DANIEL J. FORTE ‘No risk to depositors’

Bills aimed at slowing the rate of mutual bank conversions to stock companies – and benefiting depositors more when conversions do occur – are currently being considered by the Joint Committee on Banks and Banking at the State House.

If passed, the bills would “end community banking as we know it,” said Daniel J. Forte, president of the Massachusetts Bankers Association, the largest, and soon to be only, banking association in the commonwealth.

The MBA’s opposition to the legislative proposals may not have come as a surprise, but the veritable sea of dark suits that flooded the room in a show of industry solidarity was unusual. About 40 chief executive officers from financial institutions across the state filled several of the benches in the Beacon Hill hearing room on May 29 when public testimony on the bills was offered.

The majority of bankers in attendance stayed throughout the two-hour hearing on a different bill in order to be heard later on the mutual conversion bills.

Sponsored by Sens. Dianne Wilkerson, D-Boston; Charles E. Shannon Jr., D-Winchester; and Bruce E. Tarr, R-Gloucester; and on behalf of Jason Adkins, an attorney in Cambridge, the four related bills would, among other things, impose a moratorium on mutual conversions.

“From a consumer standpoint, this is long overdue,” said Shannon, speaking in favor of the bill. Shannon cited the wave of mergers overtaking the state as the main reason the legislation is needed. “Customer service has often been the casualty of those mergers,” he said.

“With more and more banks considering demutualizing, it’s time for us to take a step back [to examine who this really benefits],” Shannon said.

Just who demutualizing benefits is the question at the heart of the bill. According to Jason Adkins, an attorney with the firm Adkins, Kelston & Zavez, the motivation for converting is simply greed. Adkins is the founder and former director of the nonprofit Center for Insurance Research. He serves as legal counsel for the group.

“That’s the reason, largely, that these banks are converted. That’s an opinion held by many in the industry. I would warrant to say that if stock options were prohibited for 10 years, as it is under the proposed bill, these conversions would not be occurring,” Adkins said during an interview last week.

Under the bill S. 20, a one-year moratorium would be placed on any demutualizations while the Legislature studies the impact of such moves on the public, businesses and the Community Reinvestment Act.

“This is a very significant and, until now, silent revolution going on in banking in Massachusetts … large-scale conversions of mutual companies into stock companies. There’s no better testament to that than the fact that 40 bank presidents showed up, not with regards to bills to preserve mutuality but in regards to bills that affect conversions to stock,” said Adkins.

But Forte denied that a “movement” is taking place, saying that in the last 10 years only 15 banks have converted to stock. According to state Division of Bank records, 48 banks made the conversion from mutual to stock between 1983 and 1996.

Financial Windfall
In addition to the moratorium, the bills would require depositor approval for the conversion and the creation of a trust account in which a percentage of the converted bank’s stock would be deposited to preserve community endeavors, prohibit stock options to executives in the bank for a period of 10 years, grant intervener rights to depositors, grant depositors stock upon conversion based upon the amount the depositor has in the bank and reserve the right of interveners and depositors to challenge the approval by the commissioner.

Currently, depositors have subscription rights to purchase the stock. But awarding the stock as prescribed under the proposed legislation may actually result in placing the banks in a precarious position by giving away capital. Raising capital is usually the main reason banks decide to convert, Forte said in a recent interview.

“There’s a small segment of the mutual bank population which finds itself too big to be small and too small to be big. In order to compete with [other] financial services [providers], companies need to raise the additional capital to improve from a technology standpoint – to be able to make other purchases, whether of insurance agencies [or] security brokerages,” Forte said.

That was a sentiment echoed by many who testified before the committee, including Gerald T. Mulligan, president of Andover Bancorp and former commissioner of banks. Mulligan introduced legislation permitting the conversion of mutual banks into stock companies. It was made law in 1982.

“The proposed legislation before you today would destroy an opportunity for significant economic growth while showering a financial windfall on an accidental and arbitrary group of individuals,” Mulligan told the committee.

“The depositors provide all the capital for the bank, they elect its directors and receive all its assets if it liquidates tomorrow – all its net assets,” said Adkins in a later interview.

However, granting depositors the stock would substantiate Adkins’ claim that depositors have some sort of ownership interest, which they do not, said Forte.

“Depositors are customers of the bank. There’s no risk to depositors, they’re fully insured,” said Forte. If that happens, professional depositors may shape the industry in the future. Already, professional depositors from all over the country watch mutual banks and make nominal deposits in the hopes the bank will convert to stock and the depositor will get first rights to the stock – in which case the professional depositor can make a lot of money fast. But if depositors are given the stock, professional investors will flood the market in hopes of making a quick buck and pressure management to convert. The result will be a bank controlled by investors who have no interest in establishing a long-term relationship with the community, said Forte.

Adkins maintains that insiders, including executives and professional depositors, already benefit in the current system and changing laws to reward long-time depositors in the banks would protect against professional depositors. The amount of stock would be based on the amount of the deposit.

Part of the motivation for the bills sprang from the DOB’s decision to grant Cambridgeport Mutual Holding’s application for conversion in February 2000. “I think one of the things that became clear to a lot of people was that current laws do not protect depositors and serve the interests of management who get rich out of these deals,” said Adkins.

But while executives do usually benefit from such conversions, they have to submit to the DOB how much they stand to make. In the case of Cambridgeport, the DOB found that “management and employee benefit provisions are not unfair to depositor interests.”

The DOB found that according to current state and federal law, depositors do not have ownership rights in the bank by merely being depositors but whether that law is equitable is “beyond the scope of this application,” it read.

Another consideration, said Adkins, is that once converted to stock, banks may be targeted for acquisition. He points to Western Massachusetts where Fleet acquired five banks after they converted. “That is not competition and that is not good for a community,” he said. But in its decision, the DOB pointed out that banks can protect themselves if they wish “the resulting stock entity may employ any corporate charter anti-takeover devise permitted under applicable banking or business corporation law.”

The DOB opposes the bill. Joseph Leonard, counsel for the division said the DOB is not aware of any “universal” issue raised in all the conversions it has overseen. Currently, the DOB can oversee the conversion of troubled banks to the public sector that saves them. “We would not like to lose this regulatory option because of the passage of this legislation, Leonard said.