Market Shift: Bank Mergers Pick Up Steam Locally | Local finance execs says there's still room to consolidate
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Bay State Savings and Commerce Bank will soon be the only two Worcester-based banks left once Commonwealth National Bank is sold.
Take the pulse of the banking industry these days, and it might seem as if it’s got a heart murmur.
Big banks are in serious trouble and scrambling for ways to pay back the federal government’s bailout. Smaller community banks are trying to overcome the notion that banks aren’t lending while maintaining their conservative standards.
In Central Massachusetts, all of this and various other complexities are accompanied by an ongoing case of merger mania, the latest round of which will leave Worcester with just two locally headquartered banks.
Rare Breed
The latest acquisition to be announced is the purchase of Worcester-based CNB Financial Corp. and its subsidiary Commonwealth National Bank by Pittsfield’s Berkshire Hills Bancorp. And as far as the banking industry is concerned, the transaction could be downright wild.
Barely two weeks after the Berkshire Hills/Commonwealth National acquisition was announced, West Springfield-based United Financial Bancorp. — led by Richard B. Collins, former head of Worcester’s First Massachusetts Bank — said it would top Berkshire’s $19.5 million all-stock offer with $22.8 million, up to half of it in cash.
The Commonwealth deal frenzy comes on the heels of Flagship Bank officially becoming part of a larger corporate entity. Flagship had been owned by the Vermont-based Chittenden Corp. for years, but was recently acquired by Bridgeport-based People’s United Bank.
The new ownership has put in place new leadership at Flagship and more aggressively positioned its logo alongside Flagship’s.
For area banking executives, the Commonwealth acquisition is just the latest transaction in more than 25 years of industry consolidation that shows no sign of abating. (Click here to see a graph of local bank decline.)
Mark Fitzgibbon, principal analyst at Sandler, O’Neill & Partners in New York, said when outside banks look at Central Massachusetts, they see an area with a relatively large population and a great number of small, community mutual banks.
Berkshire, he said, “is looking to grow into larger metro areas, to Worcester and to Boston. Worcester is a big population center relative to the areas to the west. It’s a logical strategy.”
In Massachusetts, there are opportunities for healthy banks to acquire less healthy banks. Banks with money to burn are looking to grow into Massachusetts or within Massachusetts to an area where the population is greater, Fitzgibbon explained.
Typically, banks merge or do acquisitions because the weaker bank in the transaction needs to be bailed out, management at the bank being acquired wants to retire and essentially hires a new management team by selling the bank or the two banks realize that “one plus one equals three,” Fitzgibbon said.
Still Overbanked
For John Heerwagen, president and CEO of Natick-based Middlesex Savings Bank, which is in the process of acquiring troubled Strata Bank of Medway, the mergers and acquisitions will continue well into the future, and not just in Massachusetts but throughout the entire Northeast.
The region’s bankers have claimed for years that Central Massachusetts is “overbanked,” and to a certain extent, that’s still true.
“It’s fair to say that this region has more banks than are truly necessary,” Heerwagen said. “Is that to say that is a negative thing? I wouldn’t say that, but the possibility for future consolidation as a long term trend is squarely in place.”
The Northeast is full of small, mutual community banks that aren’t pressured by shareholder demands or swayed by shareholder impatience, Heerwagen noted. Those banks make easy targets for banks on the prowl for acquisitions.
However, many of those small community banks are very strong financially.
“Part of the dynamic is you have to have an interested buyer and an interested seller, and there are a number of smaller banks that can continue to be independent,” Heerwagen said.
“They’re healthy enough that if they don’t want to merge or be acquired, they don’t have to.”
According to Brian Thompson, president and CEO of Commerce Bank & Trust Co., that’s the position Commerce is in.
Once Commonwealth is acquired, Commerce and Bay State Savings Bank will be the only remaining locally-headquartered banks in Worcester.
Thompson said Commerce is helped by its size. It employs 260 people and is one of the largest independent banks in Central Massachusetts and claims more than $1 billion in assets.
“We have the ability to deliver most any product to our customers,” Thompson said.
Remaining local at a time when saying, “When we wake up in the morning, all we think about is Worcester and the Worcester area” makes perfect marketing sense may be a good strategy for Commerce, but the bank still needs to grow in order to compete in an environment where a bank like Commonwealth, which has assets of slightly less than $300 million, can be snatched up by Berkshire, which is working with assets of nearly $3 billion.
Thompson said it has reached into new areas of finance, including the establishment of a sizeable portfolio of recreational aircraft loans, for that growth, which has proven both lucrative and safe.
“It’s the orthodontist in North Carolina who wants an aircraft to take to the Outer Banks for the weekend,” Thompson said of Commerce’s typical aircraft loan customer.
“He’s going to pay based on the income from his orthodontics practice, not from a business derived from the aircraft itself.”
The other Worcester-based bank, Bay State Savings, had $221 million in local deposits as of June 30, 2008, placing it at number 25 of the WBJ’s list. Commerce is No. 8.
Home Sweet Home
Being home to just two locally headquartered banks is a long way from the days when Worcester was home to several banks, including Worcester County National Bank, Worcester County Institute for Savings, Guarantee Bank and Mechanics Bank.
None of those institutions exist any longer. (Click here to see a full list of banking trends over the past few years.)
They were scooped up by the likes of Sovereign Bank, Bank of America, Bank of New England and Fleet Bank.
Like any other bank executive, Heerwagen has been watching industry consolidation for the last 25 years and said that while it is no longer out of the ordinary for a city like Worcester to have very few bank headquarters within its borders, that trend may not be for the best.
“It’s probably not strange anymore, but is it unfortunate? Yeah. And they say the same thing about Boston. Twenty years ago, there were very large regional banks here in Boston. Has (their absence) had a direct impact? I don’t know. That might be a stretch, but it has had an impact on the local business community. You don’t have CEOs…who have the local market in mind."
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