Look in the chief executive’s office at a bank making a mutual-to-stock conversion, and you’ll likely find a man or woman thinking about retirement.
The conversion, and the expected subsequent acquisition of the bank after a three-year no-takers period, is a great way to withdraw, leaving the bank – and oneself – in better financial shape.
But that’s not what’s happening at Wellesley Bank, President and CEO Thomas J. Fontaine told Banker & Tradesman. Fontaine is just 48.
Wellesley completed its mutual-to-stock conversion Jan. 25, and Fontaine said the transaction was necessary to fund the bank’s growth. Without growth, the bank couldn’t compete, he said.
“That’s what’s going on with a lot of [mutual to stock conversions],” Fontaine said of the retirement scenario. “But we needed the capital to grow.”
Like many very small banks, 100-year-old, three-branch Wellesley Bank finds it difficult to spend its way into compliance with government regulations, or into a competitive posture with other banks. Selling stock alleviates the pressure, Fontaine said.
In the conversion, Wellesley sold 2.2 million shares of common stock at $10 apiece. That equaled out to quite a bit less than the roughly $30 million take the bank was predicting, and subjects it to a whole new level of oversight – namely, the U.S. Securities and Exchange Commission.
Viable Competition
Only one Massachusetts bank, Belmont Savings, converted from mutual to stock in 2011.
Still, it’s one of only two ways for very small mutual banks to remain competitive. The other, merging with another mutual bank, often results in job loss and the disappearance of the bank being acquired.
“There are some mutuals that are just not viable competitively,” said Kevin Handly, a banking attorney at Boston-based law firm Pierce Atwood LLP. “They can’t attract quality management, they can’t attract good directors. They can’t compete. There are enormous expenses for compliance and IT and audit expenses.”
After converting, Handly continued, “maybe they get lucky and they’re able to deploy that capital. If they don’t make it, like 90 percent of the other converted thrifts, you sell out, and at that point, the insiders get a handsome reward.”
Wellesley needs to invest in new technology, Fontaine said. It has also hired a full-time compliance officer, and plans to add an investment management business, and open its third Wellesley branch – hiring six people along the way – during the first quarter.
For certain prospective employees, the fact that Wellesley is now a stock bank may matter a great deal.
“To attract a good commercial lender, or a good residential lender, we can offer equity, because Bank of America does, Sovereign does,” Fontaine said. And in the competitive Boston area, banks big and small tend to pull employees from the same talent pool.
But what investors care about is return on equity, and small banks tend to be over-capitalized and underleveraged, providing a low return – which is why many sell outright after the three-year no-takers rule expires.
Though converted mutuals spend at least three years as well-capitalized institutions, they also necessarily undergo a cultural change, Handly said. As a strict mutual institution, banks can focus solely on long term viability, the communities they serve and banking operations.
But after conversion, they are also required to very carefully consider Sarbanes Oxley compliance, focus on earnings per share and watch those earnings on a quarterly basis – all while keeping an eye on the daily fluctuations of the public institution’s stock price.
“These are darn small institutions to be publicly traded,” Handly said.
