Independent Bank Corp. — Q1 2020 Form 10-Q
Business context and reporting period. Independent Bank Corp., parent of Rockland Trust Company, reported unaudited results for the three months ended March 31, 2020. The filing is dominated by the early effects and uncertainty of the COVID-19 pandemic. Year-over-year comparisons also reflect the Blue Hills Bancorp acquisition.
Financial and operating results
| Metric | Q1 2020 | Comparable period / change |
|---|---|---|
| Net interest income | $94.3 million | $82.5 million in Q1 2019; up 14.3% |
| Net interest margin, fully tax-equivalent | 3.74% | 4.14% in Q1 2019; 3.90% in Q4 2019 |
| Provision for credit losses | $25.0 million | $1.0 million in Q1 2019; $4.0 million in Q4 2019 |
| Noninterest income | $26.4 million | $21.5 million in Q1 2019; up 22.8% |
| Noninterest expense | $66.8 million | $56.3 million in Q1 2019; up 18.7% |
| Net income / diluted EPS | $26.8 million / $0.78 | $35.2 million / $1.25 in Q1 2019 |
| Return on average assets / equity | 0.94% / 6.22% | 1.62% / 13.10% in Q1 2019 |
The rise in loan-loss provision was the principal earnings headwind. Net interest income increased with growth in earning assets, including assets from the Blue Hills acquisition, but lower asset yields and reduced purchase-accounting loan accretion weighed on margin. Noninterest income benefited from customer-related derivatives and higher deposit and card fees; expenses increased in part with the acquired branch and employee base. The GAAP efficiency ratio was 55.36%, versus 54.12% a year earlier.
Balance sheet, credit, liquidity and capital
- Scale and funding: Total assets were $12.0 billion at March 31, up from $11.4 billion at year-end 2019. Loans were $8.92 billion, up 0.5% from year-end; deposits were $9.42 billion, up 2.9%. Total borrowings rose 80.1% to $546.0 million, including an additional $300 million FHLB borrowing during the quarter.
- Credit: The allowance for credit losses was $92.4 million, or 1.04% of loans, compared with $67.7 million, or 0.76%, at year-end. The increase from the January 1 CECL implementation balance was $24.6 million, primarily reflecting a more severe COVID-19 economic forecast and qualitative reserves for exposed industries. Net charge-offs were $384,000. Nonperforming loans were $48.0 million, or 0.54% of gross loans, broadly unchanged from year-end.
- Exposure and relief: Management identified $1.68 billion of loans in potentially highly impacted industries, 18.8% of total loans. Through the filing date, anticipated loan modifications covered 1,941 loans totaling $1.42 billion, or 15.95% of loan balances as of March 31.
- Liquidity: Cash and cash equivalents were $471.4 million, versus $151.0 million at year-end. Net cash from operating activities was negative $10.4 million, compared with positive $34.2 million in Q1 2019; financing activities provided $422.9 million. Reported additional borrowing capacity was $2.68 billion across FHLB, Federal Reserve, unpledged securities and a line of credit. Management said liquidity was sufficient, while noting that relief measures and PPP activity could temporarily strain it.
- Capital and shareholder returns: Company regulatory ratios were 14.13% total risk-based capital, 11.95% CET1 and 10.74% Tier 1 leverage at quarter-end; each was lower than at year-end. The company repurchased 1.17 million shares for $73.2 million in Q1 and completed its 1.5 million-share authorization in early April. The quarterly dividend declared was $0.46 per share.
Outlook, risks and unusual items
- Management withdrew its prior 2020 outlook and said it could not provide comprehensive guidance amid COVID-19 uncertainty. It expected near-term core net interest margin to compress further, expenses to remain broadly consistent with Q1, and the tax rate to normalize to approximately 25%. Future provisions would depend on economic deterioration beyond the assumptions used at March 31.
- The allowance forecast assumed unemployment peaking at 16.9% in Q2 2020, elevated unemployment through year-end, and no sustained economic recovery until Q4 2021. These were management assumptions, not actual outcomes or guarantees.
- After quarter-end, the company reported processing $818.9 million of PPP loans as of the filing date and anticipated $25.9 million in processing fees, to be deferred through net interest income over the loans’ lives. The filing flags possible PPP litigation and the risk that SBA guarantees could be denied or reduced if origination, funding or servicing requirements were not met.
- COVID-19 was also cited as a risk to borrower repayment, collateral values, fee income, operations, funding and capital. Management performed an interim goodwill impairment test and recorded no impairment. Pending ordinary-course lawsuits were not expected by management to have a material adverse effect.
- The 7.43% effective tax rate included a $4.7 million discrete CARES Act benefit related to revised NOL carryback provisions. The quarter also included a $1.8 million unrealized loss on equity securities. Other comprehensive income was $31.6 million, including a $23.0 million after-tax increase in cash-flow hedge fair value.
Most important facts for investors to verify
- Whether COVID-19-related credit deterioration, especially in the identified industry exposures and modified loans, leads to further provisioning, charge-offs or rising nonperforming loans.
- Whether PPP loans receive SBA guarantees and forgiveness as expected, and whether the anticipated processing fees are earned on the timing assumed.
- Whether deposit costs, asset yields and loan accretion drive the expected further margin compression, and whether liquidity remains adequate as customer relief and lending continue.
- How capital ratios and shareholder distributions evolve after the share repurchases, higher credit reserves and economic stress.
- Whether the stated macroeconomic assumptions and management’s conditional outlook remain appropriate as the pandemic and recovery develop.