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By buying Wellesley Bank, Cambridge Trust Co. is opening up opportunities for its robust wealth management services to serve new clients.
When Cambridge Trust Company acquires Wellesley Bank next year, the private bank will finally have a foothold in a market close to – but just outside – its reach.
“We are neighbors, so to speak,” said Denis Sheahan, Cambridge Trust’s CEO. “Cambridge Trust had thought of expanding into the market Wellesley Bank is already in.”
The expansion will likely happen in the second quarter of 2020 when holding company Cambridge Bancorp acquires Wellesley Bancorp Inc. The all-stock deal, announced on Dec. 5, has a value of approximately $122 million. The merger would create a combined company with total assets of about $3.8 billion.
By acquiring branches in some of Massachusetts’ wealthiest communities, Cambridge Trust will join the ranks of companies tapping into the area’s wealth management opportunities.
Deal’s Wealth Management Roots
Cambridge Trust and Wellesley Bank have a common approach to banking, Sheahan said, with similar business models, strategic focus and products, including lending and wealth management. Cambridge Trust has offered wealth management services since the bank’s beginnings in 1890, and Sheahan sees opportunities in the new market.
Wellesley Bank’s branches are in its hometown, as well as Boston, Needham and Newton. The median household income, according to the U.S. Census Bureau’s American Community Survey estimates, is almost $177,000 in Wellesley, $142,000 in Needham and $134,000 in Newton. The state median household income is about $74,000.
Wellesley Bank, which opened in 1911, has operated for less than a decade in wealth management through its subsidiary, Wellesley Investment Partners.
Cambridge Trust’s deeper roots and broader capabilities in wealth management will allow it to respond to opportunities in Wellesley Bank’s market.
Wellesley Investment Partners manages about $300 million in wealth assets. Cambridge Trust has more than $3 billion in assets under management through operations in Massachusetts and New Hampshire. Wealth management assets are not included in a bank’s total assets.
Additionally, Cambridge Trust has fiduciary powers, Sheahan said, allowing it to manage trusts and estates, services not available through Wellesley.
In its annual report earlier this year, Wellesley Bancorp noted several risk factors related to its wealth management services, including strong competition in its geographic area.
Sheahan said Cambridge Trust’s deeper roots and broader capabilities in wealth management will allow it to respond to opportunities in Wellesley Bank’s market.
“We’re confident that we can bring the benefit of that scale to the marketplace and benefit existing and future clients with a broader service offering,” Sheahan said.
Instead of expanding further, Cambridge Trust plans to focus on integrating Wellesley Bank and a New Hampshire bank it recently purchased into its larger operation.
Low Interest Rates Lower Bank Values
The $122 million price tag does not suggest Cambridge Trust paid much of a premium for Wellesley’s relatively small wealth management services, 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.
The price for acquiring an average-performing bank is about 1 1/2 times tangible book value, or between 140 and 150 percent. This deal is worth 163 percent of book value, Loomis said, adding that a premium price would have been closer to double the tangible book value.
Loomis, who is not advising the banks on this merger, said the price reflects both Wellesley’s strengths as a franchise and its average performance as a bank. Prices have softened for bank mergers and acquisitions so far this year, Loomis said, a trend he sees in this transaction.
“The price paid reflects the softening in the marketplace,” Loomis said. “As long as interest rates remain low, values for banks are going to come down.”
The day after announcing the merger, Cambridge Trust revealed plans for a public offering, 479,000 shares of common stock at a price of $73 per share. If successful, the offering would raise $33.2 million for the company after underwriting discounts and commissions.
In a statement, Cambridge Bancorp said it plans to use the proceeds for “general corporate purposes, including funding organic growth and potential acquisitions.”
Sheahan said Cambridge Trust has enough capital to grow effectively, and raising capital would continue the bank’s growth opportunities.
He added that even considering the additional capital and upcoming changes to the current expected credit losses accounting methodology, also known as CECL, the Wellesley Bank merger offers “compelling financial returns” for Cambridge Trust.
Cambridge Plans to Consolidate Gains
Cambridge Trust does not plan to close any branches after the merger, and Sheahan pointed out that only Boston has branches of both banks, located in different parts of the city. He also does not expect to add branches or pursue another merger any time soon.
“We have enough to do with what we have in terms on capitalizing on opportunities in our existing market,” Sheahan said. “That needs to be our priority.”
Instead, he said the bank would work on integrating Wellesley and another recently acquired bank, New Hampshire’s six-branch, $524 million-assed Optima Bank, into Cambridge Trust, noting that “integration takes years, not months.”
Diane McLauglin
The Optima merger, which was completed in April, and the July system conversion have given the Cambridge Trust team the confidence to know the bank can handle the work involved with another merger, Sheahan said.
The leaders of both banks will remain after the merger. Thomas Fontaine, Wellesley Bank’s chairman, president and CEO, will join the combined company as chief banking officer. He will also be one of three Wellesley directors added to Cambridge Bancorp’s board of directors.
Loomis said most selling CEOs receive a change of control payment in connection with the merger. Fontaine’s decision to forego such a payment and remain an employee offers deal cost savings for Cambridge Trust, and may possibly preserve some operational jobs for Wellesley Bank’s staff.
“This implies that he’s really interested in remaining career–wise in the bank and community,” Loomis said. “I think that’s laudatory on his part – it wasn’t all about the money.”
Fontaine referred questions about the merger to Cambridge Trust but told Banker & Tradesman he found the opportunity compelling.
“I’m excited about the opportunity,” Fontaine said. “Cambridge Trust has a genuine commitment to its clients and the community, and I think together we can build a premier private banking company in Greater Boston and southern New Hampshire.”
