Work by Matthew Stone

May 1, 2010

GARDINER -- Savings Bank of Maine, the Gardiner-based institution ordered in March by a federal regulator to boost its capital holdings or face liquidation, appears to have an investor lined up as it looks to recapitalize.

An application the 32-branch bank filed in March with the federal Office of Thrift Supervision lays out plans to form a new holding company and solicit investment through a private stock offering.

The moves are part of the bank's strategy to raise cash in time for a Sept. 30 deadline.

The OTS application -- parts of which the Kennebec Journal obtained through a Freedom of Information Act request -- shows the bank plans to form a holding company, called SBM Financial, to absorb the bank's two existing holding companies and acquire Savings Bank of Maine.

The documents released to the newspaper redact the investor names and the amount Savings Bank of Maine hopes to raise as a result of the stock offering.

Savings Bank of Maine President Arthur Markos declined to discuss the bank's recapitalization strategy.

In an interview in March, Markos said he was confident the bank could boost its capital holdings in time for the OTS-imposed deadines.

"By means of the recapitalization, the applicant expects to raise sufficient capital to inject into the bank to restore the bank's capital ratios to levels acceptable to the OTS," the application reads. "The benefits of the recapitalization are expected to far exceed its expense."

The OTS tentatively has set a June 30 deadline for deciding whether to accept Savings Bank of Maine's recapitalization plan, OTS spokesman William Ruberry said.

Information about the bank's recapitalization strategy comes more than a month after the OTS issued a "prompt corrective action" directive against Savings Bank of Maine. The directive ordered the bank to double a key capital-to-assets ratio -- to 10.76 percent from 5.19 percent -- by the end of September or make plans to sell its assets or be taken over by another bank.

A capital-to-assets ratio indicates how much cash a bank has on hand compared to the value of assets in its portfolio.

Savings Bank of Maine's capital holdings slipped in 2009 as the institution sustained "substantial loan losses," according to the application on file with the OTS.

The bank recorded $82.1 million in nonaccrual loans -- loans the institution doesn't expect to be repaid -- at the end of 2009, up from $18.5 million a year earlier, according to the Office of Thrift Supervision.

Savings Bank of Maine posted $892.5 million in assets as of Dec. 31, 2009, the most recent date for which data are available. The bank held $64.7 million of its assets in capital, according to the Office of Thrift Supervision.

A year earlier, the bank held $974.6 million in assets with $96.4 million in total equity capital.

When looking to recapitalize, a bank has essentially two options, said Donald Groves, deputy superintendent for supervision and examination at the Maine Bureau of Financial Institutions. The bank can raise cash by selling assets, or it can find investors willing to buy stock, he said.

In most cases, raising capital from investors is preferable.

By selling assets, "you're going to shrink the bank," Groves said. "You're going to sell the good assets, which means you're going to compound the earnings problems caused by the credit issues."

The Maine Bureau of Financial Institutions doesn't regulate Savings Bank of Maine, so the agency has no direct knowledge of the bank's recapitalization plan, Groves said.

"My sense is, if they've gone to this much trouble, they must be fairly confident the capital will be raised," he said. "Until the capital's in hand, you don't really know for sure."

Matthew Stone -- 623-3811, ext. 435
mstone@centralmaine.com

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