Independent Bank Corp. — Q1 2023 Form 10-Q
Business context and period. Independent Bank Corp. is the bank holding company for Rockland Trust Company. This unaudited filing covers the three months ended March 31, 2023; income and cash flow comparisons are against Q1 2022, while balance-sheet changes are generally against December 31, 2022. Amounts below are in U.S. dollars.
Financial results and condition
| Metric | Q1 2023 / March 31, 2023 | Comparable period / prior date |
|---|---|---|
| Net income; diluted EPS | $61.2 million; $1.36 | Q1 2022: $53.1 million; $1.12 |
| Net interest income (GAAP) | $159.0 million | Q1 2022: $137.4 million |
| Net interest margin (fully tax-equivalent) | 3.79% | Q1 2022: 3.09% |
| Provision for credit losses | $7.3 million | Q1 2022: $2.0 million release |
| Noninterest income / expense | $28.2 million / $98.7 million | Q1 2022: $26.3 million / $95.5 million |
| Operating cash flow | $51.5 million | Q1 2022: $75.5 million |
| Total assets; stockholders’ equity | $19.44 billion; $2.83 billion | December 31, 2022: $19.29 billion; $2.89 billion |
| Loans; deposits | $13.95 billion; $15.27 billion | December 31, 2022: $13.93 billion; $15.88 billion |
| Total borrowings | $992.4 million | December 31, 2022: $113.4 million |
| Capital ratios (company) | CET1 13.83%; total risk-based 15.66%; tier 1 leverage 10.78% | December 31, 2022: 14.33%; 16.11%; 10.99% |
- Year-over-year net income rose 15.3% and diluted EPS rose 21.4%. Q1 2022 included $7.1 million of pretax Meridian acquisition expenses; excluding those costs, the company reported Q1 2022 operating net income of $58.2 million and operating diluted EPS of $1.23.
- Management attributed higher net interest income to asset repricing, partly offset by higher deposit pricing and borrowing costs. Total deposit cost rose to 0.59% from 0.05% in Q1 2022.
- GAAP efficiency ratio was 52.69%, versus 58.34% in Q1 2022. Return on average assets was 1.30% versus 1.06%; return on average equity was 8.63% versus 7.16%.
- Net charge-offs were $538,000; nonperforming loans were $56.2 million, or 0.40% of gross loans. Allowance for credit losses was $159.1 million, 1.14% of loans, up from $152.4 million and 1.09% at year-end. The quarter’s provision primarily reflected a specific reserve for a large commercial and industrial credit.
- Available-for-sale securities had $145.5 million of gross unrealized losses at quarter-end. Held-to-maturity securities had $160.7 million of gross unrealized losses; their fair value was $1.520 billion against $1.678 billion amortized cost. Management attributed most losses to interest rates, stated it did not intend to sell the securities, and reported no credit-loss provision on these portfolios.
Material changes and liquidity
- Deposits fell $606.8 million, or 3.8%, during the quarter. Core deposits were 85.6% of deposits, down from 87.9% at year-end. Management cited industry disruption, seasonality, competition for deposits, and customers’ redeployment of excess liquidity.
- The company raised $879 million in FHLB advances, primarily short-term, citing deposit reductions, share repurchases, and precautionary liquidity management. Quarter-end FHLB borrowings were $879.6 million; the company also reported $3.04 billion of additional Federal Reserve borrowing capacity and $914 million of additional FHLB capacity.
- Estimated uninsured deposits were $4.7 billion, including $659 million of collateralized deposits. Brokered deposits were $95.4 million and reciprocal deposits were $698.3 million.
- Cash and cash equivalents ended the quarter at $502.5 million. Q1 operating cash flow was $51.5 million; financing cash flow was $126.7 million, including deposit outflows, $879 million of FHLB borrowing, $120.0 million of share repurchases, and $25.1 million of dividends paid.
- Loans grew only 0.1% from year-end. Commercial loans declined modestly; residential real estate loans rose 3.0%. Wealth-management assets under administration increased to $6.1 billion from $5.7 billion a year earlier.
- The company repurchased 1.6 million shares for approximately $120 million, completing its October 2022 repurchase authorization. It declared a quarterly dividend of $0.55 per share, up from $0.51 a year earlier. Tangible book value per share was $41.31, versus $41.12 at year-end.
Outlook, commentary, and risks
- The filing provides no formal earnings or financial guidance. Management described loan demand as subdued and underwriting as cautious, and said it was maintaining elevated attention to liquidity, including additional collateral pledges and stress testing.
- Management’s credit-loss forecast assumed further near-term increases in federal funds rates, expected declines in office-property and home prices during 2023, and that recent U.S. bank failures were not indicative of a broader systemic problem.
- Interest-rate sensitivity modeling showed estimated Year 1 net interest income changes of -0.1% for a +100-basis-point shock and -5.0% for a -200-basis-point shock; gradual +200-basis-point and +400-basis-point scenarios showed +0.7%. The filing cautions that deposit pricing and customer behavior assumptions may materially affect outcomes.
- Key risks include deposit competition and outflows, market volatility and banking-industry disruption, interest-rate changes, unrealized securities losses, commercial credit deterioration, real-estate values, economic weakness, cybersecurity and operational risks, and possible increases in FDIC assessments or regulation.
- Off-balance-sheet commitments to extend credit totaled $4.59 billion; standby letters of credit were $22.9 million. Management said pending ordinary-course lawsuits were not expected to have a material adverse effect. No material changes to off-balance-sheet arrangements or contractual obligations were reported.
- The company performed interim goodwill impairment testing amid banking-sector turmoil and reported no impairment. Disclosure controls were concluded effective, with no material change in internal control over financial reporting reported.
Important facts for investors to verify
- Deposit trends, uninsured-deposit composition, deposit pricing, and the company’s continued use and cost of wholesale funding.
- Liquidity capacity and collateral availability, including the assumptions and operational access underlying reported FHLB and Federal Reserve borrowing capacity.
- Credit quality of the large commercial and industrial relationship, commercial real estate exposure, and the adequacy of the $159.1 million allowance.
- Potential effects of securities unrealized losses, deposit competition, and interest-rate scenarios on capital, earnings, and liquidity.
- Whether net interest income and expenses remain on trend after adjusting for Q1 2022 acquisition costs and Q1 2023 share repurchases.