| The merger trend among Massachusetts’ community banks continues uninterrupted, with the latest announcement coming from Rockland Trust Co., which earlier this month said it intends to acquire Somerville-based Central Co-operative Bank.
By the numbers, the deal seems unspectacular. Rockland – or rather its parent, Independent Bank Corp. – will purchase 60 percent of Central Bancorp. Inc. shares for $32 per share, in cash. That’s a decent premium over Central’s $28.67 per share price as of April 27, and it works out to about $54.8 million.
But some banking industry executives say Rockland is paying too much for the clearly struggling Central Co-op, which was shopping itself around before finding Rockland – the same buyer that in the last five years picked up two other banks that provided geographical spread, but rather low value: Benjamin Franklin Bancorp in 2008 and Slade’s Ferry Bancorp in 2007.
Finding Value
“Every bank in the world was notified” by Central that it was looking for a buyer, one executive at a $2 billion Massachusetts bank told Banker & Tradesman. “Rockland paid for it because they wanted to get into that area. I wouldn’t pay what they paid, but somebody might think it was worth that premium.”
Another industry executive told Banker & Tradesman he was “skeptical about the deal” because Central “has never been considered a particularly strong bank.” Rockland, he added, “has had a history of acquisitions that do not seem to have added much.”
Central holds about $10 million in trust preferred money and another $10 million in federal Small Business Lending Fund money that will have to be repaid at some point. But for now, it counts as capital.
Central also held about $117 million in Federal Home Loan Bank of Boston advances as of Dec. 31, in effect making the bank smaller than its $521 million in assets would imply.
In its fourth quarter, which ended March 31, Central earned a $51,000 profit compared to $241,000 in the same period a year earlier. It reported a net loss of $78,000 available to common shareholders compared to net gains of $84,000 a year prior. Its return on average assets was 0.04 percent, compared to 0.19 percent a year earlier.
But while Central might not be a strong bank, it does have something to offer Rockland: Location.
According to Rockland’s presentation to investors on the acquisition, Rockland can cut costs at Central while penetrating Central’s market in Somerville and other proximate Middlesex County locales – giving Rockland access to some “attractive demographics,” namely, lots of wealthy people.
Middlesex County is one of the most populous counties in New England and has a median household income of nearly $80,000. It is also directly connected to Rockland’s existing territory, concentrated largely in Norfolk and Plymouth counties.
And Rockland’s plan for Central Co-op is aggressive and ambitious.
Eye Of The Beholder
Rockland is focused on “extracting cost saves from (Central’s) operating model, enhancing the product suite and adding commercial lenders to the footprint,” according to an overview by Sandler O’Neill, which is advising Rockland in the transaction.
“We believe the projected 41 percent cost savings is very achievable and that the revenue synergies, while not incorporated into our model are also very real,” said the Sandler report, which was drafted by analysts Mark Fitzgibbon and Matthew Forgotson. “In particular, [Central Co-op’s] relatively well-heeled customer base will have access to [Rockland’s] cash management services, robust consumer product suite and higher legal lending limits.”
To conclude its report, Sandler O’Neill said it is “comfortable with the story, but sticking with the hold rating for now: All things considered, we believe that [Independent Bank Corp.] is making all the right strategic moves to drive profitability and maximize shareholder value.”
“Beauty is in the eye of the beholder, and the best reflection of that is in how our stock price has reacted so far… It’s down less than 1 percent, and bank stocks are down 3.5 percent,” Rockland CFO Denis Sheahan told Banker & Tradesman. “We’ve outperformed, and that’s not my opinion, that’s our shareholders’ opinion.”
Whether the price Rockland is paying for Central seems too high to some “is irrelevant,” Sheahan said, “when you look at the returns we can garner for our shareholders. We see the possibility for significant earnings accretion, very little capital dilution. Central has almost a 90 percent efficiency ratio.”
