Investment analysts have praised Eastern Bank’s proposed acquisition of Cambridge Trust as “clever and strategic” and an opportunity to swap a slower-growing business line for a faster-growing one while gaining market share. iStock illustration
All eyes were on Eastern Bank when it announced merger with Cambridge Trust and sale of its Eastern Insurance Group to insurance company Arthur J. Gallagher & Co., and industry experts and analysts say that both banks are a perfect fit to help each other, based on what the other needs.
Analysts have called the deal “clever and strategic,” as Eastern let go of its steady-earning insurance business in exchange for higher growth prospects in wealth management and private banking, while also getting Cambridge Trust’s expertise in that area.
“Cambridge [Trust] was always perceived as being the crown jewel in banking in Eastern Mass. It was this really well-run, attractive community bank and I think a lot of companies wanted to buy it for decades,” said Mark Fitzgibbon, managing director and head of research at Piper Sandler.
Good Timing for the Merger
Fitzgibbon speculated that the sale of Eastern’s insurance business may have been, at first, an attempt to offset losses from selling its securities position earlier this year.
“I think that Eastern had planned to sell the insurance business for a while and the initial plan was to use the gain to offset losses on the sale of the securities portfolio,” Fitzgibbon said. “And then when they got sort of pretty far along and realized they were going to get a very large gain on the insurance business, they began to have conversations with Cambridge.”
Fitzgibbon said that despite Eastern and Cambridge executives keeping quiet on the topic when asked during a call with investment analysts to announce the deal – or when asked if the deal was negotiated or if Cambridge shopped around for other potential buyers– it seemed like the two banks began talking around “late in the summer.”
Spaccasi said the deal was done at an “opportune time” for Eastern, given the high valuation it got for its insurance business, and more growth opportunities in wealth management the deal opened that would pay off better over time than the insurance business.
Had Eastern not sold its insurance business, it may not be able to buy Cambridge, Fitzgibbon said, as the insurance business is only growing around 3 percent to 5 percent per year and has a 15 percent pre-tax margin, which is narrower than the 10 percent and above growth in the wealth management business, which has a 41 percent pre-tax margin.
“So, growth and profitability were the two reasons why they decided to get out of insurance and get into wealth management,” Fitzgibbon said.
For Eastern Bank, the insurance business was tough to grow as the high valuations of potential acquisition targets in the space were working against their favor.
“Eastern Insurance Group has steadily grown through a series of acquisitions over two decades but buying brokerages was becoming more challenging because of the prices they commanded,” Eastern Bank said in an emailed statement.
“The realization of the value created in Eastern Insurance has provided us the opportunity to partner with Cambridge Trust, a premier bank in our market with great employees and a highly attractive franchise. The Cambridge transaction bolsters our dense Boston area franchise, diversifying our revenue, and enhancing our wealth management business. The power of the combined franchise is very clear. And both transactions are complementary,” it added.
Tough Time for M&A
Banks face a difficult environment for mergers right now, as many hold older loans and securities with interest rates far below the going rate in today’s market thanks to the Federal Reserve’s rapid increase in rates over the last 18 months. That means, if a bank had to sell them today, they would fetch far less than their face value.
“So, while they may be good loans and they may be performing loans and there might not be credit risk or credit adjustments involved, just by virtue of where interest rates are now versus what they are in their portfolio, that’s a huge, huge interest rate mark,” Spaccasi said.
Unfortunately for banks looking to pair up, merger accounting rules mean the balance sheet of a bank being acquired has to be valued as if it was going to be sold the day the merger closed, or “marked to market.”
“For most banks, if you’re operating right you don’t have to do anything. You can just keep those securities and loans in your balance sheet,” Fitzgibbon said. But if a merger happens, “it basically wipes out the capital of most of the institutions out there.”
In Cambridge’s case, those loans and securities tallied up to over $460 million in theoretical, marked-to-market “losses.”
“They couldn’t have done this deal, likely, with someone of like-size. It just wouldn’t have worked,” Spaccasi said.
Motivations Not Yet Clear
While the partners were right for each other, Cambridge Trust executives’ and board members’ motives for agreeing to the deal remain somewhat hazy, pending future regulatory filings.
“The only reason that it happened now was because the stars kind of lined up. Cambridge was having some earnings challenges of their own. After the banking crisis in March, they saw some of their competitor banks fail very quickly and I think that really got their attention. They thought about the benefits of becoming or part of a larger organization,” Fitzgibbon said.
Fitzgibbon and Spaccasi both said that the onboarding of Cambridge Trust Chairman and CEO Denis Sheahan as Eastern’s new CEO, and the addition of three other Cambridge executives to Eastern’s board of directors might also have been a condition for the merger.
More unique and strategic mergers, as well as merger of equals, are to be expected in the future as banks seek to help each other out amid the high interest rates, Spaccasi said.
“I think many institutions can weather the storm,” he said. “The question is, do they want to do that alone or do they want to do that with a partner where they could weather it better together with their combined balance sheet and operations?”
Another example of a creative recent merger is the all-stock deal between Banc of California and PacWest Bancorp where both parties agreed to sell $400 million of new shares to private equity firms to fund the deal. Smaller to medium-sized banks are opting for mergers of holding companies with separate bank operations just like the Cape Cod Five’s and Fidelity Bank’s recent merger proposal.
Actions, Benefits After Merger
Eastern Bank said the strategic focus is to grow both wealth management and private banking in its Boston area franchise, diversifying revenue sources, and strengthening the bank’s presence in the Merrimack Valley and in southern and coastal New Hampshire.
While both banks have lending relationships with the Massachusetts Housing Partnership, Eastern said it expects “to grow contributions to its affordable housing leadership after the merger is complete.”
Nika Cataldo
The combined entity will have $27 billion assets and $23.1 billion deposits in Boston, making it the fourth-largest deposit holder in Greater Boston area. During its recent call with investment analysts about the merger, Eastern Bank CEO Bob Rivers said his bank was also well-positioned to grow deposits and “possibly move to No. 3 soon.”
Eastern will have $7.6 billion assets under management and administration under the wealth business after adding Cambridge Trust’s $5.5 billion. It will operate over 100 offices in eastern Massachusetts and southern New Hampshire, but the bank acknowledged it might close some branches in locations where two offices are close to each other.
The company will use Eastern Bank’s name in all businesses, except for the wealth management unit which will be under the Cambridge Trust brand.
As the merger is expected to be closed in the first quarter of 2024, subject to regulatory approvals, the bank sees that systems conversions will likely happen in the second quarter next year, while the wealth management conversion is expected in the third quarter of 2024.
