Banking often imitates life, in that there’s a certain natural order to things – a kind of food chain, if you will.
New banks are born and in their early stages struggle to either survive and grow, or whither and die. Those that do survive are, in turn, either gobbled up by larger rivals – in turn helping the larger companies grow – or are left unmolested to continue their own growth. In time, the prey becomes the predator, and the cycle repeats. The small fry are eaten by the middle-sized fish, the middle-sized fish sought out by the apex predators.
In business, as in life, it has happened this way for centuries.
A few months ago, we lamented in this space about the lack of bank startups, both nationally and in Massachusetts. The de novo situation, or lack thereof, hasn’t changed much since.
What has changed, or at least picked up, is the merger and acquisition market – those medium and large predators feeding on their smaller and/or weaker rivals. The past few months have been witness to a veritable bank M&A feeding frenzy: Brookline Bancorp acquiring First Ipswich; Eastern Bank securing regulatory approval for its $163 million takeover of Wainwright Bank; New Alliance swallowed by First Niagara; Berkshire Bank buying rival Legacy Bank. And that’s by no means a complete list.
The latest deal involves Connecticut’s steadily growing People’s United Bank agreeing to acquire homegrown Danversbank for what some Bloomberg analysts are calling a “hefty” $493 million.
Three years ago to the month, Danvers went public, and since then has rapidly expanded into the lucrative Boston market. The construction debris and “coming soon” banners still plaster their newest Post Office Square locations. For a bank like People’s United – itself trying to claw its way into Boston with new locations downtown and at the Prudential Center – Danvers looked like a tasty morsel indeed. And so, like a hungry high-roller at an upscale steakhouse, they paid for the best meal they could get.
Lest anyone think we’re being critical of the Danvers deal, or any other previously announced acquisition, we assure you, we’re not. After going public, as Danvers did, it’s generally only a matter of time before the pressures of “maximizing shareholder value” begin to take their toll. One day after the acquisition announcement, Danvers shares climbed 28 percent, according to Bloomberg. That’s a whole lot of shareholder value.
We understand the need and growth implications inherent in the merger and acquisition market. Like we mentioned above, it’s how the banking circle of life works.
But we’re noticing a disturbing trend of late that causes pause, if not outright concern – the bottom of the food chain is falling out.
The heated merger market, coupled with an essentially frozen de novo situation, is leading to a kind of overfishing of the local bank market. Predators are running out of easy prey, and at some point, we fear, will have no choice but to turn on each other.
Maybe that’s a good thing. Survival of the fittest is a harsh mantra, but it has served us well so far. And maybe, once the last bite is taken and the bank feeding frenzy dissipates, we’ll be left with the kind of peaceful waters more conducive to the new bank growth that has to happen in the vacuum left by the recent disappearance of banking baitfish.
We hope so. As we wrote in August, in the wake of a story highlighting the paltry de novo situation in Massachusetts: “We think the time to start fresh is right now. A bank starting today has never made a failed business loan. Has never had to cut principal balance and lose money on a struggling homeowner. Has never watched the next great downtown development project crash and burn for lack of financing and options.”
Continued growth cannot happen without fuel. And right now, we’re running out. We can only hope it’s only one more down cycle in the ongoing banking circle of life.
