For years, one, maybe two, Massachusetts community banks would launch initial public offerings and sell stock to the public.
But already this year, four community banks have filed for IPOs with the Securities and Exchange Commission, and David Cotney, the state’s commissioner of banks, expects at least one other to convert from private to public ownership.
Blue Hills Bank of Hyde Park filed with the SEC last week for a stock sale to raise nearly $240 million. It was the largest of the community banks to file for IPOs last week, joined by Melrose Cooperative Bank and Pilgrim Bank of Cohasset, which expect to raise $28.5 million and $17.7 million, respectively,
East Boston Savings Bank, which sold a minority share in stock in 2008, announced earlier this month that it will sell more stock to become completely shareholder owned.
This rush to go public is another sign of the tough conditions facing banks these days. Low interest rates continue to eat into bank profits, while the costs of complying with new regulations and investing in online and mobile technology to compete with larger institutions are only growing. It has forced many community banks to raise more capital, particularly through IPOs, said Daniel Forte, president of the Massachusetts Bankers Association.
“It’s an evolution of the banking industry,” Forte said. “Clearly this environment is a challenging one. [Profit] margins are thin.”
But bank conversions to stock companies aren’t always good for customers, said Suzanne Moot, a Milton bank consultant. Many of these banks will probably be sold to larger institutions after the required three-year waiting period, she said, leaving local businesses and residents with fewer banking options.
The state has lost a quarter of its banks since 2000, according to the Massachusetts Bankers Association. Of the 175 banks left, nearly three-quarters are mutually owned for the benefit of depositors.
Moot said there’s no evidence that the new capital raised by the banks in stock offerings benefits the community, in terms of increasing lending, introducing new products and services, or hiring more workers.
“It’s not about the community,” she said. “It’s about the management and the board.”
Sales after conversions can lead to big payouts for shareholders, including the bank’s top executives and directors. For example, three years and 11 days after Danversbank became publicly traded, People’s United Financial Inc. of Connecticut announced that it had agreed to buy the bank. In 2011, the year of the sale, Kevin Bottomley, the former Danvers chief executive, earned $12.4 million in compensation, got $3.6 million for canceling some unexercised stock options, and also received shares of People’s United, according to the bank’s filings.
Not all mutual banks go public to sell to bigger institutions, said Kenneth Ehrlich, an attorney and cochairman of the banking practice at Boston law firm Nutter McClennen & Fish.
By raising additional capital, some of these banks can hire more loan officers to increase lending, invest in technology, or even finance new branches and acquire other banks, he said. Many smaller banks are still struggling in the aftermath of the recent financial crisis and recession, he said, and without the additional capital some may not survive.
“Anything that happens that hurts a community bank’s viability isn’t a good thing for a community,” Ehrlich said. “But I can’t draw a connection between going public and hurting the community.”
Still, with relatively few publicly traded banks in Massachusetts, larger institutions that are looking to grow will watch the ones that have issued IPOs, Ehrlich said. By going public, mutual banks can be bought by other institutions, otherwise they are only allowed to merge with other mutual banks.
“A small bank that converts is likely to be an acquisition target reasonably soon after three years from the conversion date,” Erhlich said. “Because bigger banks want to grow and there’s a relatively small inventory of stock banks for sale.”
Forte, with the Massachusetts Bankers Association, said this recent flurry of IPOs is unlikely to spell the demise of community banks in the state. There are several community banks with shareholders that have remained financially strong and haven’t been sold, Forte said.
“Everyone has forecasted the demise of community banks,” Forte said. “I think they’ve been adaptable, they’ve found ways to succeed.”