With low interest rates forecast for the next couple of years, the narrowing spread between what banks pay on deposits and earn on loans will play a role in the M&A market, leading both buyers and sellers to look for opportunities.

After a seemingly quiet couple of years, bank mergers and acquisitions have picked up in Connecticut.

Economic factors and cost pressures will likely continue to drive M&A activity among community banks, especially the smaller ones, experts say. But with mergers comes disruption in customers’ lives and relationship with their financial institution.

“Because of the pace at which the mergers have happened, the pace of change has heightened the sense of customer disruption,” said Tom Senecal, president and CEO of Holyoke, Massachusetts-based PeoplesBank, which entered the Connecticut market in 2018 by acquiring First National Bank of Suffield.

Opportunities for Buyers and Sellers

With low interest rates forecast for the next couple of years, the narrowing spread between what banks pay on deposits and earn on loans will play a role in the M&A market, leading both buyers and sellers to look for opportunities.

“Because interest rates are going to stay low, that’s going to continue to put pressure on bank’s spreads and margins,” said Arthur Loomis, president of Loomis & Co., a New York-based investment bank that works extensively with community banks in the Northeast on mergers and acquisitions. “That’s going to continue to dampen the ability for community banks to grow their earnings.”

Loomis said 3 to 5 percent of community banks are acquired annually. M&A activity in Connecticut tends to run in cycles, Loomis said, which could mean less activity in the next couple of years. Mutual banks and credit unions could continue to combine, and Loomis said those with $300 million in total assets or less might seek to combine to improve technology and processes or receive support with compliance and regulatory exams.

Even within the current environment, banks can still survive.

“A smaller bank can survive and thrive, but they have to be a lot better about their business and their performance than they typically have been in the past,” Loomis said, referring generally to community banks.

Loomis has seen prices soften with M&A transactions so far this year compared to 2018, and he expects that trend to continue. Still, low interest rates could drive buyers to place a premium on banks with a high level of non-interest-bearing deposits or non-interest income, Loomis said.

Community banks looking to sell should consider more than the value on the date of the announcement or the closing, specifically evaluating the long-term return potential that a higher performing bank might offer, Loomis said.

Community banks are sold, not bought, Loomis said, and because banks have longstanding ties within their communities, some directors often don’t want to sell. They fear the stigma, optics and effects within the community, potentially leading to inertia among potential sellers.

People’s United Unites with United

The past year saw three banks complete mergers in Connecticut: Boston’s Berkshire Bank acquired Willimantic-based Savings Institute Bank and Trust Co.; Middletown-based Liberty Bank acquired Simsbury Bank and Trust Co.; and on Nov. 1, Bridgeport-based People’s United Bank acquired Hartford’s United Bank.

The latter combination will have ripple effects in towns across the state. People’s United recently announced that 18 Connecticut branches would close as a result of the merger. Another 12 will close in Massachusetts.

“The result will be a thoughtfully integrated branch network that has been optimized to eliminate overlap and deliver our combined customers continued convenient access to a People’s United branch,” Jack Barnes, People’s United Bank’s CEO, said in a recent statement about the branch closures. “Combined with our personalized mobile and online banking services, we feel our presence statewide is stronger than ever, and we look forward to building relationships with the loyal customers of United Bank.”

“We’re competing so fervently that we just absorb the costs. If you think about the smaller organizations, it’s just too expensive to compete.”
— Tom Senecal, president and CEO, PeoplesBank

Bridgeport-based People’s United had also acquired Farmington Bank and the Massachusetts-based Belmont Savings Bank in 2018.

Barnes said during the third quarter earnings call that mergers and acquisitions have given the bank opportunities to build deposits, gain market share and deepen relationships in the markets it serves.

“We think that’s all been very valuable and will continue to pay dividends for us,” Barnes said.

He was responding to a question about whether changing dynamics and market response would lead the bank to reconsider mergers and acquisitions as a tool for creating shareholder value. Declining interest rates will be a factor when considering future merger activity, Barnes said.

CFO David Rosato added: “The thoughtful M&A we’re doing is a long-term perspective about gaining market share and getting and growing new customer bases.”

Cost of Services Drives Combinations

Senecal, with PeoplesBank, said customers will often remain with an institution and accept any disruption associated with a merger, “as long as the disruption is not too disruptive.”

PeoplesBank, with retail branches in northern Hartford County and commercial operations south of Hartford, has already heard from Connecticut businesses looking for more continuity in their banking relationships, Senecal said. Small businesses appreciate banks that commit to retaining mutual ownership because the banks themselves are involved with local decisions, he added.

First National Bank of Suffield was a smaller organization, Senecal said, and sought a merger in part because it could not keep up with the costs and pace of change associated with compliance and technology. He has recently received other calls from banks looking at merger possibilities.

For years having assets around $500 million was a benchmark for successful banks, Senecal said, but in the past five to 10 years, he has seen that mark increase to around $1 billion to $1.5 billion.

Senecal noted that the costs for many of the advancements in banking – including mobile banking, interactive teller machines and expanded branch hours – have not been passed on to customers, who have benefited from the changes. He thinks banks will need to continue to consolidate to remain competitive in this environment.

“We’re competing so fervently that we just absorb the costs,” Senecal said. “If you think about the smaller organizations, it’s just too expensive to compete.”

Two credit unions merged in 2019: CT1 Media Credit Union merged into Hartford Federal Credit Union and Danbury Cyanamid Credit Union merged into Cornerstone Community Credit Union. Two more have been proposed: Connecticut Federal Credit Union’s merger into America’s First Network Credit Union and Merritt Federal Security Credit Union’s merger into Mutual Security Credit Union.

One bank merger is pending as well: Putnam-based Putnam Bank has agreed to merge with Centreville Bank, a Rhode Island-chartered savings bank.