Needham Bank’s proposal to transition from a mutual bank to a stock bank places it on a path that has been well traveled in recent years by other community-based mutual banks.
The next major step in its planned IPO will be a special meeting next week when the bank’s depositors will vote on the bank management’s plan. Without approval from a majority of its depositors, the IPO will not go forward.
Bank management says the anticipated $350 million in proceeds from the IPO will provide numerous benefits. According to its SEC filing, it plans to use the funds in part to support increased lending, grow its commercial real estate portfolio, add more branches, and pursue mergers and acquisitions.
The plan also calls for the establishment and funding of the Needham Bank Charitable Foundation, which would receive $2 million from the proceeds.
The special meeting will be held at the Boston Marriott Newton on Wednesday, July 26 from 7 a.m. to 5:30 p.m. The more than 50,000 depositors as of June 9 (and over the age of 18 with more than $50 in their accounts) will have the opportunity to vote.
Mutual savings banks date back to 1816 when Boston’s Provident Institution for Savings became the first mutual savings bank incorporated in America. Originally these institutions were organized to help the working classes because most banks in that era primarily served retail and commercial business.
The first mutual bank conversion in Massachusetts took place in 1983 when there were nearly 300 mutual banks in the state. Today there are fewer than 100, largely due to mergers, acquisitions and conversions, which provide institutions with the growth increasingly required for success and, in some cases, survival.
Those opposed to conversions say the trend is also driven by other motives. In the conversion process, they say, executives and professional investors get rich while depositors get relatively little or nothing out of the process. Moreover, converted banks answer to shareholders, not the community, and eventually are often swallowed by larger stock banks.
Ownership without authority
A defining feature of mutual banks is ownership by depositors, not stockholders. Although depositors collectively own the bank, they have no say in how the bank operates and extremely limited ability to monetize their ownership.
In its communication inviting depositors to the special meeting, Needham Bank management makes the point that the “ownership interest is tied to the depositor’s account and has no tangible market value.”
In fact, on bank balance sheets, deposited funds are counted as liabilities, while funds out on loans are considered assets.
The depositors’ most meaningful authority will be exercised at the special meeting — an up or down vote on changing the very structure of the bank. If the depositors vote to approve, they would effectively be disenfranchising themselves because a successful conversion means depositors’ voting rights would no longer exist.
At the same time, a conversion would give depositors first priority in purchasing pre-IPO shares at the strike price of $10 per share. By purchasing the stock, individual depositors would remain owners and possibly benefit financially, assuming the bank’s stock appreciates in value.
Should the conversion be approved, the bank will offer between 25.5 million and 34.5 million shares of common stock. Depositors will have first priority to subscribe. Next in line for pre-IPO orders are Needham Bank’s tax-qualified employee benefit plans, followed by its employees, officers, directors and corporators.
Local opposition
There has been some local sentiment expressed on social media opposing the plan. Local resident and bank depositor Steve Buratowski has established a Save Needham Bank Facebook page where he lists multiple, lengthy objections to the plan.
“Overall, I think this is a bad deal for the bank, for the depositors, and even for non-executive bank employees,” said Buratowski.
“The depositors get zero compensation. Meanwhile the bank executives are using the opportunity to give themselves major ownership,”
He objects to provisions of the deal in which proceeds from the IPO will be used to help fund the creation of an Employee Stock Ownership Plan (ESOP) and provide stock options for senior management.
“They could have decided to give some part of stock directly to depositors, proportional to their deposits,” he said. “That’s what most insurance companies did when they demutualized.”
The deal provisions Buratowski mentioned are fairly common elements in public offerings. These are the types of steps public companies are allowed to take, but mutual banks are not.
Due to U.S. Securities and Exchange Commission (SEC) “quiet period” restrictions following the IPO filing, bank management and marketing teams cannot share opinions or additional information about the firm. This has frustrated Needham Bank President and CEO Joe Campanelli, who said it prevents the bank from correcting certain misconceptions.
“I can say that we’re going to keep doing what we’ve been doing,” he said.
“The model works.”
“People want the feel of a community bank and also the cutting edge technology and security that’s needed. Fraud is everywhere. The cost of regulation is high. If you don’t invest, you can’t compete.”
The future?
Assuming depositors vote to approve the plan, Needham Bank will join a long list of banks that have taken the same step. Outcomes have varied.
Brookline Bank, for example, has been a stock bank since the late 1990s. It now has $11 billion in assets, with branches in Massachusetts, Rhode Island and New York, but has retained local connections.
Berkshire Bank and Hingham Institute for Savings are also cited as examples of banks that converted to stock form and remained community oriented.
On the other hand, many former mutual banks have been rolled up into larger, regional banks. One example is Wellesley Bank, which converted to stock in 2012 and is now part of Cambridge Trust.
And whatever happened to the original community bank, Provident Institution for Savings? It was purchased in 1993 by Shawmut Bank, which was later bought by Fleet Financial, which is now part of Bank of America in the often Pacman-like U.S. banking sector.
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