Bank mergers increase as profits are squeezed

Call it a marriage of convenience. Years of rock-bottom interest rates and the rising costs of technology and regulation are pushing more small Massachusetts banks to merge.

Just a little more than month into the year, the Massachusetts Division of Banks is considering two mergers, after approving nine in 2015, the most in five years.

Analysts expect 2016 to be another busy year for bank mergers — here and across the country — as small and medium banks look for ways grow, cuts costs, and survive in an industry in which bigger increasingly seems better.

“Everyone has mergers on their mind,” said Stanley Ragalevsky, a partner in the Boston offices of K&L Gates LLP, who represents many Massachusetts banks.

Smaller banks remain under pressure as stubbornly low interest rates squeeze profits, and the cost of complying with the tougher laws and regulations that followed the 2008 financial crisis add costs, analysts said. Smaller banks also must invest in technology, such as mobile banking, to compete with large national banks, such as Bank of America Corp. of Charlotte, N.C.

Richard Bove, a financial analyst with Rafferty Capital Markets LLC, a New York brokerage firm, said he expects about 500 bank mergers nationwide over the next two years.

The rate of bank consolidation in Massachusetts has traditionally been slower than the rest of the country, in part because of the character of the industry here.

More than 130 banks call the state home and many are mutually owned, meaning they operate for the benefit of their depositors and are somewhat restricted in their ability to buy and sell other banks.

For example, mutuals must convert to a publicly-held-stock company and then wait for three years before they can be purchased by another publicly held bank.

In the past decades, state banks have consolidated at a pace of 2.4 percent a year, compared with 3 percent nationally, according to the Massachusetts Bankers Association, a trade group.

But in a survey the association did last month of bank chief executives, more than seven out of nine bankers said they expected the pace to quicken to 3 percent or more a year.

In the past, these mergers used to be the last resort for struggling banks or ones that didn’t have a new generation of leaders to take over.

But the combinations in the past year have been of healthy banks watching their margins shrink and costs grow.

Scituate Federal Savings Bank, with a $300 million in assets, had flirted with the idea of merging with another bank for years, but had opted to go it alone. Then more than a year ago, its leaders determined that low interest rates, and low profits on loans, were here to stay.

When a former suitor, S-Bank, a $200 million institution in Weymouth, proposed a liaison, Scituate Federal agreed, said Richard L. Rowe Jr., chief executive of Coastal Heritage Bank, the renamed combined bank.

“It was a tough road ahead,” Rowe said. “It was pretty apparent that as a bank we had to accumulate more mass to absorb the costs. We were still profitable, but the margins were thin.”

Coastal Heritage didn’t lay off staff in the merger or close branches, but the new bank is able to share expenses for necessary items, such as technology, Rowe said.

More smaller banks are looking for partners now because they don’t want to wait too long and find that their best match has been scooped up by another bank, said Kenneth Ehrlich, with Nutter McClennen & Fish LLP, a Boston law firm that handled eight New England bank mergers in 2015.

“There’s a sense that size does matter,” Ehrlich said. “The fear is that if you go looking for a merger partner, five years from now, there won’t be anybody.”

Despite consolidation in the banking industry, David Cotney, the state’s banking commissioner, said Massachusetts consumers still have plenty of banking options, including national players and credit unions.

“Consumer access is one of the criteria that we use to judge every merger transaction,” Cotney said. Massachusetts, he added, has a “large and healthy banking market.”