Corrections or additions?
These stories by Nancy Kennedy and Barbara Fox were published in U.S. 1 Newspaper
on March 18, 1998. All rights reserved.
Carnegie: The Little Bank That Could
Back in Carnegie Bank’s early days in 1988, the startup’s
handful of officers and employees dubbed the place "The Firehouse."
At any hour of the day someone was likely to be there, working hard
to get the new venture on its feet. Ten years later, the bank is by
any measure a success: a thriving commercial bank with eight branch
offices, $430 million in assets and a $280 million loan portfolio.
In December it agreed to be acquired by Sovereign Bancorp in a transaction
that no one could call a fire sale.
In the agreement, Sovereign — based in Wyomissing, Pennsylvania,
but with a growing central New Jersey presence — will exchange
$35.50 in Sovereign common stock for each outstanding share of Carnegie
Bancorp common stock, for a total of about $94 million in Sovereign
stock. The price reflects 282 percent of Carnegie’s tangible book
value and 20.2 times Carnegie’s projected 1998 earnings — a coup
for Carnegie, even in this era of record-breaking mega-mergers.
Ten years ago banks were merging right and left. Larger, not smaller,
was the trend. Yet seven investors with no banking experience saw
a niche and opened their bank just six months before the bank failures
started to hit the headlines. "Take a look at the banking industry
from 1987 to 1992 when so many banks were closed or forced to merge
because of the economy," says Thomas L. Gray Jr., CEO. "It
was a risky time, for sure. If you did it wrong you would get into
a lot of trouble. But we did it right."
Carnegie Bancorp will be turned over to Sovereign in June, and three
Carnegie officers — CEO Thomas L. Gray, Mark A. Wolters, and Richard
P. Rosa — will leave to start over, this time as directors at
a commercial bank in Palm Beach, Florida.
"Carnegie got a very attractive price," says Claire Percarpio,
a Janney Montgomery Scott analyst in Philadelphia who follows the
bank. "The return was phenomenal for the bank’s investors."
Phenomenal, indeed. If you’re one of Carnegie’s 660 shareholders,
you can pat yourself on the back for this one.
Say you got in on the bank’s initial public offering in 1994, for
$13.125 per unit, consisting of one share and a warrant to buy another
share. On the face of it, the merger price of $35.50 a share four
years later looks good enough.
But then adjust the IPO price to reflect the three 5 percent stock
dividends shareholders got from 1995-’97, and the story gets even
more interesting. Your effective price per share drops to $11.34,
increasing your profit to more than triple your original investment.
And don’t forget the warrant. If you exercised the warrant at the
exercise price of $15.09 a share when it was set to expire in August,
1997, as 99.8 percent of the bank’s shareholders did, you now hold
an investment worth more than $55 — $35.50 for your share, plus
a gain of about $20 on the warrant share.
Investors who came on board in 1989, when the bank raised $2 million
in a stock offering, bought in at $16 a share. That looks high, but
adjusted for seven annual 5 percent stock dividends, the effective
price is $11.37 a share.
If you were one of the original investors who helped the bank raise
its initial $6 million in capital in 1988, you make out even better,
having gotten in at $10 a share. Adjust that price for the same seven
5 percent stock dividends, and your effective share price falls to
$7.11 a share — netting you a fivefold profit in 10 years’ time.
Even Sovereign admits that in its race to beat out the six other banks
interested in acquiring Carnegie, it didn’t even attempt to bargain
on price. "We’ve made 19 acquisitions in the last seven years,
and this is the highest price we’ve ever paid for a bank," says
Jay Sidhu, Sovereign’s president and chief executive officer.
The story of how Carnegie scored so big is not one brimming with tales
of a fledgling enterprise pulling back from the brink of disaster
or of lessons learned from disastrous forays into new territories.
"We had a vision and everything has gone according to plan,"
says Gray. "I never had a single sleepless night worrying about
whether or not we were going to make it."
Carnegie’s story begins in 1986, when the partners of
the Penns Neck Center Project began looking for a commercial bank
to anchor a small office center being outfitted in the old Penns Neck
School at the intersection of U.S. 1 and Alexander Road. Even then
talk was circulating about the eventual construction of a large scale
overpass at that intersection, but the developers were undeterred.
"We considered the property the 42nd and Broadway of Mercer County,"
recalls developer Peter Pantages of McCay Real Estate, based at Golden
Crest Corporate Center on Route 33. "It’s a great location for
a commercial bank, and our experience was that banks make good tenants.
They mind their own business, they pay their rent, and they help attract
About the same time, Gray, then chief executive officer of the Lafayette
Bank and Trust Company in Fairfield County, Connecticut, began to
speak to friends about his desire to be in on the chartering of a
new bank. It was, he says "on my lifelong checklist of things
In a typical friend-of-a-friend scenario, a colleague of Gray’s attended
a real estate closing in Princeton at which he met members of the
Penns Neck project. The idea of anchoring the building with a newly
chartered bank began to percolate.
Gray came down to meet with the Penn’s Neck group and look the location
over. "My recollections of the area were of passing through on
the way to Giants-Eagles preseason games, and it was all farmland
then. I was impressed by the explosion of population and business
and felt right away that this was a dynamic spot."
As a place to live and work, the booming Route 1 corridor appealed
to Gray, who was married and had a son in the fourth grade. "I’d
rather have the sound of trucks going by than the sound of critters
in my ear," he jokes.
In 1987, a group of eight investors, including Gray, began raising
the $6 million in capital required by the Federal Deposit Insurance
Corp. to charter Carnegie Bank. Trolling among friends, relatives
and business contacts, the group’s fundraising went along smoothly,
and the bank opened its doors in August, 1988.
The eight investor/founders — Bruce Mahon of McCay Real Estate;
Joseph Oakes of Princeton’s Acorn Financial Services; Michael E. Golden
of First Colonial Securities in Marlton; Jim Haas, owner of NutriSystems
franchises; Fox & Lazo’s John Burke; James Quackenbush of an Englewood-based
CPA firm; Don Williams of Princeton Equity Group; and Gray, —
were not only able to persuade investors to come up with the initial
$6 million, but also attract business to the bank in its startup days.
Aside from the Who’s Who group of investors, observers and bank executives
alike attribute Carnegie’s success to the niche it found and cultivated
among the Princeton business community.
"What attracted us to Carnegie was how it provided superior personal
service to its clearly defined niche of small to mid-size businesses
and high net worth individuals," says Sovereign’s Sidhu. "It’s
more of a culture, really, and one that has been superbly executed.
You feel it the minute you walk into a Carnegie Bank office."
Surprisingly, a community bank that targeted small businesses was
lacking in the Princeton area 10 years ago. It was a time when banks
were going through their first wave of consolidations, Pantages recalls,
and most Princeton area banks were "controlled out of Newark."
The smaller ones, including Nassau Savings, Amerifederal, and Cenlar,
soon would be embroiled in financial problems.
Gray started by assembling a team of 11 people, including two loan
executives lured away from Yardville National Bank; its chief lending
officer Mark Wolters, who came on as Carnegie’s vice president and
Loretta Lucchesi, office manager of Yardville’s loan department, as
a lending officer. Things were moving so fast — and often so informally
— that Wolters recalls some confusion about his early role that
has turned into a shared joke between him and Gray.
"When Tom brought potential customers around, I’d introduce myself
as the bank’s vice president and chief lending officer," Wolters
remembers. "It wasn’t until two years later that Tom told me he
was actually not only CEO and president, but acting as the chief lending
officer as well. I gave myself the title, I guess."
Carnegie’s first marketing strategy was a simple one: "Free Business
Checking" was the slogan that flew literally from a banner in
front of the bank’s new building at 619 Alexander Road, right in the
path of the proposed new interchange. (The bank enjoyed its high-visibility
location for years while the DOT ironed out the details of its Alexander
Road-Route 1 overpass. In 1995 the bank moved across the street to
600 Alexander Road, and the building was torn down — the condemnation
award is apparently still being negotiated.)
But beyond competing on price, the bank also stressed the personal
approach. In the early days, Gray and Mahon, the bank’s chairman,
hoofed around, dropping in on businesses to let them know the bank
was starting up. One of the doors they knocked on was Bill Robertshaw’s
ProCommunications on Witherspoon Street, a fast-growing telecommunications
company now called Signius.
"I attribute 100 percent of the bank’s success to its people,"
says Robertshaw. "My family has thoroughly enjoyed our association
with the bank, and Tom Gray, Mark Wolters and Loretta Lucchesi in
particular. They really shine with the personal touch. Everywhere
else you go, it’s `Take a number, take a seat,’ but Carnegie makes
you feel welcome when you deal with them."
Carnegie’s typical customer is a family-owned small
business, or a professional such as a doctor, lawyer or accountant
who is looking to borrow up to $5 million. Gray describes his bank’s
approach as "high touch." He stresses eyeball-to-eyeball contact
between the business owner and a lending officer who has the ultimate
power to make the decision of whether to do a deal.
"At a large bank, the decision maker usually has never seen the
customer," Gray says. "We have lending officers in each branch,
and they understand their market and have approval authority."
Decentralizing the lending process in this way, Gray says, allows
Carnegie to be more flexible than many banks. "A large bank will
say `We can’t do this deal because we have a policy against it,’"
Gray says. "Well, of course, our bank has policies, but we never
say no just for policy’s sake. And if we do say no, we try to suggest
other ways for the customer to reach his goal."
To illustrate how Carnegie tries to accommodate its customers, Wolters
relates an example from the bank’s ledgers. A businessman was renting
the space out of which his business operated, but it was up for sale
and he wanted to buy it. Unfortunately, he didn’t have the 20 percent
down payment. Instead, the loan officer — in this case Lucchesi
— suggested they look at his personal finances to see what they
"Looking at his home, I could see that he had a great deal of
equity built up," Lucchesi recalls. I suggested he take out a
home equity loan and use the cash to cover the down payment, which
he ultimately did."
Wolters says this example not only demonstrates Carnegie’s flexibility,
but also its approach to building business. "You don’t make a
lot of money on a home equity loan," he says, but in this instance
we made a lifelong customer."
Gray admits the bank had plenty of opportunity to make bad loans.
Shortly after the bank was chartered, buoyed by the confidence of
the booming 1980s economy, the U.S. banking industry nose-dived into
a mire of overly ambitious real estate loans, setting off a wave of
bank failures and government takeovers.
While plenty of potential business came Carnegie’s way as banks pulled
the plug on their lending operations, Gray said he had learned to
evaluate the merits of a deal from his first job after college as
a bank examiner with the U.S. Treasury Department.
The son of a Newark carpenter, Tom Gray had majored in English literature
at Seton Hall, Class of 1966, and stayed at Seton Hall for an MBA
in finance. His first CEO’s job came in 1972 with the $25 million
Peoples National Bank in Denville. "I had examined the bank the
year before and had come upon some problems," says Gray. "A
director called me to say `You had an awful lot to say about how that
bank should be run, why don’t you take a shot at it.’" Then Gray
took a four-year assignment to "clean up a few problems" at
Lafayette Bank and get it sold.
"I could see the mistakes banks were making — over-reliance
on collateral rather than on fundamental cash flow ability and ignoring
the fundamentals in favor of less tangible measures of a loan’s merit,"
"I would hear bank executives say they could judge the character
of a potential customer within 10 minutes and make a loan on that
basis. I thought that was the stupidest thing I’d ever heard. You
should be paying attention to the facts and figures, making an analysis
of the company and its history and of the industry," he says.
"Even if a person is passionate about his business, you still
want to go out and kick the tires, walk through the plant. We go to
the business site every time we make a loan," Gray says.
Consequently, Carnegie thrived even while other banks around it were
going out of business. Within four months of opening, the bank had
turned a profit. A year into the venture, the bank raised $2 million
in a stock offering — twice what it had hoped for — and opened
its first branch in Hamilton.
From then on, each time the bank wanted to open new offices —
ultimately in Hamilton, Marlton, Denville, Toms River, Montgomery,
Flemington and Langhorne — Gray says he looked for a "people
edge" before deciding on a location. Wolters even admits they
weren’t shy about poaching good lenders from other banks.
"We would go in and find who the players in that market were,
whose name came up time and again, because the value of any lender
is his or her relationship with the community," says Wolters.
Although conservative in its lending practices, the bank did make
loans that other banks might not have, taking risks that could have
soured. "If someone came in to a bank and said he owned a piece
of property free and clear and would like to build on it, even though
he had no experience as a contractor and had never dealt with the
trades, many banks would make the loan simply because of the equity,"
Wolters says. "I’d look for a carpenter who has been building
homes for someone else, has scraped together maybe 25 to 50 percent
of the down payment, and has a good reputation and a devoted following.
I’d back him any day of the week, because I think he would be the
one to succeed."
Despite a long record of continuous success, it was Carnegie’s 1994
initial public offering that really put the bank on the map and into
play as an acquisition candidate. It raised $9 million in the sale
of 690,000 units that began trading on the Nasdaq national market
system on September 9, 1994, opening at 13.125 per unit.
Over the years, the bank did dodge some bullets. Twice, it stuck its
toe in the water, trying new lines of business; twice it pulled back.
One foray was into the mortgage banking business, a departure from
its focus on commercial lending, and the other was into the sale of
mutual funds and annuities. Both times, says Gray, there was "little
downside for us," but he also found that the upside wasn’t compelling
enough to continue.
But the most significant escape the bank pulled off was its plan to
merge with Philadelphia-based Regent Bancshares Corp., announced in
1995 and scuttled more than a year later. Regent was the slightly
larger bank, with $251 million in assets to Carnegie’s $227 million,
but during the extended merger process a problem came to light with
Regent’s insurance premium financing business — the business of
lending to drivers in assigned risk pools in which the borrower comes
up with 10 percent of the payment up front, and the rest is due within
When the merger talks began, Regent held $2 million of the loans.
By the end of 1995, they had $17 million, Gray says. Carnegie discovered
that the default rate for the first payment was 11 percent, while
the overall default rate was a whopping 40 percent. After extending
the merger deadline to September, 1996, while the problem was examined,
the merger agreement was finally ended in January, 1997.
"We were disappointed the merger didn’t happen. It would have
been a natural fit for expansion of our market, but we were delighted
that the problem was spotted before it was too late," Gray says.
In doling out its own loans, Carnegie Bank seems to
have made some good bets. It has a nonperforming loan rate of just
1.6 percent, according to a survey done by Ryan, Beck & Co. of Livingston
last year for the New Jersey Bankers Association, which is about average
for the New Jersey banking industry. But Wolters points out that the
figure is distorted by one large loan on the bank’s books that carries
an 80 percent federal guarantee.
And Carnegie’s approach to lending has certainly paid off. In addition
to building up the loan portfolio to its current $280 million size,
the bank has maintained a healthy net interest margin, which is the
spread between the interest income from loans and the interest expense
paid out on deposit accounts. Currently, the margin is in the 5 percent
range, Wolters says, up from 1997’s 4.5 percent. That compares favorably
to the industry, and beats the 3 percent margin that Sovereign currently
Most impressive, the bank has reported an average annual growth rate
of 32 percent in its 10 years of existence, Gray says. From its beginnings
as the 92nd smallest bank in New Jersey out of 92 banks, it is now
37th largest out of 144 state-based banks and the 16th largest commercial
bank, according to the NJBA survey. Its 1997 return on assets was
0.93 percent, higher than the 0.72 reported by New Jersey banks on
By all accounts, the bank hasn’t reported numbers like these by competing
on price. "Looking for a loan is not like going into the grocery
store and buying the cheapest brand of ketchup," says Nancy Witt,
who with her husband, Ron, owns Cranbury-based Sweetwater Construction
Corp., a bank customer. "Carnegie doesn’t give its services away.
They’re always at the top end of the scale, but I think it’s adequate
payback for the higher level of risk they often take and the services
Sovereign, an $18 billion bank holding company, acknowledges the success
of Carnegie’s formula and intends to leave things as they are. Sovereign
has extended job offers to each of the bank’s 13 loan officers along
with retention bonuses and envisions no changes in the bank’s lending
"Carnegie has a style that has worked very well in its markets,"
Sovereign’s Sidhu says. "Sovereign has a much bigger commercial
loan portfolio — $800 million — but Carnegie does it far better
than Sovereign does. We are very pleased with the quality of their
loan portfolio and their way of delivering services."
One thing that won’t remain is one of the chief reasons for the bank’s
success — Gray himself. When he turns Carnegie Bancorp over to
Sovereign in June, he will be worth a couple of million dollars. With
four other Carnegie Bank stalwarts (Mahon, Golden, Wolters, and Rich
Rosa, chief financial officer) he raised $8 million in personal investments
and private placements to buy Admiralty Bank, a $40 million Palm Beach,
Florida, commercial bank. "Eight million is a hell of a lot of
money for a kid growing up in Newark, New Jersey," Gray says.
As a director (a CEO has already been appointed) Gray expects to spend
one long weekend a month in Florida, overseeing operations he says
will be patterned after Carnegie’s. In July Admiralty is slated for
a $12 million IPO. In words reminiscent of 10 years ago, Gray describes
it as "a spectacular banking opportunity in an area that is growing
in leaps and bounds."
Now divorced, with his son in his sophomore year at Syracuse University,
Gray isn’t sure what else lies ahead for him. "It was a wonderful
time for us and a wonderful opportunity," Gray says. "It’s
a bittersweet ending — the 10 years you spend on something like
this is bound to end with some tears — but it was the right time
to sell and it would have been a shame to miss it."
— by Nancy Kennedy
If you bought stock in Trenton Savings Bank two years
ago, based on the current price, you would have quadrupled your money.
In August, 1995, when the bank formed a mutual holding company, it
sold 35 percent of the holding company to the bank’s depositors. The
$31 million stock offering was so successful that two-thirds of the
would-be buyers had to be turned away.
Those who were depositors in 1996 have a second chance now. In its
second stage of going public TSB will again offer stock — the
remaining 65 percent — again to its depositor members, this time
in an effort to raise from $150 to $238 million. It has scheduled
a meeting at the Hyatt on Thursday, March 19, at 7 p.m. to explain
the deal. Call 609-844-1020 for information or if you want to attend
on March 19. Says the corporate secretary, Bob Hollenbeck: "We
are expecting a pretty good turnout, about 300 people."
You can buy (subscribe to) this new stock if you were a depositor
on August 31, 1996. But if too many would-be buyers line up at the
door, they will be selected according to the size of their deposits.
"In 1995 we offered $30 million at $10 a share, and our depositors
subscribed for $90 million, so $60 million was turned back," warns
That $10 stock was recently appraised at from $24 to $38 and it will
split to from 2.5 shares up to 3.8 shares, depending on how well the
new stock sells. Meanwhile, on the strength of the share offering,
the stock price has risen to $43.
Trenton Savings Bank was a mutual thrift bank "owned" by its
depositor members. In 1995 it formed Peoples Bancorp, the fourth largest
mutual holding company in the state, owned by the same depositor members
(65 percent) and also by those who bought stock (35 percent). By April
1, after the conversion, TSB will be a full stock (publicly held)
savings bank with $638.8 million in assets. Peoples Bancorp will be
classified, along with Summit Bancorp, as a bank holding company,
the ninth largest in New Jersey. As such it will be able to buy lines
of businesses that regulations might keep a savings bank from acquiring.
The name will not change and stock will still trade on Nasdaq as
Because the holding company will operate under federal regulations
the underwriter (Friedman Billings & Ramsey) and the attorneys (Luse
Lehman et al) are based in Washington, D.C. The contract for 35,000
copies of the 150-page prospectus went to Philadelphia-based printers,
Packard Press. Administrative costs for the offering will amount to
Subscriptions close on Friday, March 27, at noon, and getting your
bid in early won’t help. "If there were a massive oversubscription
there would be cutbacks," says Hollenbeck. On Monday, March 30,
at 10 a.m. the depositor/members will have a short meeting at bank
headquarters on Franklin Corner Road to approve the reorganization,
mostly by proxy. On Tuesday, March 31, at 10 a.m., the stockholders
will meet, again mostly by proxy.
Bank officials won’t specify exactly what TSB and Peoples plan to
do with the new money. "The stock offering will continue the prudent
but planned growth of the bank," says Lee Bellarmino, executive
vice president and chief operations officer. "We do anticipate,
and it is built into the plan, to have some new branching as well
as some strong possibility of acquisitions. We have talked about not
just the traditional companies but related companies that provide
Bellarmino isn’t ready to say just what nontraditional companies TSB
might buy, but take a look at its recent moves. To make TSB more competitive
in the business market it hired Frank Sannella from Meridian Bank
to open TSBusiness Finance, which is supposed to provide structured
financing and asset-based financing to commercial businesses. "That
is still in its start-up mode," says Bellarmino.
The most recent acquisitions are $80 million Burlington County Bank
(with two branches) and the $4 million Ocean-county based Manchester
Trust Bank (a state chartered trust bank that does not accept deposits
or make loans) that gives TSB a bigger presence in Ocean County.
TSB is in a buying mode just as First Union prepares to dump some
of the locations it shares with just-acquired CoreStates. Will it
pick up some of the First Union or CoreStates duplicates? Says
Bellarmino: "A lot of the community banks will be looking with
interest at what First Union intends to do with the overlapping branches."
by Barbara Fox
Franklin Corner Road, Lawrenceville 08648. Wendell T. Breithaupt,
president and CEO. 609-844-3100; fax, 609-844-0101. Branches in Ewing,
Hamilton, Robbinsville, Pennington, Mercerville, Trenton, West Windsor,
Lawrenceville, Burlington, and Ocean counties.
Buoyed by good news in the banking business — mergers
as big as First Union with CoreStates and as local as Sovereign and
Carnegie Bank — Patrick Ryan is leaving the beer business to start
a bank. He and his cohorts started working on a community bank charter
last November and hope to submit it to state regulators in April.
Their future institution, Hopewell Valley Community Bank, has filed
plans for a site review with Hopewell Township’s planning board to
occupy space at opposite Pennington Market in the 4 Route 31 building
owned by Chester Urbanski, a dentist.
"This is exactly the way banks have been formed for 250 years,"
says Ryan, now executive vice president of Ritchie & Page, a beer
distributorship in Trenton. "Like-minded people get together,
organize their assets and their resources, and organize the bank."
"There has never been a better environment for banking than now,"
says Ryan. "We are very aware of and cognizant of the challenge
we face in competing with other organizations, those as large as First
Union and those both locally based and as well financed as Trenton
Savings Bank and Yardville."
The minimum capital for a new bank is $5 million, and a minimum of
seven organizers is responsible for putting up at least 25 percent
of that. They must proffer 20 percent of that pledge in cash to fund
front-end organizational expense.
The investor/founder board includes Joseph Gonzalez, president of
the New Jersey Business & Industry Association; John Hansbury of
Hansbury-Gibbons Associates on Bear Tavern Road; Chris McManimon,
former owner of the Book Peddlers; Judith Perschilli, president and
CEO of St. Francis Medical Center in Trenton; Steve Picco, a partner
in the law firm of Reed Smith Shaw & McClay; Bob Prewitt, president
of Dana Communications on East Broad in Hopewell; Kathryn Ryan, Patrick’s
mother and principal owner of Ritchie & Page; and Jim Vogelsong, formerly
president and owner of Data Archives Inc.
"I’m not a banker and will not become a banker. I will be the
organizer," says Ryan.
Ryan’s late father, a self-made man and Anheuser Busch sales executive,
acquired the Budweiser distribution rights in 1963. When his father
died, his uncle (a minority owner) bought the business, fulfilling
a 25-year-old agreement. "In a couple of weeks we will close the
deal," says Ryan, "and I have to do something. I was looking
for a job at a venture that had a lot of different aspects and different
challenges, and banking fit the bill."
Ryan went to Hopewell Valley High School and the University of Virginia,
Class of 1971. After two years in the U.S. Army military police, he
was a federal criminal investigator working on white collar crime
for the General Services Administration. He went back to law school
at UVA, and practiced in Virginia until called on to manage a family
firm, an aluminum construction company in Florida, in 1981. In 1982
he moved north to work at Ritchie & Page.
One of his sisters coaches basketball at the University of Virginia
and the other is a computer analyst for the Army. Until 1993 his wife,
Mika, coached varsity basketball at Trenton State. She now runs the
Hopewell Valley basketball league. They have three school-age daughters.
"Selling beer is a very repetitive business," says Ryan, "and
I am more comfortable in handling a business where things are different.
In banking, we will be working with everyone from the local barber
to makers of high tech communications devices." In contrast, says
Ryan, "when I cleaned out my father’s papers he had a 1958 marketing
plan for St. Louis. Change the names and we could use it today."
by Barbara Fox
Corrections or additions?
This page is published by PrincetonInfo.com
— the web site for U.S. 1 Newspaper in Princeton, New Jersey.