Lowell-based Butler Bank (above) and Marlborough Co-Operative Bank plan to merge their holding companies by the beginning of April.
Two Massachusetts cooperative banks separated by five towns and 31 miles plan to merge their holding companies by April 1, pending approval from regulators and their corporators.
The physical distance between Lowell-based Butler Bank, which has $202 million in assets, and Marlborough Co-Operative Bank, which has $85 million, makes the plan a bit unusual in that merging institutions tend to be in neighboring communities.
It’s close to a first: This will be only the third time in Bay State history – and the first time in eastern Massachusetts – that two mutual holding companies of cooperative banks merge.
“I think it’s a transaction that will attract some attention from the banking community, because there are many more institutions in eastern Massachusetts, and they continue to talk about creative ways they can affiliate,” said Stanley Ragalevsky, a Boston attorney representing Butler Bank.
Roughly 190 of Massachusetts’ 210 banks are east of the Connecticut River, he added.
But Marlborough Co-Operative President and Chief Executive Officer Janet M. Bruno and Butler Bank President and Chief Executive Officer John H. Pearson Jr. have other things in common – and ideas.
“Janet and I have known each other for 15 years. We respect each other as bankers,” Pearson said.
“Perhaps through additional acquisitions or branching we can close the [physical] gap,” Bruno added.
The two banks also have complementary specialties, Bruno noted.
“They [Butler Bank] are very well-known for their construction lending. We do one- to four-family and consumer lending,” she said.
Pearson said the holding company merger will allow both banks to keep their names and community roots while combining resources and assets. For example, he said, the banks will now be able to offer larger loans because the new, combined mutual holding company will have $300 million in assets.
Bruno said it was important for Marlborough Co-Operative to maintain its autonomy by not merging into another bank.
“Community institutions lend to the communities we serve, where we understand the temperature,” she said, explaining that a larger, merged institution could lose some of that personal touch.
With merged holding companies, the banks also eventually will be able to save money by combining the compliance, information technology, human resources, marketing and advertising departments each currently maintains, Bruno and Pearson said.
Both insist no jobs will be lost in the anticipated transaction. There will be more jobs to fill, more computers to maintain and marketing still required for each institution, Bruno explained.
In fact, Pearson said, Butler Bank has 10 open positions now, including tellers, personal bankers and senior commercial-construction lenders.
Pearson and Bruno will remain presidents of their respective banks in the holding company merger. Pearson will become chief executive officer and chairman of the to-be-formed mutual holding company board, while Bruno will be its vice chairman, president and chief operating officer.
Management of the banks’ individual boards will remain the same for at least two years, Ragalevsky said.
‘A Bank Affiliation’
Mutual banks generally form holding companies for one of two reasons, Ragalevsky noted: most often as a means of augmenting their capital by selling trust-preferred securities, or, secondarily, as a precursor to a holding company merger, which allows two institutions to keep a degree of independence.
Bruno formed Marlborough Co-Operative’s in 1999.
“I was hopeful to accomplish a bank affiliation,” she said, but during the booming market of the early 2000s, it didn’t seem necessary.
“Now it is more difficult to attract deposits,” she added. “There are so many banks and, as we become more regulated, there are more costs in the back-office operations,” which banks want to share.
There’s also the consideration of shrinking net-interest margins, as an inverted yield curve has caused short-term interest rates at which banks buy deposits to nearly approximate the long-term yield on their loan portfolio.
The combined factors make now the right time to merge holding companies, according to Bruno.
Pearson said Butler’s board approved its mutual holding company about 10 months ago.
“It gives you opportunities, such as serving your customers better by making larger loans or purchasing businesses such as insurance agencies that we don’t have the right to do as a bank,” he explained.
Under Pearson’s watch, Butler Bank has grown fast – “a staggering 30 percent annual growth” in recent years, according to a statement released last month announcing the planned merger.
From 2004 to 2005, Butler Bank’s assets grew by about 20 percent, from $115.1 million to $138.2 million. In the past year, that jumped to the current $202 million.
Such growth is more typical of a stock-owned bank. But the current figure reflects an increase in both deposits and money borrowed from the Federal Home Loan Bank, according to Butler’s Call Report filed Sept. 30 with the Federal Deposit Insurance Corp.
Ragalevsky said banks like Butler whose holding companies issue trust-preferred securities typically grow assets through both organic deposit growth and the use of “leverage transactions,” in which substantial sums are borrowed at lower rates from the FHLB and lent out to borrowers at higher rates.
As deposits continue to grow over time, the FHLB funds are often paid down, Ragalevsky said. If the bank can earn its “spread” in a larger asset pool, it can make more money and ultimately retire the trust-preferred securities, replacing them with earnings, he explained.
Marlborough Co-Operative’s assets grew approximately $1 million from 2004 to 2005, when they reached $85 million.
Pearson said Butler Bank’s recent growth is the result of careful planning. About three years ago, he said, he and his colleagues saw that the mortgage market would be shrinking.
They formed a “very large sales force” and sent its members out on the road, looking for builders with whom to partner, Pearson said, and that’s been working out well.
Both banks predict that their combined assets will grow at a rate of at least 20 percent a year, according to the merger announcement. Factors such as consolidated administrative and business functions, and complementary loan specialties, also will contribute to the equation.
Another holding company merger joined Williamstown Savings Bank and Hoosac Bank, both based in Williamstown, into MountainOne Financial Partners in 2002.
“From everything I know about it, it’s been successful,” Ragalevsky said. “They’ve realized some efficiencies, and it’s one of the most successful mutuals in the state.”
Bruno said the cooperative bank structure doesn’t make a holding company merger any more or less difficult – although she added that it’s only been recently that cooperatives started to make that kind of leap.
