Independent Bank Corp. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Independent Bank Corp. is the bank holding company for Rockland Trust Company. Unless noted otherwise, financial amounts below are in U.S. dollars; reported statements are in thousands.
Financial performance and position
| Metric | Q2 2019 / June 30, 2019 | Comparable period / prior date |
|---|---|---|
| Net interest income | $106.0 million | $73.2 million in Q2 2018 |
| Net interest margin | 4.09% for Q2; 4.12% year to date | 3.89% and 3.83%, respectively, in 2018 |
| Noninterest income | $28.6 million in Q2; $50.2 million year to date | Up 30.9% and 20.2% year over year |
| Net income | $30.6 million in Q2; $65.9 million year to date | $31.1 million and $58.7 million in 2018 |
| Diluted EPS | $0.89 in Q2; $2.11 year to date | $1.13 and $2.13 in 2018 |
| Total assets | $11.60 billion | $8.85 billion at December 31, 2018 |
| Total loans / deposits | $8.95 billion / $9.31 billion | $6.91 billion / $7.43 billion at December 31, 2018 |
| Total borrowings | $499.7 million | $258.7 million at December 31, 2018 |
| Stockholders’ equity | $1.64 billion | $1.07 billion at December 31, 2018 |
- Q2 total revenue, defined as net interest income plus noninterest income, was $134.7 million, versus $95.1 million a year earlier. The quarter’s GAAP efficiency ratio was 69.08%; excluding merger and acquisition costs, the company reported a non-GAAP operating efficiency ratio of 50.74%.
- Q2 provision for loan losses was $1.0 million. Net charge-offs were $180,000 for the quarter and $333,000 for the first half. The allowance was $66.0 million, or 0.74% of loans, versus 0.93% at year-end; management said acquired loans are recorded at fair value without an allowance carryover.
- Cash and cash equivalents were $194.0 million at June 30, down from $250.5 million at year-end. First-half operating cash flow was negative $14.9 million; investing cash use was $86.2 million and financing cash provided was $44.7 million.
- At June 30, the bank’s regulatory capital ratios included 13.51% common equity Tier 1 and 14.26% total risk-based capital. The company reported a 12.08% common equity Tier 1 ratio and 14.42% total risk-based capital ratio. The bank exceeded applicable minimums and the capital conservation buffer.
- Additional borrowing capacity across listed liquidity sources was $2.90 billion. The company stated its short-term liquidity measure was within policy limits. Core deposits were 82.93% of deposits.
Material changes and key drivers
- On April 1, 2019, the company completed its acquisition of Blue Hills Bancorp for approximately $661.3 million, consisting of 6.17 million shares and $161.6 million cash. The acquisition added approximately $2.07 billion in loans and $1.93 billion in deposits, and substantially increased reported assets, loans, deposits, goodwill and equity.
- Q2 merger and acquisition expense was $24.7 million; first-half expense was $25.7 million, primarily related to Blue Hills. Management’s non-GAAP operating net income was $48.8 million in Q2, versus $31.4 million in Q2 2018, and operating diluted EPS was $1.42 versus $1.14. These non-GAAP figures exclude merger and acquisition expense and are not GAAP results.
- GAAP Q2 net income declined 1.6% year over year and diluted EPS declined 21.2%; the larger per-share decrease reflects a higher weighted-average share count, including shares issued for the acquisition. First-half net income increased, while diluted EPS was slightly lower.
- Loan balances increased by $2.04 billion from year-end, largely from the acquisition. Management estimated organic loan growth of 0.82% after adjusting for acquired loans and loans transferred to held for sale. Deposits rose $1.88 billion, primarily from the acquisition; excluding it, deposits declined modestly.
- Deposit costs rose: the Q2 total cost of deposits was 0.49%, versus 0.27% in Q2 2018. Management attributed a five-basis-point sequential decline in Q2 net interest margin and higher funding costs partly to the acquired funding mix.
- Noninterest income growth included higher mortgage banking, interchange and ATM fees, and other income. Q2 expenses also included a $1.46 million loss on sale of securities.
- Nonperforming loans were $45.3 million, or 0.51% of gross loans, versus $45.4 million at year-end and $47.1 million a year earlier. Nonperforming assets were $48.2 million, including $2.9 million of foreclosed property acquired during the quarter. Total TDRs were $50.3 million.
Outlook, commentary and risks
- Management’s 2019 outlook anticipated flat to low-single-digit loan growth and low-single-digit deposit growth for the remainder of the year. Assuming no Federal Reserve rate changes and normalized loan accretion, it expected net interest margin in the high 3.9% range.
- Management expected Q3 noninterest income to be relatively consistent with Q2, including strong mortgage demand and an anticipated gain on a pending residential loan deleverage sale. It expected Q4 noninterest income to decline mid-single digits from Q3 estimates, with no anticipated nonrecurring gains and softer mortgage demand.
- With transition costs ending and expected Blue Hills cost savings, management forecast quarterly noninterest expense to decrease low- to mid-single digits versus Q2 operating expense. It anticipated an effective tax rate of approximately 25%, and reported no near-term credit concerns while noting eventual loan portfolio deterioration was likely.
- Management described the New England economic outlook as generally positive at midyear 2019. Principal disclosed risks include economic weakness, real estate volatility, credit deterioration (including large commercial relationships), acquisition integration and synergy shortfalls, competition for deposits, interest-rate and LIBOR changes, cyber and operational events, and increased regulatory costs after assets exceeded $10 billion.
- The company reported pending lawsuits arising in the ordinary course of business; management did not expect their resolution to materially adversely affect financial position or results. It said there were no material changes to previously disclosed risk factors and no material Q2 changes in off-balance-sheet arrangements or contractual commitments. Commitments to extend credit were $3.16 billion at June 30.
- The company planned to adopt the expected-credit-loss standard (CECL) on January 1, 2020 and was still assessing its impact. Disclosure controls were concluded effective at quarter-end, with no material Q2 change in internal control over financial reporting.
Important facts for investors to verify
- Blue Hills integration progress, realized cost savings, customer and employee retention, and whether acquisition synergies meet management’s expectations.
- Underlying earnings and operating efficiency excluding merger costs, alongside GAAP results; confirm the treatment and timing of acquisition-related and other unusual items.
- Organic loan and deposit trends, deposit pricing and mix, and the assumptions behind the projected margin and full-year outlook.
- Credit quality and allowance adequacy, including acquired-loan performance, potential problem loans, nonperforming assets and TDRs; assess the impact of CECL adoption.
- Liquidity, use of wholesale and brokered funding, borrowing capacity, and capital ratios as the enlarged company operates above $10 billion in assets.