Tuesday, May 28, 2013
YOUNGSTOWN
When the Home Savings and Loan Co. of Youngstown welcomes shareholders to Powers Auditorium this morning for a special meeting, its management is betting they’ll approve an unprecedented stock offering three years in the making.
First announced in January, the company completed the offering in March when a series of private equity firms and other investors from across the country purchased 7,942 preferred shares at $2.75 each, with returns capped for each at a rate no higher than 4.9 percent.
Home Savings will ask its shareholders today to allow those preferred shares to be converted into 7,942,000 common shares, essentially turning the $40 million the bank raised through the offering into equity for the company.
For the private investors, instead of earning interest, the deal offers a better opportunity for returns if the stock performs well. Similarly, with more shares, they also would be insulated from a drop in price should the stock not live up to the investment.
For a 125-year-old community bank such as Home Savings, though, raising $40 million in capital is no small task considering the weariness of investors still shaken by an economy growing at a halting pace in the year’s after the recession.
“We’ve never done anything like this. It certainly should tell everybody something because our stock was selling at 50 cents at one point,” said President and Chief Executive Officer Patrick W. Bevack. “You go out to equity guys in Chicago and New York and try to raise money — the world has had a difficult time raising money — and for people like us it was impossible.
“When you talk about these guys putting $40 million into us, it says a lot about the area, the company and how the people at Home Savings have changed things around,” Bevack added.
Richard Horvath, a financial advis3r at American Financial Services in Boardman, and a former banker who once worked for First Place Bank and Charter One, among others, said it’s unusual for any bank, especially one of Home Savings’ size, to offer preferred stock to private equity firms.
“I think everything you’re seeing in the news with private equity shows that this would be a tough sell,” Horvath said. “I think you’re going to see some positive things happen for Home Savings. They’re coming out of their shelter, for lack of better words.”
For Home Savings, “turnaround” has been the status quo as of late.
Between 2006 and 2011, in a crisis compounded by the financial meltdown and the subsequent recession, 417 banks and thrifts failed nationwide. Though that pace has slowed in recent years, the mortgage and consumer debt that precipitated during that time has left a severe dent in the balance sheets of smaller banks nationwide, leading them to crawl out of the red as they struggled to leverage their assets against debt.
In many regards, there’s still much work to be done at Home Savings, but Bevack says the latest stock offering is an example of the slow and meticulous strategy its management has taken toward profitability and relevance in the changing world of banking and finance.
In a March ratings report, staffers at the financial website The Street wrote that Home Savings’ strengths are evident in its solid stock performance, good cash flow from operations and expanding profit margins. At the close of the first quarter, the company’s stock price jumped by 94.6 percent from a year earlier, exceeding the performance of the broader market during the same time. Meanwhile, operating cash flow increased by 98 percent in the first three months of this year compared with the first quarter of 2012, surpassing the industry average by a rate of 46 percent.
But though Home Savings market value has grown from $30 million” to about $165 million today, by Bevack’s estimate, it has struggled to return a profit to investors, making analysts sheepish on recommending the stock in recent years.
Home Savings has not paid a dividend since 2007, suffering significant declines in its earnings per share over the past two years. Compared with other companies in the thrifts and mortgage finance industry and the broader market, Home Savings return on equity has trailed both the industry average, the Nasdaq composite, where the stock is traded, and the S&P 500.
“We certainly believe paying dividends is part of our capital strategy,” Bevack said. “But we are under restrictions with the Federal Reserve. To be perfectly frank, we won’t be paying dividends in the near term, but it’s part of our long-term strategy.”
Still, the value of the stock has soared as Home Savings has managed to shore up its balance sheet. One year ago, it was trading around $2.02 before reaching a high of more than $4.00 last week.
Horvath said that growth will likely continue, albeit at a slow pace, but he added that the company’s recent stock offering shows its strength going forward.
It was only recently that regulators lifted a series of onerous provisions that Home Savings was forced to follow after it was found to have an abundance of impaired acquisition and development loans on its books. Last year, the bank sold off $115 million of those troubled loans and erased a significant amount of debt in the process.
The bank has earned a profit in four out of the last five quarters, and Bevack said shareholders have raised little fuss about the stock offering. In fact, he said, early voting shows that they will approve the conversion of those preferred stocks.
Faith Yando a spokeswoman for Texas-based Dimensional Fund Advisors LP, a majority shareholder in Home Savings, says the company does not speculate on its holdings because it manages about $300 billion in assets across 14,000 companies. She did say, however, that the company plays the market and if its interests fail to live up to a strict set of economic characteristics then they are quickly sold off.
Shareholders will also decide whether to allow 755,820 common shares, at $2.75 each, to insiders at the bank, such as its board members. The move would allow Home Savings to raise an additional $2.1 million in capital and help reassure private investors that the bank’s management is confident in its own performance.
In a separate offering, which will not be voted on or reviewed at today’s meeting, the bank will issue $5 million of common stock, at $2.75 each to common shareholders.
In all, each offering will help Home Savings raise $47.1 million.