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]

Farmington Bank Makes Its Move into Massachusetts

John Patrick Jr., president and CEO of Farmington Bank

By that, he meant this decision to cross the border — which is becoming far less of a boundary seemingly with each passing year or quarter (more on that later) — was definitely not a line item on a detailed strategic plan penned years or even months ago.

Rather, it was “an opportunity seized,” said Patrick, the institution’s president and CEO, who has presided over a number of well-planned and executed initiatives, including everything from taking the now-$2.5 billion bank public in 2011 to an elaborate territorial expansion effort marked by 10 new branches over the past three and a half years.

Elaborating, he said the merger of equals between United Bank and Connecticut-based Rockville Bank eventually left Farmington with an opportunity to hire a number of seasoned commercial lenders who know the Western Mass. market and have served customers here for years, if not decades, and establish what amounts to a foothold — specifically a small commercial-lending office on Memorial Drive in West Springfield.

“I’d be a fool if I said I knew everything that was going on in Springfield, and that we could manage that market from this area,” he told BusinessWest, referring to Greater Hartford. “That’s why it was important for us, when the opportunity came, to hire the team that we did. We hired a team that lives in Western Massachusetts, grew up there, and has worked for a long time there.”

The bank intends to move forward from its beachhead with branches in West Springfield and East Longmeadow, said Patrick, adding that these locations were carefully chosen — the former for its central location and proximity to major highways, and the latter because of the community’s rapid growth rate, proximity to other high-income towns, and location next to the Connecticut border.

While acknowledging that these specific communities, and the region as a whole, is likely overbanked, Patrick believes there is certainly room for another player, especially one with Farmington’s size — at $2.5 billion, it’s large enough to handle most deals but small enough to be more personal than the regionals and super-regionals — and track record for customer service.

Summing it up, he employed three words that he would return to often — people, technology, and franchise — and said the bank’s recent organic growth has come about directly from investments in each of them.

And he firmly believes that the name of the small Connecticut town (population roughly 25,000) will not be a hindrance to gaining market share in Western Mass., where some brands have been in existence for more than a century.

“Look at TD Bank — most people don’t even know that stands for Toronto Dominion and that this is a Canadian bank,” he said, using that $220 billion institution to get his point across. “It’s not the name on the bank that matters; it’s the people behind it, and we’ve got great people.”

For this issue and its focus on banking and financial services, BusinessWest examines Farmington’s foray across the border while explaining Patrick’s confidence that the move will be another positive step forward for the institution.

Branching Out

Patrick said Farmington Bank can trace its roots back to 1851. For most of its existence, its footprint was Farmington — an affluent suburb of Hartford that is home to Otis Elevator and Carrier Corp., among other major businesses — and surrounding communities.

Patrick joined the institution as president and CEO in the summer of 2008, just as the nation’s economy was heading into freefall and the financial-services industry was entering a period of profound change and challenge.

“I joined the company the day after Bear-Stearns collapsed,” he said, referring to the Wall Street investment bank whose demise and government-backed sale to JPMorgan Chase triggered several months of turmoil and bailouts for the banking sector and the start of a new era for institutions of all sizes.

“During that time, we were in the beginning throes of a very significant financial crisis,” he told BusinessWest. “We recognized, as an organization, that the world had changed, not because of anything we had done, or that community banks had done with regard to subprime lending and those types of things. But things had changed dramatically; liquidity in the markets dried up, and it was a very challenging time.

“I thought that, in order for banks to be relevant in the marketplace, or at least in the marketplace that we were playing in, size mattered,” he went on, “and that it was important for us to have a growth strategy, and the board thought the same thing.”

Elaborating, he said it became clear that the bank, then with roughly $950 million in assets, needed to diversify its customer base and expand geographically beyond those roots in Farmington.

As part of that strategy, the bank went public in 2011, raising roughly $180 million in capital, which it has used for what Patrick called smart, controlled growth aimed at making the bank “an economic driver” in the communities it served.

“We recognized that, if we were going to make these investments we needed to make, especially in technology, you need capital — it’s the key to success, especially on the regulatory side of things” he said, while explaining the move to go public. “But we also wanted to make sure we were raising capital for the right reasons — to take that capital and invest it back into loans and the marketplace, which we did.

“We’re not growing just for the sake of growing,” he went on. “The core of our business of lending has to be good assets because, at the end of the day, that’s one thing that can really crater a bank.”

Overall, Patrick said Farmington’s growth strategy will be the same in Western Mass. that it has been in Connecticut, meaning that the goal is to not merely to have a presence in a community or market, but to be that economic engine he described.

“We want to be a good community player — we’re not up there to take; we’re up there to be a partner in the marketplace,” he explained. “I’ve reached out to several leaders and asked how we can do that. I’ve said, ‘tell us how we can help and be a significant partner with you in the market. How can we make a difference in that market?’”

Points of Interest

As he talked about Farmington’s foray into the Western Mass. market, Patrick said it is similar in almost all ways to the bank’s expansion efforts in the Nutmeg State.

Over the past several years, the bank has essentially extended its reach on both sides of the Connecticut River, with 22 branches that reach about 20 miles south from its original base in and around Farmington, he explained. The bank’s latest gambit will effectively do the same, except the direction is north and across a state line that has been all but erased over the past decade or so as institutions on both sides of the border have ceased viewing the state line as a stopsign.

“There’s a border 20 miles to the north of where our headquarters are here,” he explained. “If I go 20 miles to the south, I’m still in Connecticut, and it’s just another geographic and economic region of our state that is contiguous to where we are in Hartford County. There’s no reason in my mind why I can’t think of Western Massachusetts as the same kind of thing.

“To go to West Springfield and Western Massachusetts, I don’t look at that as necessarily another state type of thing,” he went on. “I look at it as being contiguous to our market; that market is very similar to ours.”

That said, Patrick acknowledged that Western Mass. has its own personality, for lack of a better term, and its own business community, and serving it effectively requires knowledge of the market and its players.

And this brings him back to that notion of seizing a unique opportunity— specifically, the hiring of local commercial lenders and other banking professionals well-versed in this market and also with deep portfolios of clients they’ve served, and could potentially serve in the future as representatives of Farmington Bank.

The new additions include Mike Moriarty, senior vice president of Commercial Lending, Joe Kulig, vice president of Commercial Lending, Joe Young, vice president of Commercial lending, Catherine Turowski, vice president of Cash-management Services, Candace Pereira, assistant vice president and commercial loan officer, and all previously with United.

“The professionals we have on board with us have been imbedded in the community and the marketplace and have a tremendous reputation in that marketplace,” he explained. “And their ability to help their customers day to day, provide value-added service for those customers and businesses, and understand where they are today and what their objectives are for the future … those are things that will enable us to be successful.

“They don’t need me telling them who to call, how to do business up there, or those types of things,” he continued. “What I do is reach out to the community to get an understanding of where and how we can be a good community partner and be an economic driver in those marketplaces, in the same way that we’ve been doing it down here.”

And as he surveys the scene in Western Mass., Patrick believes the timing is good for a move into this region.

He noted that, while the planned $800 million casino to be built by MGM in Springfield’s South End and has garnered most of the attention and the press in recent months, there are other encouraging developments across the region.

“There are a lot of positive things happening in Western Massachusetts,” he said. “Set aside the casino piece; there are still a lot of things that are happening there relative to business expansion. It might not be double-digit growth, but there are still positive things taking place.”

The phrase ‘good timing’ also relates to the state of the Western Mass. banking community, said Patrick, noting that recent spate of mergers and acquisitions, including the announced acquisition of Hampden Bank by Berkshire Bank, should create opportunities, especially for smaller community banks.

“Obviously there is some disruption in the market up there, and that’s OK if we are the beneficiary of that disruption — that works,” he said. “Also, we have four new team members who have been entrenched in lending with some of the same borrowers for 10 or 15 years in that marketplace. And, in many cases, borrowers and businesses follow their lenders, as long as the organization they’re working for gives them the tools to succeed.”

Patrick said locations for the first two branches are still being scouted and should be finalized later this month. He said these initial branches will provide solid opportunities to introduce the bank, exemplify its commitment to the market, and begin the process of gaining market share.

“You don’t just throw some people in an office and say, ‘we’re open for business.’ If we’re really committed to the community and committed to the marketplace, we’re going to make other strategic investments,” he said. “We’re going to invest in a physical plant and start out with two hub branch offices, in West Springfield and East Longmeadow, and then grow around those as the marketplace dictates where the growth opportunities can be.”

Patrick said it’s difficult to project if, how, and where Farmington Bank will expand within the Western Mass. market in the years to come. For now, his focus is on the present and building a firm foundation for growth.

“We need to earn our stripes, and we need to prove ourselves; that’s the first order of business,” he told BusinessWest, adding that the institution has been quite successful at doing that within its broader footprint in Connecticut, and he believes that same pattern can be duplicated north of the border.

Although, as he said, it’s not really a border, or boundary, any longer.

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