East Boston Savings Bank is reaching north into New Hampshire for growth, but it is taking an indirect route.
Rather than open branches across the state line, or perhaps shop for an established bank, the $823 million-asset East Boston Savings is chartering a bank in Manchester that would have its own identity and name, tentatively Hampshire First Bank.
The charter application, which will soon be presented to New Hampshire banking regulators and the Federal Deposit Insurance Corp., is unusual in that East Boston Savings would not own the bank outright. It plans to put up 40% of the start-up capital, take four of the 10 board seats, and raise the rest from investors, capitalizing the bank with $30 million.
If the plan is approved, Hampshire First would be the first bank to open in New Hampshire since mid-1999.
Robert F. Verdonck, the president and chief executive officer of East Boston, and its parent, Meridian Financial Services Inc., said that he sees opportunity in Manchester, which is about 15 minutes from the Massachusetts border. The Manchester area "has seen such a resurgence in the last few years" as small businesses have moved into renovated mills along the Merrimack River.
Though New Hampshire, like most other northeastern states, has had minimal job and population growth in recent years, it has one of the lowest unemployment rates in the country - just 3.53% in the fourth quarter, according to Labor Department data - and is viewed as a lower-cost alternative to Massachusetts.
Mr. Verdonck said his group is chartering a separately branded bank because he does not think the East Boston name would play well in New Hampshire.
Also, East Boston Savings is a mutual thrift with about 47% of its loans in residential mortgages. The new bank would primarily make commercial loans.
Small-business owners often demand high-touch service and want to do business with a bank that is locally owned and managed, Mr. Verdonck said. To that end, he has hired James Dunphy, a longtime New Hampshire banker, to be the bank's president, and he has recruited other business executives from the state to be directors.
"We think buy-in by the people of New Hampshire is very important," Mr. Verdonck said.
Jon R. Burke, a managing principal of Burke Capital Group LLC, an Atlanta investment bank that focuses on the banking industry, said East Boston Savings' plan appears to reflect the very strong capital position so many mutual thrifts have and the need to do something with the capital.
East Boston's capital totaled 12.9% of assets at yearend.
Mr. Burke said East Boston may generate a handsome return on its $12 million investment, because Hampshire First Bank would be run by people who have a vested interest in its success. That might not be the case if East Boston opened branches in a more conventional way or bought a bank, he said.
"It's an out-of-the-box model," he said. "Someone is thinking differently."
Other companies have occasionally organized banks in which they took large positions, rather than complete ownership. For example, Wilson Bank Holding Co. in Lebanon, Tenn., provided 50% of the start-up capital for two banks established in 1996, both in neighboring counties, but did not give them the Wilson Bank brand.
"We wanted to have a local touch to them," said Randall Clemens, Wilson Bank's chairman and CEO.
And the $3.5 billion-asset Capitol Bancorp Ltd. of Lansing, Mich., has made its living starting banks in markets throughout the country, usually by putting up 51% of the capital and raising the rest from local investors. It has founded more than 40 banks this way, and after a bank has been up and running for three years, Capitol typically buys it outright.
Chris Hargrove, the president of Professional Bank Services Inc. in Louisville, said that sooner or later the investing bank usually decides it would be more efficient to own and operate the newer bank itself.
In fact, the $1 billion-asset Wilson Bank bought out the other shareholders in the two banks last year, though they kept their names. Mr. Clemens attributed the buyout decision to the cost of complying with certain requirements of the Sarbanes-Oxley Act.
Given the possibility of an eventual takeover, Mr. Hargrove said, investors in a start-up should usually consider how they would feel about owning the parent company's stock.
Mr. Verdonck said he wanted to start Hampshire First with $30 million of capital, a larger starting sum than banks often get, to avoid returning to investors for more money anytime soon. Two downsides to secondary offerings are the possibility that the market may not be receptive when the bank is ready and the cost of selling additional stock, he said.
Maybe so, but Mr. Hargrove said too much start-up capital can be risky, too. It could be difficult to earn a decent return on equity anytime soon, and bankers can then be tempted to chase riskier loans and less-stable deposits, the consultant said.
Pending regulatory approval, Mr. Verdonck said he expects Hampshire First to open in the late summer or early fall.
