1. Summarize and 2. Answer questions that follow the case.
Cuttyhunk Bank (A)
Walking to his office in downtown Boston on a gorgeous May day in 2002, Richard Wilson felt better than he had in weeks. Two months ago, he had become chairman and chief executive officer of Cuttyhunk Bank; the transition had been hectic and stressful. A large part of his time had been taken up with efforts to convert Cuttyhunk, which was under federal charter, to a state bank. Only yesterday he had ended a long series of negotiation s to merge with the small Harbor State Bank in suburban Roslindale. Over the last decade, many small banks in New England had had been acquired by megabanks such as Fleet. These mergers usually had resulted in major layoffs. Often this involved senior staff at the acquired banks who had developed long-term relationships with their customers. Wilson believed the state charter, facilitated by the merger with Harbor Sate, would make it financially viable for Cuttyhunk to survive and preserve its record of community service.
Wilson found himself thinking, “If I am lucky, I might be able to get away early this afternoon to try out my new sailboat on the Charles.” There were no urgent matters pending except a call from a reporter than he hadn’t had time to return. Wilson assumed it concerned the opening of a new branch next week, and he thought he could answer the reporter’s questions be out of the office by noon.
This hope was dashed when Wilson entered his building. The office was in an uproar. Every phone seemed to be ringing. His office staff, however, was gathered in the far corner of the room staring at a newspaper. Nancy Brock, the assistant treasurer, ran up to him with a copy of the Boston Herald thrust out in front of her. With a look of horror on her face, she said, “Read this.” There, on the front page of one of Boston’s major newspapers, was an excerpt from a confidential interoffice E-mail Brock had sent the previous week to the bank’s branch managers. The passage dealt with how managers should handle inquiries from bank members depositors and borrowers) concerning their attendance at a bank meeting where a vote would be taken on the proposed merger with Harbor Sate Bank. The excerpt read:
Also, although they are “entitled” to come to the meeting, we naturally do not want to encourage this. If they don’t remember whether or not they have given us a proxy, tell them that they probably have (either by signing the sig. card or returning the special form back in January ’09) but that, in any event, there is no need for them to complete a proxy now, nor are they under any obligation or requirement to attend the meeting. Just don’t tell them in so many words that they shouldn’t attend, because legally, they may. Tactful discouragement is the line to take if the subject comes up. For your information only (don’t get into this with customers), as soon as we convert to the state charter, depositors and borrowers will no longer be considered members wand will no longer be entitled to attend meetings and vote.
Wilson’s first thought was “How did this get into the newspapers?” He quickly realized, however, that he didn’t have time to pursue that question. Those increasingly ringing phones, his staff told him, were angry customers demanding to know what the bank was trying to hide and why members were being denied their voting rights. Wilson had to act and act fast. He had to come up with an answer to the phone calls and a letter to all members as soon as possible, explaining the bank’s position.
BACKGROUND ON CUTTYHUNK BANK:
After 150 years as a Massachusetts-chartered mutual savings bank, Cuttyhunk Bank converted to a federal charter in 1983. At that time, management thought the change might facilitate interstate mergers, since the merged bank would be subjecting its operations to national supervision rather than supervision from another state. Management also thought that the change would guarantee continuation of the broad powers essential for the bank’s long-term strategies.
Unfortunately the expectations failed to materialize. The Federal Home Loan Bank Board required far more complex and expensive appraisals for real estate that did the Commonwealth of Massachusetts. While the higher tighter regulations may have resulted from flagrant abuses elsewhere in the country, Cuttyhunk saw no reason why it should bear the competitive burden of expensive and time –consuming appraisals.
Also, Federal Home Loan Bank Board regulations severely limited commercial loans to Trustees. While Cuttyhunk management also opposed “sweetheart” insider deals, it didn’t want to be prohibited from having the benefit of the business judgment and wisdom of many outstanding people simply because the bank had made loans to them. Cuttyhunk management felt that it was natural for its clients to want to do business that would benefit the bank they were associated with and that these relationships were a fact of life throughout the banking industry.
Even more important, shortly after Cuttyhunk went federal, the law was change to allow Massachusetts banks to expand to other New England states. The banking industry had undergone deregulation in a number of areas in the 1980s. The New England Experiment – the first of several regional experiments – allowed banks in Maine, Vermont, New Hampshire, Connecticut, Massachusetts, and Rhode Island to engage in interstate banking transactions as long as there was reciprocity between states. This meant that a bank in Massachusetts could merge with a bank in Connecticut only if the Connecticut bank was allowed to business in Massachusetts. Some states (Vermont was one) chose not to take advantage of the relaxed regulations. During his 20-year tenure at Cuttyhunk, Wilson had seen many small banks turned into branches of corporate monoliths as a result of the deregulation.
Finally most state savings banks in Massachusetts had begun to reap considerable profits in the 1990s, thanks to lower interest rates and the booming housing market. Therefore, Cuttyhunk decided to go back to a state charter by merging with the small Harbor State Bank, which had $9 million in assets, three employees and one office in Roslindale. The merger would allow Cuttyhunk to convert to a state charter without paying a million dollars to be insured by the state.
The merger, however, had to be approved by the bank’s members. Under federal charter, depositors are members entitled to one vote for every $100 on deposited. While the conversion to a state charter would have no impact on the banks’ current depositors or borrowers, once the bank charter changed, depositors and borrowers would no longer be considered members with the right to attend meetings and vote on proposals.
Two weeks before, on April 25, Wilson had sent a letter to all members, notifying them of the upcoming meeting on May 27 when members could vote on the proposal to merge with Harbor State Bank. Wilson emphasized in his letter that members were under no obligation to attend and that those unable to attend would have their proxies voted in favor of the charter change and the acquisition “unless you indicate otherwise.”
Wilson didn’t expect a large turnout since at the first annual meeting only two members shoed up and at the second, only one member did. In neither case were any questions asked or any comments made. Yet, shortly after the notice of the May 27 meeting went out, branch managers had received dozens of phone calls from members consumed about what the change in charter would mean and whether they should attend the meeting. The branch managers had asked Nancy Brock for some guidance on what to tell the members. Wilson had told Brock that he thought it wasn’t worth depositors’ time to attend the meeting, since all the issues were clearly stated in the letter they received. However, members were entitled to vote and they couldn’t be told not to attend.
Feeling that the situation called for a quick response, Brock went off to write an email to the branch managers. Someone leaked it to the press and Wilson now faced a crisis that was growing bigger by the minute.
Questions:
1. How do you evaluate the message Wilson gave Brock? Brock’s Email? The April 25 letter?
2. Did flaws in the use of content, logic, evidence, or argument lead to this problem?
3. What messages does Cuttyhunk Bank need to send out now? From whom? How?