🔒In wake of mega-mergers, no drastic pivots — yet — for CT’s community banks

Following two of the largest mergers and acquisitions Connecticut’s banking industry has ever seen, the chasm between larger lenders and community banks has widened even further.

The pending acquisition of People’s United Financial by New York’s M&T Bank announced in February will create a regional behemoth with $200 billion in total assets. People’s United’s home-state rival Webster Financial wasted no time responding, announcing last month a merger with New York-based Sterling National Bank, which will have $63 billion in combined assets.

Once the deals are finalized, those banks will be able to make larger loans and invest more in technology and talent, increasing their ability to compete with national players such as fellow Connecticut deposit leaders Bank of America, Wells Fargo and TD Bank.

The question is, where will that leave the 29 remaining Connecticut-based banks, none of which has assets over $7 billion?

Community bank leaders say they aren’t hitting the panic button just yet, or looking to immediately abandon their business models, though they admit the need to grow to remain competitive.

Once the regional mega-mergers are finalized, Middletown’s Liberty Bank, with $7 billion in assets, will be the second-largest lender headquartered in Connecticut.

While it has done six acquisitions since 1997, Liberty Bank isn’t planning to go public or buy a handful of other banks to keep up with its larger competitors, said CEO David Glidden.

“Right now, I don’t see that for Liberty,” said Glidden, adding that he and his board of directors are always willing to explore acquisitions that might make sense. “We’re very committed to mutuality.”

At Union Savings Bank, a Danbury-based mutual with $2 billion in assets, CEO Cynthia Merkle said banks like hers aren’t counting out mergers or acquisitions, and scale continues to become more important. However, credit quality has held up better than expected as the COVID-19 pandemic wanes, and smaller banks are still well capitalized.

Those banks also don’t have shareholders and big investors breathing down their necks to produce higher returns and dividends, which means there’s no immediate need to do deals, regardless of what larger banks are up to.

Many smaller banks may just stick to their knitting, pursuing organic growth and modest returns on behalf of their account-holder owners.

“Sometimes it’s strategically easier to steer a motor boat versus a cruise ship,” Merkle said.

At Naugatuck-based Ion Bank, which has $1.4 billion in assets, CEO David Rotatori said there are threats on the horizon for smaller banks, but that a bigger Webster and People’s United are not at the top of his list. Ion competes for commercial loans as large as $10 million with those larger banks, and Rotatori doesn’t expect them to cede that ground after their respective deals close later this year. Instead, he is thinking about the potential for financial services offered by giants like Apple, Google, PayPal and Amazon to one day make smaller banks obsolete, particularly as younger customers visit brick-and-mortar branches less and less.

“The fintech companies, I think, are a much bigger threat than any type of merger activity or increased competition from traditional banks,” Rotatori said.

While he appears to be in no rush, Rotatori said Ion still needs to continue to grow in order to attract talent and invest in technology. To that end, he’s discussed potential mergers with a few CEOs of similarly-sized banks over the past few years, but none ultimately came to fruition.

“Most mutual banks that talk about this, the first thing that comes up is ‘do we want to remain mutual?’ And the answer is usually a resounding ‘yes,’ ” he said.

So while some mutual mergers could be on the horizon, IPOs may be less likely, he said.

Seize the day

Community bank CEOs say they are excited by a perceived chance to peel off customers and deposits from the two big banks after their deals close.

People’s United will change its name to M&T. Webster will keep its name but relocate its headquarters from Waterbury to Stamford. Some branches will close. Accounts will be converted to new IT systems.

Those are the types of events that can create customer churn, and smaller banks may try to seize on that.

Similar poaching of talent and deposits happened after People’s United acquired United Bank and Farmington Bank in recent years.

“We’re in a very strong position to grow organically and really take advantage of this disruption in the market,” Glidden said.

Rotatori said he sees opportunity with Webster Bank’s decision to shift its headquarters out of Waterbury, though the bank will still keep a presence in the Brass City.

Perhaps just as impactful is People’s United’s recent decision to shutter nearly 100 of its Stop & Shop-based bank branches, more than two-thirds of them in Connecticut.

“That to us was huge news and I think creates a tremendous amount of opportunity for banks like us,” Rotatori said. “We’re already seeing customers coming to us because of that announcement.”

On her Fairfield County turf, Union Savings’ Merkle has already been competing against People’s United, Webster and M&T for years. She said she is excited about the opportunity to grab new customers, but also doesn’t expect any of the larger banks to willingly cede business.

“I think they’re probably going to keep their feet on the ground out in the marketplace,” Merkle said.

Commercial business focus

Since 2018, People’s United and Webster have announced a combined approximately 50 Connecticut branch closures.

The two regional banks are certainly not giving up on retail banking, but the extent to which they end up ceding some of those customers to smaller competitors may be a calculated move.

Webster CEO John Ciulla, who will keep his top title after the Sterling deal closes, confirmed to analysts on a call last month commercial lending has become increasingly important to both Webster and Sterling, suggesting that growing Webster’s health savings account niche may be a preferable way to grow deposits, rather than through standard consumer bank balances.

“... we are stewards of capital, we deploy capital to those businesses that have the highest opportunity to generate economic profits over time,” Ciulla said. “The real reason [Sterling CEO] Jack [Kopinsky] and I are sitting across the table is you’ve seen both of these banks over time transition to a more commercial footprint with an optimized and stable and solid retail footprint.”

“We care about those [retail] customers deeply, but we make sure that we are efficiently and effectively delivering for them,” he added.

While smaller banks are happy to poach away consumer business, they recognize there are potentially more profitable ways for bigger banks to deploy their capital.

“The commercial customers are generally more profitable,” Ion’s Rotatori said. “The branch is basically the most expensive thing that banks do, and we’ve proved during the pandemic that you really don’t need to go into a branch a lot of the time.”

Jared Shaw, an Avon-based senior equity analyst at Wells Fargo Securities who covers both Webster and People’s United, said the commercial focus is shared by many large regional banks across the country.

The largest national money-center banks are more incentivized by federal regulations to attract consumer deposits, which have a higher value when calculating bank liquidity levels. That has spurred some of the consumer-facing technology innovations, such as Bank of America’s “Erica” AI-enabled chatbot, according to Shaw.

“Big banks are incented to have retail deposits so they create products that help drive it, whereas banks like Webster and People’s United differentiate by going after commercial customers,” Shaw said.

CORRECTION: A previous version of this story said Liberty Bank would be the largest headquartered bank in Connecticut after the pending M&A deals involving Webster Bank and People's United Bank. Webster Bank will continue to be based in Connecticut after its merger with New York-based Sterling National Bank, but it will relocate its headquarters from Waterbury to Stamford.