Bill Meagher delves into Circle Bank’s proposed IPO.
It’s the last week of February and pouring rain, the wind is whipping the drops sideways into a forlorn two-story structure at the corner of Grant Avenue and Redwood Boulevard in Novato. The building, vacant since 2000, seems to slump in exhaustion from the gusts, a boarded-up window looking down onto the still-green lawn. One day soon, a demolition crew will drive up to 999 Grant and put the edifice out of its misery. And that wrecking ball, as much as anything else, symbolizes the transformation of Circle Bank.
A brand new headquarters will rise up on the site. But that will only be, the most obvious sign that Circle Bank is morphing beyond its North Bay roots. An initial public offering (IPO) could raise $30 million and turn the community bank into a public company with stock available to local investors. The lender has plans to open 15 new branches all over the Bay Area, including the one currently being remodeled in Corte Madera, within two to three years after closing the IPO.
The changes won’t be easy, however. To begin with, Circle has spent considerable time and money building an image for itself as a community bank. It’s a local business that’s reached out to the community. Founded by Kit Cole and run by her daughter, Kim Kaselionis, Circle has gone to great pains to be the anti-Wells Fargo. Walk into one of its branches and you’ll find coffee and fresh-baked cookies—cookies made from batter purchased from Homeward Bound, a local nonprofit that supplies shelter and residential services in Marin. There will be child-sized furniture because the bank is very kid-friendly. It’s also friendly to creatures a bit closer to the ground, as water bowls and dog biscuits are standard equipment. It also isn’t unusual for tellers to be on a first name basis with regular customers.
That kind of “small town” feel isn’t an easy thing to imprint on a company’s culture, but it’s the centerpiece of Circle’s business model. The bank’s prospectus states that it “distinguishes itself by seeking out unmet needs in its communities and creating products and programs to meet those needs.” For Circle to grow yet remain “small” and different from Bank of America and even WestAmerica Bank, it will need to find a way for its envisioned branches in Oakland and San Jose to have the same homey feel that permeates the San Rafael branch, yet still operate as a regional bank. That’s not an easy trick to pull off.
Circle faces other challenges as well. Pulling off an IPO these days isn’t easy. While Wall Street isn’t as erratic as it was two years ago, it isn’t a sure thing, either. The average cost for an IPO is north of $1 million, so Circle is rolling the dice in a substantial way.
The banking industry isn’t exactly stable, either. Nationally, 157 banks failed in the United States last year. This year, as of the end of February, 23 banks had gone toes-up, many because they held too many real estate loans that didn’t perform. And Circle has a large concentration of real estate loans. The good news is, so far, the loans are holding up.
Circle has been working on its IPO since October of last year. As of this writing, the bank has filed six different versions of the offering plus the original, responding to questions and concerns from the Securities and Exchange Commission (SEC).
According to the IPO from February 28, 94 percent of the bank’s loan portfolio is made up of commercial real estate, multifamily real estate, single-family residential or construction and land. But the bank only shows six of those loans as non-performing and those loans are worth just $3.74 million. To put that into perspective, the bank currently carries $316 million in assets on its books.
IPO 101
IPOs are interesting animals. There are plenty of reasons to become a public company, but the most popular is that once a company is public, it can list on a stock exchange and raise capital through a sale of securities. Public companies also file regularly with the SEC, which gives investors more insight into how they operate and helps them make investment decisions. Generally speaking, going public also gives companies access to cheaper capital. If you’re a bank with plans to grow and make acquisitions, access to cheaper capital is a pretty handy tool.
Companies going public through an IPO generally work with investment banks that underwrite the offering. They agree to see to it that the shares sell, essentially saying they’ll buy the stock themselves if they’re unsuccessful in selling it to their clients. When a company the size of Facebook or Apple decides it wants to go public, Wall Street bankers engage in a combination of love dance courting the company to go public, and food fight against rivals who might capture the business, which can be worth millions.
One of the funny things about an IPO is something called the “quiet period.” Until 2005, it was the period before and after a stock offering, when the SEC mandated the company remain quiet so nobody would receive inside information regarding the offering, keeping the investment playing field level.
In December 2005, the SEC decided to liberalize a company’s abilities to communicate with the public. But as a rule, companies and investment bankers still won’t talk about an IPO prior to the SEC signing off. In January, Circle Bank proved to be the exception to the rule. In a story about the IPO just after the first of the year, Kit Cole told the Marin Independent Journal that Circle had picked the perfect time for the offering, among other observations.
The SEC then told Cole and Circle to hush up. This was confirmed accidentally by Circle’s senior vice president for marketing, Alan Gaul. Gaul was calling to apologize to NorthBay biz for not being able to grant an interview for this story. The normally loquacious Gary Tobin, Circle’s affable PR rep, wouldn’t even return phone calls seeking an interview. He instead replied with a to-the-point email: “The SEC-mandated quiet period prevents the bank from commenting at this time.”
So I went in search of information about how Circle might go public, get bigger but remain a “neighborhood bank.” I found some interesting answers.
Behind the scenes
While the official push to go public didn’t begin until October, in some ways, the bank has been laying the groundwork for a while. The bank changed its name from Novato Community Bank to Circle Bank in 2003. While Cole and company certainly could have opened a branch of Novato Community Bank in Menlo Park, Circle makes for a smoother market entrance.
For the most part, Circle has been deliberate in its hiring practices, with an eye for growth. The IPO lays out backgrounds for management players. For instance, Patrick McCarthy, the bank’s chief credit officer, has worked for five different banks over a 35-year career, everything from large bank holding companies to small operations. Mike Moulton and Mike Rice were hired from Tamalpais Bank before it imploded. Cole was familiar with both since she was involved in creating that lender. She also knew the bank well, since Tam and Circle were largely targeting the same retail customers. Moulton is the CFO and Rice is a senior vice president in charge of business lending and the SBA platform. The SBA program is large in Circle’s plans.
Chris Lee, hired from United Commercial Bank, is the chief loan officer; with a background in larger operations, he held a regional position with UCB. Unfortunately, he was in charge of the bank’s commercial real estate lending. Worse, the bank failed because of the real estate portfolio. Cole, in her interview with the IJ, said Circle did its due diligence and all those loans that caused UCB to crash weren’t Lee’s fault.
Juanna Collins will head up the bank’s operations. She’s been active in banks all over the Bay Area for the last 25 years, so she’ll be familiar with the various markets and competitors as the bank grows.
The big picture is ever-present at the branch level, according to a North Bay banking source familiar with Circle. “When it hires at the local level, for the most part, it hires people who know that specific market and have contacts in the community. The woman who heads up the Petaluma branch [Michelle Law] lives in Petaluma and was in charge of a local business. The guy heading up the Noe Valley branch [Carlos Rivera] is well known in that area. It tries to have a local face out in front.”
That same source said that, so far, the bank gives its local branches a lot of autonomy to run things at a local level. “It still has to make loans that fit the bank’s parameters and follow guidelines, but it sounds like management lets them do the work for the most part. A different way of looking at it is, it hires people from larger banks at the branch level sometimes, and the only way that happens is if they know they’ll get to run things.”
That may be easier to do with just six branches and not 20, but time will tell how much rope the local branches will get.
Industry health
One of the remarks that got Circle in hot water with the SEC was this one: “This could not be a better time for us to go public, because so many of our peer group is mired down, focusing on digging out or just surviving,” Cole told the Marin IJ.
While Cole is right that the banking industry has been hit hard by the economic downturn (and you can mount a convincing argument that the banking industry certainly played a significant role in that downturn), the numbers aren’t as convincing today as they were a year ago. And as long as we don’t see a double-dip economic setback, the numbers are likely to keep getting better.
The Federal Deposit Insurance Corporation (FDIC), which insures bank accounts and closes banks when they fail, reported in February that the banking industry posted a collective $87.5 billion profit last year. The year before, the industry showed a net loss of $10.6 billion. For those of you scoring at home, that’s a $98 billion swing over the course of a year. On the other hand, the FDIC has 884 banks on its trouble list, or one in nine across the country. The majority of those lenders are community banks, so not all of the numbers have turned against Circle.
That last stat is particularly telling. In its IPO, Circle talks about growing via acquisitions. Past incarnations of the IPO showed the bank had incentives for Cole to make acquisitions, as she stood to collect $175,000 for every $100 million in assets she brought to the bank. In the February 24 IPO, the bank board of directors changed the language so that Cole can make a bonus by expanding the bank to the nine Bay Area counties, obtaining strategic objectives set down by the board, strengthening ties with the investment community and adding shareholder value or acquiring or merging with banks within targeted geographic markets. The board also upped the bonus to $250,000.
How this IPO stands out
Circle doesn’t have an investment bank leading its effort to go public, which is unusual. The fact that the IPO may only raise $20 million to $30 million is one reason Circle may have chosen to go it alone. It’s hard to attract an underwriter with a small IPO, and this way, Circle doesn’t have to pay out 7 percent, the standard investment bank cut. Howe Barnes Hoffer & Arnett Inc. out of Chicago has agreed to “informally sponsor the listing of the Company’s shares on the Over-the-Counter Bulletin Board upon completion of this offering.” This isn’t the same thing as underwriting the offering, but it does show that Circle is seeking some degree of assistance.
The IPO also is different than others that will greet investors this year in that the CEO is slated to pick up a $250,000 bonus for simply bringing the company public. According to the IPO, the 69-year-old Cole will realize the bonus when the transaction closes. The straight cash reward isn’t the usual way execs are rewarded for IPO transactions. Oftentimes, management is granted warrants to purchase stock at a specific price or, in some cases, are granted shares as part of a compensation deal. The stock grants or warrants tie executive compensation to the fortunes of the company, further incentivizing them to work in the company’s and shareholders’ best interest.
But by far the most unusual attribute of Circle’s IPO is the fact that there’s a group of shareholders who are seeking to put their own business plan in place, including the replacement of Cole as CEO.
Back in 1996, the financial institution (then known as New West Thrift and Loan) sold shares in a private offering to recapitalize the bank. Those private investors holding almost 99 percent of the interest in what’s now the bank’s holding company, Circle Bancorp, formed a limited partnership called Shoreline Capital Partners. The partners are Deborah Milenkovitch, Stuart Cook, John Buehler, Roksanda Cerovic, Frank and Diane Doodah, Kit Cole and her daughter Kim Kaselionis.
In turn, the limited partnership has a general partner called Cole Financial Ventures Inc. (CFV). CFV is controlled by Kit Cole, who owns 61 percent of Cole Financial, her daughter, Kim, who owns 12.5 percent and Frank Doodah, a bank director.
Cole Financial controls the election of the board of directors for the holding company that, in turn, controls selection of the management of the holding company and, ultimately, Circle Bank.
On November 17, 2010, a palace coup of sorts took place, when members of Shoreline sought to make changes with Circle Bank’s management, seeking to oust Cole. No one disputes that the meeting took place or that at least some shareholders wanted Cole out.
The IPO refers to the meeting and says that Simone Lagomarinsino, the former CEO of Kinecta Federal Credit Union in Southern California, was identified by the limited partners to replace Cole. A filing was made to reflect these moves with the FDIC as well as the California Department of Financial Institutions.
An amendment in the fifth version of the IPO includes a letter from attorney Thomas Hyde of Larkspur on behalf of the bank. In the letter, Hyde disputes the validity of the partner’s claims, saying that no successor to Cole was identified, Cole Financial never received the proper notification of Cole being replaced, and one of the voters may not have held voting power, which would short the super majority needed.
Protests have been logged by both sides with the FDIC and Department of Financial Institutions (DFI). The FDIC could take as long as six months to make its decision. Meanwhile, the clock ticks on the IPO, which as of the last day of February, had six amendments and the original. In February alone, the bank filed five amendments, better than one per week. In the IPO, the bank states that, should the FDIC and DFI uphold the limited partners removal of Cole, the IPO will be scrapped.
On the other hand, if the IPO is approved ahead of the decision, the limited partners voting power will be diluted by the share sale and their plan to send Cole walking goes away.
If this sounds like the world of high finance, to a degree, it is. The legal maneuvering and behind-the-scenes power play is worthy of any Wall Street investment bank.
What it doesn’t sound like is a community bank where fresh baked cookies fill the lobby with sweet smells and your dog can get a drink anytime.
Circle Bank is changing. Whether that change will work is anybody’s guess.
Bill Meagher is a contributing editor at NorthBay biz. He also pens the Only in Marin column. He keeps what little money he has under his mattress. You can reach him at bmeagher@northbaybiz.com.
