Position Statement

Facing life in a stagnant, over-banked market, many area community banks have opted to go public or form mutual holding companies, steps that provide capital and some flexibility. Holyoke-based PeoplesBank has opted for another course, however. It is planning to stay mutual, and has announced ambitious plans to add six more branches over the next two years. The bold initiative was formed in response to current industry trends and recent banking history — and the firm belief that it will repeat itself.

Joe Lobello said he started getting calls seemingly within a few minutes after the story broke about his plans to build six new branches over the next two years, on top of three more opened this year, thus expanding PeoplesBank’s reach into Springfield, West Springfield, Northampton, and other communities where it has lacked a presence.

“People thought I was out of my mind,” said LoBello, longtime president of the Holyoke-based institution. “Everyone knows this area is seriously over-banked and saturated with branches; they thought I was crazy to be adding to six more.”

But there is a method to this perceived madness.

It is grounded in both recent industry trends and some Western Mass. banking history lessons. The former involves continued conversion of local mutual banks into either stock banks or mutual holding companies — Chicopee Savings just went public this summer, and Hampden Bank recently announced plans to do likewise — while the latter concerns the track record of banks after they have gone that route. Statewide, nearly all of them, including Springfield Institution for Savings and Woronoco Savings Bank in this market, were acquired by larger institutions within a few years of going public, actions that were accompanied by loss of market share to remaining community banks.

LoBello firmly believes that history will repeat itself, and he is positioning his bank for when it does.

The expansion blueprint, the lynchpin of a five-year plan crafted by bank officials and consultants in late 2003, calls for the bank to move aggressively into several communities where it has lacked presence beyond ATMs. The first move was into Westfield, with a branch that opened this past spring, followed by the opening this fall of the bank’s first branch in Springfield, at a site on Wilbraham Road in the city’s Sixteen Acres section, and the bank’s second location in South Hadley. On the drawing board are three more locations in Springfield — the locations have not been announced — as well as a branch in West Springfield on Memorial Avenue, another in Northampton at a yet-to-be-disclosed location, and still another in Wilbraham.

That will give the bank 20 locations by the end of 2008 and a presence in most larger communities in Hampden and Hampshire counties, said LoBello, adding that this portfolio will be accompanied by status as one of the last mutual banks left in the region and the third largest in the state. “We’re a vanishing breed,” he explained, noting that, by his count, PeoplesBank and Monson Savings are, or soon will be, the only mutual banks left in Hampden County.

But a breed apart, he continued, noting that he is a firm believer in the mutual bank model, even as fewer institutions follow it. “That model allows us to focus on customers, employees, and the community, rather than shareholders; for more than 120 years, it has been a winning strategy for us.”

Recent performance would validate that claim; the bank has seen double-digit growth over the past year in assets, deposits, and loans, and strong numbers at recently opened branches. Indeed, the East Longmeadow branch that opened in late 2004 is nearing $60 million in deposits, far ahead of industry averages for that time span, and the Westfield branch is approaching $15 million in just over one quarter.

“We’re picking up market share, and that’s why we have confidence in what we’re doing,” said LoBello. “We’ll do well as we expand the franchise because it will be very convenient — people can bank with us in virtually any community in Western Mass.”

This issue, BusinessWest takes an indepth look at PeoplesBank’s blueprint for the future and why it makes perfect sense — to LoBello, if not to some others in the local banking community.

Branching Out

LoBello fully understands why some in the banking community believe mutual institutions are dinosaurs. The access to capital — tens if not hundreds of millions of dollars garnered through IPOs — would seem to give stock banks and mutual holding companies a decided competitive edge and better odds of survival, he said, stressing that word seem.

And he wouldn’t criticize any bank for taking either step — some institutions believe they need that capital if they are to achieve growth in a stagnant region with at least one bank branch at seemingly every intersection. Still, he prefers life as a mutual bank and has some evidence that such institutions remain independent longer — and can grow at comparable if not better rates — than stock banks.

Indeed, among the more than 80 Massachusetts thrifts that converted to stock after Oct. 31, 1982 (when changes in the law permitted them to do so) only a handful remain independent today. That trend has held in this market, where SIS and Woronoco, two banks that have converted within the past 12 years, have been sold. Meanwhile, another stock bank, West Springfield-based Westbank, is being acquired by New Alliance Bancshares of New Haven, Conn.

With three more community banks now or soon to be public (Westfield Bank is converting from a mutual holding company, where a minority of shares are owned by the public, to a fully public company), PeoplesBank is opting to buck that trend, not follow it.

That was the consensus reached during strategic planning sessions that yielded the five-year plan and the bank’s aggressive expansion plans.

“We looked at the market and, like everyone else, said, ‘its over-banked, it’s over-branched, there’s no growth — what do you do?’” he said. “We came to the opinion that we would create an institution, the only large independent bank left, that would have a presence in every major community.

“That would give us a footprint similar to Banknorth and Bank of America,” he continued, “and that would put us in an excellent position for what we believe will be continued consolidation of this market.”

LoBello is committing a substantial amount of capital — an estimated $2 million to $2.5 million per branch in terms of startup costs — to test the validity of this blend of theory and history, but he approaches the exercise with confidence.

The plan essentially calls for the PeoplesBank to widen its reach to virtually every corner of Hampden and Hampshire counties. This process has been ongoing, said Douglas Bowen, the bank’s executive vice president and chief lending officer, noting that the institution has, in recent years, added locations in Longmeadow, Hadley, East Longmeadow and Amherst, and opened the Westfield branch on East Main Street in April.

The recently opened branch in South Hadley gives the bank two locations in that community (the other is on Newton Street), said Bowen, adding that West Springfield, Northampton, the largest community in Hampshire County, and especially Springfield, are the next frontiers.

The Sixteen Acres office, located near the intersection of Wilbraham Road and Parker Street, gives the bank a foothold, said LoBello, adding that plan is to build on that presence over the next few years. And while competition within Springfield is stiff, and growing, and the economy there is still largely stagnant, LoBello sees opportunities for his bank.

“The Springfield market is a natural extension for our expansion because it is the largest city in Western Mass.,” he explained. “One-fourth of the consumer households in Hampden and Hampshire counties are located in Springfield, and there are more than 4,500 businesses in the city that employ over 106,000 people.”

Checks and Balances

While he wouldn’t reveal where the bank is looking to place sites in Springfield, LoBello said the downtown area would not be in the mix, at least not initially. There are already a number of banks along the Main Street corridor, he explained, and some that have joined the roster in recent years, including Westfield Bank, have struggled somewhat.

Meanwhile, the process of finding sites anywhere has become more complicated and often more expensive, he continued. The reasons? For starters, the seemingly non-stop addition of new branches by all area banks has created intense competition within the industry for sites. Meanwhile, a host of national retailers, including CVS, Walgreens, and others, have been adding more and bigger stores in recent years, often assembling large sites at major intersections to do so.

“There are only so many good locations out there, and sometimes it takes some imagination to create a site,” he said, noting that the Sixteen Acres branch was built on parcels that were formerly home to a liquor store and an appliance outlet. “All the good, easy sites are gone.”

Assuming that sites can be assembled in Springfield and elsewhere, the next challenge is gaining market share, and LoBello said recent history allows him a good dose of confidence.

Over the 12 months that ended June 30, the bank saw assets grow by $200 million, or 18%, to $1.3 billion, making PeoplesBank the largest independent, mutual bank headquartered in Hampden County. Meanwhile, deposits grew by 22%, to $863 million, over that same period, while loans grew at a 25% clip, to $950 million.

And while the overall numbers are healthy, the performance at recently opened branches has been particularly strong, said LoBello, noting that, while mutual banks can afford to be more patient than stock institutions when it comes to growth of specific branches, PeoplesBank has seen quick results in many communities.

“The East Longmeadow branch is the most successful I’ve ever seen,” he said, noting the $58 million in deposits and more than $30 million in loans it had amassed as of early September. “The numbers are tremendous for being open just over a year.”

The Westfield branch is off to an equally solid start.

“For historical perspective, in a normal branch, you’d expect to see maybe $5 million the first year, and another $5 in the second and third — that’s the industry standard,” he said. “We’ve done that in less than six months.”

This absorption of market share comes in a community where a major player, Woronoco, was headquartered before being acquired by Berkshire Bank, and also where Connecticut-based Webster Bank has made one of its initial forays into the Western Mass. market. All this bodes well for LoBello, his loyalty to mutuality, and his ambitious five-year plan.

“We’re very confident that within the next five years there will be further consolidation in this market, among not only the large regional stock banks, but also the smaller stock banks,” he said. “We want to be positioned for when that occurs, because we’ve seen what happens when banks are acquired; when Fleet bought Bank of Boston, every community in this area picked up market share.”

Taking Interest

Lobello said he believes the presidents of area banks that are or soon will be public are sincere when they say their intentions are not to sell their institutions.
But history shows that this is the course that most will eventually take. Just when eventually will arrive he’s not sure. What LoBello is sure of is that his bank will be ready and well-positioned for that day.

That’s why he’s confident and, as far as he’s concerned, certainly not crazy.

George O’Brien can be reached at[email protected]