While securities underwriting is typically associated with money-center and superregional banks, one Pennsylvania bank is proving that midsize banks can make it in the business, too.
Dauphin Deposit Co., a $5 billion-asset company in Harrisburg, Pa., has the distinction of being the smallest owner of a section 20 subsidiary, as bank holding companies' securities underwriting units are known.
While the unit isn't setting the world on fire, it is doing steady business. And, it is likely to be more closely watched by other midsize banks, as the Federal Reserve Board moves to ease restrictions on bank section 20 subsidiaries, including raising the limit on how much revenue the units can derive from underwriting securities from 10% to 25%.
"We are going to see more and more banks with section 20s, from small regionals to money-center banks, as the lines of delineation between investment banks and commercial banks narrow," said Ted Virtue, a senior managing director at Bankers Trust New York Corp.
Dauphin was the third bank holding company to obtain the authority to underwrite debt and equity, right behind J.P. Morgan & Co. and Bankers Trust. It acquired its section 20 unit - Hopper Soliday & Co. - in 1991.
The bank has yet to take advantage of its equity powers. In the past five years, Dauphin's Hopper has underwritten only three stock offerings for other financial institutions in Pennsylvania.
But it has made progress on the debt front.
Hopper ranks 41st out of more than 200 municipal bond underwriters, according to Securities Data Corp. So far this year, it has acted as lead manager on 45 muni bond issues that raised $519 million.
In addition to investment banking, Hopper houses institutional and retail brokerage services and a consulting business.
Robert L. Freyer Jr., the banking company's president and chief operating officer, said operating a section 20 isn't for every bank. "Two different business cultures have to be able to interplay," he said in a telephone interview.
He said Dauphin and Hopper, which is based in Lancaster, "happened to be a good fit." The firms were familiar to each other because they were serving many of the same clients, including corporations and municipalities.
As restrictions on section 20 units ease, Dauphin executives expect Hopper to work more closely with its banking parent to serve clients. "It's one more way of opening up the financial institution and giving the public access to one-stop shopping," said Robert E. Kafafian, Hopper's chief advisory officer.
