KEVIN BOTTOMLEY
‘Some considering’ stock

If your bank has been thinking about converting to stock-owned, you’re in good company and your timing couldn’t be better.

That’s the message those who advise banks in such matters want local CEOs to know, although chief executive officers who have recently made the move still advise looking carefully before you leap.

“The only time that anyone should consider a conversion, either full or partial, is when they have a very strong business purpose,” warns Thomas Venables, president and CEO of Franklin-based Benjamin Franklin Bank, which converted to stock-owned in 2005 while simultaneously purchasing Chart Bank.

But banks today need capital – the main reason for issuing stock – for a variety of reasons. At least a half-dozen in the Bay State are considering full or partial public conversions at the moment, said Mark Cohen, an investment banker and managing director with Stifel Nicolaus, who covers the Massachusetts market.

“We’re seeing more interest in New England in general right now,” he said.

Lawrence Spaccasi, an attorney with Luse Gorman Pomerenk & Schick in Washington, D.C., who advises Massachusetts banks converting to stock-owned, said “the looming spec-ter of potential asset quality issues” is one reason some banks need capital fast.

Addressing credit quality issues these days has, in fact, become an issue for some banks whose customers are having trouble repaying loans, added Kenneth F. Ehrlich, co-chairman of the banking and financial services practice at Boston law firm Nutter, McClennen & Fish.

However, Ehrlich said, he advises banks his firm works with that they should only issue stock if they need capital for one of three reasons: to grow the business organically, acquire another institution or repair the balance sheet.

“Capital is the only thing that stands between a bank and failure,” he said, noting that if a bank’s capital ratio dips below 2 percent, regulators are required to close it within a certain period of time.

Banks and regulators tend to be most comfortable with levels between 8 and 12 percent.

Massachusetts, which has one of the highest percentages of mutual banks in the country, is considered a prime location for potential bank conversions, since mutual banks are the only kinds of banks allowed to convert.

Cohen and others note an added incentive to convert today: bank stocks are now valued at near-historic lows.

“Investors are all over them,” said Bob Hutchinson, Massachusetts-based managing director for investment bank Keefe, Bruyette and Woods, which advised East Boston Savings Bank parent company Meridian Interstate Bancorp in its recent 44 percent conversion.

It may seem counterintuitive for a banker to want to convert when stocks are valued low, but Cohen offered that depositor ownership, not gaining capital, is a good reason for banks to convert when share prices are low.

Bank depositors, who have the first right of purchase when a bank issues stock, “have an opportunity to own [their] institution at one of the lowest prices in the last ten years,” he said.

Bank stock values have dropped since January, when Danversbank and East Boston Savings Bank completed public offerings at 82 cents and 74 cents on the dollar, respectively.

In contrast, one Midwestern bank very recently went public at 53 cents on the dollar, Hutchinson said, meaning investors paid just 53 cents for every dollar in bank equity they gained in the transaction.

“The last time we were doing deals [at that rate] was 2000,” he said.

Bank stocks are generally viewed as stable investments, but are valued at artificially low levels these days because all banks – even small community banks with no connection to subprime lending – have been painted with the same brush as national lenders with big subprime problems, he and others said.

Asked whether getting mutual-committed Massachusetts bankers to consider converting to publicly-owned in a market where their shares would be selling for a lower price than they could get a year ago is a tough sell, Hutchinson admitted it can be.

He said he frequently encounters Massachusetts bankers hesitant to stray from the mutual structure.

He said he agrees that the mutual charter is “wonderful,” in that there are no shareholders to satisfy, and it allows a longer window of time to achieve goals.

But as regulatory and compliance burdens increase, the cost of adding new customers increases, and interest rates on loans remain low, banks’ costs are outpacing their incomes, he said.

Interest and fees are now banks’ main source of income as trust-preferred securities – a popular option among mutuals as a way to raise capital – have lately become unavailable as investors shy away from securities-based investments in general.

At $1.6 billion Danversbank, a mutual that converted to fully stock-owned in January, selling all its shares to depositors, President and CEO Kevin Bottomley said he thinks that in today’s banking environment, more mutuals may be looking to convert.

“If you think about the situation with [increasing] technology and compliance costsÂ….I am sure there are some considering this,” he said.

Danversbank has used some of the $171 million in capital it raised during its stock offering to grow its loan portfolio and expand its branch network, Bottomley said. The bank has plans to open additional branches in Salem, Malden and Wilmington.

Growing a bank is also an important strategy for banks that want to stay viable today, he and others said.

“If you look at the circumstances of the industry, it might make sense.”