Tradition:  Accent on People

Why Mutuality?

The Citizenship Factor

Mutual Holding Companies

The Mutual Conversion Process and the Rights of Depositors

Brief History of Taxation of Mutual Institutions

Americans have always been entrepreneurs. Almost 200 years ago, when people of limited means could not gain access to the commercial banking system, neighbors pooled resources to create mutual community banks. As customers of these institutions, they insisted on quality service for themselves and their communities. As owners, they delivered it.

Today’s mutual banks and mutual holding companies are at the heart of a robust, consumer-oriented, community banking industry. Serving communities across the country, these 772 mutual institutions, including 143 mutual holding companies, held more than $274 billion in assets as of September 30, 2004. Their median size is $151 million in assets. There were 277 mutuals with under $100 million in assets, and 38 mutuals having more than $1 billion in assets. They are well-managed, conservatively run institutions that are strongly capitalized and profitable.

Mutual institutions held $171 billion in loans for the 12 months ended September 30, 2004, and they service an additional $32.6 billion in mortgage loans that had been sold to the secondary mortgage market.

Mutual banks have helped millions of families live the American dream by originating countless loans for homes, cars, education and small businesses.

Today’s mutual banks are known for two outstanding qualities— independence and commitment to service. The mutual charter grants these banks the flexibility they need to help communities grow. Mutuals are allowed to take a long view of what’s best for their community, and their commitment to the best interests of the towns, neighborhoods and villages they serve is reflected in the wide variety of civic activities in which they engage. It is hometown banking at its best, where officers, directors and employees know their customers because they are neighbors.

The success of these community banks is reflected in the nation’s growing economy. Ninety-four percent of the mutual institutions in the United States were profitable for the 12 months ending September 30, 2004, earning $1.9 billion in profits.

Mutual banks have survived depressions and recessions, world wars and natural disasters because of a management strategy that is focused on the long-term future of the bank and its community. Directors or trustees have a fiduciary responsibility to ensure that their institution meets the highest standards of safety and soundness. Unlike the directors of stock-owned institutions, mutual managers are free from the glare of financial analysts who expect higher earnings every quarter.

This web area tells the story of the mutual charter and its value to families, communities and our nation. It answers questions about the effectiveness and the importance of the mutual form of ownership in today’s financial services market place, and why its value increases as our economy grows more competitive and global. We also included a summary of how mutual institutions are organized and who, if anyone, has ownership rights. There is also a brief history of taxation of mutual institutions. In addition, we have added an article from the March 2005 issue of ACB’s flagship magazine, Community Banker, that provides examples of the enduring value of the mutual institution charter in the 21st century.

Mutual banks were founded by individuals, for themselves and their neighbors. The doors of commerce that banking opened for the well-to-do were closed to average citizens. Mutual banks stepped into this breach to provide high quality consumer banking services to the depositors and to the communities they serve. They continue this tradition today, and have become an important part of the local culture and community.

The contributions of mutual institutions are documented in the history of American banking and the histories of the communities that have benefited from the tradition of service. For nearly two centuries, the nation’s mutual banks have contributed to the quality of life in cities and towns across the United States. An industry of independent, strongly capitalized and highly efficient institutions with a commitment to community service has flourished. Individuals of diverse backgrounds have formed businesses that strive to address the need for credit and services in communities.

The mutual form of ownership is almost as old as the nation itself. The first mutuals were formed just 40 years after the Declaration of Independence. They were founded to provide banking services and credit access for ordinary citizens whom the established banking community ignored. Whether state-or federally chartered, mutual institutions continue to serve everyone.

MThe first mutual bank in the United States, The Provident Institution for Savings, in Boston, Massachusetts, was formed in 1816. It was patterned after similar institutions in England and Scotland. Its founders dedicated the institution to providing a “means of contributing to the welfare of the working classes.” Its purpose was to encourage thrift among low- and middle-income persons.

This was the forerunner of what became the mutual savings bank—one of the two mutual thrift institution charters that eventually became a permanent part of the U.S. banking system. The other—the building and loan associations—later evolved into the present savings and loan associations.

One of the reasons for the popularity of the new banks was their ease of use. Workers could deposit as little as five cents or a dollar and could withdraw the monies as needed. Importantly, it was the collective pooling of these modest resources that allowed these workers to borrow money to improve their lives and help their communities grow.

This concept of operating for collective good has allowed mutual institutions to adapt to the changing needs of their customers and to be innovative in their development of new products and services. Recent examples of innovation include growth through the acquisition of other federally insured depository institutions and branch networks

The mutual community bank industry has changed over the years, and so have its customers. What has NOT changed is the abiding conviction among CEOs of today’s mutual institutions that the mutual structure best serves the banking and credit needs of their communities.

Two words dominate conversations with mutual CEOs when they make this point, independence and service.

• “The most important freedom any bank can have is the freedom to serve its customers. Mutuals have this in the purest sense because their customers are the only constituency.”
  
  
• “It is simply easier to be accommodative in the mutual environment where profits can be passed on to customers rather than stockholders. It also is easier to take a long-range view of strategic planning absent the pressure of boosting earnings every quarter.”
  
  
• “The independence possible in the mutual format is critical to preserving our community orientation. Becoming a stock-institution would make us a prime target for purchase by an out-of-town banking firm that might not have the same appreciation of our community and its needs.”
  

Notwithstanding the need to be competitive and profitable, mutual banks demonstrate a responsiveness to community that goes beyond profits and strives to improve the quality of life. Mutual managers believe that their charter is well-suited to support non-profit and other civic enterprises.

One of the mutual charter variations is the mutual holding company (“MHC”). This structure combines the mutual form with a stock entity. In a basic MHC reorganization, a mutual bank forms a new, wholly owned subsidiary stock savings bank and transfers substantially all of the mutual’s assets and liabilities to the stock institution. The original mutual institution then becomes a MHC by adopting a new mutual holding company charter. In effect, the mutual account holders of the mutual community bank become the owners of the mutual holding company. This structure recently has become more popular as mutual managers and boards of directors want to retain the independence of being a mutual but they also want the flexibility to raise capital for growth.

An MHC offers many benefits:

• Continuation as a mutual and as an independent entity;
• Controlled capital growth through limited stock offerings;
• Facilitation of growth through branch purchases, mergers and acquisitions; and
• Implementation of stock incentive plans and employee stock ownership plans.

ACB is the voice of mutual institutions, and as such ACB strongly advocates for the right of self determination for mutuals. Mutuals must have the right to determine how best to serve their customers and communities, whether it’s through a state or federal charter, a MHC or if, at some point, they decide to convert to a stock institution. While state and federally chartered mutuals are similar in organizational structure, there are some differences that become evident as part of the conversion process. Prior to conversion, the rights of depositors of a mutual savings bank and a federal mutual savings association are the same. In several states, community groups and others have worked to introduce legislation that would change the conversion process for those mutual banks chartered in that state. The proposed changes would make the process more susceptible to outside pressure and manipulation from depositor groups.

The question of depositors’ rights has been the subject of litigation and supervisory attention over the years in several states and on the federal level. A different question that is also the subject of debate is: “What are the rights of the depositors in the event of conversion?

The courts have found that operational decisions, including the level of the capital resources of a mutual bank, are for management and the board of directors to determine, subject to safety and soundness considerations. Depositors do not have the right to demand a dividend or any other payment other than the interest they are contractually owed. The courts have routinely found that depositors of mutual institutions do not have rights until conversion—at which time they receive the right to purchase shares—or liquidation.

The Office of Thrift Supervision has recently affirmed this position. In an opinion letter, OTS stated: “In sum, the federal courts have concluded that owners of federal mutual savings associations have only very limited equity interests in those institutions and those interests do not include any rights as owners to demand a distribution of the institution’s capital.”

The courts also have consistently found that a conversion is not a liquidation of the mutual institution such that depositors would receive a distribution of the converting institution’s accumulated surplus when it converts.

One of the courts to look at the issue of the rights of depositors in a conversion was the New Hampshire Supreme Court in In re City Savings Bank of Berlin and Berlin City National Bank in 1973. The court held that the dissenting depositors in a conversion were not entitled to a right of appraisal or cash payment option for their share of the bank’s surplus. The court concluded that to hold otherwise would provide depositors with a “windfall” which is “something they neither earned or bargained for.”

The court also noted that “[h]aving no voice in the management of the affairs of the bank, a depositor today in a mutual savings bank is an ‘owner’ of the bank and its surplus more in theory than in reality; in most respects his ‘ownership’ is only a technical fiction.” The court quoted with approval the banking commissioner’s conclusion that “[i]f the owner-depositor is given and exercises the option of taking cash and depleting the surplus it would, as a practical matter, render the plan ineffective.” Although this case is over 30 years old, the conclusion is still valid, and neither the courts nor the banking regulators have concluded otherwise.

As part of the ongoing discussion about the competitive inequality resulting from the tax-exempt status of credit unions, questions have arisen about the taxation of mutual community banks. In the United States, credit unions and mutual banks have a similar history. A comparison of the organizational history and business strategies and powers of the two types of entities argues for the imposition of tax on credit unions. The following is a very brief summary of the history of taxation of mutual institutions.

Up to 1952, savings and loans, mutual savings banks, and cooperatives were tax-exempt. In 1952, the tax exemption was repealed and these entities became subject to the regular corporate income tax. However, savings and loans and mutual savings banks were given a deduction for bad debts (up to 100 percent of income in certain cases), remaining virtually tax free.

Between 1952 and 1996, a number of changes were made to the tax law that increased the tax liability while decreasing the level of offsets for mutual institutions. The result is that all insured depository institutions start with the same basic tax liability. Given that the history of mutual institutions and the history of credit unions is similar in so many respects, it argues for similar tax treatment.

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Please send any comments, questions, links or good deeds about this site or mutuality to Patty Milon at (202) 857-3121