Salem Five Cents Savings Bank has applied to the Massachusetts Division of Banks to establish a mutual savings bank as the first step in its plan to create a mutual holding company to be called Salem Five Bancorp.

Almost 20 years after Congress amended the Bank Holding Company Act to allow mutual banks to form holding companies, three banks in Massachusetts now are looking to take advantage of the option, joining an emerging trend of institutions doing so with the intention of forming new business alliances, raising capital and diversifying business activity under the holding company umbrella structure.

Salem Five Cents Savings Bank has requested permission from the Massachusetts Division of Banks to establish a mutual savings bank in conjunction with its multi-step reorganization into a mutual holding company, Salem Five Bancorp. The continuing bank would operate under the name Salem Five Cents Savings Bank. Meanwhile, two institutions in western Massachusetts are looking to undergo similar restructuring. Florence Savings Bank, like Salem Five, is requesting permission to establish a mutual savings bank en route to forming a mutual holding company. The continuing bank’s name would operate under the name Florence Savings Bank. Monson Savings Bank is going about the process in a slightly different way. The bank is requesting permission to establish a mutual savings bank in conjunction with its multi-step reorganization into a mutual holding company, Monson Financial Services MHC, with a mid-tier holding company, Monson Financial Services Corp. The bank would operate under the name Monson Savings Bank.

The process to form a mutual holding company has a few steps. The mutual bank, such as Salem Five, forms a new mutual bank. A subsidiary of the new mutual bank and a new stock bank are also formed at the same time and become one and the same. The new mutual bank owns 100 percent of the new stock bank. The existing bank is merged into the stock bank subsidiary of the new mutual bank. In that merger, all bank depositors become depositors of the stock bank and the depositors’ rights are in the parent mutual holding company. According to the Division of Banks, there are currently 29 mutual holding companies in the state of Massachusetts.

Douglas Burr, senior vice president at Florence Savings, said restructuring the bank will provide more flexibility and an opportunity to raise capital by selling trust-preferred stock.

“We see it as a way to preserve our mutuality,” Burr said.

Although subsidiaries of mutual holding companies can issue stock, the parent company is not owned by stockholders and therefore free of the pressures shareholders often bring to bear on public banks. Mutuals that do not issue stock through subsidiaries also are free of substantial compliance issues. Another benefit of mutual structure is that there are no stockholders to advocate for a possible acquisition of the bank, which industry experts say can be reassuring to customers.

As bank executives looked at the changing landscape of the banking industry, Burr said, they wanted to better prepare for any future opportunities and business alliances.

Kevin Handly, a bank attorney with the Boston office of New Hampshire-based Gallagher, Callahan & Gartrell, said that is a typical response from mutual banks. In the case of Monson Savings, though, things may be different. While there are several benefits to forming a middle-tier company, banks thinking of going public will usually organize one, Handly said.

“[It is indication the bank is] contemplating going public,” Handly said.

However, Roland Desrochers, president and chief executive officer of Monson Savings, said there are no plans for the bank to go public. The bank is looking to set up a middle-tier holding company for possible future opportunities. Desrochers said with a middle-tier company the bank can generate capital through trust-preferred securities. While that would be the bank’s first venture in raising stock, there are no plans to do so at this time.

“We are positioning [ourselves] in case we need to raise capital,” Desrochers said, adding the bank also is interested in possible mergers and other financial services-related business relationships that could be facilitated under the mid-tier holding company structure.

Flexible Form

So why are some banks restructuring their companies now?

“Most banks are under a little bit of pressure,” Handly said.

The expense of running a bank is increasingly growing higher, especially in the areas of regulatory compliance and new technology.

“Compliance costs are high and they’re getting higher,” Handly said.

Also, the requirements for bank boards of directors and trustees have become more substantial than in the past. Regulators, Handly said, expect those bank leaders to be more involved in substantive aspects of the bank than in the past.

“The result is mutual banks are heaping a lot more duties on trustees,” Handly said.

The problem with higher expectations is that banks have a harder time recruiting and retaining qualified trustees. So with increased pressure from regulators and rising short-term interest rates, thrift institutions engaged in home lending are finding their profit margins are being squeezed, Handly said. The net result is that most mutuals are overcapitalized and do not have enough loan demand. While that may not be a problem in the short term, Handly said in the long run regulators will not be happy with unprofitable banks. Looking ahead to the future, mutual banks are under pressure to combine with other institutions. Handly said mutual banks have to find strategic partners and compete more effectively, but without a holding company it can be difficult to do that because the two banks are condensed into one. With a mutual holding company, however, the two banks can combine the two “invisible” parts of the bank into one, while keeping the brand identity of the two mutual banks separate.

“They can retain their market identity while forming a business alliance,” Handly said.

Salem Five’s MHC is intended to better position the bank for future bank mergers and acquisitions. Joseph Gibbons, president and chief executive officer of Salem Five, said the new structure paves the way for better growth opportunities.

“The mutual holding company provides better flexibility as far as the bank’s growth strategy is concerned,” Gibbons said.

If the bank were interested in acquiring a stock bank in the future, Gibbons said Salem Five would need to have a mutual holding company structure in order to do that. The bank isn’t waiting long to combine with another mutual bank, however. Last week, it announced the signing of a definitive agreement to merge with Salem-based Heritage Bank.

“The aim is to become the premier mutual community bank north of Boston,” Gibbons said.

The merger will create a bank with approximately $2.2 billion in assets and 19 branches serving the Greater Boston market. The bank will operate under the name Salem Five Cents Savings Bank and no stock will be issued to depositors or anyone else in connection with the mutual holding company reorganization. The bank also is adopting a “no employee layoff” policy and will make a $1 million contribution to a charitable foundation to be established for the benefit of the communities served by Heritage Bank.

Despite the timing, Gibbons made it clear that the decision to form a mutual holding company was made well before the decision to merge with Heritage.

‘Viable Option’

For some banks, there are tremendous financial advantages to setting up a holding company. A mutual bank may have a hard time raising capital, but if there is a mutual holding company, a bank can raise capital by borrowing money at the holding company level and buy stock in the subsidiary bank.

“That’s what they call double leverage,” Handly said.

Kim Meader, executive vice president of business lines at Salem Five, said raising capital is not what the bank will use the mutual holding company for.

“This is all about growth,” Meader said, adding the restructuring also is not about cutting costs.

Another benefit for banks with mutual holding companies is the opportunity for other business activities. A bank can acquire other financial services businesses, like an insurance firm, merchant bank or venture capital operation.

“Diversification is kind of a good thing in business,” Handly said.

That is crucial for a mutual bank, especially if the bank can’t deploy all its capital by making loans. Closely related financial business lines, like insurance, can be more profitable and more in demand.

Gibbons acknowledged the business activity benefits, saying that while Salem Five has no plans to delve into other types of financial services now, it could be a possibility in the future.

“As the bank [moves forward], we’ll be looking at all the opportunities,” Gibbons said.

Opining that the merger seems like a logical move for both Salem Five and Monson Savings, Handly said the latter bank may have a public offering in mind, while Salem Five’s restructuring will likely provide greater corporate flexibility.

While once there was a stigma attached to mutual holding companies with the thought the bank might go public, Handly said things have changed.

“It is not perceived as an exit strategy,” Handly said. “The fear of mutual holding companies has dissipated. It is a stable form of business organization.”

Kevin Kiley, executive vice president at the Massachusetts Bankers Association, said banks don’t view mutual holding companies as a way to quickly convert to a public institution because many of the banks tout their mutuality.

“There are banks that have a commitment to remain in mutual form,” Kiley said.

The MBA has long supported the idea of mutual holding companies because it gives banks a way to raise capital without completely converting to a stock bank.

“It’s a viable option for mutual institutions,” Kiley said.

But just because a bank wants to form a mutual holding company doesn’t mean they simply can. Handly said the Federal Reserve views mutual holding companies as a privilege, not a right. If a bank has a spotty record or issues like Community Reinvestment Act performace are not up to snuff, the Fed can turn a bank’s application down. Right now, however, most banks are strong, Handly said, and many institutions see the present as a time to reevaluate the company structure.

“Now is the time to strike,” Handly said.