The Boston banking scene got thrown for another loop recently after Independent Bank Corp. (INDB -1.08%), the parent company of Rockland Trust, announced that it plans to buy Meridian Bancorp (EBSB), the parent company of East Boston Savings Bank. The deal comes just after Independent's main competitor, Eastern Bankshares, announced that it plans to buy Century Bancorp. Now, there will be two locally headquartered $20-billion-asset banks in the Boston area for the first time since 2007, according to the FDIC.
I really like the Independent-Meridian deal because it's very straightforward and takes Independent to the next level in its growth stage. Let's take a closer look.
Attractive financials
Independent Bank is a $13.8-billion-asset bank that stretches from southern Massachusetts in Cape Cod to Boston to Central Massachusetts in Worcester. The bank is a heavy commercial lender with a growing wealth management arm. Meridian Bancorp is another heavy commercial lender that has $6.5 billion in assets, largely with a presence in the Boston area and north of Boston.
Independent plans to buy Meridian in an all-stock deal valued at $1.15 billion, valuing shares of Meridian at $21.89 per share or 151% tangible book value (equity minus goodwill and other intangible assets). The deal represented a 23% premium over Meridian's closing stock price the day before the acquisition got announced. That may seem like a lot, but getting Meridian at 151% tangible book value is actually a good price for Independent, because prior to the deal Independent traded around 220% of tangible book value. With that kind of spread between the acquirer and seller, you know the merger math is going to be favorable.
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The deal will immediately be nearly 8% accretive to Independent's tangible book value once the acquisition closes. A lot of deals dilute tangible book value, so the 8% is significant here. The acquisition will also be roughly 23% accretive to Independent's earnings in 2022, meaning the combined bank's earnings is projected to be 23% larger than Independent's earnings on a stand-alone basis in 2022.
Finally, and perhaps most significantly in this particular deal, Independent plans to eliminate 45% of Meridian's expenses, which will help drop its efficiency ratio from 60% to 47% once the deal is complete. The efficiency ratio, a metric that bank investors watch closely, is a measure of a company's expenses expressed as a percentage of total revenue, so the lower the better. With this acquisition, Independent goes from a very mediocre efficiency ratio to suddenly having one that is at the top of its national peer group.
Not special, but rare
If you look at Meridian Bancorp, you likely won't see anything too special. The bank has a lot of time deposits, which cost more to obtain and are harder to keep around when interest rates rise. The bank also has a decent amount of higher-cost borrowings in its funding base, and very little non-interest income and therefore revenue diversity.
While Independent has always been an acquisitive bank, it is still at a point where it wants to grow inside its current markets, and there are very few stock banks left in Massachusetts to acquire, especially near the size of Meridian Bancorp. The in-market purchase not only enables Independent to take out a competitor, but it also allows it to reap the huge 45% cost savings in the deal from things like branch consolidation. Furthermore, Meridian gives Independent inroads to new commercial relationships and enables the new bank to make bigger loans with its enhanced balance sheet.
While I have worried at times that Meridian has grown its commercial loan book too quickly in recent years, it has virtually no net charge-offs (debt unlikely to be recovered, a good representation of actual losses) over the last five years. Furthermore, Independent plans to run off about $700 million of commercial real estate loans over the next two years to reduce the combined bank's exposure.
I also think Independent will be able to greatly improve Meridian's funding base over time. The bank plans to immediately pay off $560 million of Meridian's higher-cost borrowings from the Federal Home Loan Bank right away. Independent will also be able to cross-sell products in its growing wealth management business to Meridian customers and hopefully drive more fee income to the bank.
Routine for Independent
The reason I like this deal so much is because it's fairly similar to what Independent has done in the past, and is a straightforward in-market acquisition. This makes it much more predictable than some of the mergers of equals we've seen recently in the banking sector. This deal takes advantage of Independent's high stock premium, removes a competitor, grows the bank meaningfully, and greatly improves its profitability and efficiency metrics. It also leaves the bank with plenty of excess capital to continue to support loan growth and return capital to shareholders.
Also, while Meridian will be the largest acquisition the bank has ever made, Independent is a proven acquirer. The bank has made 10 acquisitions since 2008 and over the last decade has grown tangible book value per share by a compound annual growth rate of nearly 10%.
I have all the confidence in the world that Independent can complete the acquisition and integrate Meridian in a smooth and timely fashion, while continuing to deliver strong returns to shareholders now and in the future.
