Nation's oldest mutual bank plans IPO to meet post-pandemic challenges

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Eastern Bank in Boston, the nation's oldest and second-largest mutual bank, is going public to prepare for a post-pandemic world.

The $12.3 billion-asset Eastern disclosed in a regulatory filing Thursday that it expects to raise $1.3 billion to $1.7 billion through an initial public offering that should take place later this year.

Eastern Bankshares will be the holding company.

The coronavirus outbreak played a major role in Eastern’s decision to shed its mutual status, the filing said.

Eastern, founded in 1818, said it would use the offering’s proceeds for a variety of purposes, including acquisitions and technology investments, as it responds to shifting customer needs stemming from the pandemic

We believe the most significant systemic challenge we will face is the accelerating pace of technological change driven by ubiquitous digital adoption” by retail and commercial clients, Eastern said in its filing.

“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,” the filing added.

The bank said regualtory restrictions prohibit it from discussing the conversion further.

Douglas Faucette, a lawyer at Locke Lord and counsel to America’s Mutual Banks, called Eastern's decision to go public "remarkable," given how the bank has "been so publicly dedicated to mutuality."

“The pandemic has had a profound impact on people's forecast of the future and this could be part of that,” Faucette said. “Maybe they decided that the mutual form didn’t let them be nimble enough for their size.”

Eastern’s mutual status — it is owned by depositors rather than investors — freed it up to make tech investments that it might not have been able to as a publicly traded company with a mandate of maximizing shareholder returns. Eastern was one of the first community banks to build its own innovation lab, which led to the creation of Numerated Growth Technologies, a fintech that allows banks to make small-business lending decisions in as little as five minutes.

Numerated was spun off from Eastern in 2017. Eastern Labs, the mutual’s innovation unit led by Dan O’Malley, joined the spinoff.

Eastern quickly restaffed its innovation team, hiring Ashley Nagle Eknaian, a former managing director of State Street's emerging technology center, in early 2018 as its chief digital officer.

“We believe our ability to innovate and integrate new products, services and technology distinguishes us from many of our similarly-sized peers,” Eastern said in Thursday’s filing.

“Important to our development and refinement of technology-driven products and services in recent years has been customizing the interface between our customers and our outsourced core data processing systems,” the filing added. “By customizing the software that connects our digital platforms to our core system, we believe we are able to develop, test and deploy new features and products more quickly than many of our peers.”

Faucette said the filing suggests that Eastern has “big expectations” that could include tech acquisitions. He expressed surprise, though, that Eastern isn't opting for a two-step conversion process, which would allow it to raise capital more slowly.

“They’re going to be really challenged to produce an acceptable return on equity with that much capital,” Faucette added. Going public in two phases by creating a mutual holding company "would have let them convert gradually.”

While there are no agreements in place, Eastern said it could use some of the funds to buy other financial institutions. The mutual also said it expects to use “a portion of the proceeds” to buy independent insurance agencies.

Like most banks, Eastern has been wrestling with fallout from the coronavirus pandemic.

The mutual’s first-quarter income fell by 74% from a year earlier to $8.4 million, including a 96% decrease in its banking operations. It set aside $28.6 million for potential loan losses in the quarter.

Bob Rivers is Eastern Bank's president and CEO.
Bob Rivers is Eastern Bank's president and CEO.

Eastern said in the filing that at customers' requests it has modified $508 million of commercial real estate loans, $96 million of business banking loans, $87 million in mortgages and $25 million in other consumer loans. The modifications are for three- to six-month periods and include temporary reprieves from making principal and interest payments.

Eastern committed $7 million to create small-dollar emergency loan programs for consumers and small businesses. Consumers were allowed to borrow up to $5,000, with no interest or payments for three months, and small-business clients had access to up to $25,000 with interest-only payments over six months.

“I expect these funds will be quickly exhausted,” President and CEO Bob Rivers said in March when the program debuted. “We see this as a first step among other things we will need to do over time, but this is a good place for us to begin.”

Eastern has also been active in the government's Paycheck Protection Program, making 7,900 loans totaling $1.1 billion. The loans could produce fees of $30 million to $35 million, the filing said.

The bank had 89 branches, $10.3 billion in deposits and $9.1 billion in loans on March 31. It is the seventh-biggest bank in the Boston area, with 2.5% of the market’s deposits, based on June 2019 data from the Federal Deposit Insurance Corp.

Other large community banks in the market include the $13 billion-asset Berkshire Hills Bancorp in Boston and the $12 billion-asset Independent Bank Corp., the parent of Rockland Trust in Rockland, Mass.

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