Independent Bank Corp. (Nasdaq: INDB) — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Comparisons are to the corresponding 2019 periods unless otherwise noted. Amounts are in U.S. dollars; financial statement amounts are generally in millions.
Business context
Independent Bank Corp. is the parent of Rockland Trust Company, a Massachusetts-based bank. Results reflect a low interest-rate environment, the COVID-19 pandemic, participation in the Paycheck Protection Program (PPP), and continued effects of the 2019 Blue Hills Bancorp acquisition. The company had $13.17 billion in total assets at quarter-end.
Financial results and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $90.9 million | $104.6 million | $276.3 million | $293.1 million |
| Provision for credit losses | $7.5 million | $0 | $52.5 million | $2.0 million |
| Noninterest income | $29.3 million | $31.8 million | $84.0 million | $82.0 million |
| Noninterest expense | $66.7 million | $67.5 million | $200.1 million | $216.9 million |
| Net income | $34.9 million | $51.8 million | $86.5 million | $117.7 million |
| Diluted EPS | $1.06 | $1.51 | $2.59 | $3.64 |
| Net interest margin (FTE) | 3.13% | 4.03% | 3.36% | 4.08% |
Q3 GAAP net income fell 32.7%; diluted EPS fell 29.8%. Management cited credit-loss provisioning and lower net interest margin. Q3 operating net income, a non-GAAP measure excluding specified noncore items, was $35.4 million versus $51.7 million.
- Revenue and margins: Q3 net interest income plus noninterest income was $120.2 million, down from $136.4 million. The FTE net interest margin declined 12 basis points from Q2 2020 to 3.13%. Deposit-cost reductions helped offset lower asset yields, but excess cash, PPP lending at 1%, and nonaccrual interest reversals weighed on margin.
- Balance sheet and liquidity: Total loans were $9.41 billion, up $531.6 million from year-end 2019, largely due to $811.7 million of PPP loans. Excluding PPP, loans declined $280.2 million. Deposits rose 18.6% to $10.85 billion. Cash and cash equivalents were $1.27 billion, versus $151.0 million at year-end. The filing reported $3.39 billion in additional borrowing capacity across listed liquidity sources.
- Credit and capital: Allowance for credit losses was $115.6 million, or 1.23% of loans, versus $67.7 million and 0.76% at year-end 2019. Nonperforming loans increased to $98.0 million from $48.0 million at Q2 and $48.0 million at year-end 2019. The company and bank exceeded applicable regulatory minimum capital requirements; company CET1 was 12.41% and total risk-based capital was 14.87%.
- Debt: Total borrowings were $295.7 million, down from $303.1 million at year-end 2019. Nine-month operating cash flow was $10.8 million, compared with $137.2 million in 2019; investing cash outflow was $450.4 million and financing cash inflow was $1.56 billion.
- Shareholder returns: The quarterly dividend was $0.46 per share. The company completed its 1.5 million-share repurchase program during the first half of 2020 for $95.1 million, at an average $63.39 per share.
Material changes and unusual items
- Q3 credit provision was $7.5 million, down from $20.0 million in Q2 and $25.0 million in Q1; management said credit conditions and loss expectations did not change significantly during Q3. Nine-month provision was $52.5 million.
- Q3 nonperforming loans rose primarily after three large commercial relationships in pandemic-affected industries migrated to nonperforming status. Q3 net charge-offs were $4.1 million, including a $3.8 million commercial charge-off.
- Active payment deferrals totaled $583.8 million, or 6.2% of loans. Most continued to be classified as current under applicable relief guidance. Management included active deferrals in estimating reserves.
- PPP originations exceeded 6,100 loans totaling $811.7 million. The company reported $27.1 million of PPP fee revenue to be amortized over loan lives; $5.4 million had been recognized by September 30.
- Mortgage banking income increased to $7.7 million in Q3 from $4.0 million, reflecting higher volume and demand. Deposit and interchange/ATM fees declined, with the latter also affected by the Durbin Amendment after the company crossed the $10 billion asset threshold.
- Q3 included a $0.7 million loss on termination of a derivative. Nine-month results included a $4.7 million discrete tax benefit related to CARES Act net operating loss carryback provisions. Goodwill impairment tests at March, June, and September found no impairment.
- The company adopted CECL on January 1, 2020; the transition adjustment to retained earnings was described as immaterial. Prior-period credit-loss figures were prepared under the previous accounting method.
Outlook, commentary, and risks
The company provided no updated 2020 outlook because of COVID-19 uncertainty and withdrew its prior 2020 outlooks, which should not be relied upon. Management said it could not reliably estimate the pandemic’s ultimate effects and warned of potential material adverse impacts on earnings, asset quality, capital, liquidity, and the economy.
Management’s September 30 credit forecast assumed unemployment would rise through mid-2022, federal funds rates would remain near zero until 2022, and no sustained economic recovery would occur until 2022. It identified about $1.3 billion of loans in highly impacted industries, including accommodations, food services, retail, other services, and arts, entertainment, and recreation. Other risks include PPP-related litigation or SBA guarantee deficiencies, interest-rate and LIBOR transition risk, regional economic and real-estate weakness, cybersecurity, regulatory costs, and potential further credit deterioration.
Management stated that pending ordinary-course lawsuits were not expected to have a material adverse effect. Disclosure controls were considered effective at quarter-end; no material change in internal control over financial reporting was reported.
Investor verification priorities
- Track nonperforming commercial loans, especially the three relationships newly classified as nonperforming, subsequent payment performance, and collateral recoveries.
- Assess whether active deferrals resume payments and whether the $115.6 million allowance adequately reflects COVID-19 exposures and the company’s economic assumptions.
- Monitor PPP forgiveness, fee amortization, and the risk that the SBA could deny or reduce guarantees; confirm the effect of PPP runoff on loan balances and margin.
- Evaluate whether deposit growth and excess cash persist, and how low rates, asset repricing, and deposit pricing affect net interest margin and earnings.
- Review capital and liquidity trends, including the effects of credit losses, dividends, and the completed share repurchase program.