This [reorganization] is an important step in implementing [The Savings Institute’s] strategic plan for growth … [and] will benefit our customers and the community alike.” – Rheo A. Brouillard

A Connecticut bank is reorganizing its corporate structure in order to raise capital to foster expansion plans and strategic partnerships.

The boards of directors of the Willimantic-based Savings Institute and its holding company, SI Bancorp, have unanimously adopted a plan of reorganization and minority stock issuance under which a newly chartered subsidiary or “mid-tier” holding company of SI Bancorp would issue a minority interest in shares of its common stock. The bank also intends to establish a charitable foundation as part of the reorganization and minority stock offering.

The Savings Institute is a Connecticut-chartered stock savings bank with total assets of $511 million at Sept. 30, 2003.

Commenting on the adoption of the plan, Savings Institute President and Chief Executive Officer Rheo A. Brouillard said, “This is an important step in implementing our strategic plan for growth because the capital raised in the stock offering will provide a financial platform for growth and expansion of our community banking franchise. We believe this transaction, which includes the formation of a charitable foundation that will be dedicated to charitable activities in the communities we serve, will benefit our customers and the community alike.”

He added that with a community banking market rife with acquisitions, and the near-constant influx of large, outside players, smaller banks like the Savings Institute need to continue expansion in order to stay afloat.

“I think that generally we see a lot of opportunity happening in our area of the state, and I think that some of what’s occurring among our peers is creating even more opportunity in markets we’re in or that are contiguous to our footprint,” said Brouillard. “We need to position ourselves to take advantage of the turmoil.”

Brouillard explained that the bank’s long-term plan is to continue the growth it has experienced over the last few years. The bank has doubled in size in the past two years and is expected to double again within the next four.

With 15 branches already, the bank is looking to expand in assets and not necessarily infrastructure, “but clearly there will be additional offices needed in the future,” said Brouillard.

The Savings Institute is a community bank in a unique situation, insofar as that in addition to offering traditional community bank services, it has a fairly sizable Trust Department as well.

“We think we’ve got a pretty good product offering that customers seem to accept very well,” said Brouillard. “In our particular area – which, unfortunately, is the least affluent in all of Connecticut – we have the No. 1 market share in most of our markets. So we’ve been fairly successful with customers that have exposure to us, and I feel the way that we deliver our services will be accepted by other consumers as well.”

The bank is eyeing Eastern Connecticut with its expansion plan. That is a large area by community bank standards, but the Savings Institute already runs from the shoreline in Groton almost up to the Massachusetts border along the Interstate 395 corridor. It also has an office as far west as Enfield.

“If you look at that geographic dispersion, there’s a lot of area for us to fill in, which implies the direction that we might take,” said Brouillard.

However, two major community banks – the Savings Bank of Manchester and Tolland Bank – currently cover much of that area. In the wake of New Haven Savings Bank’s pending acquisition of the Savings Bank of Manchester and Tolland Bank, Brouillard is hoping to pick up some new customers. Referring again to the “turmoil” that is the eastern banking market these days, he said he feels that customers will be open to the idea of a locally operated community bank.

‘Additional Capital’

The new mid-tier holding company is a clear effort to raise capital, which is something Brouillard said the bank absolutely needs.

“We’ve done a good job growing and maintaining our capital level, but we’ve never been one of those banks with 12 [percent] or 15 percent capital. We always leverage our capital to just about the max,” he said. “With growth we anticipate we’ll need additional capital.”

Also, the Savings Institute always has planned to maintain its mutual holding company. One of the hopes the bank has is that in the coming years, other banks will look at its structure and consider partnering with the bank.

“We’ve created a corporate structure that will allow us to do some things with other partners that don’t necessarily require acquisition,” said Brouillard.

“The reality is that the recent uptick in the consolidation sweepstakes, with Bank of America [acquiring] Fleet[Boston Financial], and New Haven Savings Bank, has created a competitive vacuum and creates opportunities for smaller institutions to take advantage in the marketplace,” said John Carusone, president of the Bank Analysis Center in Hartford. “It’s prudent for institutions like the Savings Institute to take advantage of this organizational structure to refuel capital accounts in order to make strategic initiatives”

Whether the New Haven Savings Bank deal goes through, Carusone said that potentiality of the deal is causing institutions to anticipate a change in the marketplace.

The eastern portion of the state is a mixed market with parts of Windham County bordering on New London benefiting from American Indian gaming facilities, while other parts of it are more rural and less commercially vibrant.

“In the long term, for an institution like the Savings Institute, this market requires them to expand,” said Carusone. “There is some logic to expand to other more vibrant and affluent parts of the state, and they don’t have to go very far.”

He noted that parts of New London County are “arguably underserved,” noting the pending creation of Joseph Ciaburri’s Bank of Southeastern Connecticut. Carusone said that new bank may be another reason for the Savings Institute to have adequate capital resources on hand.

“They’ve done the pre-work by having the legal structures via their mutual holding company to enable themselves to go to the capital markets,” he said.

The newly chartered mid-tier holding company, to be named Windham Financial Group, will offer shares of its common stock for sale to the Savings Institute’s eligible account holders, to the Savings Institute’s tax-qualified employee benefit plans, to directors, officers and employees of the Savings Institute and SI Bancorp and to members of the general public in accordance with the priorities set forth in the plan.

The highest priority will be depositors with qualifying deposits as of Nov. 30, 2002. The amount of common stock to be sold in the offering is not expected to exceed 40 percent of the value of the Savings Institute and SI Bancorp on a fully converted basis, as determined by an independent appraiser and approved by regulators.

Since 2000, the Savings Institute has operated as the wholly owned subsidiary of SI Bancorp, a Connecticut-chartered mutual holding company and a bank holding company registered with and regulated by the Federal Reserve Board. The Savings Institute is regulated by the Connecticut Department of Banking and the Federal Deposit Insurance Corp.

Following the reorganization and minority stock offering, the Savings Institute will become a wholly owned subsidiary of Windham Financial Group. SI Bancorp will own a majority, controlling interest in Windham Financial, which also will become a bank holding company registered with and regulated by the Federal Reserve Board. The chartering authorities and regulators of both SI Bancorp and the Savings Institute will remain unchanged.

The Savings Institute’s normal business will continue without interruption during the reorganization and stock offering process. The transaction will not affect the existing terms and conditions of the bank’s deposit accounts and loans.