More Regulation Fuels New Merger Activity Involving Central Mass. Institutions

The current economic and regulatory climate seems to have the makings of the perfect storm that makes bank mergers and acquisitions appealing for the financial institution on both ends of a deal.

Carll Wilkinson, managing partner of Smith & Wilkinson, a Portland, Maine, executive search firm for financial institutions in New England, said deregulation of the financial sector in the 1980s and 1990s set the stage for M&As.

As a result, he said, the number of banks in the U.S. has been cut in half over the last 30 years.

Ironically, it's an increase in regulation, largely through the 2010 Dodd-Frank bill, that's pushing the latest round of M&A activity.

This year, announced acquisitions impacting Central Massachusetts include:

• Boston-based Mercantile Bank & Trust, which was bought by Commerce Bank of Worcester;

• Connecticut-based New England Bank's purchase by United Bank of West Springfield;

• Pittsfield's Berkshire Bank buying Connecticut Bank & Trust Co.;

• And, in a rare case of a credit union acquiring a savings bank, GFA Federal Credit Union of Gardner bought Monadnock Savings Bank of Peterborough, N.H.

Also, Framingham Co-operative Bank is completing a deal with Natick Federal Savings Bank that will merge the two and create a new entity, MutualOne Bank. When the deal was announced in April, the banks' CEOs said the move was necessary because of “increasing regulatory and operational expenses.”

Brian W. Thompson, president and CEO of Commerce Bank, said those are common industry concerns.

“I think it's becoming increasingly difficult for small banks really on two fronts,” he said. “One is to continue to maintain the earnings in this low-interest environment … The other is increasing costs associated with a regulatory compliance.”

Regulatory stresses are manifested through administrative and technology costs that small banks can struggle with.

“I'd say it's more about record keeping and computerization and tracking things,” said George W. Tetler III, a partner at law firm Bowditch & Dewey who represents financial institutions in M&A dealings. “The burden is more internal in terms of systems and personnel to comply with all the regulations.”

Community banks often hire full-time compliance officers to report to agencies including the Massachusetts Division of Banks, the Federal Deposit Insurance Corp. and the Federal Reserve. Each have different reporting rules.

The Foreclosure Protection Effect

Tetler said an added strain on community banks in Massachusetts has been the state's home foreclosure prevention laws, which lengthen the time between a homeowner's initial mortgage default and when a bank can foreclose. He said that's a tough thing for community banks that make mortgage loans and hold them in their portfolios, rather than sell them.

“So the natural reaction is to be more conservative about how you lend your money,” he said.

The pressure of posting profits is highest for publicly traded stock-held banks, because they're held accountable every day as people buy and sell the stock. Although mutual banks may have somewhat less stress, they still face the same regulatory costs as stock-held banks. That can lead to merger activity.

Wilkinson said a merger of mutual banks saves them money, because the new bank can eliminate redundancies, needing only one set of top-level executives and, most of the time, the mergers happen when several of the executives are ready to retire.

“The flip side of that is that's what makes it really hard for mutual banks to merge, because there's absolutely no personal financial incentive,” Wilkinson said. He said board members often like serving, are retired and earn board fees.

“They don't get any money by merging their bank with another one, so it's like a totally selfless decision,” he said.

As shareholders of a smaller bank decide it's worth more sold than to continue to operate, the bigger community banks step in, as with Commerce and Mercantile.

Thompson said that Commerce has grown organically, but when it was approached about Mercantile wanting to sell its three Boston locations, the $26.5-million purchase made sense.

“You take advantage of opportunities as they present themselves,” Thompson said, adding that, with Commerce being a stock bank, it didn't have options for an acquisition in Central Massachusetts, where its other branches are.

“We felt that this was a much better way to enter a totally new market for us, to go in and acquire a bank who already has established customers," he said.

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