Investors are continuing their love affair with Internet stocks this year, driving the Nasdaq composite index over 5,000 for the first time last week. While high-tech firms have become the darlings of Wall Street, bank stocks have taken a beating. However, the decline of the banking sector has not kept some mutual banks from demutualizing.

Westborough Savings Bank made an initial public offering this year, and Cambridgeport Bank’s subscription offering continues through March 23. Berkshire Bancorp has filed an application with the Massachusetts Division of Banks to convert its mutual holding company to a stock holding company.

This is a good market to demutualize in, said bank consultant Arnold Danielson, chairman of Danielson Assoc. in Rockville, Md. You want a down market.

A year ago most institutions demutualized at 75 percent pro forma book, but that amount has dropped to 50 percent and may go below it in future deals, he said.

If you can do it at as cheap a price as possible, then it’s better for the people that do the investing, Danielson said.

Mutuals that convert to stock institutions often end up with large amounts of capital, which can be difficult to invest, said First Albany Corp. senior banking analyst Kevin Timmons. He views the demutualization process as flawed because it saddles institutions with too much capital.

This may not be such a bad time for these banks to go public, Timmons said. When the bank stocks are going great and the valuations are quite high, banks that demutualize end up with enormous capital levels, so much that it is difficult for them to constructively employ the capital.

But converting in a down market has its own set of challenges. It becomes difficult to market bank stocks when there is little demand for them. Jim Moynihan, senior vice president at Advest, has faced that challenge recently. Advest marketed shares for Westborough Savings Bank after sales slowed at the bank’s original investment banker, Trident Securities. The $171.8 million-asset bank offered up to 925,750 shares at $10 per share. Advest sold 200,000 shares. The bank’s stock closed at $9 on March 9.

Westborough will use the proceeds to invest in technology and personnel, and may invest in securities or buy other financial institutions. Some proceeds from the offering will be used to expand and renovate the bank’s main office to allow for the consolidation of executive and administrative offices in one building.

I think Cambridge will have their problems, and I think Berkshire will have their problems, although they are both good banks, Moynihan said. The problem is nobody wants to own bank stocks. Everybody wants to own Internet stocks.

Cambridgeport Bank is offering up to 9.2 million shares at $10 per share, and converting to a stock holding company called Port Financial Corp. According to the prospectus, Cambridgeport under President and CEO James B. Keegan will use the capital from the offering to increase lending, boost its business banking division, expand its branch network and add new products, including Internet banking. Port Financial may also use funds to acquire other financial institutions. The $721.8 million-asset bank has 10 branches.

Berkshire Bancorp in Pittsfield plans to convert to a stock holding company called Berkshire Hills Bancorp. President and Chief Executive Officer James A. Cunningham Jr. did not comment on the conversion plan because the bank still needs approval from its board of incorporators and banking regulators. Cunningham said he expects to have the needed approvals in early May. The $850 million-asset bank has 13 branches.

Investors frequently perceive bank stocks as too traditional for the new economy, despite the fact that many banks have made significant investments in technology and alternative delivery channels. Brookline Bancorp, which demutualized in 1998, invested in the Internet-only bank Lighthouse Bank. In addition to Lighthouse, a wholly owned subsidiary of Brookline Bancorp, the bank has launched Internet banking for its own customers on its Web site.

But the bank’s high-tech investments have not made it immune to the banking sector’s decline. Brookline Bancorp’s stock closed at 9 7/16 on March 9. Its 52-week high was 15 3/4. Larger institutions with online brokerages and financial services have also suffered. FleetBoston Financial closed at 25 15/16 on March 9, far below its 52-week high of 45 7/16.

As far as Brookline owning the company, the market can care less, Moynihan said. I never thought I’d see Fleet under 30. The group is totally out of favor right now.

‘Perception Matters’
In addition to wearing the label of old economy companies, banks tend to take hits when interest rates rise. Investors view bank stocks as vulnerable to interest rate rises, although banking analysts say it is a fallacy that bank profits fall when rates go up. Economists predict that the Federal Reserve Board of Governors will continue to raise rates in the near future.

Though that doesn’t affect banks as much as the market perceives, perception matters in the stock market, Timmons said. Typically stocks sell off when rates go up. There’s a small selection of stocks in an industry that’s highly favored, and everything else doesn’t matter. Banks are completely in the everything else [that] doesn’t matter.

The sector has performed badly since the Russian economic crisis in the fall of 1998, he said. Although many stocks recovered after the Russian crisis, the interest rate environment has sent many stocks back down. Big bank stocks have also been hampered by lower-than-expected earnings at some national banks last year. Bank of America, Bank One and First Union recently completed big mergers, but failed to produce the expected returns after closing the deals.

The low stock prices have slowed the pace of merger and acquisition activity from the manic pace of the late 1990s. A sinking stock price complicated Sovereign Bancorp’s buy of 285 branches from FleetBoston. Sovereign used a combination of equity and debt issues to raise $1.8 billion to purchase the branches for $1.4 billion and to raise capital levels. Sovereign’s stock closed at 7 3/32 on March 9, down from a 52-week high of 26 1/4.

Seller expectation and buyer ability are so widely separated that it makes it very difficult to accomplish a merger, Danielson said.

The problem extends beyond New England to affect banks across the country. Investors have started to question if bank stocks are a growth business in the new economy driven by high-tech innovations, he said.

We thought we were going to see a little merger and acquisition activity in 2000, but we haven’t because everybody’s currency has dropped so precipitously, Moynihan said. The opportunities are far less than they were a year and a year and a half ago. Until we see a few deals struck I think these stocks are going to languish and probably drift lower.