Local Bank Consolidation: Community Banks Seek Like-Minded Partners
By Sloane M. Perron
Community banks have many connotations associated with them. For the Federal Deposit Insurance Corp., the term refers to any financial institution with less than $10 billion in assets, but for consumers it often refers to a financial institution that is accessible, connected to the community and which has a vested interest in the success of its members.
In the famous holiday movie “It’s A Wonderful Life”, the big banks were represented by the opportunistic and power-hungry Mr. Potter, who tried to acquire George Bailey’s sound community bank, which served everyone. Although it is an overly simplistic depiction of the banking system, the film illustrates a reality that small community banks are going through: consolidations and mergers.
Sometimes banks choose to consolidate in order to provide their customers with access to larger loans and better resources, while other times they join together as part of a competitive strategy in the face of banks with more assets. Whatever the reason, the network of community banks in central Massachusetts has transformed over the decades as smaller banks join forces to create new entities.
Pictures | Courtesy | Bay State Savings Bank
Seth Pitts, Chief Financial Officer and Executive Vice President of Bay State Savings Bank
“I believe that in some cases when we look at the landscape and we don’t see the names that we saw when we were younger, sometimes when these banks come together, it’s done so that they can find these synergies to continue to help more people and I think the more people we help, the better off everyone is,” said Seth Pitts, chief financial officer and executive vice president of Bay State Savings Bank in Worcester, which has $469 million in assets.
Chart: fewer banks, more assets
Economies of Scale
Diversity of choice and competition are essential in any market, and banking is no different. Large corporate banks and small community banks all have unique goals, said Thomas Bartholomew, chairman of financial services firm Worcester Bartholomew & Co. Inc.
Thomas Bartholomew, Chairman, Bartholomew & Co.
Banks make money based on the difference between the amount they pay for deposits and the amount at which they can lend money. In addition to loans, large financial institutions have access to other means of revenue such as the sale of stocks, bonds, federal funds, preferred stocks, and matching fund loans and debt. Big banks have more assets and therefore more lending power, but that also means they inherit more risk.
“That’s what got us into these banking crises repeatedly is that regulators couldn’t assess what the risk really looked like,” Bartholomew said.
Local banks do not have the advantage of selling shares, which presents the challenge of not having funds competitive with large banks; however, they also waive the dangers of larger risks, especially those associated with high-stakes international loans.
Contrary to popular belief, consolidation doesn’t always indicate a community bank is in decline, Bartholomew said. More often than not, it’s because two institutions want to combine their assets and lending capabilities and lower their costs as part of a competitive strategy.
Economies of scale are key motivators for community bank consolidations as they try to cut overhead to stay competitive, he said.
Former banks like Flagship Bank and Trust Co. in Worcester, which merged with People’s United Financial Inc. of Connecticut, and First Massachusetts Bank in Worcester, which merged with TD Bank of Toronto, are just a few examples of local banks formerly known that consolidate .
From 2011 to 2021, the total number of banks in Massachusetts has shrunk by 34%, even as the total dollar value of their assets has increased by 66%, according to the FDIC.
Community banks’ most competitive advantage is their focus on service and relationship building, Bartholomew said.
“There is a desire to do business with community banks because they can get things done faster. You can tell your story to the president of the bank, maybe have someone listen to you, as opposed to a large community bank. Yet they [bigger banks] are capable of doing larger transactions, so there is a place for both,” he said.
Chart: Largest Central Massachusetts Community Banks, by Assets
Regardless of the size of their assets, all banks perform a unique function and are all central to the U.S. economy, said Ed Manzi, president and chief executive of Fidelity Bank in Leominster, which has 1.2 billion in assets.
Edward F. Manzi, Jr., Chairman and CEO of Fidelity Bank
“Assuming all banks are the same is like saying all restaurants are the same because they sell food,” he said.
The world of community banking faces both cyclical challenges, such as the natural rise and fall of the economy, and secular changes, such as the technological transformation of financial services, Manzi said.
Keeping abreast of the latest advancements is an expensive necessity, especially for smaller banks.
“You have lower market activity while you grow and spend money to continue to meet customer needs,” Manzi said.
Overhead costs are spent on hiring talented professionals for clients who prefer traditional front-desk services, while also investing in digital capabilities. To support escalating costs, community banks must constantly grow to stimulate cash flow.
Fidelity Bank itself has made three acquisitions in the past six years with Barre Savings Bank in 2016, Colonial Co-Operative Bank in 2018 and Family Federal Savings in 2020.
The leaders of each merged bank thought about the future and were culturally aligned with Fidelity Bank, Manzi said.
“The best way they could think of, in the long term, to help the customers, communities and colleagues who cared about their bank was to join a bigger bank like ours, join forces and have the additional resources to continue investing in their communities,” he said.
Selecting partner banks that support the same mission is the key to a sustainable acquisition. The merged banks were drawn to the bank’s values of helping customers achieve their individual financial goals.
“We believe it is a privilege to be a bank and to help people with their financial decisions and that privilege extends beyond trying to improve the quality of life in the communities in which these people live” , Manzi said.
Bay State’s Pitts, echoing the personal service offered by community banks, sees the entire banking industry from a holistic perspective instead of being focused on competition, a place where banks led by Mr. Potter and George Bailey could coexist.
“Harmony exists, and that’s a good thing. You have a choice to make, we’d love for him to be with us, but if not, that’s okay because we’re all here no matter what, whenever you need of us, we will always be there with your support,” Pitts says.