learn
that since Oct. 31, 1982, the
growth rate of mutual thrifts in
Massachusetts has compared favorably to those mutual thrifts
that converted to stock (and remained independent). The
average deposit growth for thrifts
that stayed mutual was 401 percent while the average asset
growth was 429 percent. For
thrifts that converted to stock, the
average deposit growth was 393
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percent while asset growth was
504 percent. Thus, deposits grew
at a slightly faster rate in thrifts
that stayed mutual as opposed to
thrifts that converted to stock. Assets grew faster for thrifts that
converted to stock than for thrifts
that remained mutual.
Inherent in the mutual charter
is a competitive advantage over
publicly held stock thrifts. (Closely held stock thrifts may be a
different story.) As a rule of
thumb, a thrift that converts to
stock and has publicly traded securities generally pays a dividend
equal to about 35 percent of earnings. Investors expect such a
return when they purchase stock
in thrift. But a mutual thrift does
not have to pay any dividends at
all. As a result, each dollar of
earnings increases capital by one
dollar, which can be used to fuel
further growth. By contrast, a
thrift that pays 35 percent of its
earnings as a dividend can only
apply 65 cents of every dollar
earned to capital. The compounding effect of paying a
dividend over years takes its toll.
The advantage of “free” capital
is relatively easy to prove. Assume
that a stock thrift and mutual
thrift each have $100 million in
assets and 8 percent capital in
year one. Also assume that each
thrift will have a return on assets
of one 100-basis point (we did not
discern any noticeable correlation between return on assets and
whether the thrift was mutual or
stock). After 20 years, the mutual
thrift could maintain capital at 8
percent while growing to over $1
billion. By contrast, the stock
thrift, which would pay 35 percent of its earnings as a dividend,
would only grow to $477 million—less than half the size of its
mutual counterpart—while
maintaining capital at 8 percent.
Size Not a Good Indicator
We also looked at groups of the
20 largest thrifts, 20 smallest
thrifts and the 20 median thrifts
in Massachusetts on Oct. 31,
1982. We expected that the
largest thrifts would be the most
successful (that is, after all, one
reason why we are so preoccupied with growth, isn’t it?). But
only 20 percent of the 20 largest
thrifts in 1982 still exist as independent institutions. By contrast,
40 percent of the smallest
institutions in 1982 remain independent while 65 percent of the
median institutions in 1982 remain independent. When we
looked at aggregate deposit and
asset growth (by percentage) over
the past 22 years, some of the
smaller institutions had some of
the highest growth rates. Quality
of management appeared to be a
better indicator of future success
than size.
The Big Picture
Mutual institutions can learn
much from the experience of
Massachusetts’s thrifts that converted to stock. The numbers are
revealing. They show that if a
mutual thrift converts to stock,
the thrift’s chances of survival decrease drastically. It is almost
certain that the thrift will eventually be acquired. Those thrifts
that remain independent for a
long time after converting to
stock have had to struggle to
maintain their independence.
While a stock conversion may increase capital and fuel dramatic
growth in the short term, a thrift
that remains mutual is poised to
grow at strong and steady rates
over the long term. Thrift boards
should consider these realities
when making their strategic
plans.
Although it may be implied or
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many directors may assume it,
it makes sense for the thrift’s
strategic plan to assert the goal
of staying independent. Remaining mutual is not the goal
in and of itself—but mutuality
as a stated business model furthers the institution’s goal of
staying independent. If the institution is serving its
community and filling a vital
role in the local economy,
shouldn’t the board be committed to keeping the institution
independent? What value is
delivered to a thrift’s community by rapid growth if the thrift
will soon be absorbed by a
mega-bank?
For some institutions the decision to remain mutual
requires little deliberation
while for others, it is a matter
for serious debate. Sometimes
banks have no choice but to
convert to stockholder-owned
institutions.
Obviously, the decision that
a conscientious thrift board of
directors makes to convert from
mutual to stock form is a difficult one. In any event, it is
important that the thrift’s board
of directors retains that flexibility to make that decision for the
institution. But as the experience in Massachusetts shows,
mutuality is a valid business
model that is still relevant and
viable in the 21st century.
Notwithstanding the turbulent period of 1985 to 1995 and
the many economic crises that
preceded it, mutual thrifts have
not only survived, but have
thrived. ib
www.icba.org
February 2005
Stanley V. Ragalevsky is a partner and Sean P. Mahoney is an
associate in the Boston law office of Kirkpatrick & Lockhart
Nicholson Graham LLP.
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