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Case Study: Mutual banks ensure a strong future by reorganizing into mutual holding companies

A mutual bank embodies the principle that important common objectives are often best accomplished by placing the common good ahead of individual profit. As a cornerstone of American communities including those here in Massachusetts for almost 200 years, these institutions are known for providing superior service and, just as important, offering support to the neighborhoods in which they operate. Addressing individual needs while complementing the wider interests of the community, mutual banks are firmly committed to their independence.

Modeled after similar institutions in England, the first mutual bank in the United States was formed in Boston in 1816 at a time when the commercial banking system did not provide access to ordinary citizens. Mutual banks began to offer ordinary citizens a place to deposit money or to take out a loan, thereby allowing them to improve their lives and help the community grow. Today, mutual banks, which are owned in some sense by their depositors rather than by investors, are a thriving segment of the banking industry, comprising over 700 institutions across the country that hold more than $270 billion in assets. Massachusetts is home to more mutual banks than any other state in the country.

Nonetheless, our communities, economy and needs have changed since the early establishment of mutual banks. While many of the banks have successfully met the challenge of addressing the modern-day needs of their customers simply through the development of new products and services, others are finding that they need capital to fund future growth through acquisitions, expanding operations or simply organic growth. Some mutual banks interested in combining with neighboring or nearby mutuals to share costs have met with resistance since one of the banks would go out of existence in a mutual-to-mutual merger.

Fully converting to stock form to raise capital in the public markets is not an option that many mutual banks embrace. The boards of these institutions view the bank as a community trust and are concerned that taking the bank public will make it an easy target for large, out-of-town banks looking to grow through acquisitions. The acquiring bank may not be vested in the community, subjecting the community to the loss of a truly important community asset. 

Working with a number of mutual banks throughout the Commonwealth and around the Northeast, Nutter offers counsel on legal strategies and alternative structures that permit mutual banks’ continued success. One option to raise capital for growth while maintaining independence and civic commitment is to reorganize from a mutual bank charter to a mutual holding company.

The reorganization is a multi-step transaction that results in the account holders of the mutual community bank having the same so-called liquidation rights in a new mutual holding company.

The reorganization process allows our clients to continue as mutual and independent entities while gaining specific benefits that allow for growth, including:

• Controlled capital growth: a mutual holding company can go to market and raise capital in one of two ways: issuing trust preferred securities in a pool with other community banks that does not result in the bank "going public," or issuing a minority equity interest in the institution to the bank's customers and community in an underwritten offering.
• The ability to facilitate growth through mergers and acquisitions: a mutual holding company can acquire mutual or stock banks and, if desired, continue to operate them independently as separate institutions under the "umbrella" of the mutual holding company.