On July 22, 2014, the OCC issued a bulletin (OCC Bulletin 2014-35, the “Bulletin”) in which the OCC describes the special characteristics of mutual federal savings associations (“Mutual FSAs,” and, collectively with stock-owned federal savings associations, “FSAs”) and the factors that the OCC takes into account as part of its risk-based supervision of Mutual FSAs.  In a related event, Comptroller of the Currency Thomas J. Curry delivered remarks to the Joint Mutual Forum on July 24, 2014 in which he suggested that, given the changing economic environment, it was time to consider whether the laws and regulations restricting the activities of Mutual FSAs and stock-owned FSAs should be modified to authorize them to engage in a broader range of activities and, in particular, to eliminate the Qualified Thrift Lender test and increase the ability of all FSAs to engage in commercial and consumer lending.

In the Bulletin, after briefly describing the rights of members of Mutual FSAs and the traditional operations of Mutual FSAs, the OCC comments upon the structural and operational considerations that it factors into its assessment of a Mutual FSA’s risks with respect to each CAMELS rating component. 

Capital.  With regard to the capital component of the CAMELS rating system, because Mutual FSAs rely almost exclusively on retained earnings to build capital, the OCC stresses the importance of capital planning for Mutual FSAs.  The Bulletin also describes the use of nonwithdrawable accounts or pledged deposits and of mutual capital certificates.

Asset Quality.  With regard to the asset quality component, the OCC notes that Mutual FSAs’ loan assets are concentrated in residential mortgage loans, that they tend to hold the loans they originate on their own books, and typically hold higher levels of capital to mitigate credit risk than is held by stock-owned FSAs.

Management.  With regard to the management component, the OCC emphasizes the need of Mutual FSA boards and senior management to have a well-developed business strategy and clearly articulated long-term goals.  The OCC also notes the importance to Mutual FSAs of capital planning and management succession planning. 

In connection with the OCC’s discussion of the management component of CAMELS, it discusses compensation issues for Mutual FSAs and points out that, although Mutual FSAs cannot offer equity forms of compensation, they can offset that disadvantage by offering greater job stability and a combination of higher salaries, cash bonuses, benefits and, to the extent it makes business sense and is consistent with safety and soundness concerns, phantom stock plans.  The OCC states that it expects Mutual FSAs to set an individual’s compensation “taking into consideration an appropriate balance of risk and reward that is accompanied by effective controls and strong corporate governance.”

Earnings.  Regarding the earnings CAMELS-rating component, the OCC notes that Mutual FSAs generally have lower earnings but more stable profitability than do stock-owned FSAs.  The OCC will evaluate a Mutual FSA’s earnings relative to its risk profile, capital level and strategic plan.

Liquidity.  With respect to the liquidity CAMELS component, the OCC stresses the importance to Mutual FSAs of cash flow projections, diversified funding sources, stress testing, a cushion of liquid assets and a well-thought-out contingency funding plan.  The OCC also notes that Mutual FSAs typically rely less on wholesale funding sources than do stock-owned FSAs.

Sensitivity to Market Risk.  Finally, regarding the sensitivity to market risk component, the OCC states that Mutual FSAs tend to have relatively high long-term assets to total-assets ratios and residential-real-estate assets to total-assets ratios and, accordingly, may have relatively high on-balance-sheet interest rate risk.  The OCC concludes that Mutual FSAs “should have processes in place to quantify the sensitivity of earnings and capital to adverse changes in interest rates.”