Hometown Financial Group plans to merge its subsidiary banks into one, go public and buy New Hampshire-based Primary Bank for $160 million in stock and cash in a series of three linked moves. iStock illustration

One of Massachusetts’ largest mutual bank holding companies is switching to a stock institution, highlighting a philosophical divide among industry leaders about the best way to grow and succeed.

Hometown Financial Inc., the Easthampton-based parent company for TruNorth Bank, BankESB and Hometown Bank, recently announced its intention to merge two of its component banks into TruNorth and convert from a mutual holding company to a stock holding company structure.

The conversion will help pay off debt from the eight mergers or acquisitions it’s made in the last 10 years, but also give it capital to make a $160 million stock-and-cash play for New Hampshire-based Primary Bank.

If the deal and conversion are both approved, they would add $743 million in assets and four New Hampshire locations to TruNorth Bank’s 55-branch network that’s largely lacked a Granite State presence until now.

But most of all, the deal will unlock further scale for Hometown and TruNorth, said Hometown Financial Group CEO Matthew Sosik, something that’s ever-critical in today’s banking landscape according, he said.

“Primary was formed to meet the needs of small to medium-sized businesses that are flourishing in southern New Hampshire,” Sosik said. “So that is a perfect market for us. We can start right where Primary left off. We can then go up-market a bit too, both in size and scale with the customer base because of our significantly different size. We’re going to be a bigger company up there. We can make a bigger dent in what’s going on up there.”

Biggest Mutual Sticking to Guns

Less than a week before the Hometown conversion and its planned purchase of Primary Bank were announced, one of its fellow large mutual bank holding companies – Hyannis-based Mutual Bancorp – added another member – Raynham-based Bluestone Bank – and billions of dollars in assets, making it the state’s largest mutual holding company by far.

There is room for banks of all sizes to succeed, said Mutual Bancorp CEO Matthew Burke. Growing in size isn’t a requirement, in his eyes.

Additionally, mutual institutions – which constantly highlight their community roots and are governed by representatives of their depositors – might be better off serving local needs such as small businesses compared to larger institutions, according to Burke. The same can be said for larger banks being able to better serve larger business clients, he added.

With Mutual Bancorp bringing like-minded mutual banks together into an $8.4 billion-asset entity, this will aid the overall viability of its subsidiary mutual banks by pooling resources like deposits and back-office services, Burke said.

Other mutual banks will benefit from having stronger peers, he said.

“We all work so closely together,” he said, “Maybe when you’re in market with another community bank, that’s some competitive aspect of it. But I would say, first and foremost, we’re all willing to help each other with anything at any time.”

New developments in technology can help mutuals provide the same level of tools that larger institutions are able to use.

“As a mutual, we still want to be able to offer the products and the cutting-edge technology that the customers see elsewhere,” PeoplesBank COO Aleda De Maria said. “Just because we’re a mutual and a community bank does not mean we have to be sleepy or behind the times. We can be a leader in our industry as well.”

A Question of Scale

With strong roots in one location, community banks don’t necessarily need to grow in order to be successful, said Arthur Loomis, president of community bank consultancy Loomis & Co.

“I’ve always felt that community banks, if they’re really run well, the idea that economies of scale is critical is not as important because you’re emphasizing your community connection,” he said. “It buys you a lot of market value, market cap, and it precludes the real driving force to be ‘Let’s get bigger because we need to generate economies of scale.’”

But eventually a bank can grow to a point where it gets stuck in a middle ground: Not a large bank dominating the Massachusetts scene, but also outgrowing the status of a small community institution.

“You can still be very high-performing without necessarily being $10 billion or more in size,” Loomis said, “But Hometown was in the sort of the ‘You’re neither fish nor fowl’ category, and I think this is kind of their way of trying to [take] one direction as opposed to the other.”

Making the Switch

When Sosik looks to the future of mutual banks, he believes that scale is the key factor to compete in a market that includes titans like Bank of America and JPMorgan Chase, but also super-regional banks like M&T Bank and growing regional players like Eastern Bank and Rockland Trust.

This informed the path that Hometown took in acquiring Primary Bank and gaining a strong base in the New Hampshire market.

“It is true that as a mutual grows it becomes increasingly more difficult,” he said. “Doesn’t mean it’s impossible by any stretch. It just becomes increasingly more difficult to see that path forward without taking this leap.”

The Primary Bank acquisition has been in the works for several years, Sosik said. The need for capital and the search for scale also drove the change as the bank looks to cross the $10 billion threshold.

“We have used debt very strategically and very fruitfully over the years to grow our company,” Sosik said. “This allows us to repay that debt fully. As you start to approach $10 billion, the need to grow actually accelerates because of certain regulatory features to that $10 billion mark. So, it’s just important for us to gain capital, so that we can continue to grow, and produce the next phase of this company’s evolution.”

The conversion won’t mean leaving its connection to employees and depositors behind, he argued.

“It’s not just about getting capital,” Sosik said. “It’s about getting ownership to the community, getting ownership to the depositors, getting ownership to the employees, vesting them in the future of the company, and then being able to nearly triple our giving back to the communities we serve.”

As a part of the conversion, Hometown will establish a new charitable foundation, which will be funded with a number of shares equal to 4 percent of the shares sold in the stock offering.

Sosik pointed to Westfield Bank’s 2007 switch from a mutual structure to a stock institution as an example of a conversion that didn’t separate a bank from its community.

The CEO also believes that the way Hometown was run will minimize the impact from switching to a stock institution.

“If you look at our financial performance, we operate very entrepreneurially,” he said. “We have, for all intents and purposes, operated like a stock bank for many years. So, for us, this transition it’ll be nearly without impact.”

Will Hometown Become an M&A Target?

The move also sees Hometown inch closer to big-name regional institutions such as Beacon Bank, Eastern Bank and Rockland Trust.

“As you get to a certain size and you’re trying to attract talent and trying to invest in the company,” Sosik said. “In a place where you’re competing with an M&T or maybe even Rockland or Eastern for talent resources and technology, you’re playing in a different world.”

Hometown has $6.9 billion in assets currently; the Primary Bank acquisition will bring that number to $7.66 billion, and deposits to $6.4 billion, according to information Hometown released along with its acquisition announcement. That would make it about a third the size of Rockland Trust, and a quarter the size of Eastern Bank.

Sam Lattof

But as they to compete with larger players, banks in what will become Hometown’s new size category – above $5 billion in assets – can become targets for acquisitions by larger names active in the area, such as PNC Bank and M&T Bank.

M&T CEO René Jones told an audience at the Boston College Chief Executives Club last fall that his bank was on the lookout for potential acquisition targets in the Northeast.

“You get a big-city, highly sophisticated educational institutions with people coming out that are, getting into high tech or medicine or law or big business, and you’ve got big companies there,” said Joseph Silvia, a partner in the banking practice at law firm Duane Morris. “That’s the attractiveness from a geographic perspective for one of these larger players coming in and looking for someone in Massachusetts that’s got a nice footprint, a solid reputation, good reputation with the regulators and probably not engaged in too much high-risk activities.”

Additionally, through Massachusetts, a large-enough bank can access all of New England, as well as New York and New Jersey, Silvia noted.

But Hometown is not looking to sell itself, Sosik said.

“This really has nothing to do with making our company marketable for sale at all,” he said. “The whole point here is to continue to gain scale and be a winner in the marketplace. You can’t do that by standing still.”