INDEPENDENT BANK CORP annual report, FY2018

Independent Bank Corp. — 2018 Form 10-K

Reporting period: Fiscal year ended December 31, 2018; quarterly figures include the three months ended December 31, 2018. Independent Bank Corp. is the holding company for Rockland Trust, a Massachusetts community bank operating primarily in Eastern Massachusetts and Rhode Island.

Financial performance and condition

Metric	2018	2017
Total revenue (net interest income plus noninterest income)	$386.7 million	$341.9 million
Net income	$121.6 million	$87.2 million
Diluted EPS	$4.40	$3.19
Net interest margin	3.91%	3.60%
Net cash from operating activities	$141.8 million	$130.9 million

Fourth-quarter net income was $29.9 million, or $1.07 diluted EPS, versus $22.1 million, or $0.80 per diluted share, in Q4 2017.
Interest income rose to $323.7 million from $277.2 million; interest expense increased to $25.5 million from $18.3 million. Net interest income was $298.2 million, up 15.2%.
Noninterest income increased 6.6% to $88.5 million. Noninterest expense rose 10.6% to $226.0 million, including $11.2 million of merger and acquisition expense. The GAAP efficiency ratio improved to 58.44% from 59.78%.
Management’s non-GAAP net operating earnings were $129.8 million, or $4.69 diluted EPS, compared with $91.7 million, or $3.35, in 2017. These measures exclude specified noncore items and are not GAAP results.
At year-end, assets were $8.85 billion, loans $6.91 billion, deposits $7.43 billion, and stockholders’ equity $1.07 billion. Loans grew 8.7% and deposits 10.4% year over year; growth included the MNB acquisition.
Core deposits were 88.7% of deposits; the annual cost of total deposits rose 10 basis points to 0.29%. Borrowings were $258.7 million, down 20.1%, principally reflecting the transfer of customer repurchase balances to deposits.
Cash and cash equivalents ended at $250.5 million, up from $213.1 million. Investing activities used $387.5 million and financing activities provided $283.0 million; net cash increased $37.3 million.
Capital remained above regulatory requirements: holding-company CET1 was 11.92%, total risk-based capital 14.45%, and Tier 1 leverage 10.69%. Book value per share was $38.23; tangible book value per share was $28.57.
Asset quality improved on headline measures: nonperforming loans were $45.4 million, or 0.66% of gross loans, versus $49.6 million, or 0.78%, a year earlier. The allowance for loan losses was $64.3 million, 0.93% of loans, versus $60.6 million, 0.95%.

Material changes and notable items

On November 16, 2018, the company acquired MNB Bancorp for $56.1 million in a mix of cash and stock, adding $293.5 million of loans and $278.2 million of deposits at fair value. The acquisition added $24.3 million of goodwill.
A September 2018 agreement to acquire Blue Hills Bancorp remained subject to regulatory approval and other closing conditions. The stated consideration is 0.2308 share of Independent Bank common stock plus $5.25 cash per Blue Hills share.
A large commercial customer’s bankruptcy reorganization plan led to $25.9 million of loans being classified as nonaccrual troubled debt restructurings in Q4. Total TDRs increased to $53.2 million from $31.9 million; nonaccrual TDRs rose to $29.3 million from $6.1 million.
The effective tax rate fell to 22.00% from 35.19%, primarily reflecting the lower federal corporate tax rate, New Markets Tax Credits, and other tax benefits. The company recognized $4.0 million of New Markets Tax Credits in 2018.
Cash dividends declared increased to $1.52 per share from $1.28; the payout ratio declined to 33.03% from 39.04%.

Outlook, risks and contingencies

For 2019, excluding Blue Hills, management anticipated mid-single-digit loan and deposit growth, assuming no significant competitive changes. Assuming no further rate increases, it expected full-year NIM to be 10–15 basis points above 2018; deposit costs were expected to rise another 3–5 basis points in Q1.
Management expected low- to mid-single-digit growth in noninterest income and expense, excluding noncore items; an approximately 25% tax rate excluding noncore items; and benign near-term credit conditions, while noting eventual credit deterioration was likely.
Assuming an early-Q2 Blue Hills closing, management forecast approximately 4% earnings accretion in 2019, about 20 basis points of NIM contraction beginning in Q2 absent likely balance-sheet deleveraging, and modest tangible-book-value-per-share accretion.
Key exposures include interest-rate changes, competition for deposits, commercial real estate and construction lending, and geographic concentration in Massachusetts and Rhode Island. Commercial real estate was 47.1% of loans; loans to lessors of nonresidential buildings were 15.1% of the loan portfolio.
Other disclosed risks include acquisition integration and synergies, cyber and operational risks, regulatory costs if assets exceed $10 billion, and the transition away from LIBOR. The expected 2020 CECL adoption impact was still under evaluation.
Off-balance-sheet commitments to extend credit totaled $2.64 billion and standby letters of credit $16.7 million. Pending ordinary-course lawsuits were not expected by management to materially affect financial position or results.
The company reported unqualified audit opinions on its financial statements and internal control over financial reporting.

Important facts for investors to verify

Blue Hills transaction approval, closing timing, integration costs, and realization of the projected accretion and synergies.
Performance and recovery prospects for the $25.9 million commercial bankruptcy-related TDR, and subsequent changes in nonaccrual loans and credit costs.
Whether NIM guidance is achieved as funding costs rise, and sensitivity to rate movements and deposit competition.
The expected allowance and earnings effects of CECL adoption in 2020.
Availability of future New Markets Tax Credit awards and the resulting path of the effective tax rate.
Concentration and collateral risks in commercial real estate, construction, and the company’s regional markets.