Depositor-owned banks in Mass. angling to go public
Virtually all banks with more than $4 billion in assets depend on income from selling stock to fuel their growth. Middlesex Savings Bank is the exception.
Only five banks in America have more assets than Middlesex, yet are still owned entirely by depositors, according to the Natick-based company. And bank chairman, president and CEO John Heerwagen doesn't expect that to change anytime soon.
“We see no reason and have no interest in committing to stock ownership,” he said.
Twenty-four of Central Massachusetts' 27 banks are either traditional mutual (depositor-owned) banks or — like Middlesex — mutual holding companies (MHCs), a designation that gives banks more financial flexibility without having to cede control to shareholders, according to the Massachusetts Division of Banks and the Office of the Comptroller of the Currency (OCC).
The region's lone stock banks —Commerce, Millbury National and Milford National — have all been that way since their founding.
State banking commissioner David Cotney made the surprise announcement during a recent Massachusetts Bankers Association conference that five mutual banks have asked to convert to stock banks, according to several bank CEOs in attendance. The first, Blue Hills Bank of Hyde Park, filed its application March 11 to go public.
Such a move is often the beginning of the end for community institutions, with two-thirds of newly formed stock banks selling within five years of their conversions, said Damon DelMonte, a bank analyst for Keefe, Bruyette and Woods in Hartford.
That's all the more eye-opening since mutual banks, by law, cannot be sold in the first three years following a stock conversion, said Kevin Handly, a Boston banking lawyer.
“Everybody's happy except for the community that no longer has a locally owned bank on Main Street,” said Handly, a professor of mergers and acquisitions law at Boston University.
Virtually all of the nation's top banks are organized as publicly traded institutions, permitted to take over other stock banks but not mutuals. Therefore, a conversion is often needed to turn a struggling mutual — or a mutual with senior management close to retirement age — into a viable acquisition target, Handly said.
Conversions fell off in 2008 after investors became wary of bank stocks,
DelMonte said, but they have been on the rise again since 2011 as equity markets have strengthened.
But conversions can be more than just an exit strategy for weary bank executives. It provides financial institutions with easier access to capital, allowing successful community banks to expand their physical footprints through organic growth or acquisitions.
“If you're a mutual and you're stuck in a marketplace that's not growing … demutualization is the way to go,” said Kamal Mustafa, chairman and CEO of the Manhattan, N.Y.-based Invictus Consulting Group. “Capital is gold today.”
Since mutuals cannot sell stock, they can only raise capital through profitable investments, which Handly said is often a slow process.
Money that converted banks raise through initial public offerings can allow them to open new branches, hire new workers or upgrade data systems, DelMonte said, providing an infusion of capital to the local economy.
Recruitment, retention tool
Conversions can also help attract or retain top talent, DelMonte said. Workers are sometimes entitled to additional compensation through stock ownership, he said, while executives can occasionally earn bonuses by boosting the value of company stock.
Converted bank stock often ends up concentrated in the hands of the bank's directors, and is used as the basis for dividends, Handly said. And shareholders receive a handsome payout if the converted bank is indeed sold at well above the value that appears on its balance sheet, which is typical.
“There are quite a lot of executives that end up very well off because of this,” Handly said.
On the flip side, mutuals sacrifice autonomy when they launch a conversion, since they have to answer to more than their depositors. These banks would face pressure from shareholders to provide a generous return on investment.
“Some of them (the converted banks) will be walking into a buzzsaw,” Mustafa said.
And the still-sluggish economy means most banks would have nowhere to deploy their newfound capital, Handly said.
Richard Leahy, president and CEO of Webster Five Cents Savings Bank, said his bank already enjoys an extremely strong capital ratio of 14 percent — which measures the extent to which banks can cover losses if loans go bad (core capital divided by assets) — and sees no reason to raise additional capital without a specific plan to use it.
Mutuals in Central Massachusetts have favored the formation of MHCs.
Twelve mutuals have reorganized into MHCs over the past two decades, according to the OCC and Division of Banks, with a 13th institution — Hometown Bank of Oxford — approved for reorganization.
Shedding the traditional mutual structure allows for the acquisition of stock banks or other MHCs. Middlesex Savings converted to an MHC in 2009 and acquired fellow MHC Strata Bank later that year, Heerwagen said.
MHCs also have access to borrowing by issuing debt or obtaining home mortgage credit through the government-sponsored Federal Home Loan Banks, DelMonte said.
Clinton Savings Bank formed an MHC in 2001, said president and CEO Bob Paulhus, and used it two years later to issue trust-preferred securities, a debt instrument then counted as capital by regulators.
But the Dodd-Frank financial reform law has curtailed many benefits of MHCs. Banks with more than $500 million in assets can no longer count trust-preferred securities as Tier I capital, the core regulatory measure of a bank's financial strength.
And Dodd-Frank's elimination of the Office of Thrift Supervision means MHCs can no longer pay a dividend on just the company's public shares, DelMonte said, making it more difficult to reward stockholders.
These changes have resulted in reduced demand for shares of MHC stock, Handly said.
If mutuals are looking to cash in nowadays, Handly said, they have no option but to convert and become fully owned by stockholders.
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