Independent Bank Corp.: Higher Average Loan Balance To Drive Earnings (NASDAQ:INDB)

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Earnings of Independent Bank Corp. (NASDAQ: INDB) will benefit this year from a higher average loan balance due to the acquisition of Meridian Bancorp late last year. Moreover, the bottom line will benefit from a rising interest-rate environment. Independent Bank Corp. has a large amount of excess cash that it can deploy into higher-yielding securities following a hike in the federal funds rate. Overall, I’m expecting Independent Bank to report earnings of $4.48 per share in 2022, up 29% year-over-year. The year-end target price suggests a small upside from the current market price. Further, the company is offering a small dividend yield. Based on the total expected return, I’m adopting a buy rating on Independent Bank Corp.

Average Loan Balance to be Much Higher This Year Despite Attrition Plans

After a decline of 6% in the first nine months of 2021, the loan portfolio surged in the last quarter mostly because of the acquisition of Meridian Bancorp, the parent of East Boston Savings Bank. The acquired loans increased the loan portfolio size by around 56% in November 2021, according to details given in the earnings release.

Independent Bank Corp. mostly operates in Massachusetts, whose economy is doing quite well. According to official sources, the state last reported an unemployment rate of 3.9%, which is almost as good as the pre-pandemic level.

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Unfortunately, Independent Bank Corp’s management is not aggressively pursuing organic growth. For 2022, the management is targeting loan growth of only low to mid-single-digit percentage, as mentioned in the conference call. Such a low organic growth rate will be unable to compensate for the upcoming planned pay downs and runoffs.

As mentioned in the conference call, Paycheck Protection Program (“PPP”) loans outstanding totaled $216 million at the end of December 2021, representing 1.6% of total loans. I’m expecting most of these remaining loans to get forgiven in the early part of 2022, which will constrain the loan portfolio growth. Moreover, Independent Bank Corp. plans to further reduce the East Boston portfolio after reducing the loans by $500 million last year. According to details given in the conference call, East Boston’s loans totaling around $200 million remain to be slashed, representing 1.5% of total loans.

Overall, I’m expecting the loan portfolio size to decline by 1% by the end of December 2022 from the end of 2021. Despite the reduction in loans on a period-end comparison, the average loan balance during the year will likely be 34% higher than last year because of the timing of the acquisition. Independent Bank acquired Meridian Bancorp in November 2021, according to a press release.

Meanwhile, I’m expecting deposits to grow normally next year at a low single-digit percentage. The following table shows my income statement estimates.

FY17 FY18 FY19 FY20 FY21 FY22E
Financial Position
Net Loans 6,295 6,842 8,806 9,279 13,440 13,305
Growth of Net Loans 6.0% 8.7% 28.7% 5.4% 44.8% (1.0)%
Securities 947 1,075 1,275 2,348 4,789 4,885
Deposits 6,729 7,427 9,147 10,993 16,917 17,258
Borrowings and Sub-Debt 324 259 303 181 152 154
Common equity 944 1,073 1,708 1,703 3,018 3,136
Book Value Per Share ($) 34.5 38.8 49.7 51.5 74.8 66.2
Tangible BVPS ($) 25.7 29.0 34.1 35.5 49.6 44.7
Source: SEC Filings, Author’s Estimates
(In USD million unless otherwise specified)

Excess Cash Balance Provides Opportunity to Expand the Margin

Independent Bank Corp. built up a large cash balance on its books last year. Interest-earning deposits with banks surged to $2.1 billion at the end of December 2021 from $1.1 billion at the end of December 2020 and $36 million at the end of December 2019. The buildup in excess cash gives Independent Bank Corp a good opportunity to benefit from the rising interest-rate environment. The company can deploy this excess cash into higher-yielding securities once the federal funds rate has been raised.

The repricing and maturity of loans amid a rising interest-rate environment will also help the margin this year. As mentioned in the conference call, around 20% to 25% of loans will benefit immediately from a federal funds rate hike. This proportion of loans is not too high, but it’s still material.

The management’s interest-rate sensitivity analysis given in the third quarter’s 10-Q filing shows that a 100-basis points increase in interest rates could boost the net interest income by 8.4% over twelve months. Considering the factors mentioned above and the management’s guidance, I’m expecting the margin to increase by four basis points in 2022 from 3.05% in the last quarter of 2021.

Expecting Earnings to Increase by 29% Year-Over-Year

The higher average loan balance and margin expansion will likely drive earnings growth this year. Moreover, the efficiency ratio will likely improve once the cost savings from the merger of Meridian Bancorp materializes. I’m expecting the efficiency ratio to improve to 55% by the fourth quarter of 2022 from 77% in the fourth quarter and 62% in the third quarter of 2021. However, the efficiency ratio will likely remain elevated in the first quarter of 2022 because approximately $5 million to $6 million merger-related costs remain to be incurred, as mentioned in the conference call.

Meanwhile, the non-interest income will likely face pressure from reduced swap income. This fee income was unusually high in the last quarter as the company executed some swaps. The management mentioned in the conference call that this high performance is unlikely to be replicated this year. Further, the provisioning expense will likely return to a normal level this year. The existing allowance level comfortably covers the portfolio’s credit risk. Allowances made up 1.08% of total loans, while non-performing loans made up 0.20% of total loans at the end of December 2021, as mentioned in the earnings release.

Overall, I’m expecting Independent Bank to report earnings of $4.48 per share in 2022, up 29% year-over-year. The following table shows my income statement estimates.

FY17 FY18 FY19 FY20 FY21 FY22E
Income Statement
Net interest income 259 298 393 368 402 574
Provision for loan losses 3 5 6 53 18 8
Non-interest income 83 89 115 111 106 118
Non-interest expense 204 226 284 274 333 412
Net income – Common Sh. 87 122 165 121 121 212
EPS – Diluted ($) 3.19 4.40 5.03 3.64 3.47 4.48
Source: SEC Filings, Author’s Estimates
(In USD million unless otherwise specified)

Actual earnings may differ materially from estimates because of the risks and uncertainties related to the COVID-19 pandemic.

Adopting a Buy Rating Due to a Decent Total Expected Return

Independent Bank Corp. has regularly increased its dividend every year since 2011. Given the earnings outlook, I’m expecting this tradition to continue in 2022 and Independent Bank to increase its quarterly dividend by $0.02 per share to $0.50 per share. This dividend estimate suggests a dividend yield of 2.4%, using the February 4 closing price.

I’m using the historical price-to-tangible book (“P/TB”) and price-to-earnings (“P/E”) multiples to value Independent Bank. The stock has traded at an average P/TB ratio of 2.2 in the past, as shown below.

FY17 FY18 FY19 FY20 FY21 Average
Tangible BVPS ($) 25.7 29.0 34.1 35.5 49.6
Average Market Price ($) 67.4 78.3 77.8 66.4 80.0
Historical P/E 2.6x 2.7x 2.3x 1.9x 1.6x 2.2x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/TB multiple with the forecast tangible book value per share of $44.7 gives a target price of $99.2 for the end of 2022. This price target implies a 17.0% upside from the February 4 closing price. The following table shows the sensitivity of the target price to the P/TB ratio.

P/TB Multiple 2.02x 2.12x 2.22x 2.32x 2.42x
TBVPS – Dec 2022 ($) 44.7 44.7 44.7 44.7 44.7
Target Price ($) 90.3 94.7 99.2 103.7 108.2
Market Price ($) 84.8 84.8 84.8 84.8 84.8
Upside/(Downside) 6.5% 11.7% 17.0% 22.3% 27.6%
Source: Author’s Estimates

The stock has traded at an average P/E ratio of around 19.1x in the past, as shown below.

FY17 FY18 FY19 FY20 FY21 Average
Earnings per Share ($) 3.19 4.40 5.03 3.64 3.47
Average Market Price ($) 67.4 78.3 77.8 66.4 80.0
Historical P/E 21.1x 17.8x 15.5x 18.2x 23.1x 19.1x
Source: Company Financials, Yahoo Finance, Author’s Estimates

Multiplying the average P/E multiple with the forecast earnings per share of $4.48 gives a target price of $85.7 for the end of 2022. This price target implies a 1.1% downside from the February 4 closing price. The following table shows the sensitivity of the target price to the P/E ratio.

P/E Multiple 17.1x 18.1x 19.1x 20.1x 21.1x
EPS 2022 ($) 4.48 4.48 4.48 4.48 4.48
Target Price ($) 76.8 81.2 85.7 90.2 94.7
Market Price ($) 84.8 84.8 84.8 84.8 84.8
Upside/(Downside) (9.5)% (4.2)% 1.1% 6.4% 11.7%
Source: Author’s Estimates

Equally weighting the target prices from the two valuation methods gives a combined target price of $92.5, which implies a 9.1% upside from the current market price. Adding the forward dividend yield gives a total expected return of 11.4%. Hence, I’m adopting a buy rating on Independent Bank Corp.

https://seekingalpha.com/article/4484688-independent-bank-corp-higher-average-loan-balance-to-drive-earnings

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