Drew Field
Direct Public Offerings
Case StudiesCalifornia Financial Holding Company

California Financial Holding Company

Stockton Savings Bank had been a small, local savings and loan from the 1930s until its management chose to become a publicly traded institution in 1983. It was one of the early "conversions" from the mutual to stock form of ownership. These "mutual," banks are technically owned by their borrowers and depositors. As a practical matter, there is no real economic ownership. The legal structure is more like a nonprofit social club than the typical business corporation. Born in Depression legislation, these mutuals were a populist concept of families putting in their savings so that their neighbors could take out loans to buy homes.

Federal and state regulators began allowing these mutuals to issue stock in 1982, primarily as a way to get more capital into the industry. In the complex process for conversion, one rule required that the existing "owners," the borrower and depositor members, would get the first chance to buy the new shares, in a mandated "direct community marketing." Elaborate formulas would proportion oversold shares among the members, in accordance with the amount and timing of their deposits. People who opened accounts, or increased their balances, after the offering plans were announced, would only get shares left over after the first allocation.

More than the total $6 million in shares were subscribed by the depositors and borrowers, nearly all of whom were in the bank's Northern California Central Valley neighborhood. Some "outsiders" from San Francisco, who opened accounts after learning about the offering, were largely shut out, as local customers subscribed for the entire offering.

All shares were marketed directly by the bank, following the same program as New Mexico Financial. A special element was added, to try making friends with all the securities brokers in the area, who would be receiving no commissions in the offering. They were invited for cocktails and snacks at the Country Club, where officers explained the offering -- why it was being done and how the regulations called for direct marketing. Questions were encouraged. The purpose was to help the brokers avoid the discomfort of learning about the offering from their customers, and to have them be able to respond favorably when asked their opinion.

Most of the company's investors had never owned corporate shares before and much of the education process was to explain the risk and potential reward. One farmer, who became one of the larger shareowners, had said he only invested "where I can kick the dirt." The bank's president, David Rea, invited him to come kick his desk anytime he felt like it. Today, the company is ten times the size, at over a billion dollars in assets, and has become the dominant financial institution in its market.

After the offering, two local offices of national brokerage firms began making a trading market in the shares. One of them became lead underwriter in the bank's second public offering. California Financial Holding Company was created to exchange its shares for those of the bank and, at the end of 1996, some 13 years after the DPO, an acquisition was announced. The original shareowners stood to receive about ten times their original investment, in addition to their stream of dividends over the years. Both David Rea, who has been CEO of the company since 1955, and Robert Kavanaugh, who was the bank's CFO from 1960 until his present COO position, have been able to build significant ownership of the bank's shares as well. It was announced in December 1996 that the company would be acquired, at a price equal to more than ten times the original DPO offering price.