There are several hundred state and federally chartered mutual institutions remaining. While many mutual institutions are extremely well capitalized, that is not universally true. Absent a structural change, the only method for a mutual institution to increase its capital is through the retention of earnings. As margins continue to be very thin and capital requirements and compliance costs have increased, earnings alone may not permit many mutual institutions to expand and grow, which may have long-term implications on the future of the institution. While the number of mutual institutions that have failed in recent years is small, there has been an increasing number of mutual-to-mutual mergers (including by merger with a mutual holding company) and even a limited number of conversion mergers approved.

How does a mutual institution raise capital when earnings alone are not sufficient? Traditionally, conversion from mutual-to-stock form was the best option. In a mutual-to-stock conversion, the institution sells shares of its common stock in a subscription offering, with priority given first to depositors and other members of the institution. The amount of capital raised is dependent upon both the appraised value of the converting institution and the demand for the stock. Institutions seeking to raise capital yet retain the key aspects of a mutual institution may opt for a mutual holding company formation in which only a minority interest is sold. Mutual holding company formations can also be done without selling any shares at all if an institution is seeking the greater flexibility that a holding company can provide but does not need to raise additional capital. In addition, if the holding company has less than $1 billion in total assets, the holding company may be able to borrow money and downstream the proceeds as capital to the institution provided it has the ability to service the debt and a lender is willing. Such a loan would likely involve pledging the stock of the institution.

On March 17, 2017, Representative Kevin Rothfus (R-PA) and Representative Steve Stivers (R-Ohio) introduced The Mutual Bank Capital Opportunity Act of 2017, which, if approved in its current form, would provide another means for a mutual institution to raise capital without converting to stock form through the issuance of mutual capital certificates. As proposed, a mutual capital certificate would be a type of security containing features of both debt and preferred stock. In order to qualify as Tier 1 capital, it would need to be (i) subordinate to all claims against the institution, (ii) unsecured, (iii) without any voting or member rights other than if the institution sought to change the terms of the instrument in an adverse manner, (iv) not eligible for use as collateral for a loan by the institution, (v) entitled to receive a payment of fixed, variable, or participating dividends, and (vi) not redeemable for five years from the date of issuance except in the case of merger or reorganization of the institution. Mutual capital certificates had been a permissible source of Tier 2 capital beginning in the late 1970s although, as a result of the Basel III capital rules, they are no longer permitted. 

Both the American Bankers Association and the Independent Community Bankers Association have publicly expressed their support for the bill along with a companion bill introduced in both the House and the Senate that would provide mutual institutions with expanded lending powers. However, Representative Rothfus introduced similar legislation in prior years with no action being taken. Whether action is taken by this Congress remains to be seen.