In an era of low-interest rates and compressed margins, bank consolidation is pretty much old hat – but a mutual bank’s acquisition of a national stock bank is a first-of-its-kind deal in Massachusetts.
Michael J. Jones, president and CEO of the Newburyport-based Institution for Savings, said the bank had been considering a foray into the Cape Ann region for some time before it cut a deal earlier this month to buy Rockport National Bank. Institution for Savings already has about $50 million in both loans and deposits that originate in the Cape Ann area.
“We were debating and researching whether we should do a standalone branch in Gloucester and it really came down to, if we were successful there, and someday wanted to do another branch, it might be easier for us to look at an organization that already has multiple locations on Cape Ann,” Jones said.
That Rockport also had a location in Beverly, which is contiguous to the Institution for Savings’ Ipswich office, made it even more attractive. Michael Shea, Rockport’s vice chairman of the board of directors, echoed that point in a statement announcing the merger.
And so around mid-April, the two banks inked a deal by which the $1.7 billion Institution for Savings will acquire the $200 million Rockport National Bank in an all-cash deal valued around $28.3 million.
A Real First
In acquiring Rockport National, a national-chartered stock institution, the state-chartered mutual bank Institution for Savings will purchase the smaller bank’s assets and assume its liabilities. Institution for Savings will set up a subsidiary that will purchase Rockport’s stock and then dissolve upon paying off Rockport’s shareholders.
The structure of that deal makes Institution for Savings the first Massachusetts mutual bank to purchase a public company without first establishing a mutual holding company, said Sean P. Mahoney, a Boston-based partner with the law firm K&L Gates.
To be clear, re-mutualizations are not a first for Massachusetts. The $8.7 billion Eastern Bank in Boston has previously acquired stock institutions – most recently, Bedford, N.H.-based Centrix Bank – but Eastern has done so through its holding company, Eastern Bank Corp. Institution for Savings does not have a holding company.
Similar deals have been done at least twice before in Connecticut. Liberty Bank acquired Southern Connecticut Bancorp last year; in 2010, Union Savings Bank acquired First Litchfield Financial Corp. and its subsidiary, the First National Bank of Litchfield.
Jones said that forming a mutual holding company was out of the question from the get-go. The bank’s bylaws, he said, would not allow it.
Similarly, Institution for Savings never considered a merger under parity authority, a third option for structuring such a deal.
“That just creates too many inefficiencies and causes not only confusion to the customer, but also duplication, whether it’s advertising or loan commitments. When you form those subsidiaries, you’re almost running two separate banks,” he said. “That is not our desire from a cultural standpoint.”
Rockport’s shareholders will get $138.58 in cash for each share of common stock. That’s a premium of 127 percent over its recent closing price of $60.95 per share and around 29 times its earnings last year.
“In the deals with banks today, in particular with the cash deals, it’s definitely more of a function of a multiple book rather than the current stock price. Because [Rockport’s stock] is thinly traded, the price is not really indicative of the company’s value,” Jones said.
He added that $28.3 million was a fixed price, and Institution for Savings did not base that offer on Rockport’s stock price.
“As a mutual bank, they’re not subject to the 20/20 hindsight of activist investors,” Mahoney said. “They’re not going to have analysts or investors criticize them for paying too much. They’re free to make their own determination as to what a reasonable price is and pay that. Chances are that they can earn their purchase price back in a reasonable amount of time.”
Positioning For Future Growth
Jones expresses little worry about competition in those new markets – particularly from banks that may be public, or getting there, and may be tempted to get aggressive on pricing loans and deposits. He thinks his bank’s mutual structure will be an advantage. He pointed to a solid year for loans in 2013, when the bank originated $150 million in new loans, more than half its total new originations, out of just one office in Newburyport.
And growth, he said, is essential to keep your head above water these days.
“I think it’s going to be really difficult for any bank out there, or any franchise out there, with less than $500 million in assets,” Jones said, “unless they have a significant amount of capital, to really make it in this industry.”
Email: lalix@thewarrengroup.com
