|
|
|
No Potters in This Field
Spurning fast-buck suitors, New Haven Savings ensured a wonderful life
|
Business New Haven
12/4/1995
By: Mitchell Young
|
Every holiday season I watch Frank Capra's It's
a Wonderful Life. I stay riveted until our hero, George Bailey (Jimmy Stewart) succeeds in recapturing the affections and trust of the depositors and foils Potter's evil bid for a banking monopoly. It seems far-fetched that we would accept a modern-day sequel; the world just ain't what it used to be.
What drives us to the VCR as a consummation
of our turkey fest? Perhaps it's the instinct that
the traditional values that hold home, hearth and community together extend beyond the well-promoted discussion of nuclear family values.
Recently, as we prepared to interview Charles Terrell, president of New Haven Savings Bank, for this column, the Middletown-based Mechanics Savings Bank, a mutual savings bank, announced it would convert to public shareholder ownership to attract more capital in order to “take advantage of the opportunity” provided by the merger of Fleet and Shawmut banks.
In doing so Mechanics joins many other New England mutual savings banks (many no longer with us) which have “converted” with the goal of securing capital to respond to a changing financial services environment.
Between 1984 and 1990, New England savings bank conversions raised approximately $2.4 billion. Proponents claimed that the capital would provide a cushion when the economy in New England fell into recession.
The results were quite to the contrary. In spite of significantly higher levels of capital, converted savings banks had a higher failure rate than other savings banks or commercial banks. Why? According to banking experts, their new strength became their overwhelming burden: More capital meant a lower return on equity, disappointing shareholders and causing bank managements to respond by leveraging assets. Thus institutions that survived and even grew during the great Depression of the 1930s succumbed or were transformed by a regional recession, in turn deepening it significantly and bringing untold additional hardships to the larger commercial community.
The changing financial environment - and how bankers and the investment community have responded to it - is especially important as the drive to reshape financial markets and institutions continues unabated. Business people and others need to exercise vigilance in the face of the recent fallibility (and motives) of those driving change in the financial system. In the end, bank shareholder loses were marginal compared to the tens of billions lost by taxpayers, municipalities, failed businesses and real-estate investors and their non-bank creditors.
N ew Haven Savings Bank celebrated its 100th birthday before World War II. The bank's original incorporators included Roger Sherman, New Haven's first mayor and a signer of the Declaration of Independence. From the time of its founding it was a mutual savings bank, organized without shareholders and “owned” by depositors, created to serve the needs of individuals. New Haven's four extant banks at the time took no deposits from and made no loans to ordinary citizens. The new bank followed the path of other similar institutions, the first having been created in Scotland in 1810 by a clergyman planning for the well-being of his parishioners. In Connecticut it was preceded only by the Society for Savings (Hartford) in 1819, Norwich Savings Society in 1824, Middletown Savings Bank in 1825, and the Savings Bank of New London in 1827. The bank's incorporators cited in its charter petition “the need of persons with irregular or small incomes of a safe place of deposit and the advice of persons informed as to the best securities for small investments.”
During the mid- and late 1980s, critics of New Haven Savings' hidebound, frumpy lending vision abounded. Terrell admits that while the bank didn't foresee the collapse in condo values (as if anyone did), it steered pretty clear of the leveraged development and commercial loans that eventually destroyed Connecticut Savings Bank (also established before the Civil War), First Constitution Bank, Union Trust, ComFed Savings, Bank of New England and severely hobbled the Bank of Boston, Shawmut, Bank of New Haven and many others. New Haven Savings exited the regional recession one of the best capitalized banks in New England.
As Terrell points out. it wasn't a vision about the quality of Connecticut's business expansion that kept the bank from going too far afield - it was adherence to its original mission. “This is the community we serve,” says Terrell from his Church Street office. “We don't want to be in Bridgeport, or Hartford, or other places, necessarily. We're responsible for this community. If it does well, we do well.”
That sounds like ad copy from the helmsman of the “very nice” bank. But then he adds: “There are two basic reasons why an institution would convert: One is capital problems - in a mutual, there is no way to solve capital problems except through earnings or conversion. If the institution had relatively low capital and wanted to grow, it would be restricted. The second is probably the reason most converted, which is greed.” And you pretty much have to believe him.
When we spent the 1980s finding out that greed was good, where were Charlie and friends? “There are no ESOPs [for a mutual bank] or stock options for either the directors or the managers,” Terrell explains. “So [investment advisers] would come along and say, 'Hey, you've got $100 million in capital; you're going to raise another $100 million [from investors] - who owns the first $100 million? The new entity is going to have $200 million in capital so the stock is going to have a tremendous jump' - they call it a 'pop' - 'You're going to leverage this capital and the stock's going to go way up. You're all going to be rich.'”
But New Haven Savings never took the bait. “We didn't need the capital,” Terrell explains. “[There were] two big factors. One is the tradition: You walk through the halls and you see the pictures of the CEOs going back to 1838. It's worked very well as a mutual. But the principle issue is independence and control. Any stock institution can be bought out at the right price. And then the community ends up with a branch office.”
Pointing to larger regional banks with twice New Haven Savings' assets but with less capital, Terrell explains: “We could be their size with our capital, and we could do that in the next two days by buying assets and borrowing the money - if we were driven by return on equity. Our measurement standard is return on assets. Return on assets rewards capital accumulation: The more capital you have, the more free money you have generating earnings.”
Business people, commentators, politicians, the press, even mutual bankers have all embraced the collective wisdom that the market will take care of everything. “If we need more community banks, we'll get them,” Terrell says. “These things go in cycles. The longer this consolidation [of banks] goes on, the sooner people are going to recognize that there ought to be more community banks. The traditional way to start one is investment motivation.
“What motivation was here for Roger Sherman to start New Haven Savings Bank? He was being a good guy.”
Just like George Bailey.
|
Go FirstGo PreviousGo
NextGo LastGo
to Index
|
|
