For the small banks involved in a recent set of mergers, these deals are opening opportunities to help them and their customers thrive as competition grows tougher.
After a year when larger publicly traded banks dominated Massachusetts’ merger activity, mutual banks in recent months have started to make deals again.
East Cambridge Savings Bank announced in February it would acquire Woburn-based Patriot Community Bank, and Hometown Financial Group, a multi-bank mutual holding company, announced plans in March to acquire Quincy-based Envision Bank.
These deals will mean the loss of two more banks based in Massachusetts, which has seen a 60 percent decline in the number of banks based here since 1994.
Critics of bank consolidation often cite mergers as harming consumers because of limited competition and less local lending.
But for both the $1.31 billion-asset East Cambridge Savings Bank and Hometown Financial Group, which owns three banks with a combined total of $3.64 billion in assets, these deals provide opportunities to help the institutions continue to thrive amid growing challenges for small lenders.
“What made this transaction a little bit more special was the fact that it’s strengthening the community bank model,” said Gilda Nogueira, East Cambridge Savings Bank’s president and CEO. “It’s not just an acquisition to grow the bank; it truly is to continue to provide what we value so much, which is mutuality, community banking and being able to strengthen that.”
Banking Now ‘a Scale Business’
An analysis by the National Community Reinvestment Coalition earlier this year found that the U.S., like Massachusetts, has seen the number of banks decline by about 60 percent since 1994, down to fewer than 4,500 banks at the end of 2021.
Massachusetts had 265 banks based in the state at the end of 1994, according to Federal Deposit Insurance Corp. data, and ended 2021 with 105 banks.
In a presentation on bank consolidation and branch closures, the NCRC said community banks in particular matter because of the role relationship banking has on communities and the effects that deposits at these banks have on local lending.
“You cannot rest on those laurels. The status quo still will eat you alive.’”
— Matthew Sosik, CEO, Hometown Financial Group
But for an industry that has always had small profit margins – margins that continue to shrink – growth is critical for community banks to remain viable, said Matthew Sosik, CEO of Easthampton-based Hometown Financial Group.
“Banking has really become a scale business,” Sosik said. “When you think about banking as an entire industry, you really need to grow; you need to be building scale to ensure that you’re relevant today and for years to come.”
Hometown Financial Group is one of the few companies in New England that acts as a mutual holding company for multiple banks: Abington Bank, Oxford-based bankHometown and Easthampton-based bankESB. Envision Bank will combine with Abington Bank when the deal is completed, likely in the fourth quarter.
Staff Size Offers Challenge
For William Parent, who became president and CEO of Envision Bank a few weeks into the pandemic, the effects of evolving technology and changing customer experiences for both retail and business banking had created challenges to remaining relevant in a competitive market.
“You need the resources to compete, to remain relevant in the marketplace,” Parent said. “We had worked very hard to be a relevant factor in the markets that we competed in, but I saw, quite frankly, a dynamic challenge to maintaining that relevance going forward.”
The bank did have a successful run, Parent said. After going public in 2016 and taking losses in the next two years, Envision Bank started seeing positive earnings, including record net income in 2020, a result Parent said he knew was a one-time event.
Envision’s parent company, Randolph Bancorp, faced operational risks in managing the company to maintain its stock price going forward at a level that would satisfy shareholders, Parent said.
A key area for Envision Bank to keeping growing was commercial real estate, and Parent said the $802 million-asset bank faced limits to the size and number of loans. Parent had previously led Blue Hills Bank, which had about $3 billion in assets, and felt the effects of Envision’s smaller size over the last two years.
“We really had limited capacity to have multi-project, multi-property relationships with sponsors,” Parent said. “And that was a missed opportunity if we stayed at our current size.”
Another challenge Parent saw was relying too much on a smaller staff.
“When you’re smaller and you have to grow and you have to evolve, you’re relying on smaller group of people to continue to execute on that, and it gets harder on them to continue to do that month over month,” Parent said. “That starts to create some operating risk either that you can’t retain them as they don’t want to do it because it’s too much of a commitment, or they burn out, and that can’t be worse because you still have them working with you, but they’re not as effective.”
Long-Term Viability Sought
When Abington Bank and Envision Bank merge, the combined size of about $1.4 billion will provide better opportunities for organic growth as well as merger opportunities, Parent said. After the deal is complete, he plans to work for Hometown Financial Group on corporate strategy and said he is looking forward to the flexibility that mutual banks have in taking a longer view on growth compared to stock banks.
Hometown Financial Group plans to remain mutual, said Sosik, the company’s CEO. He did acknowledge, though, that he would “never say never” about converting to a stock bank.
“The only reason we would ever look favorably at any kind of conversion would be simply to augment capital,” Sosik said. “It wouldn’t ever be about some of the ancillary reasons why bankers have historically converted their mutual.”
Hometown Financial Group has banks on the South Shore, in Central Massachusetts and in Western Massachusetts, and Sosik said this geographic diversity helps community banking by allowing each bank to focus on its local market while sharing back-office services.
“We’re getting all the efficiencies behind the scenes, and yet we’re still getting the local branding power in the customer-facing aspect,” Sosik said. “We love our business model.”
He added, though, that that model was “not for the faint of heart,” noting additional work involved with holding multiple banks.
The combination of Abington Bank and Envision Bank, which Sosik said will have a new name, will give Hometown Financial Group about $4.5 billion in assets. Sosik sees this acquisition as providing the scale needed for long-term viability – at least for now.
“The reality is that you have to keep moving forward,” Sosik said. “You cannot rest on those laurels – the status quo still will eat you alive.’”
Boost to Lending Capacity Seen
In acquiring Woburn-based Patriot Community Bank, a privately held stock bank, East Cambridge Savings Bank will have about $1.5 billion in assets.
Diane McLaughlin
This additional size, said bank president and CEO Nogueira, will give the bank more leverage in its lending capacity as well as operational efficiencies. She added that these benefits will let the bank focus on its mission as a mutual bank supporting the community.
Patriot Community Bank founder, President and CEO John O’Donnell will join East Cambridge Savings Bank as an executive vice president and senior commercial lending officer. Nogueira said this will help give customers a smooth and transparent transition as the banks combine.
Nogueira added that mergers are inevitable in the industry, especially for smaller banks facing margin pressure and rising costs. She said combining institutions provides a way to strengthen community banking.
“Together, we are able to keep the community bank model alive and become stronger just by the joining of the two organizations,” Nogueira said. “The combined organization will be larger, and I truly believe that it strengthens the model that we so much believe in.”
