KBRA Comments on Enterprise Bancorp, Inc.'s Proposed Merger Agreement with Independent Bank Corp.
On December 9, 2024, Rockland, MA-based Independent Bank Corp. (NASDAQ:INDB) ("Independent"), parent company of Rockland Trust Company ("Rockland Trust"), and Lowell, MA-based Enterprise Bancorp, Inc. (NASDAQ:EBTC) ("Enterprise")(KBRA senior unsecured debt rating: BBB / Stable Outlook), parent company of Enterprise Bank and Trust Company ("Enterprise Bank"), jointly announced the signing of a definitive merger agreement pursuant to which Enterprise will merge into Independent and Enterprise Bank will merge into Rockland Trust in a cash and stock transaction for total consideration valued at approximately $562 million, or 1.55X TBV at the merger announcement. Enterprise shareholders will receive 0.60 shares of Independent common stock and $2.00 in cash for each Enterprise share; aggregate consideration to Enterprise shareholders equates to approximately 7.5 million shares of INDB and $27.1 million in cash. As a part of the transaction, Independent plans to raise approximately $250 million in subordinate debt prior to the transaction closing. Post close, Board Chair and Enterprise Bank founding member, George Duncan, will become an advisor to the Independent Board, and EBTC's CEO, Mr. Larochelle, will serve as a consultant for Rockland Trust for one year. Additionally, Independent will appoint two Enterprise directors to its board following the merger. As a note, Enterprise's directors and executive officers collectively own about 20.4% of EBTC's outstanding shares.
Independent Bank Corp. is the holding company for Rockland Trust Company, a full-service commercial bank headquartered in Massachusetts. With 124 branches in Eastern Massachusetts and Worcester County as well as commercial banking and investment management offices (total AUM $6.9 billion) in Massachusetts and Rhode Island, Rockland Trust offers a wide range of banking, investment, and insurance services to individuals, families, and businesses. INDB's growth strategy has been somewhat acquisitive, focusing on smaller scale transactions, with the most recent merger with Meridian Bancorp, Inc. completed in 2021, adding over $6 billion in total assets.
Founded in 1989, EBTC operates a network of 27 branches in an economically stable region of the Northern Massachusetts and Southern New Hampshire. EBTC's business model focuses on commercial banking with complementary retail banking and wealth management services (AUM/AUA of $1.5 billion as of 3Q24). Excluding two small branch acquisitions completed in 2000, EBTC's growth has been organic and centered on expansion primarily in suburban markets north of Boston.
EBTC's franchise is supported by the company's long running ties with the local communities, which, in return, have helped the bank to maintain a very low-cost deposit base in a highly competitive geographic region. The bank's deposit base is also supported by a sizable noninterest-bearing portion (around 30% of total deposits). In addition, with a loan-to-deposit ratio of around 90%, the bank is able to remain largely self-funded in the current environment with limited reliance on external funding sources.
Enterprise operates predominantly in Northern Massachusetts and Southern New Hampshire, whereas Independent operates primarily from Boston to Rhode Island, areas known for attractive demographics, economic vitality, and growing business density. We note that Rockland Trust and Enterprise Bank operate in adjacent markets, which minimizes branch overlap and logistical complexities. As a result, no branch closures are planned, underscoring the complementary nature of the merger. The combined entity will rank among the top 10 in market shares in all counties within its footprint, strengthening its competitive position. In addition, the combination delivers significant scale with platform for strategic investments, including the ability to leverage a larger balance sheet and diversified products across Enterprise's commercial and wealth management businesses. As such, Enterprise's $1.5 billion in wealth assets under management will merge with Rockland Trust's existing wealth management capabilities, creating a $8.7 billion wealth platform, positioning the bank for growth in fee-based income. Both banks emphasize gathering low-cost, relationship-driven deposits to fund loan growth with below peer level of reliance on non-core deposits. Post-merger, the combined entity will manage approximately $20 billion in deposits, around 25% - 30% of which are noninterest-bearing, which is viewed as strong, given the highly competitive geographic region.
In terms of bottom line earnings, both companies exhibited strong profitability metrics in recent periods, generally in the 1% ROAA range. This was primarily supported by resilient NIM, anchored by relatively low cost of funding. In addition, both companies' fee income businesses were centered around wealth management, which is less correlated with the interest rate environment. As for noninterest expense, the management estimated cost savings of approximately 30% of Enterprise's annual operating expenses (50% realized in 2025 and 100% in 2026). The merger expenses total $61.2 million on a pre-tax basis.
Both banks exhibited strong asset quality performance with de minimis amounts of NCOs in recent periods. After the merger, Investor CRE would represent the largest lending segment of the combined loan portfolio, at 37% of total loans, or around 308% of total RBC (includes the expected $250 million subordinated debt issuance). However, the management team has stated that they plan to reduce the exposure to below 300% over time through runoff.
Despite the meaningful decline in capital levels following the completion of the merger, it appears that the enhanced earnings profile of the post-merger combined institution (1.41% 2026 estimated ROAA) will enable a rebuild of capital ratios through earnings accretion, with management estimating an increase of 132 bps in CET1 ratio over the intermediate term.
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