Deja Vu All Over Again: Getting Too Big to Succeed?

On March 26 Calculated Risk posted an “unofficial” list of troubled banks, some 680, give or take a few.  Most of these banks were small to modest in size, with total assets of $500 million or less.  Many were also thrift or savings institutions.  Some were stock banks, others were not.

No banks in the state of total tax paranoia, where I reside, were on that list.  At least not to this point.

But there was one bank on the list in an adjoining state that peaked my interest — that being Butler Bank, or Butler Coop as we knew it, located just over the border in Lowell, Massachusetts. Steven Syre, in his April 9 column in the Boston Globe, did an article on what had become the sad status of Butler.

For those of us who were around during the great S&L and bank debacles of the late ‘80s and early ‘90s, Butler Coop was a small, conservative and somewhat stodgy organization with a sound underwriting policy.  It stuck to home mortgages and other consumer debt, staying away from the commercial lending activities that ultimately proved to be the undoing of many of its brethren.  It also had no branches and stuck to its established market area.

But after weathering the initial debacle, things changed quite drastically.  The bank began to heavily engage in commercial residential construction lending as real estate started to boom in the early part of year 2000.  Reports suggest an annual loan growth rate of 20-25% for the five years up to 2006, when it hit 30%.  The growth was fueled, at least in good part, by the establishment of a loan production office in Kennebunk, Maine, somewhere around 2003.  Loan production offices, especially ones located so far away from primary market areas normally, in my experience, produce a large quantity of loans, not necessarily of good quality.

But there were several other events that took place during 2006 and appear to have had influence on the future of the bank that Syre fails to mention.  Among these is the establishment of a branch in North Andover which expanded the market into an opulent area.  Also and perhaps more significant, was the acquisition of the Marlborough Cooperative Bank which was agreed to at the end of 2006 and consummated in the late spring of 2007.  This again expanded the market into potentially opulent areas.  It should be noted that Marlborough Coop posted a loss of $127,000 for year 2006 while Butler showed earnings to some $2 million for the same year.  As part of the acquisition, Marlborough Coop Senior Management assumed a more active and influential role in the operation of the merged institution.  Not being familiar with the backgrounds of the individuals involved I’m not in a position to venture a guess as to any contribution they might have made to the problems of the bank, but there were enough red flags that someone, either in management, on the board of directors, or as outside auditors or examiners, should have noticed.

The initial banking debacle of the ‘80s and ‘90s was caused, at least in this area, by an overbuilding of residential condominiums to the point where supply exceeded demand.  Resulting property values, while they might not have crashed to the current degree, didn’t go through the roof either.  It took years to work the excess off, resulting in bankruptcy for many developers.  This time around the problem lies in the area of 55-and-over plus single-family opulent housing that people either can no longer afford or have chosen not to buy.  Once again it will take time to work the surplus off.

By the summer of 2007 the hemorrhaging had begun.  Butler found itself in trouble with completed construction projects that weren’t selling as hoped, and uncompleted ones that developers hadn’t finished and weren’t about to.  Among these is a 100-unit subdivision in Wells, Maine, a well-established opulent vacation community on the seacoast.  Like other areas, Seacoast Maine has been negatively impacted by the recession, after several years of extremely rapid growth which, like the bank growth, ultimately proved to be unsustainable.

Per Atrios, the Philadephia Blogger Duncan Black, on Friday, April 16 Butler Bank got “eated”, i.e. closed down by the FDIC.  Its branches and operations were taken over by Peoples United, a Connecticut-based outfit of some 300 branches and $22 billion in assets, which is looking to expand its holdings in Eastern Massachusetts.  As is FDIC policy, top bank executives were immediately shown the door.  However their futures aren’t as bad as it may seem  – the cronyism that is rampant in the banking and finance industry will see to that.  For the moment Butler employees and lower-level management are being retained to operate the new branches of what is now Peoples United.  I say “for the moment” because personal experience suggests it will be just that: while a few will be retained, the majority will eventually be let go to join the ranks of the unemployed.

The demise of Butler won’t mean much in historical terms.  Being a mutual it had no shareholders, so there’s no whining from that quarter. However it is important in that local communities and their business have lost a potential source of funding they can’t afford to lose.  Yes, there is a succeeding institution, again for the moment, but it is new to the communities and its underlying policies may not allow it to provide the level of service necessary to sustain the customer base it has acquired.  Key to this is interest rates, i.e. can the succeeding bank survive on the loan rates the failed bank was charging its borrowers.

The moral to all this is quite simple.  Had Butler management and directors understood the limits of growth the bank might be viable today.  Sometimes banks can get too big to succeed.  Venturing beyond established market areas, for a community bank, entails a high probability of potential loss.  In the case of Southern Maine bank people should have found out why banks in the area that were familiar with the territory, had chosen not to do the deals in question.  There had to be reasons.

This saga will be played out at other locations before things improve.  Eventually banks will come along and pick up some of the pieces.  However this will take time, especially if, has been the case in the past, the movers and shakers promoting the new banks are the same as those who were involved in the old ones.  Stay tuned.   It will be déjà vu all over again.