December 6, 2004
Is bigger better? | The consolidation trend continues in Maine banking
By Taylor Smith
Later this month, the 40 Maine branches of Providence, R.I.-based Fleet National Bank will swap their signs, trumpeting the arrival of Bank of America, the Charlotte, N.C.-based industry behemoth that in April announced its acquisition of Fleet. Meanwhile, Portland-based Banknorth Group, which over the last decade cobbled together a patchwork empire of community banks to become the largest independent New England bank, announced in August that it would sell a majority stake to Toronto-Dominion Bank, a Canadian institution looking for a foothold south of the border. And in mid-January, shareholders of First National Lincoln Corp., parent company of the First National Bank of Damariscotta, will vote on a proposed merger with FNB Bankshares, which controls the First National Bank of Bar Harbor.
Over the next few months, as these deals are sewn up, the competitive landscape in Maine banking is poised to change dramatically. The shift from Fleet to Bank of America will allow customers in Maine access to nearly 17,000 ATMs and more than 5,800 bank branches throughout 29 states. (Bank of America also has a presence in 35 countries around the globe.) "It meant huge consolidation and huge savings," Chris Pinkham, president of the Maine Association of Community Banks, says of the rationale for the deal.
And Banknorth will relinquish its short-lived title as the largest independent bank in New England when its deal with TD Bank closes during the first quarter of 2005. (Shareholders ˆ some of whom have been quite vocal in their opposition to the deal ˆ are expected to vote on the deal later this month or in early January. See "Foreign exchange," p. 25.) The impending merger between First National Lincoln and FNB Bankshares, while on a smaller scale than the Fleet and Banknorth deals, will expand the bank's footprint from Wiscasset to Calais, making it the sixth-largest bank operating in Maine, with deposits of well more than half a billion dollars.
With Banknorth Canadian-owned, Bangor Savings Bank will move into position as the largest Maine-based bank, with Camden National Bank, First National Lincoln and Kennebunk Savings Bank following behind. According to a number of industry experts across the state, mergers and acquisitions among Maine banks large and small will continue in the near term, but there's no clear consensus on what that will entail. Speculation on how many deals there will be, when they will happen or even which institutions will be involved is cloudy at best.
Some industry watchers are convinced that the consolidation trend is winding down, especially as the number of potential acquisition targets has been dramatically reduced in the wake of recent deals. But others expect to see the bank deals continue as heightened industry regulations and strong consumer demand for a wide range of banking products and services put pressure on banks' bottom lines. "It's not over," says Rick Borgman, associate professor of finance at the University of Maine's Maine Business School in Orono. "The forces that drive these mergers are still there."
Perhaps the most important question is not whether the consolidation will continue, but, rather, whether it must continue ˆ particularly in Maine, where the vast majority of the state's roughly 40 banks are on the smaller end of the banking spectrum. According to Federal Deposit Insurance Corp. data, the three largest banks operating in Maine ˆ Banknorth, Cleveland-based Key Bank and Fleet ˆ control nearly 40% of the state's banking market, leaving more than 35 institutions to split up the rest.
So is it possible for small, community-based banks to thrive, or must they band together for survival? "I think that's a question [banks] constantly ask themselves and their boards of directors," says Mark Walker, vice president and counsel for the Augusta-based Maine Bankers Association. "But in most cases, they're not in a position where they have to merge or consolidate with anyone. None of them are in trouble. They don't have to look for a merger and they don't have to consolidate to serve their customers."
The strength of small
Some industry experts are convinced that the consolidation wave largely has run its course since two of the largest financial institutions operating in Maine ˆ Banknorth and Fleet ˆ were themselves taken over by even larger players. Jim Ackor, a bank analyst at RBC Capital Markets in Portland, is firmly in that camp. The reason, he says, stems from the widening gulf between large and small banks, which reduces the likelihood that another major national bank will find something of value in the Maine market. "Banknorth was the big one by a long shot, and now you have an extraordinarily large entity that's not saleable," he says, referring to Banknorth's size following the TD Bank deal. "You also have a sizable number of small community-based banks and savings banks, and not much in between. The banking industry is evolving, and that evolution has already played out" in Maine.
Ackor says banks of different sizes serve different niches for customers; for larger banks, it's the promise of a wide range of products and services, from sophisticated investment instruments to online banking. For small banks, it's the promise of unparalleled customer service. "You're always going to have a portion of the retail banking or small-business banking population that is going to be more comfortable banking with a small, local institution where you can recognize and name the person behind the desk," he says. "There's always going to be room for that small, service-oriented community bank, and other [people] are always going to opt to go with the Banknorths or the Bank of Americas of the world."
Walker agrees with Ackor, adding that there will be fewer mergers and acquisitions in Maine because many local banks aren't actively looking to push beyond their home turf. "There are a lot of institutions that don't want to expand," he says. "They want to grow, but they want to do it naturally by serving their market area and growing naturally with the economy and their customers."
That said, Walker says he wouldn't be surprised to see a handful of deals in the next few years. The most likely scenario, he says, is that a mid-sized regional bank would come in and strike a deal with a relatively small Maine-based bank in hopes of gaining market share in a particular region. He uses the example of Chittenden Bank, a Burlington, Vt.-based institution that since the mid-90s has grown into a New England banking powerhouse with banks in four states and more than $5 billion in deposits. The bank in 2001 continued its expansion into Maine with acquisitions of Portland-based Maine Bank & Trust and Kennebunk-based Ocean National. (The banks today operate independently under the umbrella of Chittenden Corp.)
Larger banks, he says, will have a hard time finding another Maine-based bank that's as attractive an acquisition target as Banknorth, while deals among smaller banks are unlikely because "such banks are happy and content to fill that niche" as community banks.
However, national statistics suggest the consolidation will continue: According to the FDIC, the number of banks in the United States declined nearly 50% between 1985 and 2003, dropping from nearly 15,000 banks to less than 8,000. That decline was caused largely by the disappearance of small community banks through mergers and acquisitions. During that period, the big banks got bigger by snapping up their smaller competitors; the FDIC reports that the nation's largest banks ˆ those with assets of $10 billion or higher ˆ controlled 73% of the industry's assets last year, up from 42% in 1984.
"Fifteen or 20 years from now will show a much smaller number of banks nationwide," says Ackor. "But consumers are still going to left with plenty of options. They'll be able to make a decision between convenience and access to a broader breadth of products and services rather than the handholding and above-average service from the local bank. There are plenty of customers who want one or the other."
The power of big
Though there will always be consumers who prefer what Ackor calls the "handholding" from community banks, it's clear that the trend nationally is toward ever larger financial institutions. According to Chris Emmons, president and CEO of Gorham Savings Bank, part of what's driving that trend is the fact that consumers used to the array of services they can receive at large institutions increasingly demand them from their hometown bank as well. In addition, small banks must conform to what Emmons describes as increasingly costly regulatory burdens.
To achieve the revenue growth necessary to support increased services and regulatory compliance, Gorham Savings has decided to grow its business branch by branch, most recently with the addition of two branches in Portland. However, Emmons says, larger banks have stronger technology infrastructure and larger marketing budgets; it's much harder for a small or mid-sized bank to compete on price with the larger institutions. "You kind of accept it as the way in which the industry has chosen to go," he says. "It's driven by the economies of managing your bottom line, but it's also conforming to the regulatory burdens, making investments that are needed in technology and people. For the smaller banks, it's challenging."
Greg McBride, a senior financial analyst with North Palm Beach, Fla.-based Bankrate, says the nationwide trend is being driven by an increasingly competitive banking environment where expanding into new markets often means a boost for a bank's bottom line. "The greatest way to grow is through acquisitions," he says. "It's the quickest and least expensive way to get into a [new] market in a significant way."
As a result, some banks are finding that striking a deal with a peer makes smart business sense ˆ especially in terms of expansion. Despite the reduced number of banks nationwide, the FDIC reports that the number of bank branches has risen substantially in recent years. (The FDIC attributes much of that to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, which eased interstate banking restrictions.) In Maine, the state Bureau of Financial Institutions reports that the state has experienced a net gain of 71 bank branches since 1985.
The FDIC also reports that banks with $1 billion or less in assets ˆ which represents more than 90% of Maine banks ˆ are "notably" more efficient as they operate more branches. The agency found that banks with more than 11 branches have a median non-interest income ratio 82% higher than banks with one office. A number of Maine banks have benefited from branch expansion, with perhaps the most significant being Bangor Savings Bank's 1998 purchase of 31 Fleet branches. The deal nearly tripled Bangor Savings' total number of branches; the move was widely seen as a defining moment for the company that's poised to take the title of the largest Maine-based bank from Banknorth.
The conventional wisdom surrounding the $48 million deal between First National Lincoln and FNB Bankshares also points to added efficiency. Thanks to the late-summer media splash surrounding the Banknorth sale, the deal hasn't gotten much press since it was announced in August. And as the mid-January shareholder vote approaches, First National Lincoln executives are tight-lipped about the deal. (CEO Dan Daigneault declined to speak to Mainebiz for this story.) Regardless, the planned combination of the two banks will create a significant player in the midcoast and downeast regions. A Maine Bureau of Financial Institutions order approving the merger notes that the combined institution, which will have 14 branches from Wiscasset to Calais, "is expected to be a stronger competitor, benefiting from an increased capital and asset base, expanded service market and increased efficiencies produced by consolidation of operations and economies of scale."
For now, though, it seems that other Maine banks can afford not to jump on the consolidation bandwagon. There's not an oversupply of banks in Maine, the institutions themselves are in good financial shape according to industry experts and there are enough customers happy to trade online bill-paying for some local charm. But as the national consolidation trend continues ˆ as it has for nearly two decades ˆ it's a fairly safe bet that the number of small community banks today will decline in the years to come. "It's going to be harder and harder to stay small," says Borgman of UMaine. "The marketplace is getting trained to expect a little bit more from their banks, and it's very hard to do for banks who are all by themselves. They might not want to become big, but they're facing the same forces that are driving the same mergers around the world."
Over the next few months, as these deals are sewn up, the competitive landscape in Maine banking is poised to change dramatically. The shift from Fleet to Bank of America will allow customers in Maine access to nearly 17,000 ATMs and more than 5,800 bank branches throughout 29 states. (Bank of America also has a presence in 35 countries around the globe.) "It meant huge consolidation and huge savings," Chris Pinkham, president of the Maine Association of Community Banks, says of the rationale for the deal.
And Banknorth will relinquish its short-lived title as the largest independent bank in New England when its deal with TD Bank closes during the first quarter of 2005. (Shareholders ˆ some of whom have been quite vocal in their opposition to the deal ˆ are expected to vote on the deal later this month or in early January. See "Foreign exchange," p. 25.) The impending merger between First National Lincoln and FNB Bankshares, while on a smaller scale than the Fleet and Banknorth deals, will expand the bank's footprint from Wiscasset to Calais, making it the sixth-largest bank operating in Maine, with deposits of well more than half a billion dollars.
With Banknorth Canadian-owned, Bangor Savings Bank will move into position as the largest Maine-based bank, with Camden National Bank, First National Lincoln and Kennebunk Savings Bank following behind. According to a number of industry experts across the state, mergers and acquisitions among Maine banks large and small will continue in the near term, but there's no clear consensus on what that will entail. Speculation on how many deals there will be, when they will happen or even which institutions will be involved is cloudy at best.
Some industry watchers are convinced that the consolidation trend is winding down, especially as the number of potential acquisition targets has been dramatically reduced in the wake of recent deals. But others expect to see the bank deals continue as heightened industry regulations and strong consumer demand for a wide range of banking products and services put pressure on banks' bottom lines. "It's not over," says Rick Borgman, associate professor of finance at the University of Maine's Maine Business School in Orono. "The forces that drive these mergers are still there."
Perhaps the most important question is not whether the consolidation will continue, but, rather, whether it must continue ˆ particularly in Maine, where the vast majority of the state's roughly 40 banks are on the smaller end of the banking spectrum. According to Federal Deposit Insurance Corp. data, the three largest banks operating in Maine ˆ Banknorth, Cleveland-based Key Bank and Fleet ˆ control nearly 40% of the state's banking market, leaving more than 35 institutions to split up the rest.
So is it possible for small, community-based banks to thrive, or must they band together for survival? "I think that's a question [banks] constantly ask themselves and their boards of directors," says Mark Walker, vice president and counsel for the Augusta-based Maine Bankers Association. "But in most cases, they're not in a position where they have to merge or consolidate with anyone. None of them are in trouble. They don't have to look for a merger and they don't have to consolidate to serve their customers."
The strength of small
Some industry experts are convinced that the consolidation wave largely has run its course since two of the largest financial institutions operating in Maine ˆ Banknorth and Fleet ˆ were themselves taken over by even larger players. Jim Ackor, a bank analyst at RBC Capital Markets in Portland, is firmly in that camp. The reason, he says, stems from the widening gulf between large and small banks, which reduces the likelihood that another major national bank will find something of value in the Maine market. "Banknorth was the big one by a long shot, and now you have an extraordinarily large entity that's not saleable," he says, referring to Banknorth's size following the TD Bank deal. "You also have a sizable number of small community-based banks and savings banks, and not much in between. The banking industry is evolving, and that evolution has already played out" in Maine.
Ackor says banks of different sizes serve different niches for customers; for larger banks, it's the promise of a wide range of products and services, from sophisticated investment instruments to online banking. For small banks, it's the promise of unparalleled customer service. "You're always going to have a portion of the retail banking or small-business banking population that is going to be more comfortable banking with a small, local institution where you can recognize and name the person behind the desk," he says. "There's always going to be room for that small, service-oriented community bank, and other [people] are always going to opt to go with the Banknorths or the Bank of Americas of the world."
Walker agrees with Ackor, adding that there will be fewer mergers and acquisitions in Maine because many local banks aren't actively looking to push beyond their home turf. "There are a lot of institutions that don't want to expand," he says. "They want to grow, but they want to do it naturally by serving their market area and growing naturally with the economy and their customers."
That said, Walker says he wouldn't be surprised to see a handful of deals in the next few years. The most likely scenario, he says, is that a mid-sized regional bank would come in and strike a deal with a relatively small Maine-based bank in hopes of gaining market share in a particular region. He uses the example of Chittenden Bank, a Burlington, Vt.-based institution that since the mid-90s has grown into a New England banking powerhouse with banks in four states and more than $5 billion in deposits. The bank in 2001 continued its expansion into Maine with acquisitions of Portland-based Maine Bank & Trust and Kennebunk-based Ocean National. (The banks today operate independently under the umbrella of Chittenden Corp.)
Larger banks, he says, will have a hard time finding another Maine-based bank that's as attractive an acquisition target as Banknorth, while deals among smaller banks are unlikely because "such banks are happy and content to fill that niche" as community banks.
However, national statistics suggest the consolidation will continue: According to the FDIC, the number of banks in the United States declined nearly 50% between 1985 and 2003, dropping from nearly 15,000 banks to less than 8,000. That decline was caused largely by the disappearance of small community banks through mergers and acquisitions. During that period, the big banks got bigger by snapping up their smaller competitors; the FDIC reports that the nation's largest banks ˆ those with assets of $10 billion or higher ˆ controlled 73% of the industry's assets last year, up from 42% in 1984.
"Fifteen or 20 years from now will show a much smaller number of banks nationwide," says Ackor. "But consumers are still going to left with plenty of options. They'll be able to make a decision between convenience and access to a broader breadth of products and services rather than the handholding and above-average service from the local bank. There are plenty of customers who want one or the other."
The power of big
Though there will always be consumers who prefer what Ackor calls the "handholding" from community banks, it's clear that the trend nationally is toward ever larger financial institutions. According to Chris Emmons, president and CEO of Gorham Savings Bank, part of what's driving that trend is the fact that consumers used to the array of services they can receive at large institutions increasingly demand them from their hometown bank as well. In addition, small banks must conform to what Emmons describes as increasingly costly regulatory burdens.
To achieve the revenue growth necessary to support increased services and regulatory compliance, Gorham Savings has decided to grow its business branch by branch, most recently with the addition of two branches in Portland. However, Emmons says, larger banks have stronger technology infrastructure and larger marketing budgets; it's much harder for a small or mid-sized bank to compete on price with the larger institutions. "You kind of accept it as the way in which the industry has chosen to go," he says. "It's driven by the economies of managing your bottom line, but it's also conforming to the regulatory burdens, making investments that are needed in technology and people. For the smaller banks, it's challenging."
Greg McBride, a senior financial analyst with North Palm Beach, Fla.-based Bankrate, says the nationwide trend is being driven by an increasingly competitive banking environment where expanding into new markets often means a boost for a bank's bottom line. "The greatest way to grow is through acquisitions," he says. "It's the quickest and least expensive way to get into a [new] market in a significant way."
As a result, some banks are finding that striking a deal with a peer makes smart business sense ˆ especially in terms of expansion. Despite the reduced number of banks nationwide, the FDIC reports that the number of bank branches has risen substantially in recent years. (The FDIC attributes much of that to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, which eased interstate banking restrictions.) In Maine, the state Bureau of Financial Institutions reports that the state has experienced a net gain of 71 bank branches since 1985.
The FDIC also reports that banks with $1 billion or less in assets ˆ which represents more than 90% of Maine banks ˆ are "notably" more efficient as they operate more branches. The agency found that banks with more than 11 branches have a median non-interest income ratio 82% higher than banks with one office. A number of Maine banks have benefited from branch expansion, with perhaps the most significant being Bangor Savings Bank's 1998 purchase of 31 Fleet branches. The deal nearly tripled Bangor Savings' total number of branches; the move was widely seen as a defining moment for the company that's poised to take the title of the largest Maine-based bank from Banknorth.
The conventional wisdom surrounding the $48 million deal between First National Lincoln and FNB Bankshares also points to added efficiency. Thanks to the late-summer media splash surrounding the Banknorth sale, the deal hasn't gotten much press since it was announced in August. And as the mid-January shareholder vote approaches, First National Lincoln executives are tight-lipped about the deal. (CEO Dan Daigneault declined to speak to Mainebiz for this story.) Regardless, the planned combination of the two banks will create a significant player in the midcoast and downeast regions. A Maine Bureau of Financial Institutions order approving the merger notes that the combined institution, which will have 14 branches from Wiscasset to Calais, "is expected to be a stronger competitor, benefiting from an increased capital and asset base, expanded service market and increased efficiencies produced by consolidation of operations and economies of scale."
For now, though, it seems that other Maine banks can afford not to jump on the consolidation bandwagon. There's not an oversupply of banks in Maine, the institutions themselves are in good financial shape according to industry experts and there are enough customers happy to trade online bill-paying for some local charm. But as the national consolidation trend continues ˆ as it has for nearly two decades ˆ it's a fairly safe bet that the number of small community banks today will decline in the years to come. "It's going to be harder and harder to stay small," says Borgman of UMaine. "The marketplace is getting trained to expect a little bit more from their banks, and it's very hard to do for banks who are all by themselves. They might not want to become big, but they're facing the same forces that are driving the same mergers around the world."
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