New England Mutual Banks — The Pandemic and Beyond
by Chris Haley, Executive Vice President, Supervision, Regulation & Credit, Federal Reserve Bank of Boston, and Brett Oppel, Supervisory Examiner, Supervision, Regulation & Credit, Federal Reserve Bank of Boston
Since the chartering of Provident Institution for Savings in Boston in 1816, mutually owned financial institutions, or mutual banks, have played a critical role in supporting the New England economy. Mutual banks opened for business in the early 19th century with the twin goals of encouraging household savings and providing residential loans to their members. Although present in other parts of the nation, mutual banks have historically made up a much larger proportion of financial institutions in New England given their popularity as an organizational structure in the mid-19th century when many New England banks were founded.
Two centuries after the first mutual bank opened its doors, there are currently over 400 mutual financial institutions operating nationwide, with nearly a third located within the six New England states.1 Massachusetts alone has 84 such banks, which is the most in any state (see Figure). In September 2022, the Federal Deposit Insurance Corporation (FDIC) approved a new mutual bank application, the first in five decades; perhaps not surprisingly, it is located right in the center of New England.
General Activities and Operations of Mutual Banks
While mutual banks can engage in a wide array of banking services and product offerings, they have historically focused on local deposit-taking and residential lending. As of September 30, 2022, median one- to four-family residential lending totaled 65 percent of average gross loans at mutual institutions2 compared with 46 percent at their stock-owned peers.3 The mutual bank business model is similar to that of other community banks. Mutual banks face strong competition from national peers and newer nonbank and online-oriented entrants into the financial services landscape. Additionally, the median net interest margin for mutual banks tends to be lower than that for stock-owned peers, in large part because mutual banks have larger residential loan portfolios, which are lower yielding. In response, many mutual banks have focused on diversifying loan portfolios and product offerings as well as seeking out operational efficiencies. In particular, commercial real estate lending at mutual banks has been increasing in recent years; non-owner-occupied commercial real estate lending grew more than 43 percent over the past three years.4
Mutual Banks During the Pandemic
Since the onset of the pandemic, mutual banks have continued to support their members and communities by sustaining their lending and deposit-taking activities, resulting in substantial balance sheet growth at many banks. Similar to their community bank counterparts, mutual banks participated in pandemic assistance programs such as the Paycheck Protection Program (PPP)5 and worked with their customers to mitigate the impact of business disruptions through deferrals or modifications. These actions were significant in helping communities in the First District navigate the pandemic and contributed toward regional economic stability. Also like their peers, mutual banks experienced significant deposit growth as a result of governmental stimulus measures and increased savings rates. While PPP-related activity led to an increase in commercial lending, banks that experienced pandemic-related growth in deposit balances placed those funds into short-term investments and cash equivalents due to what could be the shorter-term nature of the new deposits.
In a mutual structure, there are no shareholders or common stock; rather, depositors share ownership interest of the institution. In effect, retained earnings are the sole category of capital. Historically, mutual banks have had capital levels that are higher than those of their stock counterparts. The more conservative position is due in large part to the inability to raise capital via public offerings. This also is one of the reasons for the larger residential mortgage portfolios, which historically present less risk than commercial loans and therefore help to preserve capital. Other mutual banks are structured with a holding company owned by the depositors. In this type of structure, the mutual holding company can issue subordinated debt. This form of capital can be raised by mutual holding companies, with the proceeds flowing downstream to the bank. Over the course of the pandemic, mutual banks did see some reduction in their comparatively high capital levels stemming from balance sheet growth. As mutual banks emerge from the pandemic, the appropriate level of capital in light of larger balance sheets and more diversified loan portfolios is becoming an area of increased focus.
Strategy in Light of an Evolving World
Management teams at mutual banks and other community banks face the immediate challenges of how to strategically navigate an upward interest rate environment. Many of these institutions have a liability-sensitive balance sheet structure and face margin pressure in a prolonged rising rate environment. The current economic environment could also result in potential asset quality issues, which, together with margin pressure, can degrade capital.
Careful consideration of the loan portfolio and the inherent risk that it presents to capital will likely continue to drive how much credit risk is appropriate as well as the type of credit risk in the portfolio. On the deposit side, strong ties to the community given mutual banks’ organizational makeup have led to historically stable core deposits fostered by strong long-term relationships. Increased competition for consumers from online banks and other nonbank financial players is causing many mutual banks to reconsider the long-term implications of these competitors to their business strategy. In response to this competition, many mutual banks are starting to partner with third-party technology providers in activities related to deposit gathering and concurrently implementing appropriate third-party risk management practices. Mutual banks are reassessing the required skill sets and accompanying staffing to better use third-party products, including the addition of board trustees with more technology-based backgrounds. Like their stock counterparts, management teams at mutual banks realize that the banking world is dynamic, and they must keep up to compete. While they historically have had strong, loyal customer bases, mutual banks recognize that offering a competitive product suite is key to retaining this customer base. Their unique ownership structure provides one advantage in this regard: They lack shareholder return pressure, possibly allowing for a more patient and long-term view of necessary investments.
For the past two centuries, the mutual bank structure has served New England communities well. As the region and the nation transition out of the pandemic, fundamental risk management practices remain important. Boards of trustees and management at mutual banks, just like their counterparts at other community banks, who develop strong capital planning activities, employ prudent business strategies and risk management processes, and position their balance sheet appropriately will be well positioned to serve their customers well into the future.
- 1 Data obtained from the December 31, 2020, FDIC analysis, available at www.fdic.gov/resources/bankers/mutual-institutions/index.html.
- 2 Mutual institution refers to the national median mutually owned insured savings bank having assets between $300 million and $1 billion using Call Report data as of September 30, 2022.
- 3 Stock-owned institution refers to the national median stock-owned insured savings bank having assets between $300 million and $1 billion using Call Report data as of September 30, 2022.
- 4 This is based on Call Report data as of September 30, 2022.
- 5 The PPP was a Small Business Administration–backed loan program designed to help businesses keep their workforces employed during the COVID-19 crisis.