Image courtesy of HarborOne Bank.

When the holding companies of Amesbury-based Provident Bank and Brockton-based HarborOne Bank made second–step conversions earlier this year to go fully public, they broke a three-year dry spell in the IPO market for community banks in Massachusetts. 

But despite the recent uptick in activity, mutual conversions in New England going forward are likely to remain modest, according to experts, who say consolidation is the main culprit behind the new trend. 

“Very few mutuals are converting,” said Arthur Loomis, president of Loomis & Co., a New York-based investment bank that works extensively with community banks in the Northeast on mergers and acquisitions and capital financings. “Part of this is attributable to the aggregate number of mutual banks dwindling. As the number shrinks, the balance sheet size of those remaining grows, as they are unique and customers do prize those relationships. Also, with growth, the justification of independence becomes easier.” 

Burst of IPOs Three Years Ago 

The last flurry of bank IPOs in the commonwealth occurred in 2014. 

The holding companies of Norwood-based Blue Hills Bank, which was recently acquired by Rockland Trust; Cohasset-based Pilgrim Bank, which was recently acquired by Hometown Financial Group; and Melrose Bank all went public, while East Boston Savings Bank made a second-step conversion. 

The wave continued when the holding company of Provident Bank made a minority stock offering in 2015 and HarborOne Bank’s holding company made a minority offering in 2016. The holding company of Randolph Bank, which now goes by the name Envision Bank, also made a full conversion that year.  

But since that time the number of banks has been on the decline. 

There were 5,913 commercial banks and savings institutions insured by the FDIC at the end of the first quarter of 2016, according to the FDIC. By the end of first quarter this year, that number had shrunk to 5,362. 

In Massachusetts, the number of state-chartered financial institutions has decreased from 137 halfway through 2016 to 116 institutions now. 

Capital, Leadership Can Signal Conversion 

A few key indicators hint at a mutual bank converting to a stock company, according to Loomis, 

A bank could be low on capital, as was the case when HarborOne made its second-step conversion, or it could bring in a new CEO that has experience with taking companies public. 

Bram Berkowitz

An even greater indicator is if there starts to be a lot of turnover on the board of directors after the new CEO is brought in because it is the board that ultimately needs to sign off before a bank can go public. 

But these indicators have fallen by the wayside as the number of mutual-to-mutual conversions in New England has ballooned in recent years, said Larry Spaccasi, a partner at Luse Gorman, a Washington, D.C. firm that has represented Massachusetts banks in mergers and acquisitions.  

“There has been lots of mutual-to-mutual merger activity and that is largely result of management secession issues,” he said. “It’s harder to find the next leaders of a bank and those that can retool and reenergize it so it can thrive.”  

Spaccasi said because there is less training by the bigger banks and fewer young people are entering the industry, fewer employees are growing their careers with a bank. This may cause senior management and the board to be more agreeable to merge into another bank rather than promoting from within and going out to the public markets to raise capital, he said. 

Why Less Activity? 

Loomis added that mutual banks with mediocre performance often prefer to merge with other mutual banks because it would face less of a culture clash compared to a merger with a fully public bank, which has to hit benchmarks for investors every quarter.  

Troubled mutual banks also typically prefer to merge with other mutual banks, he said, although some may go public in a last-ditch attempt to save the bank. For example, Randolph Savings went public in order to make an acquisition and try to get back to profitability.   

Both Spaccasi and Loomis don’t foresee too much full conversion activity in the near future, although Spaccasi said there could be some level of interest in mutual holding company minority offerings. 

But Loomis said activity could get more robust if mutual banks’ balance sheets start to grow more steadily again, perhaps by 10 percent or more per year, although that requires favorable economic growth and lower taxes.  

There could also be a “black swan” event, such as Uber eliminating the value of taxi medallions, a banking crisis involving real estate loans or Facebook’s newly announced cryptocurrency Libra supplanting a large portion of the banking system, which in turn would require mutual banks to recapitalize. 

“Given the voting public’s desire for more governmental services, taxes are not expected to decrease. Outsized economic growth catalysts are expected to be driven by technology, IPOs, soaring salaries for middle class, huge increases in productivity and the discovery of plentiful natural resources,” Loomis added. “In other words, it’s highly unlikely.”