Independent Bank Corp. (NASDAQ: INDB) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are to December 31, 2018 unless noted. Independent Bank Corp. is the bank holding company for Rockland Trust Company. The quarter-end statements predate the April 1, 2019 closing of the Blue Hills Bancorp acquisition.
Key financial results
| Metric | Q1 2019 | Comparable period / change |
|---|---|---|
| Net interest income | $82.5 million GAAP; $82.7 million fully tax-equivalent | GAAP: $68.5 million in Q1 2018; FTE increase of 20.5% |
| Net interest margin | 4.14% FTE | 3.77% in Q1 2018; up 9 basis points from Q4 2018 |
| Net income | $35.2 million | $27.6 million; up 27.8% |
| Diluted EPS | $1.25 | $1.00 |
| Operating net income and EPS (non-GAAP) | $36.7 million; $1.30 | $27.6 million; $1.00 |
| Return on average assets / equity | 1.62% / 13.10% | 1.39% / 11.73% in Q1 2018 |
| GAAP efficiency ratio | 54.12% | 60.51% in Q1 2018 |
| Cash dividends declared per share | $0.44 | $0.38 in Q1 2018 |
Operating net income is a non-GAAP measure; it excludes $1.0 million of merger and acquisition costs, net of tax adjustments. Management cautions that non-GAAP measures are not substitutes for GAAP results.
Financial position, cash flow and credit
- Assets and lending: Total assets were $9.00 billion, up from $8.85 billion at year-end. Loans were $6.98 billion, up $70.7 million during the quarter, driven mainly by commercial and industrial lending. Securities totaled $1.08 billion.
- Deposits and funding: Deposits were $7.46 billion, up $36.5 million. Core deposits represented 88.48% of deposits; the quarterly cost of deposits was 0.39%, versus 0.24% in Q1 2018. Borrowings were $308.0 million, compared with $258.7 million at year-end.
- Liquidity: Cash and cash equivalents ended the quarter at $292.3 million, versus $250.5 million at the start of the year. Operating cash flow was $34.2 million; investing activities used $66.7 million and financing activities provided $74.4 million. Reported additional borrowing capacity from listed sources was $2.50 billion; management said its primary short-term liquidity measure remained within policy limits.
- Capital: Stockholders’ equity was $1.10 billion; equity to assets was 12.28%. Company regulatory ratios included 12.09% common equity tier 1, 13.11% Tier 1 risk-based capital and 15.28% total risk-based capital. The Company and Bank exceeded applicable minimum capital requirements.
- Credit quality: The allowance for loan losses was $65.1 million, or 0.93% of loans, versus $64.3 million and 0.93% at year-end. Q1 provision was $1.0 million; net charge-offs were $153,000. Nonperforming loans were $43.3 million, or 0.62% of loans, down from $45.4 million and 0.66% at year-end, and $47.7 million and 0.75% a year earlier.
- Problem credits: Troubled debt restructurings totaled $52.0 million, down from $53.2 million at year-end but up from $31.3 million a year earlier. The filing attributes much of the year-over-year increase in nonaccrual TDRs to a large commercial borrower’s bankruptcy reorganization in Q4 2018. Management reported 58 performing potential-problem-loan relationships totaling $47.5 million.
Material changes, outlook and risks
- Interest income rose to $91.5 million from $73.7 million year over year, while interest expense increased to $9.0 million from $5.3 million. Management attributed higher net interest income to loan and securities growth, higher asset yields and its asset-sensitive position; higher deposit and borrowing costs partly offset the benefit.
- Noninterest income increased 8.4% to $21.5 million, including growth in investment management and interchange/ATM fees. Noninterest expense rose 5.4% to $56.3 million, including $1.0 million of acquisition costs and higher salary and technology expenses. The effective tax rate was 24.65%, compared with 19.86% in Q1 2018; the filing cites discrete tax items and lower tax-credit benefits.
- Blue Hills acquisition: Completed April 1, 2019. Consideration was $667.1 million, including 6,166,010 shares and $167.4 million cash. The transaction added approximately $2.1 billion of loans, $196.9 million of securities, $1.9 billion of deposits, $124.8 million of borrowings and 11 branches. Management expected approximately 4% 2019 earnings accretion and modest tangible-book-value-per-share accretion. It anticipated modest near-term runoff in certain acquired loan and time-deposit portfolios.
- Management outlook: For the legacy business, management anticipated mid-single-digit annualized loan and deposit growth; low-to-mid-single-digit growth in noninterest income and expense; and, assuming no Federal Reserve rate changes, a 2019 net interest margin 10–15 basis points above 2018, excluding Blue Hills. Including the acquisition and an expected balance-sheet reduction strategy, management anticipated a pro forma margin in the mid-to-high 3.9% range. It expected an approximately 25% full-year effective tax rate, reported no near-term credit concerns, but said eventual loan-portfolio deterioration was likely.
- Debt and unusual items: The Company issued $50 million of fixed-to-floating subordinated notes at 4.75% through March 2024, maturing in 2029. It also entered a $125 million credit facility, comprising a $50 million revolving facility and a $75 million term loan, to support the Blue Hills closing; the $50 million revolver was repaid after quarter-end. The Company adopted lease accounting on January 1, 2019, recognizing operating lease right-of-use assets and liabilities; quarter-end right-of-use assets were $33.7 million.
- Risks and contingencies: Key stated risks include regional economic or real-estate weakness, credit deterioration, interest-rate and deposit-pricing changes, acquisition integration and synergy execution, increased regulatory costs as assets exceed $10 billion, competition, cybersecurity and operational disruptions. Commitments to extend credit were $2.65 billion, with $17.6 million of standby letters of credit. Management did not expect pending ordinary-course lawsuits to materially adversely affect results or financial position.
Investor verification priorities
- Verify Blue Hills integration, realized synergies and earnings accretion against management’s approximately 4% expectation, including acquired-loan and deposit runoff.
- Track legacy and combined net interest margin, deposit costs, funding mix and sensitivity to rate changes; the filing’s simulations depend on deposit and prepayment assumptions.
- Monitor commercial borrower exposures, potential problem loans, TDRs and allowance adequacy, particularly given management’s expectation of eventual credit deterioration.
- Reconcile reported and operating earnings, including acquisition costs and related tax adjustments, and assess whether expense growth persists.
- Review post-acquisition capital, liquidity and regulatory-cost effects; quarter-end balances and ratios do not include the completed Blue Hills transaction.
- Assess the impact of the planned January 1, 2020 expected-credit-loss accounting standard; the Company was still evaluating adoption effects.
Management stated that Q1 results are not necessarily indicative of full-year results.