Danversbank recently announced that it plans to convert to stock ownership. The bank’s Saugus branch is pictured above.
A rare event in Bay State banking is poised to take place by the end of the year, with Danversbank recently announcing its plan to convert to stock ownership.
But if the actual event is infrequent, behind-the-scenes conversations about it aren’t, according to Kevin Bottomley, who has served as chief executive officer of the bank – which has $1.3 billion in assets – for the past 11 years.
Most larger mutual banks probably have considered such a move at one time or another as a faster way to raise the millions of dollars they need to grow and maintain their edge in an increasingly competitive financial services market, he said.
Bottomley said Danversbank’s board has discussed it for four or five years, as the bank suffered the interest-rate margin squeeze affecting all banks – and even as it worked to raise capital in other ways by merging with BankMalden in February, and doing three issues of trust-preferred securities, which can be counted as up to 25 percent of a bank’s tier 1 capital (most liquid finances).
The trust-preferred securities raised $29 million, and the merger helped improve capital ratios. Meanwhile, Bottomley said, he’s hoping for a minimum of $100 million in new cash at the public offering planned for January.
“We were looking at doing a holding company structure,” he noted. That action would have allowed the bank to grow by adding more banks under the Danversbank holding company umbrella.
“We had a number of discussions with the usual suspects around us, but by mid- to late April it became clear that it wasn’t going to happen on a timely enough basis for us,” he said. “That’s when I went to the board and said, ‘This year, management has come to a different conclusion.'”
The 157-year-old bank’s board approved the stock-conversion plan on June 15. An application to do so was filed with the state Division of Banks four days later.
The Danversbank plan also must be approved by the bank’s corporators, the Securities and Exchange Commission, and the Federal Reserve Bank, which regulates its holding company. The Federal Deposit Insurance Corp., Danversbank’s regulator, must be kept in the loop but does not have to give approval.
Danversbank’s assets have grown from $220 million to $1.3 billion but its tier 1 capital-to-asset ratio also has decreased to the current 6.8 percent during Bottomley’s tenure, as the bank became more leveraged, Bottomley said. That puts the bank in a pool of institutions with capital/asset ratios of less than 7 percent that are considered more likely to convert to stock.
Regulators consider banks with 8 percent to 10 percent risk-weighted capital, relative to total assets, to be “adequately capitalized.”
Capital is used to cover unexpected losses and purchase new services and staff. Banks also cannot loan more than 20 percent of their tier 1 capital.
Bottomley said Danversbank plans to use the money it hopes for in its stock offering to add de novo branches at a quicker pace than it otherwise would have; increase and diversify its senior lending staff, especially in commercial lending; and move away from “an over-reliance on interest income” by adding more fee-producing services. It also plans to establish a charitable foundation.
Another recently converted Massachusetts bank, Franklin-based Benjamin Franklin Bank, acquired Chart Bank in Waltham for $47 million immediately after its 2005 public offering, which raised $83 million.
Bottomley said he’s well aware that some mutual banks view stock conversion as “going to the dark side,” because it sometimes results in the bank’s eventual sale, at a profit.
‘In Friendly Hands’
Banks that convert often are acquired by other banks shortly after the required three-year moratorium, according to a 2005 report prepared by Stanley Ragalevsky, a partner and banking attorney with the Boston firm Kirkpatrick & Lockhart Preston Gates Ellis.
Ragalevsky found that between 1982 and April 2005, just 13 of 83 Massachusetts banks or mutual holding companies that issued stock to the public remained active, or “survived.” Fifty-five were acquired by other banks and 15 failed, he discovered.
In contrast, of 184 banks that remained mutual during the same period, 135 remained active, 35 were acquired and 14 failed.
Major regional or national banks such as Bank of America, Citizens Bank, TD Banknorth and Sovereign Bank are the biggest ultimate “acquirers” of converted banks in Massachusetts.
Bottomley insisted that a well-executed transition “means you can implement a strategy and stick around.”
He added, “We are not doing this to sell the bank, I can tell you hand over heart. You do end up not 100 percent in control of your own destiny [by selling stock], but Â… a good portion of [our] stock [likely will be] in friendly hands,” which would make that destiny easier to control.
Bottomley said Danversbank employees will benefit from an employee stock ownership plan in which everyone from “tellers to senior vice presidents” will own a portion of the bank’s stock because they are employees.
As in any stock bank offering, bank depositors (as of February 2006, in Danversbank’s case) and board members and senior management who are also depositors (as of February 2005) will get the first shot at purchasing Danversbank stock, for a discounted $10 offering price, when it’s offered. They can keep it or sell it later; historically, such stock sells at a profit.
Danversbank is being assisted in its conversion by Sandler O’Neill + Partners, a New York investment bank that provides technical and marketing assistance with the conversion, for a fee. As part of its services, the firm helps identify so-called “professional depositors.”
Just a couple of months ago, the Securities and Exchange Commission prosecuted a small cadre of depositors who had opened accounts at 65 U.S. banks – including seven in Massachusetts – under false pretenses, and benefited by purchasing stock ahead of legitimate depositors when those banks went public.
Bottomley said “the identity of professional depositors and groups of them is not unknown to people in the industry,” adding that heightened visibility of their activities means they are more likely to be prevented.
Bottomley predicted Danversbank customers will benefit in additional, ongoing ways, because the bank will be able to offer them “state-of-the-art services” with the cash it expects to obtain.
“The business customers, they particularly understand,” he said. “They say, ‘If you are not growing, you’re not getting better.’ They say, ‘You can’t get or keep good people if you’re running in place.'”
