Eastern Bank executives believe the pandemic will cause both consumer and commercial banking customers to become much more digital in their banking habits. And they need a significant infusion of cash to meet the demand.

When Eastern Bank completes its planned initial public offering later this year, it will go from being the country’s oldest and largest mutual bank to one of Massachusetts’ biggest stock banks. 

And this transformation will affect more than Eastern Bank’s place in the banking landscape. It could reverberate throughout the state’s banking industry. 

With Eastern Bank planning to use some of the capital raised from the public offering on technology, community banks could face even more pressure to keep up, particularly as the pandemic has accelerated customers’ adoption of digital banking. Because Eastern also plans to look for mergers and acquisitions, some banks could decide to put themselves up for sale.  

As the coming years likely see more acquisitions and a changing banking landscape, another possibility looms – that Eastern could decide to sell itself.  

All this potential consolidation could leave a void in communities still accustomed to the bank’s presence, a void the remaining mutual banks and credit unions could fill. 

“There’s good news for the mutuals that are the next tier below Eastern in size,” 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. “Mutuals will be the long-term survivors. It won’t be the shareholder-owned ones because they’re going to gradually all be acquired.” 

Technology Push Planned 

Eastern Bank was founded in 1818, operating primarily in Salem and Lynn. The bank is now headquartered in Boston with 89 branches in Massachusetts and New Hampshire, plus administrative offices in Lynn and Brockton. A wholly owned subsidiary, Eastern Insurance Group, has grown through a series of acquisitions and operates mostly in Massachusetts, with additional offices in New Hampshire and Rhode Island. 

Eastern had total assets of $12.34 billion as of March 31, deposits of $10.3 billion and net loans of about $9 billion. Year-to-date net income through March 31 was $8.64 million, and $135.43 million for all of 2019. 

The portfolio includes $6.4 billion in commercial loans and $2.5 billion, in residential, according to a filing with the Securities and Exchange Commission. It also participates with other lenders in $1 billion worth of other loans. 

Eastern declined to speak to Banker & Tradesman, citing regulatory restrictions. But in its securities filing, the bank said its public offering was necessary to position the bank for what its leaders believe will be a rapidly evolving competitive landscape.  

“As we anticipate the competitive landscape that will emerge after our economy recovers from the negative impacts of the COVID-19 pandemic, we believe the most significant systemic challenge we will face is the accelerating pace of technological change driven by ubiquitous digital adoption by both consumer and commercial banking customers,” Eastern said. “We believe this trend has greatly amplified the importance of scale in banking, and the increasing benefit of scale exacerbates the challenge of competing with significantly larger banks and large information technology and e-commerce companies.” 

By raising capital, Eastern would have opportunities to work with financial technology firms on implementing newer products, including offerings banks and consumers didn’t realize they needed before the pandemic, said Kevin Olsen, senior vice president of payment solutions at the financial software company VSoft. 

“I really applaud them for what they’re doing,” Olsen said. “I think it’s awesome to see, and I expect great things to come out of it, but in a short period of time.” 

Eastern also plans to use the capital to offer relief for borrowers affected by COVID–19, it said. Long-term, the bank said it wanted to pursue profitable loan and deposit growth.  

More Resources for M&A 

More capital and status as a stock bank would also make Eastern more competitive when bidding for mergers and acquisitions, the bank said in its filing. 

The last two years have seen a number of bank acquisitions in Massachusetts, but none involving Eastern. Its last purchase was Centrix Bank & Trust in New Hampshire, in 2014, and before that the $324 million-asset, Brockton-based The Community Bank in 2012. It also bought Wainwright Bank & Trust, which had about $1 billion in assets when it was acquired in 2010. 

David Bishop, a senior vice president and senior research analyst with D.A. Davidson who covers Northeast stock banks like Rockland Trust and People’s United Bank, said now might be a good time for a bank like Eastern to enter the market to generate a significant amount of capital.  

Eastern’s existing technological lead and new investments fueled by the conversion could position it well for acquisitions. As banks assess the effects of the pandemic, including their digital offerings, Bishop said, they could seek out mergers, especially since the interest rate environment will continue to squeeze banks’ margins and limit technology investments they could make on their own. 

“I think Eastern will be in good shape to be acquisitive in the next couple of years,” Bishop said. 

Banks must wait three years after going public before being sold. Research by Compass Point Managing Director Laurie Havener Hunsicker shows that of 733 conversions since 1990, excluding mutual holding companies, 81 percent of those that were eligible ended up being sold. She added that sales happen on average five-and-a-half years after the initial public offering. 

Diane McLauglin

Loomis also said that Eastern Bank could end up selling itself, bulking up its size through acquisitions, perhaps even outside its region, before being acquired by another bank.  

Loomis said he was surprised by Eastern’s decision to go public, noting that mutual banks do not have to worry about shareholder returns and have more control over their destinies. Being a stock bank will also give Eastern more opportunities to do stock transactions during mergers and acquisitions. 

As more stock banks get acquired, Loomis said this could offer the state’s remaining mutual banks opportunities to thrive in their markets. He pointed to New Hampshire, where almost all of the state’s stock banks have already been acquired, leaving opportunities for Bank of New Hampshire and the banks in New Hampshire Mutual Bancorp.’s family to focus on the local market.