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Fitch Affirms Independent Bank Corp's IDR at 'BBB'; Outlook Stable
August 31, 2017 / 8:28 PM / 3 months ago

Fitch Affirms Independent Bank Corp's IDR at 'BBB'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, August 31 (Fitch) Fitch Ratings has affirmed the Long-Term and Short-Term Issuer Default Ratings (IDRs) of Independent Bank Corp. (INDB) and its subsidiary, Rockland Trust Company, at 'BBB' and 'F2', respectively. The Rating Outlook is Stable. A detailed list of rating actions follows at the end of this release. KEY RATING DRIVERS IDRS, Viability Ratings (VRs) AND SENIOR DEBT The ratings affirmation and Outlook reflect the company's stable asset quality, conservative credit culture and steady operating performance. In Fitch's view, INDB will continue to deliver consistent financial measures such as lower-than-peers' net charge-offs (NCOs) as well as stable, reasonable returns while maintaining current capital ratios. Although Fitch believes the company's balance sheet liquidity is weaker than peers, an offset is the company's sizeable mix of non-interest-bearing deposits, which is above average relative to peers. The Stable Outlook also incorporates the view that INDB has made progress in increasing capital ratios. INDB's 'BBB' rating is supported by its consistent performance evidenced by low level of credit losses and relatively stable earnings through various credit downturns. Fitch notes that during the last major credit downturn, INDB's NCOs peaked in 2010 at 43bps, much lower than peers despite the significant concentration in commercial real estate (CRE)loans. Credit measures remain benign although Fitch recognizes that asset quality metrics have benefited from the continued low rate environment and remain near troughs. Although Fitch expects credit losses to normalize over the medium term, we believe INDB's credit performance will remain stronger than peers. INDB's earnings performance metrics continue to exhibit stability buoyed by relatively solid spread income and low credit costs. INDB is more asset sensitive relative to peers, and recent rate hikes have benefitted the company's net interest margin (NIM) which increased to 3.60% in 2Q17 compared to 3.48% at year-end 2015. Further, INDB's performance relative to peers has been more consistent with less earnings volatility despite its loan concentrations. Ratings are constrained by risk concentrations in CRE and historically more aggressive capital management relative to peers. In Fitch's view, INDB's high CRE-to-total risk-based capital ratio of over 300% is high relative to peers. More recently, INDB's tangible common equity ratio has steadily increased and has converged to peer levels. While Fitch views INDB's capital levels as adequate for its ratings, Fitch expects that INDB will manage its TCE position to its long-term target of between roughly 8.25%-8.50%. Given INDB's nature as a strategic acquirer, the bank's current ratings incorporate the possibility that capital ratios may experience temporary dips due to acquisitions. Fitch considers INDB's liquidity profile to be somewhat weaker than peers. INDB's loan-to-deposit ratio of 94% at 2Q17 was the highest among peers. Additionally, balance sheet liquidity is limited relative to peers with cash and securities totaling 14% of total assets compared to the peer median of 25%. However, offsetting INDB's relatively weaker liquidity metrics is its sizable proportion of non-interest-bearing deposits, which comprised 32% of total deposits at 2Q17, up from 23% at year-end 2010. INDB's mix of non-interest-bearing deposits is among the highest in its peer group. INDB's primary funding source is its core deposit base, which accounted for 91% of total deposits. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES INDB's subordinated debt is notched one level below its VR of 'bbb' for loss severity in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profiles. LONG- AND SHORT-TERM DEPOSIT RATINGS The uninsured deposit ratings of INDB are rated one notch higher than INDB's IDR and senior unsecured debt because U.S. uninsured deposits benefit from depositor preference. U.S. depositor preference gives deposit liabilities superior recovery prospects in the event of default. HOLDING COMPANY INDB's IDR and VR are equalized with those of its operating bank, Rockland Trust Co., reflecting its role as the bank holding company, which is mandated in the U.S. to act as a source of strength for its bank subsidiaries. Ratings are also equalized reflecting the very close correlation between holding company and subsidiary default probabilities. SUPPORT RATING AND SUPPORT RATING FLOOR INDB has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, INDB is not systemically important and therefore, the probability of support is unlikely. IDRs and VRs do not incorporate any support. RATING SENSITIVITIES IDRS, VRs AND SENIOR DEBT Fitch believes the current ratings are at the high end of their potential rating range, and the likelihood for a positive rating action is limited at this point. In Fitch's view, the company's historically more aggressive capital management, comparatively high concentration of CRE and weaker liquidity profile constrain ratings. Ratings could come under pressure if INDB's capital position were to be negatively impacted by a reversal in credit quality performance or more aggressive capital management. A negative rating action could also occur if INDB were to organically grow into new lending types where the company lacked a competitive advantage or expertise that materially altered the company's loan portfolio. Additionally, should the company pursue an acquisition that results in materially lower pro forma capital levels, negative rating action is possible. While Fitch views INDB's ratings at the upper end of their range, positive rating momentum could emerge over time should the bank manage through a period of rising rates without substantially increasing reliance on wholesale funding. Additionally, positive rating momentum could occur should INDB consistently manage capital levels more in line with higher-rated peers. Further, growth in non-interest income that brings INDB's reliance on spread income more in line with higher-rated banks could result in positive rating momentum. SUBORDINATED DEBT AND OTHER HYBRID SECURITIES The subordinated debt and hybrid capital ratings are primarily sensitive to any change in INDB's (or the bank subsidiary's) VR. LONG- AND SHORT-TERM DEPOSIT RATINGS The long- and short-term deposit ratings are sensitive to any change to INDB's Long- and Short-Term IDR. HOLDING COMPANY Should INDB's holding company begin to exhibit signs of weakness, demonstrate trouble accessing the capital markets, or have inadequate cash flow coverage to meet near-term obligations, there is the potential that Fitch could notch the holding company IDR and VR from the ratings of the operating companies. SUPPORT RATING AND SUPPORT RATING FLOOR INDB's Support Rating and Support Rating Floor are sensitive to Fitch's assumption as to capacity to procure extraordinary support in case of need. Fitch has affirmed the following ratings: Independent Bank Corp. --Long-Term IDR at 'BBB'; Outlook Stable; --Short-Term IDR at 'F2'; --Viability Rating at 'bbb'; --Subordinated debt at 'BBB-'; --Support Rating at '5'; --Support Rating Floor at 'NF'. Rockland Trust Company --Long-Term IDR at 'BBB'; Outlook Stable; --Short-Term IDR at 'F2'; --Viability Rating at 'bbb'; --Support Rating at '5'; --Support Rating Floor at 'NF'; --Long-Term deposits at 'BBB+'; --Short-Term deposits at 'F2'. Contact: Primary Analyst Michael Shepherd, CPA Associate Director +1-212-908-9138 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Johannes Moller, CFA, FRM Associate Director +1-646-582-4954 Committee Chairperson Justin Fuller Senior Director +1-312-368-2057 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. 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