Independent Bank Corp. — 2021 Q3 Form 10-Q
Business context and period. Unaudited results for the quarter and nine months ended September 30, 2021. The company is the holding company for Rockland Trust, serving customers primarily in New England. Comparisons are with the corresponding 2020 periods unless otherwise stated; balance-sheet comparisons are with December 31, 2020.
Financial results and condition
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net income | $40.0 million | $34.9 million | $119.3 million | $86.5 million |
| Diluted EPS | $1.21 | $1.06 | $3.61 | $2.59 |
| Net interest income | $90.1 million | $90.9 million | $279.0 million | $276.3 million |
| Provision for credit losses | $(10.0) million | $7.5 million | $(17.5) million | $52.5 million |
| Noninterest income | $26.5 million | $29.3 million | $76.7 million | $84.0 million |
| Noninterest expense | $72.4 million | $66.7 million | $215.4 million | $200.1 million |
| Net interest margin | 2.78% | 3.13% | 3.00% | 3.36% |
- Q3 net income rose 14.7% year over year; nine-month net income rose 37.9%. The quarterly and year-to-date credit-loss provision releases were significant contributors to earnings.
- Q3 revenue, defined as net interest income plus noninterest income, was $116.5 million; the GAAP efficiency ratio was 62.14%, versus 55.44% a year earlier.
- Total assets were $14.53 billion, deposits $12.26 billion, loans $8.81 billion, and stockholders’ equity $1.76 billion. Deposits increased 11.5% from year-end; loans declined 6.2%, largely reflecting PPP forgiveness and repayments.
- Cash and cash equivalents were $2.01 billion at September 30. Nine-month cash flow was $156.8 million provided by operating activities, $641.9 million used in investing, and $1.20 billion provided by financing activities.
- Total borrowings were $157.0 million, down from $181.1 million at year-end. The company reported $4.09 billion of additional borrowing capacity across listed liquidity sources.
- Capital remained above regulatory minimums: company CET1 ratio was 13.53%, total risk-based capital ratio 15.78%, and tangible common equity to tangible assets 8.79%. The quarterly dividend was $0.48 per share.
- Asset quality improved: nonperforming loans were $45.8 million, or 0.52% of loans, versus $66.9 million, or 0.71%, at year-end. Allowance for credit losses was $92.2 million, or 1.05% of loans, versus $113.4 million, or 1.21%, at year-end.
Material changes versus comparable periods
- Compared with Q3 2020, Q3 2021 net interest income declined 0.9% and net interest margin fell 35 basis points. Management attributed quarterly pressure to lower PPP fee income and deployment of excess liquidity into lower-yielding short-term assets.
- Q3 noninterest income decreased 9.9%, mainly reflecting lower mortgage banking and loan-level derivative income; investment management and deposit-fee income increased. Noninterest expense rose 8.6%, including $1.9 million of Meridian merger costs and higher salaries and benefits.
- The nine-month credit-loss provision shifted from a $52.5 million expense in 2020 to a $17.5 million release in 2021. Net charge-offs were $3.6 million versus $4.6 million.
- Securities increased 99.5% from year-end to $2.32 billion as the company deployed excess cash. Core deposits were 92.0% of deposits; the cost of total deposits was 0.05% in Q3.
Outlook, commentary, risks and unusual items
- Management’s near-term expectations for the remainder of 2021 were relatively flat loan balances, low-single-digit deposit growth, continued investment of excess liquidity in securities, and provision expense below net charge-offs if economic conditions and asset quality continued to improve. It expected slightly lower noninterest income and slightly higher noninterest expense. These are management expectations, not a full-year earnings forecast.
- The Meridian Bancorp acquisition, announced in April, was expected to close in Q4 2021, subject to regulatory approvals and other closing conditions. Shareholders of both companies had approved it. Consideration was 0.2750 Independent Bank shares per Meridian share, with approximately 14.2 million shares expected to be issued; the stated transaction value was approximately $1.15 billion based on the specified April 2021 share price.
- Management cited continuing uncertainty from COVID-19 and variants, supply-chain and labor disruptions, inflation, regional economic conditions, real estate and borrower credit quality, interest rates, and integration and regulatory risks related to the acquisition. It noted that about $1.3 billion of loans were in industries considered highly impacted by COVID-19 and $222.9 million of loans had active deferrals, mostly current. Potential problem loans totaled $135.7 million.
- After quarter-end, on October 29, the company sold a $15.8 million commercial and industrial relationship included in nonperforming assets and expected to recognize an approximately $2.5 million gain.
- Pending ordinary-course lawsuits, including litigation related to the merger, were not expected by management to have a material adverse effect. The filing also reports $3.59 billion of commitments to extend credit and $208.8 million of loan exposures with recourse.
Important facts for investors to verify
- Whether the Meridian acquisition received required approvals, closed as anticipated, and delivered expected integration benefits without unanticipated costs or dilution.
- Whether credit quality and the allowance remain adequate as deferred loans resume regular payments and COVID-sensitive sectors, labor constraints, and inflation affect borrowers.
- How PPP forgiveness, loan payoffs, deposit growth, and excess-liquidity investment affect loan growth, net interest margin, and earnings.
- Whether management’s near-term outlook was achieved, particularly its expectations for provision expense, noninterest income, and expenses.
- The subsequent-period accounting and realized gain on the post-quarter-end $15.8 million loan sale.