MetroWest495 Biz

The conversions reflect growing pressure on local mutual banks — par- ticularly small ones — as regulatory requirements, the costs associated with them, and other expenses rise while low interest rates make it difficult to generate more revenue. Selling stock provides an influx of cash, and it can pave the way for mergers down the road. But a number of banks in the MetroWest and Interstate 495 area say they're determined not to go that route. Walter Dwyer, president and CEO of Ayer-based North Middlesex Savings Bank, said it's clear why some banks want to convert: It's a way to grow. "We as mutual banks have no other way to raise capital than to basically reinvest our earnings," he said. Under federal rules designed to ensure an adequate debt-to-equity ratio, a bank that makes $2 million in a year can only grow by $20 million, which might not be enough to meet demand or adjust to higher compli- ance costs. Dwyer: Private banks take a longer view "That's probably the argument that you're getting from the banks that have converted or are in the process of converting," Dwyer said. "We and a lot of other mutuals of similar size don't feel like we need to grow that fast. ... We think the fact that we're not under pres- sure from shareholders to grow quickly allows us a longer view." The truth, Dwyer and others in the industry say, is that banks that are con- verting to stock ownership are unlikely to remain community banks for long. Historically, most institutions that have switched end up being acquired by larger banks. That's because whoever buys the stock — particularly large institutional investors — will push for the strong return they're likely to get by cashing out their investment in a sale to a larger bank. Bank mergers are an old story around the country, although Massachusetts retains an unusually large number of small mutual banks. Unlike the storm of mergers the state experienced in 1999 and 2004, when customers saw signs switch from BankBoston to Fleet to Bank of America within those few years, the current crop of stock conversions and potential mergers mostly involves small banks. Slim odds for survival after conversion? Kenneth F. Ehrlich, a partner with the banking and financial services practice group at Nutter McClennen & Fish LLP in Boston, said the pressure on small banks is clearly pushing some to look at selling stock. But he said it's just as clear why some would want to avoid that. "Many mutual banks culturally would not be interested," he said. "All kinds of data (show) that when a bank converts to stock, it's more likely to disappear." After the conversion, a bank can't legally be acquired for three years. "A number of banks wait three years and a day and then sell, and all the stock- holders make a lot of money," Ehrlich said. He said there will probably be other mutual-to-stock conversions down the road, but probably not coming as quickly as they have so far this year. "On average, over the next 10 years, we might see one a year," he said. For Franklin's Dean Bank, one of the region's smallest financial institutions, maintaining independence has been a matter of strategic growth, according to President Kevin Goffe. "By maintaining a planned growth strategy during the economic downturn, we have enabled the bank's capital to grow faster than the assets of the bank. So, as economic conditions improve, the bank will experience a greater capacity to expand with the recovery," he said in an email message. Goffe said Dean is also working with other mutual banks around the country to lobby for new federal rules that would allow them to raise capital without con- verting to stock ownership through an investment vehicle called mutual capital certificates. Anybody weighing options? Some small banks are eyeing other potential strategies to grow. In 2009, with the financial crisis shaking up the industry, Charles River Bank in Medway transformed into a three-tiered structure. It's now technically a stock bank, but all stock is owned by a mutual holding company. President Jack Hamilton said the bank's current form would make it easier to sell stock if it wanted, but that's not the plan. Instead, the structure could let the bank merge with another mutual institution without forcing one of them to give up its name and branding. For now, though, Hamilton said no merger is in the cards. He said the bank has spoken with other institutions "on a very preliminary basis," but even a limited sort of merger tends to worry banks' boards of directors, which often fear giving up local control. "I think if you left it up to the CEOs, there'd be deals made fairly frequently," he said. "Directors have a different perspective, and, as a result, it's very slow in progressing. I thought we'd be seeing more mergers at this point than we have." At North Middlesex, Dwyer said he sees the upside to taking a route similar to Charles River's. Creating a holding company not only opens the door to more equitable mergers but also gives banks a way to own other sorts of finan- cial businesses. But he said the legal fees MetroWest495 Biz | October 2014 17 Source: FDIC, June 30, 2013 Deposits in MetroWest Area Banks (thousands) We help businesses and organizations communicate with purpose, clarity and effect, but knowing our business isn't enough. We know yours too. Boston Providence Washington, DC (866) 411-7321 www.ConoverGould.com Environment l Si ng & Permi ng l Healthcare l Corporate l Government l Non-Profit Banks watch their dollars — and their future. Pictured here is Avidia Bank teller Sheila Dilling. s page 25 $0 $500,000 $1,000,000 $1,500,000 $2,000,000 $2,500,000 $3,000,000 $3,500,000 $4,000,000 $95,601 Wrentham Co-operative Bank Middlesex Savings Bank Avidia Bank MutualOne Bank Marlborough Savings Bank North Middlesex Savings Bank Dean Bank Charles River Bank $3,517,369 $794,095 $439,263 $384,879 $276,580 $203,031 $165,398

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