Massachusetts Deal Shows Patience Is a Virtue for Acquirers

Executives of Independent Bank Corp. have long wanted to get into Boston but have been playing it cool for the past decade.

The Rockland, Mass., company wouldn't pay up to get there, executives say, biding its time by doing things like opening a commercial lending center in Boston's financial district and buying other banks that were close to the city.

Independent also managed to book loans at a healthy clip in its existing markets. Behind the scenes, though, its team was keeping an eye out for something in Boston.

"We've never viewed Boston as critical to our long-term sustainability, but took the approach that when an opportunity presented itself we would jump on it," Christopher Oddleifson, chief executive of Independent and its Rockland Trust banking unit, said in an interview.

The $6.3 billion-asset Independent agreed late Tuesday to buy Peoples Federal Bancshares in Brighton, Mass., for $131 million. The $606 million-asset Peoples has eight branches, split evenly between Boston and its suburbs.

Independent is paying 123% of Peoples' tangible book value at a price that several industry observers viewed as attractive. By comparison, deals announced nationwide in the first half of this year had an average price of 149% of tangible book value.

"Rockland Trust scored a strategic coup," said John Carusone, president of Bank Analysis Center. "It provides further consolidation of their market position around Greater Boston without overreaching from a pricing standpoint."

Oddleifson said the deal was part of a competitive bidding process, but it still fits Independent's stringent M&A expectations, which include earnings accretion in the first year, minimal tangible book dilution and an earn back in less than five years. Independent is projecting that the deal will add 2 to 3 cents to its earnings annually, and it is modestly additive to its book value.

"We approach M&A with a certain discipline. We are not going to enter into a deal that is ‘strategic,'" Oddleifson said, adding that "strategic" is often a euphemism for a high-priced deal that is built on future expectations.

Independent expects to cut up to 45% of Peoples' annual expenses, with management noting that Peoples' efficiency ratio is roughly 80%. That level of expense trimming is high; most acquirers on average expect to cut 30%.

The projection is also high considering that none of that cost savings are expected to come from branch closures. Oddleifson said the drivers of the cuts include Peoples' technology costs and the retirement of its top two executives.

"There are massive economies of scale — we don't have to increase our back office all that much to add $600 million in assets," Oddleifson said.

Analysts largely applauded the transaction.

Collyn Gilbert, an analyst at Keefe, Bruyette & Woods, wrote in a note to clients that the deal "looks to be another disciplined, prudent acquisition."

"As with [Independent's] past deals, this looks to be of modest size, and supports both" earnings per share and tangible book value accretion, Gilbert said. The deal "most importantly broadens Independent's presence in Boston proper. … Overall, we view this as an attractive use of Independent's premium currency."

The move is smart for Independent because Boston is short on community banks, Gilbert said in an interview.

"So many parts of Massachusetts are uber-competitive, but in Boston you have the super-large banks and you have Peoples and Webster," she said.

Though Peoples' loan book might be weighed down by residential mortgages, its retail focus gives Independent incredible cross-selling opportunities. "You're getting a true customer list that can be harvested," Gilbert said.

The deal was a surprise, but a welcomed one given the metrics, said Taylor Brodarick, an analyst at Guggenheim Securities.

"I thought they were going to take an M&A pause and focus on gathering momentum from the franchise they've built," Brodarick said. "But if they are going to step back into M&A, I'd say that stepping into Boston without having to pay is a lot is a good move for them."

Brodarick said the key will involve Independent leveraging its new platform with the inroads it has made since opening up a commercial loan and wealth management office in Boston last year.

Peoples is a former mutual that completed its stock conversion in 2010. Conversions are barred from selling within the first three years after a conversion, but often sell quickly after the third anniversary.

"They didn't waste any time in putting themselves up for sale; it is the classic example," said Theodore Kovaleff, an analyst at Halcyon Cabot and prolific shareholder of converted mutuals.