A 40-year Plan
ESB President and CEO Matt Sosik
When asked to describe the current strategic plan for Easthampton Savings Bank (ESB), Matt Sosik, the institution’s president and CEO, said it’s fairly simple, really.
“I want this bank to be here 30 or 40 years from now, and we’re a little myopic about that,” he told BusinessWest. “We’re focused on making sure that this a community asset decades from now.”
“We’ll be gone — maybe we’ll be pushing up daisies, who knows?” he went on, referring to himself and Tom Brown, ESB’s executive vice president Retail Banking who’s already logged 30 years with the institution, and was sitting beside him. “We want this bank to be here; it has a necessary place in the long-term future of the communities we serve.”
Such talk might have seemed melodramatic decades ago, or even a few years ago, he acknowledged, but the times have changed, and mere survival is no longer the foregone conclusion it once was, as evidenced by the number of institutions that are now referred to only in the past tense, said Sosik, who arrived at the bank roughly 15 months ago after a lengthy stint as CEO at Oxford, Mass.-based Hometown Bank.
Indeed, the cost of business is soaring, and margins, dramatically impacted by plummeting interest rates, are razor thin. In this environment, size certainly matters — not in terms of bragging rights, but simply the ability to function properly, and profitably, in a changed landscape.
“We’re never going to measure ourselves by our asset size — we’re going to measure ourselves by how successful we are,” said Sosik as he described a general operating philosophy that was in place long before he arrived at ESB. “But in banking, community banking especially, size continues to a be an incredibly important metric; efficiencies are borne by spreading them over a broader base of assets. Period.”
That’s why most banks have embarked on territorial expansion efforts in recent years, which have taken them to corners of the Bay State far removed from their home bases, and into other states, especially Connecticut, as well. Such efforts have also led to an explosion in new branches, and significant over-banking in communities such as East Longmeadow, Amherst, Northampton, and others.
But in addition to seeking size, banks have also become driven in their quest to become more efficient and create economies of scale. This has been achieved largely through mergers and acquisitions, an ongoing trend that has changed the banking and business landscapes in many ways.
ESB has been part of these trends, said Sosik, as witnessed by its acquisition earlier this year of Citizens National Bank in Putnam, Conn., a move that, as mentioned earlier, gives the institution a broader geographic footprint while also growing its asset base.
But the bank is also being creative in its growth-and-survival strategy, as evidenced by the announcement in late September that ESB and Hometown will form a strategic partnership through the merger of the institution’s holding companies, a transaction that will yield a $1.7 billion entity, and thus the size needed to remain competitive in today’s changing financial services landscape.
However, this somewhat unique union — creation of the so-called multi-bank holding company is becoming more common but is still rare for this market — enables both institutions to operate independently, maintain their names, identities, and operating systems, and thus avoid some of the headaches that accompany typical mergers.
Another benefit of the holding-company-merger model is that it can expanded, said Sosik, adding that other institutions can become part of this larger entity. And he’ll entertain such entreaties, as long as they constitute good fits.
For this issue and its focus on banking and financial services, BusinessWest takes an in-depth look at ESB’s strategy for adding several decades to its 145-year track record of service to the community.
Generating Interest
As he talked with BusinessWest about the merger of holding companies, how it came about, and the many advantages to such a growth vehicle, Sosik said that banks such as ESB may still have a proverbial five-year plan — although most documents have a shorter duration because of the fast pace of change in this industry.
But the overall outlook must be for a much different timeframe, he said, adding that community banks must take a long view — as in 30 or 40 years — and create strategies that will ensure the current name is still over the door after that much time has past.
The strategic plan at ESB is not necessarily focused on acquisitions, said Sosik, adding that rather, it is framed by what he called “well-defined metrics that we wanted to obtain” that are monitored on a regular basis (more on them later).
“But at the end of that business plan, we talked about an acquisition strategy that we thought we could put into practice,” he went on. “And it gets back to that notion that size is a path to efficiency, and for us, if we can drive our overhead ratio, which is simply our non-interest expenses as a ratio of average assets, to 2%, we feel we can be successful over a very long term.
“For us, this is about scale, it’s about efficiency,” he continued, “and it’s about producing a business plan that can stand the test of time.”
Tom Brown says traditional organic growth will not be enough to enable ESB to create the size it needs to compete in a changing financial services landscape.
As he talked about how this strategic plan has unfolded to date, Sosik said that ESB, like most banks facing similar challenges, is constantly looking for opportunities to achieve that aforementioned scale and efficiency, but in ways that certainly make sense for the institution.
One such opportunity was the recently finalized merger with Putnam, Conn.-based Citizens National, another mutual bank, an acquisition that, when completed, provided the institution with $1.3 billion in assets (Citizens was a $333 million bank when the deal was announced) and a brand network of 15 full-service offices.
“That might not have made a lot of sense to some of our competitors, but it made a great deal of sense to us,” he said, referring specifically to the geographic distance between the two banks’ headquarters. “It stood on its own financially … it made good financial sense, it was creative to our bottom line, and it was a great return on investment.”
The acquisition represented a distinct departure from the way the bank operated through its first 144 years of existence, said Brown, adding quickly that it was a change brought about by necessity.
“We got to this point through normal branching over time — kinder, gentler economic times to be sure,” he told BusinessWest, referring to the past 30 or 40 years in particular. “We had a lot of organic growth, but we can’t continue to grow in that way; I see this strategy as an opportunity for us to ensure that we can carry out our mission of mutuality well into the future.
“We have 200 families that rely on us for their livelihood,” he went on, referring to the bank’s current workforce. “We take that responsibility very seriously.”
Sosik agreed, adding that traditional organic growth is not going to get the job done in the current banking environment, one that seems destined to become increasingly challenging with time.
“To get the scale we think is necessary, you can no longer rely on a de-novo branching strategy,” he explained. “There’s a bank on every corner, there’s a branch on every corner … there’s no way to achieve real growth in that environment. And that’s why you look at acquisitions as a way to geographically diversify and continue to grow that base of assets that provides that needed efficiency.”
By All Accounts
It was this search for effective, practical, and, yes, imaginative, acquisition strategies, that led ESB to pursue talks with Hometown, an institution that Sosik was obviously quite familiar with.
Those talks picked up in intensity several months ago, he said, adding that when finalized — the merger has been approved by both banks’ boards but is awaiting regulatory approval — this deal will yield a bank that will approach $2 billion in assets and $14 million in annual earnings at the outset.
“It will be a powerful, financial, community-driven machine,” he said, adding that it will cover nearly all of the territory between and including the Pioneer Valley and northern Worcester County.
Under the terms of the deal, Hometown Community Bancorp will merge into ESB Bancorp, and Sosik will serve as the merged company’s CEO, while Michael Hewitt, president and CEO of Hometown Bank, will serve as its president. Both Sosik and Hewitt will continue as CEOs of their respective banks. The merged parent holding company is also planning to change its name to Hometown Financial Group to better reflect its strategic positioning as a multi-bank holding company.
Efficiencies will be created through the simple elimination of redundancies, said Brown, adding that the new entity will need only one department for human resources, compliance, auditing, purchasing, technology, marketing, and others, where now there are two.
That doesn’t necessarily mean there will be immediate and dramatic reductions in force, he went on, adding that there will be a sharing of resources undertaken slowly and methodically, with staff consolidation attained mostly through attrition.
But while these efficiencies are being created, there are decidedly fewer of the serious headaches and inconveniences to customers that have resulted from most of the recent mergers, in which one bank is essentially absorbed into the other, Brown went on.
“If you’re focused on community, employees, and customers — if that’s the focus of your mission — then you shouldn’t be able to screw up a merger,” he told BusinessWest, adding that ESB and Hometown are committed to those fundamentals.
As he explained how it all works, Sosik grabbed his copy of the press release announcing the deal and drew a simple schematic on the back. The top half showed two mutual holding companies (MHCs) with a single line to the banks they control. The bottom half had one MHC, representing a multi-bank holding company, with two lines connected to boxes marked ‘ESB’and ‘HB.’
“There’s room for more lines here,” said Sosik, indicating that further expansion of the new holding company is possible, if the fit, or fits, are good ones.
“We’re basically recreating the mission of the MHC to become a multi-bank holding company,” he noted. “And we believe that we can be attractive to other like-minded mutuals who are thinking the same things we’re thinking about size, efficiency, and long-term viability, and are worried about those things. We think we can bring them into a multi-bank holding company that is philosophically attractive to them.
“We’re not in any rush to do that, though,” he went on, while deciding not to speculate on what institutions may fall into that category, other than to say the desired partners would obviously be small- to mid-sized mutual banks.
“We’re taking about institutions that, like us, want to be serving their respective communities 30 or 40 years from now,” he went on, “but don’t have a way of ensuring that on their own. If together, we can put some certainty to that, then we may have something that will work.”
The Feeling’s Mutual
As he talked about his institution and its strategic plan, Sosik speculated that at some other community banks, the thought process may be about how to navigate the next five years or that they simply can’t plan past 10 years because they don’t know what the future will bring.
At ESB, the thinking is different, more proactive, he went on, adding that the focus is on three or four decades from now, when someone else is occupying his office and downtown Easthampton looks much different.
And it’s about shaping the future much more than it is about dreading what it might bring.
George O’Brien can be reached at [email protected]
