Independent Bank (INDB) - 2020 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements (unaudited) The unaudited financial statements for Q1 2020 reflect asset growth, a decline in net income due to increased credit loss provisions, and the adoption of the CECL standard Consolidated Balance Sheets The balance sheet shows asset growth to $12.0 billion, driven by cash and borrowings, with an increased credit loss allowance Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $11,980,240 | $11,395,165 | | Net Loans | $8,824,054 | $8,805,899 | | Allowance for credit losses | $92,376 | $67,740 | | Goodwill | $506,206 | $506,206 | | Total Liabilities | $10,300,584 | $9,687,022 | | Total Deposits | $9,416,198 | $9,147,367 | | Total Borrowings | $545,985 | $303,103 | | Total Stockholders' Equity | $1,679,656 | $1,708,143 | Consolidated Statements of Income Q1 2020 net income decreased to $26.8 million, primarily due to a $25.0 million provision for credit losses, despite growth in net interest and noninterest income Consolidated Income Statement Highlights (in thousands, except per share data) | Account | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--- | :--- | :--- | | Net Interest Income | $94,304 | $82,525 | | Provision for credit losses | $25,000 | $1,000 | | Noninterest Income | $26,435 | $21,533 | | Noninterest Expenses | $66,840 | $56,311 | | Net Income | $26,751 | $35,225 | | Diluted Earnings Per Share | $0.78 | $1.25 | Consolidated Statements of Cash Flows Q1 2020 cash flows show a shift to net cash used in operations, increased cash used in investing, and strong cash provided by financing activities Cash Flow Summary (in thousands) | Activity | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $(10,403) | $34,168 | | Net cash used in investing activities | $(92,138) | $(66,733) | | Net cash provided by financing activities | $422,944 | $74,384 | | Net increase in cash and cash equivalents | $320,403 | $41,819 | Condensed Notes to Consolidated Financial Statements Notes detail CECL adoption, increased credit loss allowance due to COVID-19, and subsequent events including PPP participation and loan modifications - The Company adopted the CECL standard (ASC 326) on January 1, 2020, replacing the incurred loss methodology with an expected loss model, resulting in an immaterial increase to retained earnings upon adoption[34][35] - The allowance for credit losses increased by $24.6 million (36.3%) in Q1 2020, primarily due to a $25.0 million provision expense reflecting forecasted credit deterioration from the COVID-19 pandemic[74][299] - Subsequent to quarter-end, the Company processed $818.9 million in Paycheck Protection Program (PPP) loans and received loan modification requests for approximately $1.42 billion, representing 15.95% of the total loan portfolio, due to the COVID-19 pandemic[211][213] - The Company's effective tax rate for Q1 2020 was 7.43%, significantly lower than 24.65% in Q1 2019, due to a $4.7 million discrete tax benefit from the CARES Act[150] Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion highlights the significant impact of COVID-19 on Q1 2020 results, including a $25.0 million credit loss provision, withdrawn outlook, and robust capital and liquidity - Q1 2020 results were significantly impacted by a $25.0 million loan provision expense, primarily driven by assumptions regarding the COVID-19 pandemic[222] - Due to the COVID-19 pandemic, the Company has withdrawn its 2020 outlook, anticipating further net interest margin compression and a normalized tax rate of approximately 25%[238][241][245] - The company identified approximately $1.7 billion of loans in industries highly impacted by COVID-19, including Accommodation ($411.4 million), Food Services ($155.4 million), and Retail Trade ($526.7 million)[292][293][294] - During Q1 2020, the Company repurchased 1.2 million shares of common stock at a cost of $73.2 million under its share repurchase program, completed in April 2020[330] Financial Position As of March 31, 2020, the Company maintained a strong financial position with total assets of $12.0 billion, increased credit loss allowance, and robust capital ratios Asset Quality Ratios | Ratio | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Nonperforming loans as a percent of gross loans | 0.54% | 0.54% | | Nonperforming assets as a percent of total assets | 0.40% | 0.42% | | Allowance for credit losses as a percent of total loans | 1.04% | 0.76% | | Allowance for credit losses as a percent of nonperforming loans | 192.29% | 140.98% | Capital Ratios (Company Consolidated) | Ratio | March 31, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Tier 1 leverage capital ratio | 10.74% | 11.28% | | Common equity tier 1 capital ratio | 11.95% | 12.86% | | Total risk-based capital ratio | 14.13% | 14.83% | - The allowance for credit losses increased to $92.4 million, or 1.04% of total loans, at March 31, 2020, primarily driven by a $25.0 million provision for credit losses related to the COVID-19 pandemic[299] Results of Operations Q1 2020 net income declined to $26.8 million due to increased credit loss provisions, despite growth in net interest and noninterest income Key Performance Ratios | Ratio | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | | :--- | :--- | :--- | | Return on average assets | 0.94% | 1.62% | | Return on average equity | 6.22% | 13.10% | | Net interest margin | 3.74% | 4.14% | - Loan level derivative income increased by $3.0 million (461.15%) to $3.6 million in Q1 2020 due to higher customer demand[351][352] - The effective tax rate was 7.43% for Q1 2020, compared to 24.65% for Q1 2019, primarily due to a $4.7 million discrete tax benefit from the CARES Act[357] Risk Management The company actively manages credit, market, and liquidity risks, intensifying credit risk management due to COVID-19 and maintaining strong liquidity Interest Rate Sensitivity (Impact on Net Interest Income) | Parallel Rate Shocks (bps) | Year 1 Impact | Year 2 Impact | | :--- | :--- | :--- | | -100 | (1.1)% | (3.5)% | | +100 | 3.7% | 4.6% | | +200 | 8.1% | 11.2% | Sources of Liquidity (as of March 31, 2020, in thousands) | Source | Outstanding | Additional Borrowing Capacity | | :--- | :--- | :--- | | Federal Home Loan Bank of Boston | $358,591 | $1,179,248 | | Federal Reserve Bank of Boston | $0 | $692,179 | | Unpledged Securities | $0 | $754,494 | | Line of Credit | $0 | $50,000 | | Total Additional Capacity | | $2,675,921 | Quantitative and Qualitative Disclosures About Market Risk This section refers to the 'Risk Management' section for disclosures on market risk, primarily focusing on interest rate risk - Information regarding quantitative and qualitative disclosures about market risk is included in the 'Risk Management' section of Item 2 of this Form 10-Q[389] Controls and Procedures Management concluded disclosure controls and procedures were effective as of March 31, 2020, with no material changes to internal controls - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by the report[389] - No material changes in internal controls over financial reporting occurred during Q1 2020, with the company monitoring the impact of remote work due to COVID-19[390] PART II. OTHER INFORMATION Legal Proceedings The company is involved in ordinary course legal proceedings, with management expecting no material adverse financial impact - In the opinion of management, the final disposition of pending lawsuits is not expected to have a material adverse effect on the Company's financial position or results of operations[391] Risk Factors This section updates risk factors, primarily focusing on the significant and evolving impacts of the COVID-19 pandemic and PPP participation - The COVID-19 pandemic is adversely affecting the Company, its customers, and employees, with the full extent of its impact on business and financial position remaining uncertain and potentially significant[394] - The most notable impact to Q1 2020 results was a higher provision for credit losses of $25 million, with future credit loss forecasts remaining subject to significant uncertainty[398] - As a participating lender in the SBA Paycheck Protection Program (PPP), the Company faces additional risks of litigation and the potential for the SBA not fully honoring loan guarantees[404][405] Unregistered Sales of Equity Securities and Use of Proceeds During Q1 2020, the Company repurchased 1.18 million shares at an average price of $62.90, completing its share repurchase program in April 2020 Issuer Purchases of Equity Securities (Q1 2020) | Period | Total Shares Purchased | Average Price Paid Per Share | Shares Purchased Under Program | | :--- | :--- | :--- | :--- | | Jan 2020 | 13,389 | $72.00 | 13,389 | | Feb 2020 | 133,107 | $71.06 | 122,800 | | Mar 2020 | 1,035,656 | $61.74 | 1,030,734 | | Total | 1,182,152 | $62.90 | 1,166,923 | - The share repurchase program for up to 1.5 million shares, announced in October 2019, was completed in April 2020 after the remaining 333,077 shares were repurchased[408] Exhibits This section lists exhibits filed with the Form 10-Q, including Sarbanes-Oxley Act certifications and interactive data files