East Boston Savings Bank, one of Boston’s oldest and largest mutuals, plans to convert to a partially stock-owned institution. The conversion, which has the support of the state Division of Banks, still needs approval from the Federal Reserve.
East Boston Savings Bank, one of Boston’s oldest and largest mutuals, plans to convert to partially stock-owned, according to documents it filed with the Securities and Exchange Commission this month.
The plan took a giant step forward last week when it was approved by the Securities and Exchange Commission.
“We will be moving forward within a short period,” said Robert F. Verdonck, president and chief executive officer of the 159-year-old, $896 million institution. Last Wednesday, EBSB was only awaiting word from the Federal Reserve, which regulates its holding company, Meridian Interstate Bancorp, as to whether the conversion could proceed. Verdonck also is president and director of Meridian.
The conversion has been approved by the state Division of Banks.
If the plan gets the green light from the Fed, it will be at least the fourth transaction of its type in the Bay State this year. Hampden Bank in Springfield completed a full stock conversion in January, and Danversbank expects to do the same by the end of the year. And just a few weeks ago, West Springfield-based United Bank initiated proceedings to convert from partial to full public ownership.
Meanwhile, lawyers who have assisted in the transactions say that Massachusetts has more mutual holding companies than any other U.S. state. A mutual holding company structure facilitates both stock conversion and mergers with other mutual institutions.
Strategy consultant Jim Jones, owner of First Wellesley Consulting Group in Wellesley, predicted there will be more conversions and mergers in the future.
Bay State banking is different today, Jones said, with intense competition from a greater variety of financial institutions and ever-increasing regulatory compliance costs driving some banks to decide they need a large infusion of capital, fast, to remain viable.
Massachusetts and New England are mutual bank strongholds, which is why some banks will choose to remain mutual and merge in order to grow, he added.
Still, Jones noted that mutual banks’ growth is constrained by their profits, while a bank that issues stock for sale can get “an injection of capital that allows them to immediately expand.” That’s why, he predicted, “a number of [Massachusetts] banks will convert to stock.”
Bank stock sells well, Jones noted, in part because a bank has a ready pool of first buyers – its depositors, who know the institution well, and by law have the first shot at purchasing shares. Sometimes, depositors purchase all available shares.
When a conversion takes place, a bank generally earns several million dollars.
‘The Best and Brightest’
EBSB would gain a minimum of $85 million during its partial conversion. Through Meridian, which it formed last year, it plans to offer 43.7 percent of its common stock – between 8.54 million and 11.56 million shares – for sale.
Meridian Financial Services, Meridian Interstate Bancorp’s state-chartered mutual holding company parent, will be the majority shareholder, owning approximately 55 percent of the shares.
Beyond the public stock offering, approximately 300,000 shares will be contributed to Meridian’s charitable foundation.
Verdonck said the bank hopes to augment its present growth strategy with the anticipated cash.
“We’re hoping to do just what we have been doing, which is continue to grow in different markets,” he noted.
Increasing commercial real estate, construction and commercial lending capacity and adding staff also will be a priority.
According to the Nov. 7 filing, the bank will use the funds initially to fund “short-term, liquid investments,” but over time also may increase lending limits, invest in securities or open new branches.
The bank stated in the filing that it plans to add stock shares as a compensation benefit in order to “retain and attract qualified directors, officers and staff and enhance our current incentive-based compensation programs.” It added, “We believe we are raising the amount of capital we can effectively deploy.”
Also according to the filing, East Boston Savings intends to enter into “amended and restated” two-year employment agreements with Verdonck, Executive Vice President and Senior Loan Officer Philip F. Freehan, and Treasurer and Chief Financial Officer Leonard V. Siuda, and Meridian will form a two-year employment agreement with board Chairman and Chief Executive Officer Richard J. Gavegnano. The agreements have a $3.6 million cash value.
Jones said executing the growth strategy is harder than getting the cash.
“The market is still healthy in terms of bank offerings,” he said. But since East Boston Savings’ growth strategy of adding branches and focusing on commercial lending appears similar to that of many community banks, he continued, the bank will have to differentiate itself.
“The question becomes: Can East Boston [Savings] better execute it than their competitors?” he said.
Paying good money for skilled employees is never a bad idea, Jones said.
“You really have to hire the best and brightest. And so much depends on commercial loan officers and bank managers,” he said. “You ignore compensation at your peril.”
EBSB’s board of directors and executive officers are expected to purchase 129,900 shares of the bank’s stock. After they and depositors make their purchases, the rest will be offered to the general public, with initial announcements in communities where EBSB’s 11 branches are located.
If all goes as planned, Verdonck said he hopes the offering will be complete and funds available by early next year.
Meridian Interstate Bancorp also owns 40 percent of the stock of Hampshire First Bank, a de novo bank that opened a year ago in Manchester, N.H., and today has $42 million in assets.
