KEVIN HANDLY
Preserves identity
In a banking era dominated by mergers, expanded services and new lines of business, some local banks are exploring mutuality as a way to raise additional capital, restructure insurance and other subsidiaries and even affiliate with other banks in an undisruptive way.
There are currently 28 mutual holding companies in Massachusetts, six in Connecticut, four in New Hampshire and one in Maine, and while hundreds have formed since the early 1990s, industry watchers predict this type of conversion is the next big trend in Bay State banking.
As larger banks like FleetBoston Financial, Sovereign Bank New England, Citizens Bank and Maine-based Banknorth continue to buy out smaller banks throughout the region, some smaller banks are keeping pace by forming mutual holding companies.
Richard Schaberg, an attorney at the Washington, D.C.-based firm of Thatcher Proffitt & Wood who works with Massachusetts banks, said creating a mutual holding company gives banks more control over their assets and eliminates fears of having to distribute bank assets in a merger situation.
“[Mutual holding companies] are a way to give banks more power and facilitate their own mergers,” said Schaberg.
In the case of a typical bank merger, one of the banks gives up its name, headquarters and board of directors. The new combined entity will likely have but one president and one vice president and chief financial officer.
Schaberg said forming a mutual holding company can combine the assets of both banks under one parent company leaving the structure of each substantially unaltered.
According to one local attorney who specializes in bank charter and conversion issues, creating a mutual holding company structure for an established bank has multiple advantages.
“A mutual holding company would be advantageous to any mutual bank that was thinking about forming an alliance with another mutual bank because, under a mutual holding company, each of the two banks maintains a separate identity. The banks can form an alliance without merging [one of the parties] out of existence,” said Kevin Handly, an attorney with Boston-based Goulston & Storrs.
Handly said mutual savings banks form mutual holding companies for various reasons, including raising capital, maintaining bank identity and also the potential of combining with a bank in another state, although that process has yet to take place in Massachusetts.
“Banks could combine with a bank in another state … for regulatory simplicity, although this has not yet been done in Massachusetts. Also, forming a mutual holding company would help raise capital,” said Handly.
‘Seamless Transaction’
The process of forming a mutual holding company is simple and straightforward, according to Handly.
For a state-chartered bank, an information statement or proxy statement must be prepared for all board members or corporators of the bank, and approved by the state’s Division of Banks, followed by a special meeting to vote on the plan of reorganization, explained Handly.
In simple terms, in a case where the desired result is a merger, Bank A proposes Bank B be reorganized as a new mutual bank. Bank B organizes a wholly owned subsidiary stock bank called Bank C. Bank A then merges into Bank C and, at that point, Bank A is the mutual holding company and Bank C is the subsidiary stock bank.
“The whole process is anywhere from six to eight months, start to finish,” said Schaberg.
“For customers, it is a seamless transaction and in fact, many bank customers don’t know that their bank is a subsidiary of a parent company. For the bank’s board, there is an additional layer of corporate governance but usually no member change – you have a holding company meeting and you adjourn that and have a bank meeting.”
For some banks, however, the case is bit more complicated.
Bridgewater Savings Bank formed a parent holding company to increase capital for the bank, and also to separate out its insurance and investment service businesses the bank had acquired from previous transactions.
“Our story starts in 1994 when we were fortunate enough to hire three trust officers and, as a result of that, we grew a trust department over nine years and hit around $100 million in assets under management,” said James Lively, president and chief executive officer of the bank.
In 1997, Bridgewater Savings began an alternative investment program that focused on selling mutual funds and annuities and, in 2002, the bank began selling life, disability and property casualty insurance under a subsidiary company.
“Our story has been a savings bank turned financial services company. Now, we wanted to basically separate these areas into companies so we formed a mutual holding company that would allow us to establish our own independent insurance agency, investment agency and eventually we will get a federal trust charter,” said Lively. “Our plan really allows us to develop each one of our individual entities and provide them with the capital they need. We did a lot of thinking about this process and when we went to present our case to the board, we had a pretty compelling case.”
Lively said there were no changes to the overseers of the bank – the board of directors of the bank became the trustees of the holding company and Lively said the management structure of the bank remained the same.
Because of the due diligence and preparation done before the forming of a parent company, Lively said the bank suffered no consequences and all associates of the bank were on board for the change.
“We put our ducks in line before we went to propose the idea of forming the holding company and that is something I suggest all banks should do. It can be a costly initiative. Some banks look at forming this as a merger vehicle; we looked at it as a business strategy,” said Lively.
At South Shore Co-operative Bank, President and Chief Executive Officer John O’Brien said the bank wanted to be able to issue trust-preferred securities to “provide the needed capital to help fund the future growth of the bank. We reviewed the options with bank board of directors and they gave us the go-ahead.”
South Shore Co-op will technically become a stock-form organization, but its mutuality will be preserved because South Shore Mutual Holding Co. will own 100 percent of the issued stock. South Shore Co-op will hold its first corporate meeting on July 31.
But there are some instances where banks are not approved for forming a parent company.
According to Handly, the DOB would not approve the request if the Federal Deposit Insurance Corp. were not convinced that the majority of independent members of the bank would not approve the deal.
“If the DOB or FDIC concluded that the transaction involved insider benefits, it would not be approved. It would not be approved if the transaction was not fair to the depositors,” said Handly.
Regulators base criteria for approving the organization of a mutual holding company on specifications including fairness to bank depositors, the absence of excessive or unwarranted insider benefits and the notion that the bank has a reasonable and appropriate plan for utilizing capital that is raised, according to Handly.
But the trend of forming mutual holding companies is more than mere vehicle to raise capital. It also allows great flexibility in terms of affiliations and business structure.
“There is no law in Massachusetts that would prevent the possibility of combining two different bank charters under one holding company,” said Handly. “It can have a savings bank subsidiary, a national bank subsidiary, a trust subsidiary or a mutual bank subsidiary. Of course, the difficulty is that under the [Office of Thrift Supervision] rules, the OTS will only permit a federal savings bank to be under a federally chartered holding company.”
So for now, federally chartered banks are unlikely to find the formation of a mutual holding company as attractive as their state-chartered counterparts.
“I hear about forming [mutual holding companies] as a trend and I hear of other banks going forward with the process,” said O’Brien. “It certainly provides the opportunity to affiliate with another bank, but that is not our goal and we have no intentions of doing that.”
Melanie Nayer can be reached at mnayer@thewarrengroup.com
