Independent Bank Corp. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Independent Bank Corp. is the bank holding company for Rockland Trust Company. Results include the acquired Meridian Bancorp business; Meridian closed in Q4 2021, making year-over-year comparisons materially affected by the larger company.
Financial performance and position
Unless otherwise noted, amounts below are in millions of dollars.
| Metric | Q3 2022 | Comparison |
|---|---|---|
| Net interest income | $162.6 | Up 80.5% from $90.1 in Q3 2021; fully tax-equivalent (FTE) NII was $163.6, up 81.2%. |
| Net interest margin | 3.64% FTE | 2.78% in Q3 2021; asset repricing in higher rates and Meridian contributed. |
| Provision for credit losses | $3.0 | Compared with a $10.0 release in Q3 2021. |
| Noninterest income | $28.2 | Up 6.6%; deposit and card fees rose, while mortgage banking income declined. |
| Noninterest expense | $92.7 | Up 28.0%, primarily reflecting Meridian-related operating scale. |
| Net income / diluted EPS | $71.9 / $1.57 | Net income up 79.7%; diluted EPS up 29.8% from $40.0 / $1.21. |
| Efficiency ratio | 48.60% | GAAP basis, versus 62.14% in Q3 2021. |
For the nine months, net income was $186.8 million and diluted EPS was $4.00, versus $119.3 million and $3.61 in 2021. FTE NII was $447.9 million, up 60.1%; FTE net interest margin was 3.33%, versus 3.00%. Nine-month noninterest income was $82.4 million (+7.4%) and noninterest expense was $278.8 million (+29.4%). The 2022 period included $7.1 million of Meridian-related merger and acquisition costs. Excluding those costs, management reported non-GAAP operating net income of $191.9 million and operating diluted EPS of $4.11; these are non-GAAP measures.
Balance sheet, funding and capital
- At September 30, total assets were $19.70 billion, down from $20.42 billion at year-end 2021. Total loans were $13.70 billion, up 0.8%; excluding PPP runoff, management reported 2.4% loan growth since year-end. Residential and home-equity lending supported growth, while commercial real estate attrition weighed on commercial balances.
- Deposits were $16.34 billion, down 3.4% from year-end, mainly from runoff in higher-cost time and rate-sensitive deposits. Core deposits were 87.8% of deposits, up from 84.5%. Q3 total deposit cost was 0.15%, versus 0.05% a year earlier.
- Total borrowings were $113.4 million, down from $152.4 million at year-end. Reported additional capacity from listed liquidity sources was $5.19 billion; management said its short-term liquidity measure remained within policy limits.
- Stockholders’ equity was $2.82 billion, down from $3.02 billion at year-end. Accumulated other comprehensive loss reached $179.1 million, principally reflecting market-value declines in available-for-sale securities and cash-flow hedges. Tangible common equity to tangible assets was 9.66% (non-GAAP).
- Regulatory capital remained above applicable minimums: company CET1 ratio was 13.98% and total risk-based capital ratio was 15.71%; the bank was also above its “well-capitalized” thresholds.
- For the nine months, operating cash flow was $305.9 million; investing cash outflow was $784.5 million and financing cash outflow was $825.8 million. Cash and cash equivalents fell $1.30 billion to $936.3 million, chiefly reflecting securities purchases, deposit outflows, share repurchases and dividends.
Material changes, outlook and risks
- Interest-rate and securities exposure: The company is asset-sensitive in its models and said rising rates had benefited earnings. However, the available-for-sale portfolio had $180.5 million of gross unrealized losses and held-to-maturity securities had $187.8 million of gross unrealized losses at quarter-end. Management attributed most securities losses to interest rates rather than credit quality and said it did not expect to be forced to sell. These market-value declines contributed to the reduction in equity and comprehensive income.
- Credit: Nonperforming loans rose to $56.0 million (0.41% of loans) from $27.8 million (0.20%) at year-end. The allowance was $147.3 million, or 1.08% of loans, and nine-month net charge-offs were $0.6 million. Management also identified $173.5 million of potential problem loans, which it said remained current on payments. Active COVID-related deferrals were $193.3 million, including $137.7 million scheduled to mature in Q4 2022.
- Economic assumptions and risks: The credit-loss forecast assumed a U.S. recession beginning in Q4 2022 and persisting in the short term, alongside elevated inflation, continuing supply-chain issues and further near-term rate increases. Management cited possible impacts from deposit competition, changing rates, regional economic weakness, real estate conditions, credit deterioration, cyber and technology risks, regulation, and geopolitical events. Interest-rate sensitivity estimates depend on assumptions; the filing’s model estimated a 2.4% Year 1 NII increase under an immediate +100-basis-point shock.
- Business mix: Higher rates and reduced customer demand lowered mortgage originations sold; more residential loans were retained. Nine-month mortgage banking income fell 73.5% year over year, while deposit-account and interchange/ATM fees grew.
- Capital returns: The company repurchased 1.8 million shares for $139.9 million during the first nine months, completing its January $140 million program. It declared dividends of $0.51 per share in each of the first three quarters. A new plan announced October 20 authorizes up to $120 million of repurchases through October 19, 2023.
- Guidance and other matters: The filing provides no formal earnings or financial guidance. Management described strong core deposit account openings, a low cost of deposits, strong fee income and continued monitoring of the economic environment. Pending ordinary-course lawsuits were not expected by management to have a material adverse effect. Disclosure controls were concluded effective, and no material Q3 change in internal control was reported.
Most important facts for investors to verify
- How much of the earnings and NIM improvement is sustainable as deposit costs rise, and how much reflects Meridian’s added scale and higher market rates?
- Whether deposit outflows continue, and how the company uses its reported borrowing capacity and securities liquidity under stress.
- Whether nonperforming loans, potential problem loans and maturing payment deferrals lead to higher provisions or charge-offs.
- How unrealized securities and hedge losses affect tangible capital, and whether securities would need to be sold before recovery.
- Whether expense growth, integration costs and the new share-repurchase plan affect future operating leverage and capital flexibility.