Mutual to stock conversions were very popular in the 1980s & ’90s, but as we noted earlier this year, the conversion rate in recent years had slowed to a crawl (JRN 34:12). Not any longer.
The primary difference between the two is that mutuals are owned by their depositors. As such, they are free to reinvest profits back into themselves. Stock institutions are owned by shareholders, some of whom are depositors, but not all. A stock conversion enables the bank to raise capital by selling stock ownership. That capital is usually used to fund growth.
When a conversion is announced, the depositors of record are allowed to purchase stock prior to the Initial Public Offering (IPO). Many people used this as a get rich quick scheme. They would open accounts at as many mutual banks as they could and then sit back and wait/hope that at least some of them would convert. If the depositor purchased 1,000 shares at $10 and the stock opened at $15 in the IPO, they made an easy $5,000 profit by selling right away.
Of course the amounts were bigger, but the concept was the same. This was repeated over and over again. These depositor/owners had no vested interest in the bank. They simply wanted to make money. Eventually the pace of conversions died down, but it seems to be heating back up.
*****HarborOne Bank, Brockton, MA is a particularly interesting case. It was originally established in 1917 as Brockton Credit Union. In 2004 it changed its name to HarborOne Credit Union and in 2013 it became HarborOne Bank, a Cooperative Bank (a mutual bank). Then, on June 29, 2016, HarborOne Bank converted again. This time into a two-tier mutual holding company structure.
*****Pentucket Bank, Haverhill, MA took a similar approach with its conversion last June (JRN34:12). It formed a two-tiered holding company structure too, one tier being a mutual. While the bank itself is no longer a mutual, it is still owned by one. This enabled it to raise the desired capital without risking its coveted independence.
Not coincidentally, both of these examples are in Massachusetts. In fact, the first mutuals were established in Massachusetts and Pennsylvania in the early 1800s. Back then most commercial banks only served retail and commercial businesses so consumers needed a safe place to earn interest on their savings.
In addition to safety, (similar to credit unions—see JRN 34:29) mutual banks are owned by the people they serve, their depositors. Many of these owners are now looking to grow in order to remain viable. Aside from organic growth, there are basically two ways to do this and still maintain ownership. It can either merge with another mutual or do what HarborOne and Pentucket did. As a result, the number of mutual banks is diminishing.
In fact, in an effort to boost the ranks, leaders of mutual banks discussed ways to lower the regulatory hurdles credit unions face to convert to mutual institutions (‘a la HarborOne) at a recent meeting of the OCC’s Mutual Savings Association Advisory Committee. It can’t hurt. The last mutual bank to be chartered in the U.S. was in 2004 when Washington Credit Union became *****1st Security Bank of Washington.
The vast majority of mutual banks still reside in the Northeast and Mid-Atlantic today. A complete list of Mutual Banks (not Mutual Holding Companies) along with financial highlights, can be found on page 7 and is continued on the special insert.