Analysts believe Eastern Bank’s all-cash purchase of Century Bank will give it a significant advantage over other community banks in southern New England.

The combination of two of the largest banks based in the Greater Boston area will create a financial institution with about $22 billion in assets. Analysts say this combination will position Eastern Bank to continue to grow, giving the bank a competitive advantage that will be hard to replicate. 

When Eastern Bank decided to convert to a stock bank last year, the Boston-based bank cited mergers and acquisitions as one of the reasons for abandoning its status as the country’s oldest and largest mutual bank.  

Just six months after raising $1.7 billion in its initial public offering, Boston-based Eastern Bank has made its first move, agreeing to acquire Medford-based Century Bank in an all-cash deal. 

“From the get-go, [Eastern Bank was] very outspoken about opportunities that could come at any time, and they wanted to be ready to jump in and execute,” said Damon DelMonte, a director of equity research at Keefe, Bruyette & Woods. “I think this deal is an exact example of what they were talking about.” 

Eastern Leveraged IPO Capital 

The deal announced on April 7 calls for Eastern Bank to buy Century Bank, the state’s largest family-run bank, for $642 million, about one-third of the capital Eastern raised in its initial public offering last fall.  

While this is the third acquisition announced this year involving banks with a presence in the Greater Boston market, it is the only one with banks from the same market. Because most of Century Bank’s branches are within 3 miles of an Eastern Bank, branch closings will bring opportunities for cost savings, DelMonte said. The bank expects savings of 45 percent of Century Bank’s existing expenses.  

Using all cash for the transaction will dilute the bank’s tangible book value at a higher rate than an all-stock deal, DelMonte said, but it will also allow for more growth in earnings per share, creating meaningful earnings for Eastern Bank. 

In an investor presentation about the deal, Eastern Bank compared the Century acquisition with a share repurchase, another use it could have made with the capital, although not until a year after the IPO and even then subject to additional regulatory limitations during the first three years after the IPO. 

Eastern said that both the Century acquisition and a share repurchase program would earn back the tangible book value in four years, but the bank said the earnings per share would see a 55 percent accretion compared to 40 percent with a share repurchase.  

“Executive management has been pretty vocal and pretty transparent that they were going to seek to leverage the $1.7 billion in proceeds from the conversion IPO,” said David Bishop, a senior analyst with Seaport Global. “[The acquisition] looks to be a darn good leveraging of that excess capital.” 

Bishop said the deal still leaves Eastern well–capitalized and expects the company to implement a share repurchase program later this year. He added that Eastern’s decision to increase its dividend by 33 percent, which was announced at the same time as the acquisition, showed that Eastern’s management has a promising outlook for the near- and intermediate-term. 

Cross-Sell Opportunities Opened 

Despite the high price tag for Century Bank, the deal will solidify Eastern Bank’s position in the Boston metropolitan statistical area, Laurie Havener Hunsicker, managing director of equity research for banks at Compass Point Research & Trading LLC, wrote in an analyst’s report.  

“In our view, [Eastern Bank] now has a Boston ‘moat’ that can’t be replicated,” Hunsicker said, using a term that describes a competitive advantage in business. 

Diane McLaughlin

Hunsicker pointed out that the combined bank would rank fifth in deposit share in the area just behind TD Bank and nearly double the deposits of the next largest Massachusetts-based bank, Rockland Trust.  

The deal, which is subject to regulatory and shareholder approval, would also give Eastern Bank access to Century Bank’s health care, marijuana and higher education lending specialties. 

In getting these specialty products and Century’s expertise, Bishop said the combined capital of the two banks raises the possibility for larger loans. 

Another opportunity for growth will be exposing Eastern’s own lending products, which DelMonte said are broader than Century’s, to its new customers. Eastern also has an insurance division, Eastern Insurance Group, and wealth management products and services that it can cross-sell as well. DelMonte said these products give Eastern the added benefit of bringing in non-interest income.  

“When you look at this combined company, you now have a $22 billion–asset, homegrown bank in the Greater Boston area, with outreaches throughout all of Southern New England,” DelMonte said. “You have a very strong business and commercially–focused lender who I think will have a lot of opportunity to participate in the future growth and development across the Greater Boston and New England area.”