Local bankers face a choice: Grow or die
Bay State Savings, Marlboro turn to holding companies for survival
According to the Massachusetts Bankers Association, "surge" might be the wrong word to describe the number of small community banks forming mutual holding companies recently.
But "uptick" might do.
In fact, the Massachusetts Division of Banks has already approved the for- mation of three bank mutual holding companies this year. Five Massachusetts banks formed mutual holding companies in 2005, and five more did the same in 2006.
Bob Lewis, president and CEO of Bay State Savings BankNo sale
Most recently, the division approved the formation of mutual holding companies for Worcester-based Bay State Savings Bank, and for Marlboro Savings Bank.
Robert J. Lewis, president and CEO of Bay State Savings, insisted the formation of its holding company – called 1895 Mutual Holding Co. – is not the first step toward selling the bank.
But a merger isn’t out of the question, he said. "If we wanted to partner with another bank, the only way to do it would be through a merger," Lewis said.
"We put it in place if we need it someday," he added.
Bay State has seven branches and holds $220 million in deposits.
Neither Bay State’s holding company, nor Marlboro’s, issues public stock.
Still, through the holding company, the bank has access to capital markets that were once off-limits, and is able to issue trust preferred securities to fund growth that its received earnings could never pay for.
There are a number of reasons a small, local bank might want to form a mutual holding company, and all of them have to do with the simple choice between growth and death.
"The marketplace is very, very competitive out there," said David Floreen, senior vice president of the Massachusetts Bankers Association.
"We’re not growing at any breakneck pace as a state, so you need to create some opportunities," he said.
Stan Ragalevsky of the Boston law firm Kirkpatrick & Lockhart Preston Gates Ellis LLPEasy money
Mutual banks are owned by their depositors, and they don’t need to make money hand-over-fist to satisfy stockholders.
But all around them are other banks, public banks. And those other banks are getting bigger. They have branches in grocery stores, they have ATMs everywhere; they offer things like trust funds and specialty accounts.
When they want to get bigger, they issue more stock and use the money to open more branches.
In response, some mutual banks form mutual holding companies, raise some capital, and grow a bit. When a mutual holding company issues stock, depositors own 51 percent of a holding company, and the rest is sold to public investors.
That is almost a sure sign a bank will be sold within five years.
A holding company can’t be taken over. When the bank must grow again, stockholders get antsy, and demand that the bank goes fully public. Somebody comes along and buys the bank, and the bank president and its top executives get rich.
According to banking attorney Stan Ragalevsky of the Boston law firm Kirkpatrick & Lockhart Preston Gates Ellis LLP, only 15 percent of the banks that formed publicly traded mutual holding companies in the last 20 years are still around.
Often, that decision is not in the best interest of the bank, he said. "How can you make a decision that’s five times more likely to lead to the termination of the existence of the bank?" he wondered.
Penny pinchers
But for banks like Bay State – which is not issuing stock and has no plans to do so – forming a mutual holding company could be more about saving a few pennies by merging with another bank.
The arrangement Lewis envisions would be one in which "both can exist."
"We’ve seen more mergers and partnerships in the last two years," said Floreen. "Some institutions will probably look ahead to say it’s in our best interest; we want to set ourselves up to be in a good position to sell."
For others, it’s a matter of merging to "pool resources," Floreen said.
"There’s a higher reliance on third-party vendors, if you pool resources, you can get a better deal for everybody," Floreen said. "Sometimes it’s being able to continue to do what you’re doing without having to raise prices, or for less of an increase."
"If bank A and bank B spend $200,000 per year on data processing, if you can combine under a mutual holding company and cut cost from $400,000 to $250,000 or $300,000, it allows you to charge five or 10 points less on a loan, or offer better rates on CDs."
But all is not perfect when all the bank can do to raise capital is issue trust preferred securities, Ragalevsky said.
"Trust preferred securities are like CDs," he said. And banks are finding interest rates are "eating up their revenue, and it’s preventing them from growing."
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