PEYTON R. PATTERSON – Bank needs to grow

A second public hearing is scheduled for New Haven Savings Bank after public outcry against its proposed conversion and acquisitions went too long into the night the first time around. Local residents are voicing concern they will lose their community bank, while the bank is touting its recent $27.5 million community reinvestment pledge.

Hundreds of angry New Haven Savings depositors turned out at a public hearing last Thursday, Dec. 4, to protest the bank’s conversion into a stockholder-owned bank.

New Haven Savings, currently a mutual savings bank owned by its depositors, has asked state Banking Commissioner John Burke for permission to make the switch. Critics expressed concern that the converted bank would no longer make community concern a priority.

“We want our bank back, we want our bank back, hey, hey, hey, right now!” the Rev. Scott Marks, a New Haven clergyman, shouted into a bullhorn outside last week’s public hearing.

Bank leaders have said the change is needed to keep New Haven Savings competitive in the Connecticut banking market. The bank also has proposed taking over Vernon-based Tolland Bank and the Savings Bank of Manchester as part of its future plans.

Emotions ran high during the three-hour hearing last week as speakers accused bank executives and President and Chief Executive Officer Peyton R. Patterson of trying to cash in on the conversion while selling them out.

“We weren’t able to conclude the meeting last Thursday because we ran out of time,” said Jim Heckman, government relations officer for the Department of Banking, who added at The Commercial Record’s press time that a continued meeting will be scheduled as soon as possible. Heckman noted that of the roughly 350 people in attendance, there were 21 public officials and 85 members of the public who signed up to speak.

“There was a presentation by the bank and the commissioner allowed public officials to speak as well. We got through 28 people before we had to call it a night,” said Heckman. “So when we start back up, speaker No. 29 will have the floor, and the commissioner will allow additional speakers.”

Heckman added that residents from Tolland and Vernon were in attendance at last week’s hearing because of the proposed acquisitions of Tolland Bank and the Savings Bank of Manchester.

Trust at Stake

Following the conclusion of the second public hearing, Burke will take all comments into consideration and review the bank’s application. After the review, the commissioner will make his final decision. According to Heckman, there is no precedent of an application being rejected.

Critics of the plan include New Haven Mayor John DeStefano Jr. and state Attorney General Richard Blumenthal. They fear the bank will curtail its investment in the region and eventually get bought out by a larger bank.

“The proposed transaction potentially allocates 21 percent of the stock to the top management,” DeStefano said, referring to the up to $35.6 million that top bank executives would split from the bank’s initial public offering if the conversion is approved. “We’re taking an institution whose wealth was created in Greater New Haven and turning it over to an institution regional in nature and very likely to be purchased by a larger institution in the next five years.”

Patterson told the crowd the bank has no intention of abandoning its roots.

“The good news is that we have the No. 1 market share in the markets that we’re in, but we need to be able to grow so that we can sustain that over time,” Patterson said.

Blumenthal said the bank should give deposit holders a chance to vote on the change.

“The credibility and trust of this process is at stake,” Blumenthal said.

On Nov. 17, however, the Federal Deposit Insurance Corp. approved New Haven Savings Bank’s request to waive a depositor vote regarding the bank’s Plan of Conversion to become a public company.

That plan was approved by its corporators at a meeting on Sept. 8 and, pursuant to Connecticut law and historical practice, the bank requested the waiver.

The FDIC determined that the vote of the bank’s “independent corporators constituted a sufficiently independent review of the bank’s plan of conversion” to satisfy regulatory requirements. That said, the approval received does not constitute approval of the bank’s conversion or merger applications which are pending before the FDIC, Connecticut Department of Banking and Federal Reserve Bank of Boston.

Attorney Kevin Handly of Goulston & Storrs in Boston explained that under state law, depositors have a right to vote on a transaction – and in the case of New Haven Savings, depositors have the right to vote on both the conversion and the acquisition.

The FDIC also requires a depositor vote under its regulations, but, if state law provides an alternative mechanism for voting and the FDIC is satisfied that the mechanism provides an objective third-party review of the transaction, than that alternative vote is allowed. Hence, New Haven Savings was allowed to waive its depositor vote because Connecticut state law allows a corporator vote, provided the corporators are at least 60 percent non-bank management.

Handly explained that the issue had been stalemated in 1995 when three Massachusetts banks were looking to convert to stock and the FDIC demanded they hold depositor votes. The FDIC compromised with the 60 percent rule and ended the logjam.

“What the FDIC was concerned about was that corporators may be in the back pocket of management and that their vote wouldn’t be an independent impartial check,” said Handly.

If a deposit vote were to take place, there is typically a minimum deposit amount of $100 required, and the FDIC allows a proxy vote. The quorum required is less than 50 percent, making it even easier for a depositor vote to take place and be counted, said Handly.

“If you had 25 percent of depositors return proxies and a majority of those voted in favor, then the transaction would go through, even though less than a majority of depositors are voting in favor of your deal,” said Handly. “But people with $500 in the bank are not going to take the time to fill it out.”

The problem with depositor voting, he noted, is that it’s philosophically at war with traditional New England concepts of savings banks. In New England, depositors don’t have any rights – “they never have,” Handly said.

“New England banks are paternalistic organizations where trustees are responsible and corporators meet once a year to elect trustees. The idea of giving depositors a vote is not in the tradition of New England savings banks, and that’s been historically a big part of the problem,” he said.

The FDIC first ran across depositor voting with savings and loan banks where depositors have many rights and often hold yearly meetings to vote on bank issues. The scenario is vastly different in New England.

“Mutual institutions do not want to have depositors confused with shareholders of a stock bank. Depositors in a mutual bank in New England stand in a different relationship. Really, the only right that they get is the right to share in whatever is left if the bank is liquidated and solvent, and there is capital to distribute,” said Handly.

‘Unwavering Support’

While there is no recent precedent for a depositor vote upsetting a mutual bank’s desire to convert to stock or acquire another bank, there was a recent instance in Massachusetts where the depositors upset a merger transaction of two cooperative banks in Boston’s Jamaica Plain section. The Roxbury Highland Bank proposed a merger with People’s Cooperative Bank; their merger proposal had to go to depositors, who voted it down.

“They did not want to lose their local bank,” said Handly. “There is a ferment or wave of depositor activism in the New England thrift industry that is a reaction to the tremendous consolidation taking place. Depositors are rising up and saying ‘we’re not going to take it.'”

Concerns of New Haven residents that they may lose their hometown bank to acquisition are not completely unfounded. Historically, converted mutual institutions in New England have a short shelf life. Once a bank converts to stock, it no longer has complete control.

“Capital is king,” said Handly. “In return for all that capital, you give capital markets a considerable say in your destiny. And if you’re not producing returns that are competitive in your market, that capital will pressure you to do something else and deploy it more effectively.”

In the past, converted banks have found it too much of a challenge to produce the kinds of returns on equity that capital markets expect, but that often does not become evident until three or four years after conversion.

“Plus, the fact is that once an institution is converted to stock they can be bought,” said Handly. “They can be forced to merge sooner than they want to, even if management doesn’t want to go out of business.”

If the conversion is handled well, many of the stockholders will be local residents and depositors, since the first bite at the stock goes directly to them. Therefore, in the beginning, virtually all of the stock will be held locally, but the situation quickly can change.

“Suddenly your local stockholders have liquidity, and can sell their stock in national securities markets where investors are looking for community bank stocks to buy up. So in a short time, quite a lot of stock is no longer held by local folks but by mutual funds, hedge funds and national investors,” said Handly.

“In the short term there are protections to ensure that for at least three years following conversion they won’t be taken over. But beyond that, all bets are off,” said Handly. “There are exceptions, but generally they are merged out of existence between five and 10 years after they convert.”

The day before their hearing with the Department of Banking, New Haven Savings outlined preliminary details regarding a new $27.5 million package for low- and moderate-income lending programs and investments – a package in addition to its separate commitment of $30 million in conversion stock funding for its foundation.

According to a press release from the bank, the initiative, called the “NewAlliance For Neighborhoods” program, is being made possible as a direct result of the bank’s public conversion and will earmark an immediate $5 million in grants for affordable housing over the first three years.

“We want to demonstrate our unwavering support for homeownership in Greater New Haven, specifically for low- and moderate-income individuals and families,” said Patterson. “The NewAlliance For Neighborhoods program makes specific funding commitments and launches programs that will measurably help the people and neighborhoods of our community – not just in the short term, but over the long haul.”

The program will extend throughout the bank’s entire footprint.

The bank set a new residential mortgage lending goal of $18 million over three years within Greater New Haven’s low- and moderate-income neighborhoods. As part of that, $5 million will be specifically designated for low-income neighborhoods in the city of New Haven. That represents more than a four-fold increase from current low-income lending levels in the city over the past three years.

New Haven Savings also plans to create small-business lending programs to support low- and moderate-income areas. Initially, the bank will establish a $2 million small-business loan pool within the Fair Haven neighborhood of New Haven. The special loan pool will provide flexible and low-rate financing opportunities for qualified local businesses.

Additionally, New Haven Savings announced a series of outreach initiatives that officials say are critical to helping it reach its lending and investment goals. Three new mortgage originators will be hired in New Haven and a Community Partners Program will team the bank with community leaders to identify potential homebuyers and to assess the banking needs of individual communities. A Financial Literacy Program also will be launched and implemented in conjunction with community partners.

“NHSB understands the important role it plays in financing and supporting homeownership and urban revitalization,” said Patterson. “We also understand that success requires a long-term commitment, and that’s exactly what we have laid the groundwork for today. We have a long history as New Haven’s community service leader, and we are making the commitments necessary to extend that leadership role well into the future.”