What Are Mutual Savings Banks and How Do They Work

Mutual savings banks are a type of financial institution that's owned and controlled by its depositors. They're not-for-profit organizations that aim to provide financial services to their members.

Their primary goal is to serve the financial needs of their members, not to maximize profits. This is reflected in their business model, which focuses on offering competitive interest rates and low fees.

One of the key characteristics of mutual savings banks is their focus on community development. They often invest in local projects and initiatives that benefit their members and the wider community.

Mutual savings banks are also known for their strong commitment to financial inclusion. They strive to provide access to financial services for people who may not have been able to access them otherwise.

A savings account is essentially a type of account that allows you to deposit and withdraw money as needed.

These types of accounts were originally designed to serve low-income individuals, who would often invest in long-term, fixed-rate assets like mortgages.

Historically, people who used these accounts would typically have a primary location in the Mid-Atlantic and industrial Northeast regions of the United States.

By 1910, there were 637 of these institutions, which is a testament to their popularity and importance back in the day.

Mutual savings banks are just one type of financial institution, but there are many others out there.

Commercial banks, on the other hand, are profit-driven institutions that offer a wide range of financial services to individuals and businesses.

Credit unions, like mutual savings banks, are not-for-profit cooperatives that provide financial services to their members.

Building societies are another type of financial institution that focuses on mortgage lending and savings products.

Industrial banks, also known as development banks, provide financing to businesses and individuals for economic development.

Mutual savings banks have several advantages that make them an attractive option for depositors. They are generally better capitalized and operate more conservatively than traditional banks, which helped them survive the Great Depression.

One of the key benefits of mutual savings banks is their customer service. Since depositors are also owners, the bank has a vested interest in keeping them satisfied, leading to a more personalized and attentive experience. This approach is reflected in the bank's eagerness to please its customers.

Mutual savings banks are also known for their depositor safety. They are typically chartered by state or federal bodies and insured by the FDIC, which provides an added layer of protection for depositors. This, combined with their conservative investment approach, allows them to weather financial strife more effectively than traditional banks.

Here are some key advantages of mutual savings banks:

Mutual savings banks also have some disadvantages. One of the main drawbacks is that they do not have a national presence, which can limit access to banking services in certain areas. Additionally, they may not offer the same level of technological advancement as larger banks.

Mutual savings banks have several advantages that set them apart from traditional banks. One of the biggest advantages is financial stability. Generally speaking, mutual savings banks are better capitalized and operate more conservatively than the average public bank.

They were among the few banks that survived the Great Depression because of their refusal to take on too much risk. This conservative approach to banking helps to ensure that depositors' funds are safe and secure.

Mutual savings banks also offer excellent customer service. As depositors are also owners, the bank has a vested interest in keeping its customers happy. This leads to a more "eager to please" approach when it comes to customer service.

Depositor safety is another key advantage of mutual savings banks. They are typically chartered by state or federal bodies and are insured by the Federal Deposit Insurance Corporation (FDIC). This provides an added layer of protection for depositors.

Mutual savings banks are able to take a long-term approach to business, rather than focusing on short-term profits. This allows them to build longer-term relationships with the community and provide more flexible solutions.

The profits from mutual savings banks stay within the community. This can take the form of lower rates on loans and higher rates on deposits, or through donations to community schools, charitable causes, and local events.

Members can typically walk into a mutual savings bank at any time and get financial advice from financial experts. This level of accessibility is a major advantage for those who need help with their finances.

Mutual savings banks have their downsides. One major issue is that they can be too conservative, which might hurt the investment performance of depositor funds.

Manager compensation is often tied to the financial health of the bank, which can lead to overly cautious decision-making. This means that even when taking on a bit more risk would make sense, managers might stick to what's safe to avoid jeopardizing their own compensation.

A lack of direct depositor control is another problem. Mutual savings banks are owned by depositors, but the board of trustees holds the power. This board can remain unchanged for years, leaving depositors with little influence over the bank's decisions.

Depositors have limited ways to exert their influence, with their only real option being to take their deposits elsewhere. This lack of control can lead to frustration and a sense of disconnection from the bank.

There's also a risk that your mutual savings bank may be acquired by a larger corporate bank or even go public. This can happen when a bank issues stock through an initial public offering (IPO), which can lead to a loss of community control and a shift in priorities.

Here are some of the specific disadvantages of mutual savings banks:

Mutual savings banks make money by charging interest income on loans they provide to customers, just like commercial banks. However, they tend to be more community-focused and often have stricter lending standards.

The interest rate mutual savings banks charge for loans tends to be greater than what they pay on deposits, which is why they're able to operate. This is a key difference from commercial banks, which often prioritize making a profit over serving their community.

Credit unions are a type of financial institution that operates as not-for-profit organizations, designed to serve their members who are also de facto owners. They pool their money to provide loans, demand deposit accounts, and other financial products and services to one another.

Most credit unions are significantly smaller than retail banks, usually focusing on serving a particular region, industry, or group. For example, the Navy Federal Credit Union has 300 branches, largely near military bases.

Credit unions are insured by the National Credit Union Administration (NCUA), which protects depositors' funds up to a specific limit per depositor, per credit union. As of March 31, 2021, total assets in federally insured credit unions stood at $1.95 trillion.

Members of credit unions can participate in decision-making processes, electing a board of directors from among the membership or voting on significant matters. This is in contrast to commercial banks, which are owned by shareholders and operate to make profits for them.

Here's a comparison of credit unions and commercial banks:

Holding company formation can be a complex process, but it's essential to understand the basics. A holding company is a separate entity that owns and controls other companies, allowing for tax benefits and liability protection.

In the United States, a holding company can be formed as a corporation, limited liability company (LLC), or partnership. This flexibility is beneficial for businesses with varying needs and structures.

To qualify as a holding company, the entity must own at least 80% of another company's stock or ownership interest. This threshold ensures that the holding company has significant control over the subsidiary.

A holding company can also be used to separate assets and liabilities from the operating company, reducing risk and increasing financial flexibility. This separation can be particularly useful for businesses with high-risk operations or those seeking to minimize tax liabilities.

The IRS considers a holding company a separate entity for tax purposes, allowing it to file its own tax return and deduct expenses related to the subsidiary.

Mutual savings banks can conduct life insurance business if it's authorized under State law.

To qualify, the life insurance business must be carried on in a separate department of the bank, and its books of account must be maintained separately from other departments.

The life insurance department must also qualify as a life insurance company under section 801 if it were treated as a separate corporation.

A partial tax is computed on the taxable income of the bank determined without regard to any items of income or deduction properly allocable to the life insurance department.

This partial tax is based on the rates and manner provided in subchapter L, chapter 1 of the Code.

A second partial tax is computed on the income of the life insurance department, determined without regard to any items not properly allocable to the department, at the rates and in the manner provided in subchapter L.

This is the same tax treatment as given to life insurance companies under section 801 and following.

Mutual savings banks were first established in the United States in 1819 with the founding of the Provident Institution for the Savings of the Poor in Boston.

The Provident Institution was founded by a group of Boston merchants who wanted to provide a safe and accessible place for working-class people to save their money.

Mutual savings banks operated on a non-profit basis, meaning they didn't pay dividends to shareholders and instead reinvested their profits into the bank.

Their focus was on serving the community and providing financial services to those who needed them most.

The first mutual savings bank was created in Philadelphia in 1816 as a way to give working-class families a safe place to store their money and earn interest.

This was a revolutionary idea at the time, considering most banks shut out low-wage workers in favor of working with retail and commercial businesses instead.

The first mutual savings bank was funded by wealthy individuals who sought no form of profit or repayment in return, making it a philanthropic-forward endeavor.

Initially, MSBs only offered federal and state government bonds, but their services grew to include industrial bonds, blue-chip stocks, mortgage loans, and other collateralized lendings within a few years.

Mortgage loans became the biggest moneymaker for MSBs by the end of World War II, making up 75% of the industry's assets.

By 1820, the number of mutual savings banks in the U.S. skyrocketed from 10 to 637, with new institutions popping up everywhere until 1910.

Mutual savings banks operate with a unique ownership structure where customers become bank members and have voting rights in decision-making processes. This ensures that the bank operates in the best interests of its customers.

Customers deposit their money into various accounts offered by mutual savings banks, which provides the funds the bank can use to lend to borrowers. Deposits are a crucial source of income for the bank.

Mutual savings banks offer various lending services, including mortgages and personal and business loans. The interest earned from these loans forms a significant portion of the bank's income.

Here are the key aspects of mutual savings bank operations:

Mutual savings banks are subject to regulatory oversight by state banking authorities or federal agencies, ensuring their financial stability. This oversight is crucial to maintaining the trust of customers and the community.

Mutual savings banks are unique institutions that prioritize the interests of their depositors over profits. They are owned by their depositors, who have a say in decision-making processes.

One of the key benefits of mutual savings banks is that they offer higher interest rates on deposits, making them a more attractive option for savers. They also provide a range of services, including loans and savings deposits.

However, mutual savings banks are not controlled by their depositors, which can be a drawback. They are also often smaller and more localized, with limited national presence.

Here's a comparison of mutual savings banks with credit unions and commercial banks:

Mutual savings banks are also known for their community-focused approach and friendly customer service. However, some may be behind the times in terms of technology.

Mutual savings banks have some great benefits that set them apart from other types of banks.

One of the main advantages is that they are depositor-owned, which means that the people who use their services have a say in how the bank is run.

Friendly customer service is another perk, as mutual savings banks often prioritize building relationships with their customers.

FDIC-insured deposits provide an added layer of security for account holders.

Community-focused banks often have a strong presence in the local area and may offer more personalized service.

Not everything about mutual savings banks is positive, however.

One drawback is that they are not controlled by their depositors, which can lead to a lack of direct input from the people who use their services.

They also tend to have a smaller, more regional presence, which may limit their reach and services.

Many mutual savings banks are choosing to go public in order to raise more capital, which can be a double-edged sword.

Finally, some mutual savings banks may be behind the times in terms of technology, which can make it harder for customers to access their accounts and services.

Here's a quick summary of the benefits and drawbacks of mutual savings banks: