Community banks hold pat
Photos/Edd Cote
Mutual community banks such as Avidia follow a growth strategy aimed at longevity and independence.
Banks watch their dollars — and their future. Pictured here is Avidia Bank teller Sheila Dilling.
Over the past few months, there’s been a mini-boom in switches of community banks to the ranks of publicly held institutions. Hyde Park-based Blue Hills Bank, East Boston Savings Bank, Melrose Cooperative Bank and Pilgrim Bank of Cohasset have all decided to start selling stock.
The conversions reflect growing pressure on local mutual banks — particularly small ones — as regulatory requirements, the costs associated with them, and other expenses rise while low interest rates make it difficult to generate more revenue. Selling stock provides an influx of cash, and it can pave the way for mergers down the road. But a number of banks in the MetroWest and Interstate 495 area say they’re determined not to go that route.
Walter Dwyer, president and CEO of Ayer-based North Middlesex Savings Bank, said it’s clear why some banks want to convert: It’s a way to grow. “We as mutual banks have no other way to raise capital than to basically reinvest our earnings,” he said. Under federal rules designed to ensure an adequate debt-to-equity ratio, a bank that makes $2 million in a year can only grow by $20 million, which might not be enough to meet demand or adjust to higher compliance costs.
Dwyer: Private banks take a longer view
“That’s probably the argument that you’re getting from the banks that have converted or are in the process of converting,” Dwyer said. “We and a lot of other mutuals of similar size don’t feel like we need to grow that fast. ... We think the fact that we’re not under pressure from shareholders to grow quickly allows us a longer view.”
The truth, Dwyer and others in the industry say, is that banks that are converting to stock ownership are unlikely to remain community banks for long. Historically, most institutions that have switched end up being acquired by larger banks. That’s because whoever buys the stock — particularly large institutional investors — will push for the strong return they’re likely to get by cashing out their investment in a sale to a larger bank.
Bank mergers are an old story around the country, although Massachusetts retains an unusually large number of small mutual banks. Unlike the storm of mergers the state experienced in 1999 and 2004, when customers saw signs switch from BankBoston to Fleet to Bank of America within those few years, the current crop of stock conversions and potential mergers mostly involves small banks.
Slim odds for survival after conversion?
Kenneth F. Ehrlich, a partner with the banking and financial services practice group at Nutter McClennen & Fish LLP in Boston, said the pressure on small banks is clearly pushing some to look at selling stock. But he said it’s just as clear why some would want to avoid that.
“Many mutual banks culturally would not be interested,” he said. “All kinds of data (show) that when a bank converts to stock, it’s more likely to disappear.”
After the conversion, a bank can’t legally be acquired for three years.
“A number of banks wait three years and a day and then sell, and all the stockholders make a lot of money,” Ehrlich said.
He said there will probably be other mutual-to-stock conversions down the road, but probably not coming as quickly as they have so far this year.
“On average, over the next 10 years, we might see one a year,” he said.
For Franklin’s Dean Bank, one of the region’s smallest financial institutions, maintaining independence has been a matter of strategic growth, according to President Kevin Goffe.
“By maintaining a planned growth strategy during the economic downturn, we have enabled the bank’s capital to grow faster than the assets of the bank. So, as economic conditions improve, the bank will experience a greater capacity to expand with the recovery,” he said in an email message.
Goffe said Dean is also working with other mutual banks around the country to lobby for new federal rules that would allow them to raise capital without converting to stock ownership through an investment vehicle called mutual capital certificates.
Anybody weighing options?
Some small banks are eyeing other potential strategies to grow. In 2009, with the financial crisis shaking up the industry, Charles River Bank in Medway transformed into a three-tiered structure. It’s now technically a stock bank, but all stock is owned by a mutual holding company. President Jack Hamilton said the bank’s current form would make it easier to sell stock if it wanted, but that’s not the plan. Instead, the structure could let the bank merge with another mutual institution without forcing one of them to give up its name and branding.
For now, though, Hamilton said no merger is in the cards. He said the bank has spoken with other institutions “on a very preliminary basis,” but even a limited sort of merger tends to worry banks’ boards of directors, which often fear giving up local control.
“I think if you left it up to the CEOs, there’d be deals made fairly frequently,” he said. “Directors have a different perspective, and, as a result, it’s very slow in progressing. I thought we’d be seeing more mergers at this point than we have.”
At North Middlesex, Dwyer said he sees the upside to taking a route similar to Charles River’s. Creating a holding company not only opens the door to more equitable mergers but also gives banks a way to own other sorts of financial businesses. But he said the legal fees and the potential negative public perception from people who might worry that an IPO is next make North Middlesex wary of taking that route.
Instead, Dwyer said, the bank has been looking at the possibility of collaborating with others in its position, finding ways to share IT and compliance services, for example. The other potential way to handle growing pressure is a merger between mutual banks, which would force one entity to give up its identity.
“I think that’s something we all talk about and think about, but that is very hard to do as far as representing the communities,” he said. Dwyer recalls a mergers-and-acquisitions lawyer telling him, “ ‘Don’t ever call me about a merger until you’ve figured out the five big questions: Who’s going to be president and CEO? Who’s chairman of the board? How to allocate board fees? What’s the name of the company, and where’s the corporate headquarters?’ He said, ‘If you can’t figure those out, don’t even bother.’ ”
Answering those questions is hard, but not impossible, something that’s clear from past mutual mergers. The two largest mutual banks in the region, Middlesex Savings Bank in Natick and Avidia Bank in Westborough, are both the product of mergers. Middlesex was created in the 1982 merger of Middlesex Institution for Savings and Natick Five Cents Savings Bank, and it later absorbed two more local banks. Avidia is the product of Westborough Savings Bank and Hudson Savings Bank’s 2007 merger.
Middlesex, which is far larger than the area’s other mutual banks, has no real need to issue stock because it’s already well capitalized, said Brian Lanigan, the bank’s first executive vice president and chief operating officer.
“We have enough resources,” he said. “We just don’t need any additional capital to expand any of our banking.”
Lanigan said it helps that the bank has a large investment portfolio of securities, which it’s slowly reinvesting in loans to customers.
“We’re able to really grow the relationship side of our business by having that reserve of investment securities,” he said.
For Avidia, having twice the deposits of many community banks helps spread around the costs of compliance, President Mark O’Connell said.
O’Connell acknowledged that the bank’s earnings aren’t through the roof these days, but he said that’s not such a big problem if there are no outside shareholders making demands. And he said the bank provides a different sort of value through its local philanthropy and reinvestment in the area.
“If we went public in three years and sold out in 10 years, there wouldn’t be a local bank anymore,” he said. n
WBJ Web Partners
Most Recent
Most Recent
0 Comments