STANLEY V. RAGALEVSKY
Current activity ‘startling’
In the first two months of 2007, eight bank merger applications are pending with the Massachusetts Division of Banks, with another one already finalized.
The merger between DanversBank and BankMalden – combining two mutual savings institutions – was completed last week. Seven more retail bank mergers are pending, as is the joining of two wholesale banks – Investors Bank and State Street.
Two federally chartered banks, Mutual Bank in Whitman and Security Federal Savings of Brockton, also recently merged.
All this activity puts the Bay State well on its way to surpassing the nine-per-year average it’s maintained for the past 20 years, according to Daniel J. Forte, president and chief executive officer of the Massachusetts Bankers Association. In 2006, just one merger was completed, when Salem Five acquired Heritage Co-operative Bank.
Stanley V. Ragalevsky, a partner with Boston law firm Kirkpatrick & Lockhart Preston Gates Ellis who represents clients in at least three of the pending mergers, called the current rate of activity “startling.”
Mergers are more common between stock-owned institutions, whose main fiduciary duty is to maximize stockholder profits, Ragalevsky said during a February presentation at a Massachusetts Bankers Association seminar. Depositor-owned mutuals, by contrast, must satisfy five constituencies: the community, customers, employees, officers and directors – in any merger transaction, he said.
Ken Ehrlich, chief of the banking practice at Nutter, McClennen & Fish in Boston, which represents banks in three pending and one recently completed merger, predicted that at the current rate, the roster of 208 banks currently operating in Massachusetts may shrink by as many as 15 before the end of the year.
Ehrlich said increased regulatory compliance costs and the so-called inverted yield curve – the name for the unusual, current situation when interest rates on longer-term U.S. Treasury notes fall below those of the overnight federal funds rate and short-term Treasury bills – are to blame.
The inverted yield curve effectively lessens the spread between interest a bank earns on loans and what it pays out on deposits, and has had the result of producing smaller profit margins for banks.
CEOs involved in pending applications agree that mergers, and talk of them, recently have become more prevalent on local banking scene. Thomas F. Lyons of Fall River-based BankFive described the current environment as a merger boom.
Stephen G. Crowe, whose MountainOne Financial Partners holding company already parents two western Massachusetts banks and plans to merge holding companies with a third – South Coastal Bank Holdings, with is based clear across the state in Rockland – this year, expects merger activity will continue at a brisk clip.
“I’ve been talking to banks [about potential mergers] for the past two years,” Crowe said. “I’ve even had conversations with banks in Vermont.”
Crowe said his colleagues all over the state are talking about mergers as a way to deal with a tough competitive and regulatory environment by becoming more efficient.
“I do think we’ll be seeing more of them,” he said.
Forte said the current climate is somewhat unique, since it includes a higher percentage of mutual banks joining forces.
But 70 percent of Massachusetts banks are mutuals, he pointed out, so the increase in the number of mutual banks involved in mergers is, in part, driven by sheer numbers.
Forte said banking in many ways is little different than many other industries in the throes of consolidation these days. Banks, however, have been especially challenged by huge competitive changes in recent years, he said.
For example, 20 years ago, mortgage companies were just emerging as competitors for loans, he said. They’ve now taken over 70 percent of the residential mortgage market.
The face of credit unions is also changing, with many growing larger and starting to offer commercial loans.
“Keep in mind that both of these are industries not regulated at the same level as banks,” Forte said of the mounting competitive pressures.
Forte and other industry watches say that each of the recently announced mergers has unique characteristics, but taken together they represent an emerging trend that’s likely to continue for the foreseeable future.
One mutual-mutual bank merger now pending is that of $239 million-asset Ipswich Co-operative into $554 million-asset Newburyport-based Institution for Savings.
Both banks are more than a century old. They’re located in neighboring towns and have similar goals, according to their CEOs.
Ipswich Co-operative’s CEO Michael Jones said the merger is a way to stay competitive for the long term – and to stay mutual.
“It’s all about sustainability,” he said. With competitive pressures from less-regulated institutions mounting, banks must be realistic and strive to achieve better economies of scale if they are to stay viable, he said.
“Someone will end up paying – either our employees or customers who we can’t loan to at as good a rate, or the community we can’t donate to as much,” he said.
So, over a series of lunchtime conversations during the past two years, Jones and Institution for Savings President and CEO Mark Welch formed their plan.
If the merger goes through as scheduled, on July 1, Jones, who’s 39, will become executive vice president and chief operating officer of the merged banks. Ipswich Co-operative’s branches will bear Institution for Savings’ name. The new combined bank will have assets of close to $800 million, giving it the capacity to make larger loans.
Welch, 57, will retain his title.
“This isn’t about us trying to be a big regional player,” Welch said. “This is just a deal that was too good to pass up.”
Welch predicted the interest-margin squeeze banks are facing will improve, but not as much as some would like.
“Everything hanging out there is conspiring to make it difficult for banks of less than $500 million to make a go of it,” he said.
New Models
BankFive President and CEO Lyons said his $605 million-asset Fall River institution wasn’t looking to merge, but started to think about it when approached by an investment banker retained by the privately owned, $75 million-asset Luzo Community Bank.
“The more time we spent with the Luzo people, particularly with the chairman, Mr. [Jose] Gouveia, the more we found we had a lot in common,” he said.
One of the most attractive things was Luzo’s location: Its two branches are in New Bedford, a community to which BankFive wanted to expand.
Luzo, which serves many people in New Bedford’s Portuguese community, had found itself unable to offer products and services to meet its customers’ needs, Lyons said. Gouveia, who did not return a phone call from Banker & Tradesman, told the New Bedford Standard-Times that his bank had been losing customers, especially in the fishing industry, because it could not extend sufficient lines of credit.
Luzo’s single-page Web site lists its phone number and branch addresses on County Street and Acushnet Avenue in the city. It does not have any automated teller machines, Lyons said.
He said he thought the fact that 75 percent of BankFive’s employees are Portuguese, and that it’s also based on the South Coast, was attractive to Gouveia.
Gouveia, who is 75, told another publication that he’s “ready to take a back seat,” according to a press release about the merger. He will retain no official title once the transaction is complete, possibly by early September.
Lyons said BankFive was able to purchase Luzo, which is a stock bank, because it formed a mutual holding company more than a year ago.
“We wanted to be able to take advantage of any opportunities that came along,” he said of the decision by his mutual institution to create a parent holding company.
One unique mutual partnership being expanded isn’t actually a bank merger at all. It’s the merger of North Adams-based MountainOne Financial Partners, a $650 million-asset holding company that parents Hoosac Bank and Williamstown Savings Bank, with South Coastal Holdings, the parent of $250 million-asset South Coastal Bank in Rockland.
The new partnership represents the first time that a mutual holding company anywhere will parent three banks, said Crowe, former CEO of Williamstown Savings Bank and now president and CEO of MountainOne.
He and former Hoosac Bank President Thomas W. Kelly, who’s now head of Bank of Newport, in Rhode Island, merged their banks’ holding companies in 2002.
That merger of mutual holding companies also was a first-of-its-kind event nationally, and an example only a few such holding companies have followed to date, Crowe said. Holding company mergers are more common among stock banks.
But Crowe and South Coastal Holdings Chairman, President and CEO John J. O’Connor III predict the merged trio will operate well together.
In holding company mergers, the banks involved maintain their independence and individual boards, Crowe explained, but share resources and have access to each others’ capital for making loans.
South Coastal needed access to that capital, said O’Connor. “And we represented something of a growth engine to them.”
South Coastal has a strong commercial lending practice in southeastern Massachusetts, which has better prospects for growth than the western part of the state, he said.
South Coastal’s corporators approved the holding company merger just last week – bringing the plan one step closer to fruition.
“We think it’s a nice model, and we welcome anyone who’s interested” in expanding the number of institutions under the holding company, Crowe said. “This is part of our strategic plan, as opposed to going public to stay afloat.”
As applications for proposed mergers increase – and with them, on occasion, some layoffs as the merging entities seek to streamline back-office operations – MBA’s Forte said the combined entities are positioning themselves for long-term success.
“We still have a very strong and very healthy banking industry in this state. The institutions that are merging are strong,” Forte said.
Merging is a way some banks are rising to meet new challenges, Forte said, and does not represent a crisis in the banking sector. Mergers, however, likely will remain a fixture given the current economic landscape, he added.
