Banks Navigate a Rapidly Changing Chess Board

BankLandscapeDPartIn assessing the many ways banking in Massachusetts has changed, Dan Forte summons two numbers: 338 and 175.

The first, said Forte, president of the Mass. Bankers Assoc., is the number of banks with offices in the Bay State in 1990. The second number is the same tally at the end of 2013.

“That’s a 48% drop, which, annualized, is a 2% drop per year,” Forte said. “There have been some periods where the consolidation was slower, while in some periods, it has been a little faster. We’re coming out of an economic trough, albeit slowly, and as the economy gets stronger, you’ll see mergers pick up over the next few years.”

Indeed, after a few relatively — but never totally — quiet years on the bank-merger front, 2014 has brought a rush of movement, most recently Berkshire Bank bringing Hampden Bank under its banner (see sidebar, page 19).

“It’s a combination of things,” Forte said, noting that the region’s most recent big moves — Berkshire’s in-market acquisition of Hampden, the interstate ‘merger of equals’ between United Bank and Rockville Bank a year ago, and Connecticut-based Farmington Bank’s plan to expand into Massachusetts — are very different from each other.

“The community banks are going to remain strong, but, like every other industry, there’s going to be a lot of change, and this is part of the change,” he said. “It’s really nothing new.”

Or, as Brian Corridan put it, “we have a lot of very good banks here in Western Massachusetts. But the world is changing, and the checker game in banking has become a chess game.”

Corridan, a local expert on the financial-services industry and president of Corridan & Co. in Chicopee, emphasized that not only are mergers and consolidations par for the course these days, they’re not the biggest story.

Hampden Bank

Berkshire Bank leaders are discussing whether to retain, consolidate, or close Hampden Bank branches that overlap Berkshire branch footprints — including Hampden’s headquarters in downtown Springfield.

“The reality goes far beyond the larger banks in our area merging with the smaller banks. We are now banked internationally right here in our Valley,” Corridan said, citing Citizens Bank, an affiliate of the Royal Bank of Scotland; TD Bank, part of Toronto-Dominion Bank in Canada; and the most recent entry, Spain-based Santander, which acquired Sovereign Bank in 2009.

“Look around — people have accounts at Citizens, TD Bank, and Santander. We’re not just talking about regional banks anymore, but foreign banks. They see the value of retail banking in our area,” Corridan said. “And it’s just the tip of the iceberg; there’s a lot of consolidation to come as banks look for economies of scale.”

That’s one of the reasons offered by Sean Gray, Berkshire Bank’s executive vice president of retail sales, in explaining why his institution is “doubling down on Springfield,” where Hampden Bank is headquartered, and where Berkshire already has a significant presence.

“Ultimately, there are economies of scale that come with larger size,” he said. “We believe we have to be big enough to do all the things larger institutions can do, but we feel we need to keep our roots in local decision making, and stay active in foundations and volunteerism and all the things you want a community bank to do at the end of the day.”

When it comes to making moves on this massive chessboard, how does a bank become more efficient, more profitable, and offer expanded services and a broader range of loans, while also maintaining the community involvement and high-touch environment long valued by retail customers in Western Mass.? For this issue’s focus on banking and financial services, BusinessWest examines how creating this balance has become, for banks large and small, the name of the game.

In the Red Tape

Ironically, much of the recent movement among banks to grow larger, quickly, has come as a result of new regulations in the wake of the 2008 financial collapse — a crisis in which the largest banks shouldered much more blame than smaller community banks.

“Since Obama came to town, it’s been a regulatory jungle, and the departments within individual banks experiencing the highest growth rate are the compliance departments,” Corridan said. “In response to more complicated regulations, the federal government is demanding more reports, and that rocks your bottom line. If you have to put $400,000 to $500,000 into your compliance department, that may upset the balance of whether you had a profitable balance or you’re in the red.”

Forte agreed, citing the way ‘call reports’ — the condition reports banks issue to regulators at the end of each quarter — have become much more onerous.

“The costs of doing business are clearly increasing,” he told BusinessWest. “As of 2012, there were 1,995 items in a call report. In 1990, there were 569 items. And the regulations coming out of Dodd-Frank are going to increase them even further; they’re looking now at increasing the number of reporting requirements by 63 elements. Every item takes time and costs money, and the risk of not completing these forms correctly is significant.”

Therefore, he said, banks aren’t just expanding their brand when they merge; they’re spreading these regulatory costs over a larger footprint.

For William Crawford IV, CEO of Rockville Bank, the decision to merge United with Rockville was about investing smartly in an aggressive growth plan.

“Getting to $5 billion in assets, getting to that scale, was very important,” he said. “We’re seeing a lot of small banks seek out strategic partners, much as we saw with Hampden, simply because the economics of being a very small community bank — say, under $1 billion — is very difficult when you look at the interest-rate environment out there. It makes it very difficult to lend money, and, unfortunately, we may be in this environment for an extended period of time.”

Still, he emphasized the importance of maintaining community ties, particularly in the realm of long-established charitable and volunteer efforts.

“Both companies, United and Rockville, have significant foundations that will continue to invest here as we always have,” he said. “And because of our increased size and scale, we have more resources to do those things. So, from a community perspective, two companies coming together is definitely a plus.”

While customers might occasionally feel disoriented by changes in bank ownership, Forte noted that banks have been contracting nationally at a 3% annualized rate, putting Massachusetts behind the U.S. pace. Some of that has to do with the fact that 70% of the banks in Massachusetts are mutual banks, which are limited in how they can merge.

“It requires the right alignment of planets — the board, management, succession timing, etc.,” he said. “Clearly, the trend from this year is a little faster than three years ago, which is not surprising, given all that’s been going on economically.”

The loosening of state laws across the U.S. governing interstate banking, starting around 30 years ago, created a much more nurturing environment for mergers, leading to the remarkable contraction in Massachusetts-based banks since 1990, Forte said.

“State lines are fairly arbitrary; you’re looking more at economies. That’s why interstate banking is so critical; it gave banks large and small the ability to expand geographically, regardless of state boundaries.”

Cache and Carry

Forte emphasized, however, the vigilance with which merging banks protect their reputation as local institutions.

“Community banks are a vibrant sector of the economy, and they help their local communities,” he said. “Their biggest strength is being high-touch. If they can maintain the high-touch aspect and be quick followers of technology and keep costs down going forward, they will continue to confound the pundits who have long predicted their demise.

“I believe there will continue to be a strong community-bank sector of the industry, and we’re not going to become like Canada, with six large banks and 100 credit unions that serve as the local banks,” he added. “We have vibrant community banks here in Massachusetts.”

That said, Corridan noted, “we’re down two publicly traded banks in the Pioneer Valley — Chicopee and Westfield. Look back 25 years, when we had BankBoston, Shawmut, Bank of New England, Baybank … we had smaller banks, and dozens of them.”

With their gradual fade, he predicted that the next 10 to 15 years will see a rapid ascent in credit-union membership. “If you want to bank locally, you’ll see credit unions get stronger, because they’re going to be the local banking entity.”

Springfield resident Morriss Partee, creator of EverythingCU.com, an online source for credit-union information and advocacy, hopes that’s the case, but admitted progress toward that goal has been gradual at best.

“Consolidation in banking has been going on for a very, very long time, and people always say the credit unions stand to benefit from that, and they certainly have to some extent,” Partee said. “At the same time, it’s surprising that they haven’t benefited even more than they have.

“The option of banking locally is just not that important to a lot of people,” he continued. “Of course, it’s important, but a lot of people don’t think deeply about their bank relationship. They say, ‘OK, I have checking; I have a big bank with lots of ATMs around; I can be functional in society.’”

Partee says there’s still plenty of untapped potential for credit unions, but they have to convince people it’s easy to switch over. EverythingCU.com has long offered a ‘switch kit’ to make that task easier and, in recent years, help people do it online. “People hear about credit unions from their friends or see representatives at a trade show and say, ‘OK, your credit union sounds great, but it’s not worth the hassle of moving.’”

Partee, who has been a vocal opponent of a Springfield casino, puts large national and international banks in the same category — businesses, he says, that want to benefit from Springfield but who, at the topmost levels, don’t care about detrimental effects on the community because they don’t live here.

“When lending decisions are made locally, that’s going to help the local community,” he said. “There are still local community banks that are staying local, and a lot of people feel just as passionately about their local community bank as they do about their credit union. With the largest banks — the internationals, especially — it seems like doing business with them is not necessarily helping the local economy; they’re not as responsive to entrepreneurs or people who don’t fit into neat little boxes they can check off in their system.”

Pittsfield-based Berkshire Bank, for its part, has been careful to characterize its acquisition of Hampden as a way of doubling its commitment to Greater Springfield, not uprooting a locally headquartered bank with a 162-year presence.

“We are keeping local leadership and local decision making right here,” Gray said, noting that Hampden Bank President Glenn Welch will remain the combined bank’s regional president for the Pioneer Valley. “We are the largest bank headquartered in Western Mass., and when we look at our overall investment in the region, Springfield has to be a part of that. We are very committed to Glenn and his leadership and his commitment to this region.”

Checking the Landscape

Partly because of the economies of scale produced by the merger, Gray said the combined institution would grow more quickly than the two would have separately. The fate of individual branches, some of which now have overlapping footprints, is still being discussed, though Berkshire is determined, he added, to keep as many current Hampden employees in place as possible.

That brings up a common concern in the industry — overbranching. Strikingly, while the number of banks in the Bay State has been cut in half over the past 25 years, the number of total branches has risen by 12%. “You’ve got a lot more branching,” Forte said, “as well as more services that provide easier access to customers, like remote deposit capture, online banking, and mobile banking.”

Considering these trends, and the fact that real-estate is the second-highest cost for banks after personnel, one would expect banks to start closing branches, rather than open more, he noted. But that hasn’t happened yet.

“New England is overbanked in terms of the number of branches per household,” Crawford said. “And it’s higher than it needs to be. Look at the transaction levels, and look at how frequently people conduct business inside a branch, versus using a mobile device for bill pay, or even a call center. The reality is, there are probably too many bank branches right now, and that structure can’t be supported by the way customers do their banking these days.”

Perhaps that’s the next phase of what has become an intriguing and unpredictable game.

“Think of how much change banks have gone through, and imagine what they will look like in three years, seven years, or 10 years,” Crawford told BusinessWest. “We need to have leadership that can figure out what’s working and work with vendors to get there — and do it in a way that’s attractive to customers and cost-competitive with much larger players. That’s the challenge.”

Berkshire Hills Acquisition of Hampden Bank Creates $7B Institution

Berkshire Hills Bancorp’s recent acquisition of Hampden Bancorp — bringing Hampden Bank under the Berkshire Bank banner — means that, for the first time in generations, no bank will be headquartered in Springfield. But Berkshire leaders say customers and the community will both benefit from the merger.

“This in-market partnership will create a strong platform for serving our combined customers, while producing attractive returns for both our existing shareholders and the new shareholders from Hampden joining us in this transaction,” said Michael Daly, president and CEO of Pittsfield-based Berkshire Bank. “This merger complements our expansion initiatives in Central Massachusetts and Hartford, a combined market area that is the second-largest in New England.”

Berkshire Hills Bancorp and Hampden Bancorp have signed a definitive merger agreement under which Berkshire will acquire Hampden and its subsidiary, Hampden Bank, in an all-stock transaction valued at approximately $109 million. Berkshire’s total assets will increase to $7.1 billion, including the $706 million in acquired Hampden assets.

Sean Gray, Berkshire’s executive vice president of retail banking, said the move “deepens our investment and commitment to the marketplace. We’re already in Springfield and the surrounding communities, so this gives us better economies of scale in that marketplace, which allows is to do more, and we’re excited about that opportunity.”

The in-market merger is expected to create efficiencies, strategic growth, and market-share benefits for the consolidated operations of the two banks in the Springfield area. Hampden operates 10 branches in the Greater Springfield area and reported $508 million in net loans and $490 million in deposits as of Sept. 30, 2014. Berkshire operates 11 branches with $627 million in deposits in the same market area.

“We will move into the top-five position in deposit market share,” Daly said, “and plan to use this opportunity to further capitalize on our strong product set and culture of customer engagement.”

Gray echoed the concept of culture. “I think we started with like values. We believe that a community bank has a responsibility to the community, and I think Hampden Bank thinks about it the same way. There’s a mutual respect there,” he said, adding that “our CEO has a great relationship with their CEO, and they both felt that the time was right.”

He also noted that Berkshire, like Hampden, has a culture of community involvement through donations — $269,852 since 2013 — and employee volunteerism.

Glenn Welch, president and CEO of Hampden Bank — who will become Berkshire’s regional president for the Pioneer Valley — said he is “delighted to be joining the Berkshire franchise. Our two banks share rich histories, consistent core values, and a strong commitment to customers and communities. I’m proud of our 162 years of serving customers in our markets and believe the combination created by our two companies will benefit our clients, communities, and shareholders.”

Under the terms of the merger agreement, each outstanding share of Hampden common stock will be exchanged for 0.81 shares of Berkshire Hills common stock. The merger is valued at $20.53 per share of Hampden common stock based on the $25.35 average closing price of Berkshire’s stock for the five-day period ending Nov. 3, 2014. The $20.53 per-share value represents 133% of Hampden’s $15.49 tangible book value per share and a 6.0% premium to core deposits based on financial information as of Sept. 30, 2014.

Gray conceded that the merger could lead to closings where Berkshire and Hampden have an overlapping branch presence, but nothing has been decided yet.

“Right now, we’re in the evaluation process,” he said. As for employees, “obviously, there will be some redundancy in jobs. But Hampden has 126 employees, and Berkshire right now has 102 openings. Will each of those employees map directly to these openings? We don’t know yet, but we do have a track record here.”

Specifically, he referred to Berkshire’s acquisition of Legacy Bancorp in 2010. “We were able to retain a good majority of those jobs. We put a lot of emphasis on that part of the evaluation process.”

Meanwhile, “from a customer perspective, they will have more branches,” Gray said. “We’ll be looking at what makes sense moving forward, but at the end of the day, the customers of this region will have enhanced services and more total branches.”


Joseph Bednar can be reached at [email protected]

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