Independent Bank Corp.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Independent Bank Corp. is a regional bank focused on community banking, serving individuals, families, and businesses primarily in the Massachusetts area.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Independent Bank Corp. (INDB) operates primarily through its subsidiary, Rockland Trust Company.

Business Overview

INDB operates as a commercial bank offering a wide array of services tailored to its customers in the Massachusetts region. Its revenue streams can be broadly classified into:

  • Net Interest Income (NII): This is the difference between the interest earned on loans and investments and the interest paid on deposits and borrowings.
  • Non-Interest Income: Includes a variety of fee-based services, such as loan origination fees, gains on sales, and fiduciary fees.

A significant portion of INDB’s revenue is derived from net interest income, making the bank sensitive to changes in interest rates and the overall yield curve.

  • Increased Competition: The banking industry is facing heightened competition from large national banks, fintech companies, and credit unions.
  • Digitalization: Consumers are increasingly demanding digital banking options. Banks that cannot offer advanced online and mobile banking solutions will lose customer share.
  • Interest Rate Sensitivity: Rising and falling interest rate cycles have a significant impact on NII for banks, thus affecting profitability.
  • Economic uncertainty: The threat of recession and unemployment can reduce loan volumes and increase credit losses

Competitive Landscape

INDB operates in a competitive environment. Although it is a local Massachusetts focused bank, it must be competitive to other local community banks as well as big banks that operate in the area.

  • Local Banks: Other regional banks within the Massachusetts area such as Brookline Bancorp (BRKL), Eastern Bank, etc.
  • Big National Banks: Large national players who also have significant presence in the area include Bank of America (BAC), JP Morgan Chase (JPM) and Wells Fargo (WFC)
  • Fintechs: Fintech companies present some competition in the space as well. Online lenders and payment platforms often have lower costs which enables them to compete on price.

What Makes INDB Different?

  • Local focus: INDB is focused on community banking which helps it tailor to specific preferences of its customers.
  • Relationship-driven approach: The company emphasizes building strong relationships with its clients, which helps in maintaining customer loyalty and creates switching costs.
  • High level of operational quality Management talks about a conservative culture and high-quality credit standards.

Financial Analysis

The analysis focuses on the latest information, most data is as of Dec 31, 2022, also including some Q1 2023 data and comments.

  • Revenue:
    • NII is the primary driver.

    • Net interest income is $1.15 Billion, up 10% from 2021 levels. The increase is mostly attributable to increased yields on loans and securities, partially offset by rising interest rates on deposits.

    • Fee and commission income has increased due to both an increase in wealth management fees as well as insurance income.
  • Profitability:
    • Net income was $367.4 million in 2022, up from $335.8 million in 2021.
    • The 2022 ROA is 1.16% and ROE of 11.28%. These levels have declined slightly from 2021 and it has been noted that they are also expected to fall further as the yield curve inverts, making the banks earning spread less favorable.
    • The interest rate hikes have caused funding cost pressures resulting in lower profitability
    • Margins:
      *The net interest margin (NIM) rose to 3.4% in the fourth quarter of 2022, up 10 basis points from the previous quarter and 20 basis points year-over-year. While NIM is slightly up and relatively robust at these levels, management expects it to decrease over the next few quarters as rates paid on deposits increase.
  • Balance Sheet:
    • Total Assets: INDB has a sizeable asset base of $21.1 billion as of December 31, 2022

    • Total Debt: Debt comprises primarily of deposits from clients and borrowings with a debt to assets ratio of roughly 75%. A high amount of deposits show customer trust in the bank. A decent debt to assets ratio also provides good leverage while keeping a stable financial base.

    • Liquidity is very good as indicated by the low loan to deposits ratio, which is roughly 91% and is even decreasing, as well as $2.3B of high-quality liquid assets.
    • Capital structure is conservatively financed- with a Tier 1 leverage ratio above 8%, and a total capital ratio of 12.7%.

Recent Concerns/Controversies/Problems

  • Interest Rate Headwinds: The rapid increase in interest rates by the Federal Reserve is causing a shift in the yield curve, which negatively affects INDB’s net interest income. In particular, deposit rates have risen faster than the rates of loans, putting pressure on margins.
  • Mortgage Weakness: The mortgage business has slowed down. New residential mortgages decreased by 46% and are a drag on future earnings. This area was already down in 2022 and may see a prolonged slowdown.
  • Credit Losses: Management has noted a slight increase in criticized and classified loans, but believe that these levels are still acceptable given the strong economy. There was a provision for loan losses in the last quarter that was significantly larger than previous quarters, due to a conservative stance and the expectation that losses will increase. Management continues to closely monitor the potential for credit losses.
  • Investment Security Losses: Increase in unrealized losses in investment securities, stemming from the increase in interest rates, have negatively impacted its book value and net income.

Business Understandability Rating: 3 / 5

INDB’s business model is fairly straightforward as a regional community bank. The core banking activities of accepting deposits and issuing loans are simple to grasp. The areas that bring a level of complexity are some of the accounting standards for financials, some of the bank specific metrics such as tier-1 capital and regulatory requirements. The effect of interest rates on net interest margin is another area where understanding may be a little difficult. A solid but not very basic understanding of accounting and finance is needed to fully understand it.

Balance Sheet Health Rating: 4 / 5

INDB has a solid balance sheet with high levels of capital and liquidity. While debt-to-asset and loan-to-deposit ratios may be a little high from a very conservative standpoint, these are still within manageable limits. The capital levels are well above regulatory requirements. There is some concern regarding unrealized losses on securities due to rapidly rising interest rates which needs to be watched, but this does not fundamentally change the company’s solid financial position.

Moat Rating: 2 / 5

Based on all of the documents and research conducted, INDB only has a very weak moat.

Economic Moat Discussion

  • Switching Costs:
    • INDB benefits from some switching costs, as some customers find it tedious to change banks. This is particularly true for customers with direct deposits, automatic payments, or large business accounts. *However, these switching costs are not very high because there is nothing proprietary or unique about INDB banking.
  • Intangible Assets:
    • INDB has a good local reputation as a community bank which is an advantage, especially with attracting certain local customers. However, this is not a widely recognized brand like Coca-Cola or Starbucks, or even big national banks such as JP Morgan. Thus its brand power is limited.
  • Cost Advantages:
    • A small amount of low cost deposits are available, but this is not unique, and many big banks use economies of scale to offer lower cost service as well.
    • INDB is not a low-cost producer. As the banking sector becomes more competitive and digitized, there are many ways that competitors can match, or even exceed, INDB’s efficiencies.
  • Network Effects:
    • The company has no real network effect to its advantage. It is just a regional bank and not a platform that derives additional value with an increasing number of users.

Moat Rating: 2/5 INDB’s moat is extremely weak, mostly stemming from some local switching costs. It has almost no moat when compared to other similar banks as the industry as a whole is extremely competitive. Also the bank has no real competitive advantage like cost leadership, economies of scale, network effects, unique technology, patents, brands, etc.

Risk to Moat and Resilience

The company’s moat is especially susceptible to interest rate hikes and economic conditions.

  • Interest Rate Risk: Rapid interest rate increases can increase borrowing costs, reduce the market value of their bond holdings, and increase the amount of capital that has to be set aside for losses, which will greatly diminish future earnings.
  • Economic Downturn: A downturn or recession can impact loan volumes and credit quality leading to a reduction in interest income, and a higher provision for losses.
  • Competition: Increased competition can lead to pricing pressures, leading to a lower net interest margin and declining profitability.
  • Technology Disruption: Lack of adequate investment and development in digital and mobile banking services can cause loss in customer market share.
  • Regulatory Risk: The bank has to maintain certain regulations for risk weighted capital and other metrics. These regulations are often changed or updated and can impact the operational profitability of the bank.

Resilience:

INDB has shown the ability to be resilient by quickly taking action to increase its lending rates in response to higher interest rates, and also by maintaining adequate capital and liquidity. Furthermore, its local brand and customer relationships help it retain loyal customers. However, given its sensitivity to interest rates, market risk, and also the fact that they derive most of the revenue from lending activities, the resilience is not fully tested in a down turning economy or in an extended period of unfavorable conditions, thus it is only moderately resilient.