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OCC Bulletin 2014-35 | July 22, 2014

Mutual Federal Savings Associations: Characteristics and Supervisory Considerations


Chief Executive Officers of Federal Savings Associations, Department and Division Heads, All Examining Personnel, and Other Interested Parties


This bulletin describes the unique characteristics of mutual federal savings associations (mutuals) and the considerations the Office of the Comptroller of the Currency (OCC) factors into its risk-based supervision process.


The OCC developed this guidance to highlight the key distinctions between federal savings associations (FSA) organized in the mutual form of ownership and shareholder-owned or stock institutions. The guidance

  • describes the mutual governance structure and mutual members' rights.
  • outlines mutuals' traditional operations.
  • highlights supervisory considerations in rating mutuals for each component of the Uniform Financial Institutions Rating System (more commonly referred to as CAMELS, or capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk).

Note for Community Banks

This bulletin applies to mutuals and may be relevant for certain stock FSAs that are part of a mutual holding company (MHC) structure.


In 2011, the OCC established the Mutual Savings Association Advisory Committee (MSAAC) to advise the OCC on ways to help ensure mutuals' continued health and viability. The MSAAC recommended that the OCC issue guidance to highlight unique characteristics and enhance understanding of mutuals. For example, the rescissions of Regulatory Bulletin 27b, "Compensation," (June 13, 2001) and CEO Memo 153, "Examinations of Mutual Savings Associations" (November 1, 2001), issued by the former Office of Thrift Supervision, created uncertainty for mutuals, particularly with regard to executive compensation. This bulletin addresses those concerns by focusing on considerations across the CAMELS components as they pertain to mutuals.

Other than regulatory provisions regarding chartering, bylaws, combination transactions, and member communications, mutuals are governed by the same statutory requirements, rules, and regulations as shareholder-owned or stock FSAs. While safety and soundness principles for mutuals are generally the same for stock FSAs and national banks (collectively, stock banks), there are operational differences that should be factored into the risk assessment.

Rights of Mutual Members

Mutuals do not have stockholders. All holders of a mutual's savings, demand, and other authorized accounts are members of the mutual. The mutual charter grants members certain rights, giving members some control over the mutual's affairs.1 Members' ability to exercise control over a mutual is not the same as the rights of stockholders of stock banks, although there are similarities. Mutual members have the right to

  • vote.
  • amend the charter.
  • amend the bylaws.
  • nominate and elect directors.
  • remove directors for cause.
  • request special meetings.
  • communicate with other members.
  • inspect the corporate books and records.
  • share pro rata, based on deposits, in the mutual's remaining assets following the satisfaction of all liabilities in any liquidation.

In practice, members delegate voting rights through the granting of proxies typically given to the board of directors (trustees) or a committee appointed by a majority of the board.

Operations of Mutuals

Most mutuals operate as traditional, community-based associations, focused primarily on home mortgage lending and retail deposits. Compared with stock banks, mutuals tend to have higher capital levels and earnings that are somewhat lower but more stable. Approximately 90 percent of mutuals have assets of less than $500 million. Regarding asset composition, on average mutuals have a significantly higher concentration of residential mortgages than do stock FSAs, and a comparable level of commercial real estate and junior lien residential mortgages. Compared with stock FSAs, mutuals make fewer consumer, commercial, and industrial loans.

Of the existing mutuals, about 88 percent are more than 75 years old and 42 percent are more than 100 years old. Because mutual management is not under the same pressure to maximize earnings as stock management, mutuals often have more conservative strategic goals and objectives. Mutual management tends to take a longer-term perspective on operations, service to the community, and meeting customer needs.

The following sections highlight important structural and operational considerations in assessing risks at mutuals for each of the CAMELS components.

Capital Adequacy

Mutuals are subject to the same regulatory capital requirements as stock banks. The OCC has the same authority for setting individual minimum capital requirements for mutuals as for stock banks. A difference, however, is that mutuals have very limited means to increase regulatory capital quickly. Therefore, capital planning is critical for mutuals.

Mutuals build capital almost exclusively through retained earnings. Mutuals may also include as capital certain instruments, such as nonwithdrawable accounts or pledged deposits and mutual capital certificates, if the instruments meet the qualifying criteria for regulatory capital. These instruments, however, are rarely used. A mutual may also convert to stock form to raise capital.

Nonwithdrawable Accounts or Pledged Deposits

In the past, when a new mutual was organized, founding members pledged deposits for the time required for the mutual to build sufficient capital through retained earnings. Beyond a mutual's initial organization, pledged deposits were rarely used. Pledged deposits can raise issues, and are appropriate only for sophisticated investors. Account holders of pledged deposits cannot withdraw such deposits without regulatory approval. Furthermore, there is the possibility that the investor could lose the entire pledged deposit if the institution experiences significant financial difficulties, because pledged deposits are not insured by the Federal Deposit Insurance Corporation (FDIC). Pledged deposits may count as regulatory capital only if the deposits meet the qualifying criteria outlined in the capital rules (12 CFR 3).

Mutual Capital Certificates

The Home Owners' Loan Act of 1933 provides that mutuals may issue mutual capital certificates in accordance with OCC regulations (see 12 CFR 163.74). Mutual capital certificates are long-term debt securities issued by a mutual. The certificates are subordinate to all other claims on assets and are not insured by the FDIC. Such certificates may count as regulatory capital only if they meet the qualifying criteria outlined in the capital rules (12 CFR 3). Because mutual capital certificates typically contain a provision for cumulative dividends, such certificates do not satisfy tier 1 regulatory capital criteria.

Conversion to Stock

A mutual may convert to the stock form of ownership under rules designed to ensure an orderly adjustment to the different pressures that come with stock ownership. In many cases, the mutual form of ownership is deeply embedded in the institution's roots and conversion to stock is not a preferred option. While there is no parallel market pressure on mutuals similar to that exerted by shareholders of stock banks to increase the value of the equity securities issued, mutuals may experience depositor pressure to convert to stock form.

An alternative way to raise capital and maintain mutual ownership is to establish an MHC. In this scenario, a mutual reorganizes into an MHC structure in a multi-step transaction in which the mutual becomes a stock subsidiary of an MHC. Upon completion of the reorganization, the former mutual's members become members of the MHC. With relevant regulatory approvals, the stock FSA may issue less than 50 percent of its stock to persons other than the MHC. This is often referred to as a minority stock issuance. In some reorganizations, a mid-tier stock holding company is created that controls 100 percent of the stock FSA, and a minority stock issuance could occur at this level. If there is a minority stock issuance, the MHC members have priority subscription rights. A minority stock issuance may occur at the same time as the MHC reorganization, or it may occur later.

Asset Quality

Asset quality is an area that receives significant review for both mutuals and stock banks. As noted in the operations discussion above, in the aggregate, mutual loan portfolios are predominately concentrated in residential mortgage loans. While some mutuals originate a moderate level of loans secured by commercial real estate, mutuals tend to be less concentrated in commercial, industrial, and consumer loans than stock FSAs. The higher level of one- to four-family first-lien residential loans is a common distinction between mutuals and stock FSAs. Also, mutuals tend to hold the loans they make on their books. Mutuals typically hold higher levels of capital to mitigate any additional credit risk arising from this exposure.


Management is a key component for mutuals, as it is for banks of any charter type. It is important to note that mutuals, like stock banks, must have clearly defined business strategies and well-articulated long-term goals. Mutual boards of directors are required to exercise their fiduciary duties and provide appropriate oversight over management. Strategic, capital, and succession planning are particularly important for mutuals.


Mutuals and stock banks have the same need to hire and retain competent employees. Although mutuals may have some advantages over stock banks in attracting and retaining qualified employees, such as greater stability and less threat of acquisition, some mutuals believe they are at a disadvantage because stock banks have more flexibility with compensation arrangements. Mutuals may use a combination of higher salaries, bonuses, and benefits to overcome this disadvantage. Both mutuals and stock banks occasionally use phantom stock plans2 to provide incentive compensation. The total value of compensation plans should be considered when comparing mutuals' and stock banks' compensation programs.

The overarching consideration is that compensation programs must be reasonable in amount and commensurate with the duties and responsibilities of the covered individuals. The OCC expects mutuals to customize their compensation programs to fit the individual needs of the institution, taking into consideration an appropriate balance of risk with reward that is accompanied by effective controls and strong corporate governance.


A bank's earnings determine its ability to absorb losses, ensure capital adequacy, and generate a reasonable return. Earnings are essential to any bank's viability but are especially important for mutuals, which build capital primarily through the accumulation of earnings. Examiners evaluate mutuals' earnings for stability, trends, quality, and level. The mutual's operations are also evaluated, and additional factors, such as capital level, credit risk, and interest rate risk, are considered.

When determining the earnings rating for a mutual, examiners consider the adequacy of earnings relative to the bank's risk profile, capital level, and strategic plan. Lower earnings, by themselves, are not indicative of a poorly run mutual. If a well-run mutual with conservative growth plans and a high capital base has low earnings, such earnings, if stable and consistent, may be adequate and are rated accordingly.

Mutuals generally have lower earnings, net interest income, noninterest income, net interest margin, and return on equity relative to stock FSAs. However, mutuals have more stable levels of profitability. Mutuals, like stock banks, must generate sufficient earnings to meet expenses, pay interest on deposits, and satisfy regulatory capital requirements. Whenever possible, examiners compare mutuals with other mutuals to provide a more meaningful review of the various financial ratios to identify problem trends and outliers. There is a Peer Group Average Report available among the Uniform Bank Performance Reports (UBPR) at This report provides averages for mutual-only peer groups in four asset ranges.

When it is not possible to compare a mutual with other mutuals, which can be the case with large mutuals that have few peers of the same asset size, it is appropriate to compare a mutual's net income to a stock bank's net income after dividends. Net income after dividends is the earnings reinvested for both types of charters (see table 1).

Table 1: Comparing After-Dividend Income for Stock Banks and Mutuals

  Stock Mutual
Net income $1,000 $800
Dividends -200 0
Reinvested earnings 800 800

Similarly, adjustments to net income based on the effective tax rate are needed to compare mutuals to subchapter S corporations. In a subchapter S corporation, the tax burden is passed on to individual shareholders, but mutuals cannot elect subchapter S status because they are not owned by shareholders. Dollar values reported on the call report are not adjusted for this difference in tax treatment, but there is a ratio on the UBPR for return on average assets that is adjusted for subchapter S corporations.


The "Liquidity" booklet of the Comptroller's Handbook outlines the OCC's expectations in managing liquidity risk. The booklet emphasizes the importance of cash flow projections, diversified funding sources, stress testing, a cushion of liquid assets, and a formal, well-developed contingency funding plan as primary tools for measuring and managing liquidity risk. The OCC expects national banks and FSAs (collectively, banks) to manage liquidity risk using processes and systems that are commensurate with the bank's complexity, risk profile, and scope of operations. Within the contingency plan, management should identify the stress events that could threaten the bank's ability to fund both short-term and long-term operating and strategic needs. These events include those situations that have a significant negative impact on liquidity, earnings, or capital because of the bank's balance sheet composition, business activities, management, or organizational structure. A defining aspect of mutuals is that they typically rely much less on wholesale funding than stock FSAs.

Sensitivity to Market Risk

Management of interest rate risk is important to mutuals. The median percentage for long-term assets to total assets and residential real estate to total assets is higher for mutuals. As a result, mutuals may possess higher on-balance-sheet interest rate risk (apart from hedging activities and other offsets to reduce risk). Mutuals, on average, hold higher levels of capital as a cushion to help offset this sensitivity exposure. In addition, mutuals have a higher percentage of Federal Home Loan Bank advances that are long term (i.e., greater than one year). Mutuals should have processes in place to quantify the sensitivity of earnings and capital to adverse changes in interest rates.

Further Information

Please contact Donna Deale, Deputy Comptroller for Thrift Supervision, Midsize and Community Banks, at (202) 649-5420.

Jennifer C. Kelly
Senior Deputy Comptroller for Midsize and Community Banks

1 OCC regulations provide a form of mutual charter and possible charter amendments, as well as bylaw requirements for mutuals. The charter, bylaws, and other regulatory requirements establish the rights of mutual members. These rules also establish the general corporate governance requirements for mutuals, including the conduct of member meetings, the composition of the board of directors, the board members' responsibilities, and how to amend the charter or bylaws.

2 In a phantom stock plan, a company grants participating employees or directors "phantom shares" of stock. The company does not issue actual shares to the plan participants. The plan specifies (among other things) a means by which the value of the phantom shares is determined and a vesting schedule. Subsequently, participants are eligible to receive a payment (normally cash) in exchange for their phantom stock.