East Boston Savings Bank, whose Peabody branch is shown above, is one of three Bay State banks that initiated stock conversions in 2007.
Two of the three Bay State banks that initiated stock conversions in 2007 completed them by early 2008, and the third hoped to do so late last week, showing that the despite a down economy, investors here still have an appetite for bank stocks.
“Banks are seen as relatively stable investments. They’re like a utility. It’s a relatively safe, regulated entity that you’re buying,” said Lawrence Spaccasi, a partner at the Washington, D.C.-based law firm Muldoon Murphy & Aguggia, which represented $896 million East Boston Savings Bank and its holding company, Meridian Interstate Bancorp, in its first-step, partial (44 percent) stock offering that started last month.
EBSB, a 159-year-old mutual, hoped to complete the stock sale in a syndicated community offering last week, meaning the shares did not sell out in initial offerings to bank depositors or the community. It would not reveal the results before Banker & Tradesman’s press time.
West Springfield-based United Bank completed its second-step stock sale, also in a syndicated community offering. The sale of all shares, for a total of $95 million, was finalized on Dec. 4, with institutional investors including mutual funds, life insurance companies and pension funds purchasing the balance.
Danvers-based Danversbank completed its full conversion offering in one step, selling all shares to depositors and its employee stock-sharing plan for $172 million in late November and December. Shares were sold for $10 each.
The banks all intend to use the cash for growth, including the addition of new branches, possible acquisitions, and more competitive wages for their employees, their presidents have said.
United Bank President and Chief Executive Officer Richard Collins told Banker & Tradesman that new-bank competition in western Massachusetts drove its decision to take the second step to full conversion late last year.
As four new banks arrived on the scene in the last couple of years, Collins said, he and the bank’s board members began wondering, “‘Do we want to continue to be an also-ran or be able to be a competitor?'” They subsequently decided to offer the remaining 53 percent of the bank’s shares.
Most depositors, who bought all the United shares on the first offering in 2005, weren’t as interested two years later because they already had the shares they wanted, Collins said.
But the rules of the federal Office of Thrift Supervision, United Bank’s regulator, required that shares be offered to depositors first.
While Massachusetts banks have been successful, it’s not as easy to sell bank stocks as it was just a couple of years ago, when the economy, lending and building industries, and home sales were booming.
Four U.S. banks canceled, delayed or reversed public offerings in December, American Banker reported last month. California-based K-Fed Bancorp and Georgia-based Atlantic Coast Federal Corp. canceled second-step conversions, according to the Dec. 31 article. Meanwhile, Baltimore-based BCSB Bankcorp said it would delay a second-step offering pending a reappraisal, and Bradford Bancorp, also of Baltimore, didn’t sell enough shares in its initial offering, and on Dec. 27 said it would return the funds it had raised, plus interest.
Valuation a Key
Eric Luse, a partner at Luse Gorman Pomerenk & Schick, the Washington, D.C.-based firm that assisted United Bank in its second-step conversion, said bank stocks typically sell fast – and fully – to depositors.
“It’s only been in weak markets like this that non-depositors have the opportunity to buy at the non-IPO [initial public offering] price,” he said. “[Now] could be a buying opportunity for other investors otherwise not able to buy in,” he added, noting that if he were advising a bank’s board of directors today, he would tell them all deals depend on valuation of the stock.
“I think the attractiveness of the deal to an investor depends on the valuation,” Luse said. For example, United Bank’s stock sold at 80 percent of pro forma tangible book value, per share, he said. Danversbank’s sold at approximately 82 percent of book value – roughly 82 percent of its holding company’s net worth – and East Boston Savings estimated its shares would sell at anywhere between 69 percent and 81 percent of book value, depending on how many finally sold.
Beacon Federal, an upstate New York bank that Luse Gorman Pomerenk & Schick assisted in a stock sale last October, offered its shares at 68 percent of tangible book value and sold them all to depositors in the first round, according to Luse. He said banks near metropolitan areas such as New York and Boston are likely to have an easier time selling their stock if they choose to go that route.
Danversbank Chairman, President and Chief Executive Officer Kevin Bottomley agreed, saying that in his opinion, one of the reasons his $1.3 billion bank’s stock sold so quickly was its location.
“Being located in eastern Massachusetts didn’t hurt,” he said.
Bottomley also cited the relatively low level of “excess capital” Danversbank had before it sought more capital through a stock offering, as well as the fact that it did a “vanilla full conversion” all at once instead of a partial offering, as reasons the offering may have been completed faster.
“An investor could see we clearly needed the capital,” said Bottomley, whose bank got regulatory approval for its conversion on Jan. 9 and began trading on NASDAQ Jan. 10.
Danversbank had less capital than most other Massachusetts savings banks when it converted, said Chief Financial Officer Mark Panella, adding that the level of capital it had is more typical of a commercial bank.
With its $172 million windfall, the bank plans to continue to focus on commercial lending with now-increased lending capacity, to expand its branch footprint through de novo branches, and potentially to add non-traditional business lines such as insurance, Panella said.
Stephen J. Coukos, a partner at Chu, Ring & Hazel in Boston, said full conversions are always more attractive to investors, in part because some assume that after the three-year bank regulator-imposed moratorium on buyouts, the converting bank will be sold to another bank and investors will realize a profit “at a multiple” of their investment.
Empirical evidence to that effect is “overwhelming,” he added.
However, at least two publicly owned local banks – Brookline Bank and Boston Private Bank & Trust – each have been owned publicly for more than five years and not sold.
Coukos said an Office of Thrift Supervision allowance affecting only United Bank (since East Boston Savings and Danversbank are regulated by the state, which doesn’t make a similar allowance) likely made that investment opportunity particularly attractive in the bank’s first-step conversion.
The OTS allows a bank’s mutual holding company, which would continue to own part of the shares following the first step, to waive its right to accept cash payouts from stock dividends, he said, meaning investors in that case would benefit from both their own dividends and a share of the holding company’s.
“That’s much more attractive from an investment standpoint,” he said. “It is certainly a point emphasized by investment bankers and the D.C. counsel who represent [local banks] on this issue.”
Coukos, who represents Massachusetts mutual bank clients but not any of the recently converted institutions, said “a couple” of his clients are considering public offerings as part of their strategy, despite the mixed signs of how well it’s working.
“It’s something many mutuals have considered, and continue to [do so]” in today’s competitive, cash-strapped environment, he said.
