Eastern Bank's latest deal is a textbook example of taking lemons and making lemonade.
The Boston bank is a mutual thrift, meaning it has no outside shareholders and can only offer cash to acquire other companies, as in its $134 million agreement announced Tuesday to buy Centrix Bank & Trust (CXBT) in Bedford, N.H.
But selling banks frequently prefer stock, often because of tax considerations and especially if a buyer's stock trades at a significant premium to book value. Centrix had hired an investment bank to seek buyers and had received offers from a "handful" of banks, says Joe Reilly, Centrix's president and chief executive. Reilly declined to identify the other bidders.
The multiples on Eastern's offer were appealing. It would pay a 49% premium for Centrix shares based on Monday's closing price, and 216% of Centrix's tangible book value.
That tangible-book multiple is the highest paid for a New England bank since 2009, says Matthew Kelley, an analyst at Sterne Agee. Centrix stock rose 46% to $40.13 per share in Tuesday trading.
The deal also offers Centrix the chance to join the nation's largest mutual thrift, and one that's unlikely to convert to a publicly traded stock bank. Eastern last considered a full or partial conversion to a stock-owned bank in the early 1990s, says Andrew Ravens, an Eastern spokesman. The option was rejected and Eastern has not considered it since, he says.
Eastern's structure as a mutual thrift was a key selling point, Reilly says.
"We look at it as a final stop for our shareholders," Reilly says. "That's very meaningful to us."
The acquisition still requires approval from Centrix's shareholders and from regulators.
The deal shows that all-cash offers can be competitive, says Richard Holbrook, chairman and CEO.
"I've never found [having to make all-cash offers] an impediment to being able to do a deal," Holbrook says. "We've always been able to overcome that. And some [people] like the predictability of the value of our cash."
Eastern was established in 1818 and has almost 100 offices in eastern Massachusetts, but none in New Hampshire. The company had looked for years at expanding in New Hampshire, including opening its own branches in the state, Holbrook says.
Buying Centrix made more sense than a de novo expansion into New Hampshire because of Centrix's strong book of commercial loans, Holbrook says. That would have taken more time for Eastern to build on its own, he says.
"They've always been on our list as someone" we would consider making a bid to acquire, Holbrook says.
Eastern would be crossing state lines for the first time, but Holbrook downplayed that fact. Many of Eastern's customers already live in New Hampshire and the bank has some business operations in the state, including insurance and indirect auto-lending units, he says. And Eastern's single-largest facility, its 500-employee operations center, in Lynn, Mass., is located less than an hour from New Hampshire, where many of its employees live.
"When I joined Eastern Bank in 1996, all of our operations were in Essex County, north of Boston," Holbrook says. "We then bought a bank south of Boston [Hibernia Bank in Quincy, Mass.] and that was almost a bigger internal change than [the Centrix acquisition] will ever be."
Eastern and Centrix expect the deal to close this fall. It would increase Eastern's total assets to about $9.6 billion.
The deal also continues Eastern's streak of making about one acquisition every 18 months, Holbrook says. Its last deal, in 2012, was for Community Bank in Brockton, Mass. As a mutual, Eastern needs time to generate excess cash from earnings to pay for its acquisitions.
"The only source of capital we have is earnings," Holbrook says. An acquisition "decreases tangible net value somewhat, and you have to build it back up," so it will probably be another year and a half, or two years, before Eastern makes another deal, he says.
But Holbrook is confident more deals are coming.
"It's important for our bank to continue to grow, to be able to remain relevant," he says. "If we stop growing, I think you start to decay."