Independent Bank Corp. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. Independent Bank Corp. is the parent of Rockland Trust Company, a community bank operating primarily in Eastern Massachusetts and Rhode Island. The company completed its acquisition of Blue Hills Bancorp on April 1, 2019; results and year-end balances therefore include a substantial acquired business.
Financial performance and position
| Metric | 2019 | 2018 |
|---|---|---|
| Total assets at year-end | $11.40 billion | $8.85 billion |
| Loans at year-end | $8.87 billion | $6.91 billion |
| Deposits at year-end | $9.15 billion | $7.43 billion |
| Total borrowings at year-end | $303.1 million | $258.7 million |
| Net interest income | $393.1 million | $298.2 million |
| Net interest margin | 4.04% | 3.91% |
| Noninterest income | $115.3 million | $88.5 million |
| Noninterest expense | $284.3 million | $226.0 million |
| Net income | $165.2 million | $121.6 million |
| Diluted earnings per share | $5.03 | $4.40 |
| Return on average assets | 1.52% | 1.46% |
| Return on average common equity | 10.85% | 12.31% |
Management reported non-GAAP operating earnings of $184.6 million, or $5.62 per diluted share, compared with $129.8 million, or $4.69, in 2018. The measure excludes noncore items, principally merger and acquisition costs, and should not be treated as a substitute for GAAP results.
Cash flow and liquidity: Operating cash flow was $216.5 million, investing cash flow was $20.2 million, and financing cash flow was negative $336.2 million. Cash and cash equivalents ended the year at $151.0 million, down from $250.5 million. The company reported $3.35 billion of additional borrowing capacity across disclosed liquidity sources, including FHLB and Federal Reserve facilities and unpledged securities; the basic surplus/deficit liquidity measure was within policy limits.
Capital and credit: At year-end, the company reported a 12.86% CET1 ratio, 14.83% total risk-based capital ratio, and 11.28% Tier 1 leverage ratio; the bank was classified as well-capitalized. Nonperforming loans were $48.0 million, or 0.54% of gross loans, versus $45.4 million, or 0.66%, in 2018. The allowance for loan losses was $67.7 million, or 0.76% of loans, compared with $64.3 million, or 0.93%. Net charge-offs increased to $2.6 million from $1.1 million.
Material changes and drivers
- Balance-sheet growth was substantially acquisition-related: Blue Hills contributed $2.07 billion of loans and $1.93 billion of deposits at acquisition. Total loans rose about $2.0 billion, while organic loan balances declined 0.6% after adjusting for the acquisition and loans sold.
- Deposits rose 23.2% year over year, primarily due to Blue Hills, although organic deposits declined 2.8%. Core deposits were 82.9% of deposits; the full-year cost of deposits increased 18 basis points to 0.47%.
- Net interest income increased 31.9% on a fully tax-equivalent basis, largely reflecting higher earning assets from acquisitions and loan growth. Net interest margin expanded 13 basis points.
- Noninterest income rose 30.3%, including higher mortgage banking, investment management, deposit, and interchange revenues. Mortgage banking benefited from acquired production capacity and strong refinance demand.
- Noninterest expenses increased 25.8%, including $26.4 million in merger and acquisition expenses, up from $11.2 million. The efficiency ratio improved to 55.92% GAAP and 50.82% on management’s operating basis.
- Dividends declared increased 15.8% to $1.76 per share. The payout ratio was 32.25%. No shares were repurchased under the authorized 1.5 million-share program by year-end.
Outlook, risks, and unusual items
- 2020 outlook: Management expected low-single-digit net loan and deposit growth. It projected net interest margin in the mid-to-high 3.80% range, approximately 15–20 basis points below 2019, assuming no rate changes and modest funding-cost improvement. Operating fee income was expected to be essentially flat, excluding specified 2019 items and the expected interchange reduction. Operating expenses, excluding 2019 noncore costs, were expected to increase in the low-to-mid-single-digit range.
- Management expected the effective tax rate to rise to approximately 26% in 2020 after the final New Markets Tax Credit expired in 2019. The company adopted CECL on January 1, 2020 and estimated an initial allowance impact of 0–5%, subject to final implementation and validation.
- Crossing $10 billion in assets brings additional CFPB oversight. The company expected the debit interchange cap taking effect in July 2020 to reduce interchange income by $5.0–$5.5 million in the second half of 2020.
- Key risks include interest-rate sensitivity, credit deterioration, and geographic and real-estate concentrations. Commercial real estate was 45.1% of loans; lending is concentrated in Massachusetts and Rhode Island. Loans to lessors of nonresidential buildings were 17.5% of total loans.
- Other disclosed risks include integrating acquisitions and retaining customers and employees, competition, cybersecurity and operational disruptions, regulatory change, and transition away from LIBOR. Management described the regional near-term economic outlook as generally positive but noted moderating residential real-estate activity and low housing inventory.
- Unusual items included $26.4 million of merger and acquisition expense, a $1.46 million loss on securities, a $951,000 gain on loan sales, and a $3.1 million insurance recovery related to an acquired loan previously charged off. Management stated that pending ordinary-course lawsuits were not expected to have a material adverse effect.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. The audit identified the allowance for loan losses and Blue Hills acquired-loan and core-deposit-intangible valuations as critical audit matters.
Important facts for investors to verify
- How much of the reported earnings and balance-sheet growth is sustainable organically versus attributable to Blue Hills and other acquisitions?
- Whether deposit balances and funding costs stabilize, given the 2.8% organic deposit decline and higher time-deposit mix.
- Whether credit quality and reserves remain adequate as net charge-offs rose and allowance coverage declined; review commercial real-estate and nonperforming-loan exposures.
- Whether the 2020 margin, loan-growth, expense, tax, CECL, and interchange-income assumptions track management’s stated outlook.
- How acquisition integration, goodwill of $506.2 million, and acquired-asset valuation assumptions affect future results and impairment risk.