Like all banks, the $225 million Hometown Bank would like to grow. But it has some obstacles to consider – namely, the thicket of bank branches that surround Hometown’s home base of Webster.

According to Hometown CEO Matthew Sosik, the bank is pretty much surrounded. To the north, Worcester seems to have a bank or credit union on every corner. To the west, there’s Springfield, which is home to three banks and eight credit unions. And to the south there’s Putnam, Conn., another relatively crowded locale.

“It’s overbanked, by any definition,” Sosik told Banker & Tradesman.

Wading into the fray with completely new branches seemed like a risky prospect. Instead, Hometown leapt over the city of Worcester entirely, agreeing to merge with the struggling Athol-Clinton Cooperative Bank, which has two branches at the northern end of Worcester County. The expected merger was announced at the end of January, and shareholders at both institutions voted in separate meetings last week to approve the deal.

Portfolio Pressures

Hometown officials said they see a good opportunity to grow in a less competitive banking environment, and plan to bring their commercial business to the residential-only lending operations of Athol-Clinton. The $85 million Athol-Clinton, for its part, will get needed resources as it fights rising costs compounded by a messy loan portfolio.

Athol-Clinton was issued an FDIC consent order – a regulatory warning – in early 2010, ordering it to clean up its portfolio and operations after losses hit the bank’s balance sheet. At the end of the fourth quarter, the bank had $9.2 million worth of loans in nonaccrual status, loans more than 90 days overdue on which the bank had stopped accruing interest.

Steven Duvarney, Athol-Clinton’s chairman, said loan delinquencies have stabilized over the winter, and the bank is still analyzing which of those loans will result in foreclosures and which can be restructured. In its merger with Hometown, the two banks expect to retain all 20 Athol-Clinton employees.

Despite its portfolio problems, Athol-Clinton has maintained a solid capital base and was not desperate for a merger partner, said Peter Conrad, president and CEO of the Cooperative Central Bank, a cash reserve institution for cooperative banks.

“This is far from a forced merger,” he said. Still, the FDIC consent order and loan troubles were an incentive to find a partner – and somewhat limited the bank’s options, as it necessitated that they find a bank with a larger capital cushion and the personnel to work on rectifying the balance sheet.

Smooth Transition

But Athol-Clinton is also facing the usual pressures of small banks, Conrad added. Costs are climbing and eroding the bank’s ability to offer customers what they want. Many smaller banks are looking to partner up for those same reasons. Athol-Clinton, although it did consider other options, also wanted to stick with a fellow co-operative bank, Conrad said.

As for the sizable distance between Hometown’s three branches and Athol-Clinton’s two, the geography was a point the banks’ boards had to consider, Sosik said, though neither institution thought it would be a deal-breaker. Athol-Clinton will take on Hometown Bank’s branding, but the name “Hometown” travels well, and technology capabilities make it easier to connect with farther-flung offices these days.

Athol-Clinton is already familiar with a gap between offices, Duvarney said. Its two branches, in Athol and Lancaster, are separated by five towns. They were united by a merger between two banks in the 1960s, and have fared well despite the distance between them, Duvarney said.

In addition, Hometown’s acquisition will bring more products and services to Athol-Clinton’s customers, including commercial business to the bank’s heavily residential portfolio.

The towns Athol-Clinton serves are similar to Hometown’s area, Sosik said, and in the grand scheme of things, the two groupings aren’t terribly far. Hometown’s CEO acknowledges that it will take some work to get northern customers familiar with Hometown’s name and branding, but he has no worries that the transition process will disrupt their services.

“It’s going to be better than seamless,” he said.