Independent Bank (INDB) - 2020 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) This section presents the unaudited consolidated financial statements, including balance sheets, income statements, comprehensive income, stockholders' equity, and cash flows, along with detailed notes explaining the basis of presentation, recent accounting updates, and specific financial instrument details Consolidated Balance Sheets The consolidated balance sheets show a significant increase in total assets and deposits as of June 30, 2020, compared to December 31, 2019, primarily driven by higher interest-earning deposits and commercial & industrial loans, alongside a substantial increase in the allowance for credit losses Key Balance Sheet Metrics | Metric | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :--------------------------------- | :----------------------------- | :----------------------------- | | Total Assets | $13,022,500 | $11,395,165 | | Interest-earning deposits with banks | $974,105 | $36,288 | | Total Loans | $9,359,648 | $8,873,639 | | Allowance for Credit Losses | $(112,176) | $(67,740) | | Total Deposits | $10,716,821 | $9,147,367 | | Total Stockholders' Equity | $1,671,692 | $1,708,143 | Consolidated Statements of Income The consolidated statements of income reveal a decrease in net income for both the three and six months ended June 30, 2020, compared to the prior year, largely due to a substantial increase in the provision for credit losses, despite a slight increase in total noninterest income for the six-month period Income Statement - Three Months Ended June 30 | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | | :------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net Interest Income | $91,098 | $106,019 | | Provision for Credit Losses| $20,000 | $1,000 | | Total Noninterest Income | $28,190 | $28,648 | | Total Noninterest Expenses | $66,607 | $93,032 | | Net Income | $24,902 | $30,628 | | Basic Earnings Per Share | $0.76 | $0.89 | | Diluted Earnings Per Share | $0.76 | $0.89 | Income Statement - Six Months Ended June 30 | Metric | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | | :------------------------- | :------------------------------------------ | :------------------------------------------ | | Net Interest Income | $185,402 | $188,544 | | Provision for Credit Losses| $45,000 | $2,000 | | Total Noninterest Income | $54,625 | $50,181 | | Total Noninterest Expenses | $133,447 | $149,343 | | Net Income | $51,653 | $65,853 | | Basic Earnings Per Share | $1.54 | $2.11 | | Diluted Earnings Per Share | $1.54 | $2.11 | Consolidated Statements of Comprehensive Income The consolidated statements of comprehensive income show a decrease in total comprehensive income for both the three and six months ended June 30, 2020, compared to the prior year, despite a significant increase in the net change in fair value of cash flow hedges for the six-month period Comprehensive Income - Three Months Ended June 30 | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | | :--------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Net Income | $24,902 | $30,628 | | Total Other Comprehensive Income | $2,117 | $14,075 | | Total Comprehensive Income | $27,019 | $44,703 | Comprehensive Income - Six Months Ended June 30 | Metric | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | | :--------------------------- | :------------------------------------------ | :------------------------------------------ | | Net Income | $51,653 | $65,853 | | Net change in fair value of cash flow hedges | $23,181 | $11,875 | | Total Other Comprehensive Income | $33,676 | $22,129 | | Total Comprehensive Income | $85,329 | $87,982 | Consolidated Statements of Stockholders' Equity The consolidated statements of stockholders' equity show a decrease in total stockholders' equity from December 31, 2019, to June 30, 2020, primarily due to share repurchases and common dividends declared, partially offset by net income and other comprehensive income Key Stockholders' Equity Metrics | Metric | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :------------------------- | :--------------------------- | :------------------------------- | | Total Stockholders' Equity | $1,671,692 | $1,708,143 | - Common dividends declared for the six months ended June 30, 2020, were $0.92 per share, compared to $0.88 per share for the same period in 2019[24] - The company repurchased 1,500,000 shares under its share repurchase program for a total cost of $95,091 thousand during the six months ended June 30, 2020[24] Consolidated Statements of Cash Flows The consolidated statements of cash flows indicate a substantial net increase in cash and cash equivalents for the six months ended June 30, 2020, primarily driven by a significant increase in cash provided by financing activities, largely from increased deposits, which offset a considerable increase in cash used in investing activities Key Cash Flow Metrics - Six Months Ended June 30 | Metric | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | | :-------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Net cash used in operating activities | $(13,362) | $(14,860) | | Net cash used in investing activities | $(468,471) | $(86,231) | | Net cash provided by financing activities | $1,436,579 | $44,650 | | Net increase (decrease) in cash and cash equivalents | $954,746 | $(56,441) | | Cash and cash equivalents at end of period | $1,105,720 | $194,014 | Condensed Notes to Consolidated Financial Statements The condensed notes provide essential context and detail for the financial statements, covering accounting policies, recent updates like CECL adoption, and specific information on securities, loans, derivatives, income taxes, fair value measurements, revenue recognition, comprehensive income, commitments, and low-income housing investments Note 1 - Basis of Presentation This note clarifies that the financial statements are unaudited, prepared in accordance with GAAP for interim reporting, and reflect the consolidated operations of Independent Bank Corp and its subsidiary, Rockland Trust Company - Independent Bank Corp is the sole stockholder of Rockland Trust Company[31] - The accompanying unaudited consolidated financial statements are prepared in accordance with GAAP for interim financial information and Form 10-Q[33] Note 2 - Recent Accounting Standards Updates The company adopted the CECL standard (ASC Topic 326) effective January 1, 2020, which changed the methodology for estimating credit losses to reflect expected lifetime losses, resulting in an immaterial increase to retained earnings - Adopted FASB ASC Topic 326 "Financial Instruments - Credit Losses" (CECL) effective January 1, 2020[35] - CECL adoption resulted in an immaterial increase to retained earnings as of January 1, 2020[36] - Currently reviewing FASB ASC Topic 848 "Reference Rate Reform" for potential impacts of the LIBOR transition[37][38] Note 3 - Securities This note details the classification and valuation of investment securities, including available for sale, held to maturity, trading, and equity securities Key Securities Metrics | Metric | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :---------------- | :--------------------------- | :------------------------------- | | Total Securities | $1,174,894 | $1,190,670 | | Trading Securities| $2,541 | $2,179 | | Equity Securities | $20,810 | $21,261 | - The company did not record an allowance for estimated credit losses on any available for sale or held to maturity securities during the three and six months ended June 30, 2020[47][51] - As of June 30, 2020, all held to maturity securities held by the Company were rated investment grade or higher[53] Note 4 - Loans, Allowance for Credit Losses, and Credit Quality The ACL significantly increased due to anticipated credit deterioration from the COVID-19 pandemic, with specific qualitative adjustments for highly impacted industries Key Loan and Allowance Metrics | Metric | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :----------------------------------- | :--------------------------- | :------------------------------- | | Total Loans | $9,359,648 | $8,873,639 | | Allowance for Credit Losses (Ending Balance) | $112,176 | $67,740 | | Provision for Credit Loss Expense (3 months) | $20,000 | $1,000 | | Provision for Credit Loss Expense (6 months) | $45,000 | $2,000 | Nonaccrual Loans | Nonaccrual Loans (in thousands) | June 30, 2020 | December 31, 2019 | | :------------------------------ | :------------ | :---------------- | | Commercial and industrial | $20,736 | $22,574 | | Commercial real estate | $6,313 | $3,016 | | Residential real estate | $14,561 | $13,360 | | Total Nonaccrual Loans | $48,756 | $45,892 | - The allowance for credit losses increased by $44.4 million (65.5%) from January 1, 2020, to June 30, 2020, primarily due to anticipated credit deterioration from the COVID-19 pandemic[76] - As of June 30, 2020, $1.2 billion in loans had active deferrals due to the COVID-19 pandemic, which are not considered troubled debt restructurings or reflected as delinquent[96] Note 5 - Loans and Allowance for Loan Losses This note provides historical disclosures for loans and the allowance for loan losses under legacy GAAP, prior to the adoption of the CECL standard on January 1, 2020 Historical Loan Metrics (Legacy GAAP) | Metric | December 31, 2019 (in thousands) | | :----------------------------------- | :------------------------------- | | Total Loans by Group | $8,873,639 | | Allowance for Loan Losses (Ending Balance) | $67,740 | | Impaired Loans (Total) | $49,628 | | Purchased Credit Impaired Loans (Carrying Amount) | $14,856 | Note 6 - Goodwill and Other Intangible Assets The carrying value of goodwill and other intangible assets decreased slightly due to amortization, and no impairment was found during interim tests conducted due to the COVID-19 pandemic Goodwill and Intangibles | Metric | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :----------------------------------- | :--------------------------- | :------------------------------- | | Goodwill | $506,206 | $506,206 | | Other Intangible Assets | $25,996 | $29,286 | | Total Goodwill and Other Intangible Assets | $532,202 | $535,492 | - Interim impairment tests for goodwill and other intangible assets were performed at March 31, 2020, and June 30, 2020, due to the COVID-19 pandemic, with no impairment identified[115] Note 7 - Earnings Per Share This note presents the basic and diluted earnings per share calculations for the three and six months ended June 30, 2020 and 2019, showing a decrease in EPS for both periods in 2020 Earnings Per Share - Three Months Ended June 30 | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :------------------------- | :------------------------------- | :------------------------------- | | Basic Earnings Per Share | $0.76 | $0.89 | | Diluted Earnings Per Share | $0.76 | $0.89 | Earnings Per Share - Six Months Ended June 30 | Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------- | :----------------------------- | :----------------------------- | | Basic Earnings Per Share | $1.54 | $2.11 | | Diluted Earnings Per Share | $1.54 | $2.11 | Note 8 - Stock Based Compensation The company granted time-vested and performance-based restricted stock awards during the first six months of 2020, with no stock options granted in the same period - Granted 46,550 time-vested restricted stock awards on February 27, 2020, vesting ratably over 5 years[118] - Granted 17,100 performance-based restricted stock awards on February 27, 2020, contingent on performance measures over a three-year period (Jan 1, 2020 - Dec 31, 2022)[119] - No stock options were granted during the six months ended June 30, 2020[121] Note 9 - Derivative and Hedging Activities The company uses derivative financial instruments to manage interest rate risk, with a significant increase in the fair value of asset derivatives Notional Amount of Cash Flow Hedges | Metric | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :--------------------------------------- | :--------------------------- | :------------------------------- | | Notional Amount of Interest Rate Swaps on Borrowings | $175,000 | $75,000 | | Notional Amount of Interest Rate Swaps on Loans | $450,000 | $450,000 | | Notional Amount of Interest Rate Collars on Loans | $400,000 | $400,000 | | Total Notional Amount (Cash Flow Hedges) | $1,025,000 | $925,000 | Fair Value of Derivatives | Metric | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :--------------------------------------- | :--------------------------- | :------------------------------- | | Fair Value of Asset Derivatives | $219,130 | $78,385 | | Fair Value of Liability Derivatives | $158,469 | $53,923 | - The company expects approximately $18.4 million (pre-tax) to be reclassified to interest income and $1.2 million (pre-tax) to interest expense from OCI related to cash flow hedges in the next twelve months[130] Note 10 - Income Taxes The company's income tax provision decreased significantly due to a discrete tax benefit from the CARES Act's net operating loss (NOL) carryback provisions Income Tax Provision - Three Months Ended June 30 | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | | :----------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Combined Federal and State Income Tax Provision | $7,779 | $10,007 | | Effective Income Tax Rate | 23.80% | 24.63% | Income Tax Provision - Six Months Ended June 30 | Metric | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | | :----------------------------------- | :------------------------------------------ | :------------------------------------------ | | Combined Federal and State Income Tax Provision | $9,927 | $21,529 | | Effective Income Tax Rate | 16.12% | 24.64% | - The lower tax provision for the six months ended June 30, 2020, was due to a $4.7 million discrete tax benefit recognized in Q1 2020, associated with revised net operating loss (NOL) carryback provisions in the CARES Act[149] Note 11 - Fair Value Measurements This note defines the fair value hierarchy and outlines valuation techniques, highlighting an increase in individually assessed collateral-dependent loans classified as Level 3 Key Fair Value Metrics | Metric | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :--------------------------------------- | :--------------------------- | :------------------------------- | | Total Recurring Fair Value Measurements (Assets) | $549,924 | $507,633 | | Individually Assessed Collateral Dependent Loans (Level 3) | $37,419 | N/A | | Pooled Trust Preferred Securities (Level 3) | $986 | $1,114 | - The fair value hierarchy prioritizes inputs: Level 1 (quoted prices in active markets), Level 2 (observable inputs), and Level 3 (unobservable inputs)[151][152] - The company's derivative valuations are classified as Level 2, as credit valuation adjustments are not significant to the overall valuation[162] Note 12 - Revenue Recognition This note disaggregates noninterest income, highlighting decreases in deposit account and interchange/ATM fees due to COVID-19 impacts Noninterest Income (ASC 606) - Three Months Ended June 30 | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | | :--------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Deposit Account Fees | $2,829 | $5,080 | | Interchange and ATM Fees | $5,214 | $5,794 | | Investment Management | $7,296 | $7,153 | | Total Noninterest Income in-scope of ASC 606 | $16,148 | $19,880 | Noninterest Income (ASC 606) - Six Months Ended June 30 | Metric | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | | :--------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Deposit Account Fees | $7,799 | $9,486 | | Interchange and ATM Fees | $10,110 | $10,310 | | Investment Management | $14,125 | $13,901 | | Total Noninterest Income in-scope of ASC 606 | $34,478 | $36,654 | - Deposit account fees decreased due to reductions in overdraft fees, particularly during Q2 2020, as customers benefited from government stimulus payments[372] - Interchange and ATM fees decreased reflecting overall decreases in consumer spending amid the COVID-19 pandemic[374] Note 13 - Other Comprehensive Income (Loss) This note reconciles changes in components of other comprehensive income (OCI), showing a significant increase in accumulated OCI from January 1, 2020, to June 30, 2020 Other Comprehensive Income - Six Months Ended June 30 | Metric | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | | :--------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Net Change in Fair Value of Securities Available for Sale | $11,042 | $10,174 | | Net Change in Fair Value of Cash Flow Hedges | $23,181 | $11,875 | | Total Other Comprehensive Income | $33,676 | $22,129 | Accumulated Other Comprehensive Income | Metric | June 30, 2020 (in thousands) | January 1, 2020 (in thousands) | | :--------------------------------------- | :--------------------------- | :----------------------------- | | Accumulated Other Comprehensive Income (Loss), Net of Tax | $51,845 | $18,169 | Note 14 - Commitments and Contingencies This note outlines the company's financial instruments with off-balance sheet risk, with no material adverse effect expected from pending lawsuits Off-Balance Sheet Commitments | Metric | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :------------------------------- | :--------------------------- | :------------------------------- | | Commitments to Extend Credit | $3,348,063 | $3,337,930 | | Standby Letters of Credit | $19,507 | $21,565 | | Loans Sold with Recourse | $391,567 | $404,532 | - Management does not expect the final disposition of pending lawsuits to have a material adverse effect on the company's financial position or results of operations[207] Note 15 - Low Income Housing Project Investments The company has invested in low-income housing projects to generate tax credits and benefits, with an increase in the original investment value Low Income Housing Investments | Metric | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :------------------------- | :--------------------------- | :------------------------------- | | Original Investment Value | $124,212 | $96,275 | | Current Recorded Investment| $95,958 | $72,510 | | Unfunded Liability Obligation | $48,896 | $34,967 | - The company expects a net tax benefit of approximately $2.0 million for the full calendar year 2020 and a total of $16.0 million over the remaining life of the investments[211] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance and condition, highlighting the significant impact of the COVID-19 pandemic on operating results, particularly the elevated provision for credit losses and compressed net interest margin Cautionary Statement Regarding Forward-Looking Statements This statement warns readers that the report contains forward-looking statements subject to various risks and uncertainties, particularly those related to the COVID-19 pandemic - Forward-looking statements involve risks and uncertainties, including those related to the COVID-19 pandemic, which could cause actual results to differ materially[213][214] - Key risk factors include further weakening in the economy due to COVID-19, unanticipated loan delinquencies, adverse changes in asset quality, and changes in market interest rates[214][217] - The company disclaims any intent or obligation to update publicly any forward-looking statements[216] Selected Quarterly Financial Data This section provides a five-quarter summary of key financial data, illustrating trends and the impact of recent events like the COVID-19 pandemic on profitability and asset quality Quarterly Financial Highlights | Metric | June 30, 2020 (in thousands) | June 30, 2019 (in thousands) | | :--------------------------------------- | :--------------------------- | :--------------------------- | | Total Assets | $13,022,500 | $11,603,199 | | Total Loans | $9,359,648 | $8,950,787 | | Allowance for Credit Losses | $(112,176) | $(65,960) | | Total Deposits | $10,716,821 | $9,307,915 | | Net Income | $24,902 | $30,628 | | Basic EPS | $0.76 | $0.89 | | Net Interest Margin | 3.25% | 4.09% | | Allowance for Credit Losses as a % of Total Loans | 1.20% | 0.74% | Executive Level Overview Management's overview highlights that the first two quarters of 2020 were significantly impacted by $45.0 million in loan provision expense, primarily due to assumptions regarding the COVID-19 pandemic - Operating results for Q1 and Q2 2020 were significantly impacted by $45.0 million of loan provision expense, driven by assumptions regarding the COVID-19 pandemic[222] - The company funded over 5,600 PPP loans totaling $793.0 million through Q2 2020[223] - A 1.5 million share repurchase buyback was completed during Q2 2020[224] Interest-Earning Assets The company's asset strategy focuses on loan growth, with interest-earning assets increasing in Q2 2020 primarily due to PPP loan funding and elevated cash balances - Management's asset strategy emphasizes loan growth, primarily in commercial and home equity portfolios[225] - Interest-earning assets increased in Q2 2020, driven by commercial loan balances (PPP funding) and growth in cash balances from elevated deposits[225] Funding and Net Interest Margin The company experienced significant deposit growth in Q2 2020, which enhanced liquidity but compressed the net interest margin to 3.25% - Total deposits increased by $1.3 billion (13.8%) to $10.7 billion in Q2 2020, driven by PPP loan fundings and government stimulus[228] - The cost of deposits decreased by 20 basis points to 0.28% in Q2 2020 compared to Q1 2020[229] Net Interest Margin Analysis | Factor | Impact on Net Interest Margin (basis points) | | :--------------------------------------- | :------------------------------------------- | | Net Interest margin as of March 31, 2020 | 3.74% | | Decreased loan yields | (0.43)% | | Excess liquidity (cash) levels | (0.19)% | | PPP loan activity at 1% interest rate | (0.12)% | | Decreased cost of funds | 0.16% | | Net interest margin as of June 30, 2020 | 3.25% | Noninterest Income Management continues to focus on noninterest income, which is primarily derived from deposit account fees, interchange and ATM fees, investment management fees, and mortgage banking income - Noninterest income is primarily comprised of deposit account fees, interchange and ATM fees, investment management fees, and mortgage banking income[231] Expense Control The company employs a balanced approach to noninterest expense control, achieving a GAAP efficiency ratio for Q2 2020 of 55.84% Efficiency Ratios | Metric | June 30, 2020 | June 30, 2019 | | :--------------------------------------- | :------------ | :------------ | | Efficiency Ratio (GAAP based) | 55.84% | 69.08% | | Efficiency Ratio on an Operating Basis (Non-GAAP) | 55.84% | 50.74% | Capital The company's capital strategy aims to promote long-term earnings growth, completing its share repurchase program and declaring quarterly cash dividends during the first half of 2020 - Completed a 1.5 million share repurchase program in the first half of 2020 at a total cost of $95.1 million[234] - Declared quarterly cash dividends of $0.46 per share for Q1 and Q2 2020, an increase of 4.5% from 2019[235] Book Value Per Share | Metric | June 30, 2020 | June 30, 2019 | | :------------------------- | :------------ | :------------ | | Book Value Per Share (GAAP)| $50.75 | $47.67 | | Tangible Book Value Per Share (Non-GAAP) | $34.59 | $32.00 | Second Quarter 2020 Results Net income for Q2 2020 was $24.9 million, representing a decrease compared to Q2 2019, negatively impacted by elevated provision for credit losses and a lower net interest margin Q2 2020 Performance Summary | Metric | Q2 2020 (in thousands) | Q2 2019 (in thousands) | | :------------------------- | :--------------------- | :--------------------- | | Net Income | $24,902 | $30,628 | | Diluted Earnings Per Share | $0.76 | $0.89 | - Q2 2020 net income decreased 18.7% and diluted EPS decreased 14.6% year-over-year[236] - Results were negatively impacted by elevated provision for credit losses (due to COVID-19) and a lower net interest margin[236] 2020 Outlook The company's 2020 outlook anticipates continued challenges to loan growth, slight net interest margin compression, and decreased interchange revenue - Continued uncertainty over business activity is likely to challenge loan growth over the second half of 2020[238] - Net interest margin is expected to compress slightly over the latter half of 2020 due to asset reinvestment into a low-rate environment[238] - Interchange revenue is expected to decrease by $4.5 - $5.0 million over the second half of the year due to the Durbin amendment[244] - Loan provision levels in coming quarters will be highly correlated with further deterioration of economic factors and increased perceived loss exposure[244] Non-GAAP Measures This section explains the use of non-GAAP financial measures to provide clearer insights into the company's core banking business by excluding noncore items - Non-GAAP measures (e.g., operating net income, operating EPS, tangible book value per share) are used to provide greater visibility into the company's core banking business by excluding noncore items[241] Key Non-GAAP Ratios | Metric | June 30, 2020 | June 30, 2019 | | :--------------------------------------- | :------------ | :------------ | | Tangible Common Equity to Tangible Assets Ratio (Non-GAAP) | 9.12% | 9.92% | | Book Value Per Share (GAAP) | $50.75 | $47.67 | | Tangible Book Value Per Share (Non-GAAP) | $34.59 | $32.00 | Critical Accounting Policies This section identifies the Allowance for Credit Losses as a critical accounting policy, emphasizing the significant judgment involved in estimating expected lifetime credit losses under the CECL standard - The Allowance for Credit Losses is identified as a critical accounting policy, involving significant judgment and uncertainties[251] - The CECL standard, adopted January 1, 2020, uses a quantitative model combined with qualitative factors and economic forecasts to estimate expected credit losses[252] - For held-to-maturity securities, a zero loss expectation is determined due to guarantees by the U.S. Federal Government or government-sponsored agencies[255] FINANCIAL POSITION This section provides a detailed analysis of the company's financial position, covering its securities and loan portfolios, asset quality, allowance for credit losses, and funding sources Securities Portfolio The company's securities portfolio decreased slightly by $15.8 million (1.3%) at June 30, 2020, compared to December 31, 2019 - Securities decreased by $15.8 million (1.3%) at June 30, 2020, compared to December 31, 2019[258] - The ratio of securities to total assets was 9.02% at June 30, 2020, down from 10.45% at December 31, 2019[258] Residential Mortgage Loan Sales The company's residential mortgage loan sales activity saw an increase in loans sold with servicing rights released in Q2 2020 compared to Q2 2019 Mortgage Loan Sales Activity - Three Months Ended June 30 | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | | :--------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Total Closed Loans | $238,028 | $256,425 | | Sold or Held for Sale in the Secondary Market | $223,196 | $179,705 | | Total Loans Sold | $216,578 | $148,822 | | Sold with Servicing Rights Released | $206,515 | $125,186 | Mortgage Servicing Asset Balance | Metric | June 30, 2020 (in thousands) | June 30, 2019 (in thousands) | | :--------------------------------------- | :--------------------------- | :--------------------------- | | Mortgage Servicing Asset Balance | $3,321 | $4,587 | - The company incurred no losses related to mortgage repurchases for the three months ended June 30, 2020[260] Loan Portfolio The company's loan portfolio increased by $486.0 million in the first six months of 2020, primarily due to $793.0 million in PPP loan fundings - The loan portfolio increased by $486.0 million during the first six months of 2020, primarily due to $793.0 million in PPP loan fundings[268] - Excluding PPP activity, loans declined by $307.0 million (3.46%) compared to December 31, 2019[268] - PPP loans comprised 39.0% of the total commercial and industrial portfolio as of June 30, 2020[270] Asset Quality The company actively monitors asset quality, with $1.2 billion in loans receiving payment deferrals in response to COVID-19 Key Asset Quality Metrics | Metric | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :--------------------------------------- | :--------------------------- | :------------------------------- | | Total Nonaccrual Loans | $48,756 | $45,892 | | Total Nonperforming Loans | $48,814 | $48,049 | | Total Nonperforming Assets | $48,814 | $48,049 | | Total Troubled Debt Restructurings | $41,839 | $44,365 | - As of June 30, 2020, $1,173,921 thousand (12.5% of total portfolio) in loans had active deferrals due to COVID-19, which are not accounted for as TDRs or reflected as delinquent[294] - Management has identified approximately $1.6 billion of loans within potentially highly impacted COVID-19 industries[297] Allowance for Credit Losses The allowance for credit losses significantly increased to $112.2 million at June 30, 2020, a 65.5% increase from January 1, 2020, driven by the COVID-19 pandemic Allowance for Credit Losses Summary | Metric | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :--------------------------------------- | :--------------------------- | :------------------------------- | | Allowance for Credit Losses (End of Period) | $112,176 | $67,740 | | Provision for Credit Losses (3 months) | $20,000 | $4,000 | | Provision for Credit Losses (6 months) | $45,000 | $2,000 | | Allowance for Credit Losses as a % of Total Loans | 1.20% | 0.76% | - The allowance for credit losses increased by $44.4 million (65.5%) from January 1, 2020, to June 30, 2020, primarily due to anticipated credit deterioration from the COVID-19 pandemic[311] - The economic outlook used for the allowance calculation included assumptions such as unemployment rates peaking late 2021 and federal funds rates holding near 0% until 2022[313] Federal Home Loan Bank Stock The company's investment in Federal Home Loan Bank (FHLB) stock increased slightly, serving as a necessary long-term investment for balance sheet liquidity FHLB Stock Investment | Metric | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :------------------------- | :--------------------------- | :------------------------------- | | Investment in FHLB Stock | $15,090 | $14,424 | - The FHLB stock holding is viewed as a necessary long-term investment for balance sheet liquidity and access to wholesale funding[327] Goodwill and Other Intangible Assets Goodwill and other intangible assets decreased slightly due to amortization, with no impairment identified in interim tests performed in response to the COVID-19 pandemic Goodwill and Intangibles Balance | Metric | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :----------------------------------- | :--------------------------- | :------------------------------- | | Goodwill and Other Intangible Assets | $532,202 | $535,492 | - Interim impairment tests were warranted and performed at March 31, 2020, and June 30, 2020, due to the COVID-19 pandemic, with no impairment of goodwill or other intangible assets found[329] Cash Surrender Value of Life Insurance Policies The cash surrender value of life insurance policies held to offset employee retirement obligations increased slightly Life Insurance Policy Value | Metric | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :--------------------------------------- | :--------------------------- | :------------------------------- | | Cash Surrender Value of Life Insurance Policies | $198,124 | $197,372 | Income from Life Insurance | Metric | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | | :--------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Tax Exempt Income from Life Insurance Policies | $2,588 | $2,268 | | Gains on Life Insurance Benefits | $692 | $0 | Deposits Total deposits increased significantly by $1.6 billion (17.2%) to $10.7 billion at June 30, 2020, driven by PPP loan fundings and government stimulus - Total deposits increased by $1.6 billion (17.2%) to $10.7 billion at June 30, 2020, compared to December 31, 2019[331] - Core deposits represented 87.32% of total deposits as of June 30, 2020[331] Cost of Deposits | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :------------------------- | :------------------------------- | :------------------------------- | | Total Cost of Deposits | 0.28% | 0.49% | Borrowings Total borrowings decreased by $7.4 million (2.4%) at June 30, 2020, due to prepayments facilitated by strong deposit growth - Total borrowings decreased by $7.4 million (2.4%) at June 30, 2020, compared to December 31, 2019[334] - The company made a $200.0 million prepayment on FHLB borrowings and paid down $37.5 million of its long-term line of credit during Q2 2020[334] Borrowings Breakdown | Metric | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :------------------------- | :--------------------------- | :------------------------------- | | Federal Home Loan Bank Borrowings | $145,770 | $115,748 | | Long-term Borrowings | $37,433 | $74,906 | | Total Borrowings | $295,701 | $303,103 | Capital Resources The company and its bank subsidiary exceeded all minimum regulatory capital requirements at June 30, 2020, and completed the common stock repurchase program - The company and the Bank exceeded the minimum requirements for all applicable regulatory capital ratios at June 30, 2020[340][342] - A cash dividend of $0.46 per share was declared on June 18, 2020[338] - The 1.5 million share repurchase program was fully completed in the first half of 2020, at an average cost of $63.39 per share[346] Investment Management Assets under administration for the Investment Management Group decreased to $4.4 billion at June 30, 2020, reflecting market volatility and an outflow of custody accounts Assets Under Administration | Metric | June 30, 2020 (in millions) | December 31, 2019 (in millions) | | :--------------------------------------- | :-------------------------- | :------------------------------ | | Assets Under Administration | $4.4 | $4.6 | Investment Management Revenue | Metric | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | | :--------------------------------------- | :------------------------------------------ | :------------------------------------------ | | Revenue from Investment Management Group | $13,100 | $12,500 | - The decline in assets under administration reflects overall market decline driven by investor response to the COVID-19 pandemic and an outflow of custody accounts[347] RESULTS OF OPERATIONS This section analyzes the company's results of operations, detailing changes in net interest income, provision for credit losses, noninterest income, noninterest expense, and income taxes Summary of Results of Operations The company's results of operations for the first half of 2020 were impacted by a compressed net interest margin and elevated provision for credit losses H1 2020 Performance Summary | Metric | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | | :------------------------- | :------------------------------------------ | :------------------------------------------ | | Net Income | $51,653 | $65,853 | | Diluted Earnings Per Share | $1.54 | $2.11 | | Return on Average Assets | 0.86% | 1.30% | | Net Interest Margin | 3.48% | 4.12% | - The provision of $45.0 million recorded during the six months ended June 30, 2020, was driven by assumptions regarding future losses contemplating the impact of the COVID-19 pandemic[353] Net Interest Income Net interest income (FTE) decreased for both the three and six months ended June 30, 2020, primarily due to a lower interest rate environment - Net interest income (FTE) for Q2 2020 was $91.3 million, a decrease of $14.9 million (14.1%) compared to Q2 2019[355] - Net interest income (FTE) for H1 2020 was $185.9 million, a decrease of $3.1 million (1.6%) compared to H1 2019[355] Net Interest Margin - Three Months Ended June 30 | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | | :------------------------- | :------------------------------- | :------------------------------- | | Net Interest Margin | 3.25% | 4.09% | | Interest Rate Spread | 3.09% | 3.82% | Net Interest Margin - Six Months Ended June 30 | Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------- | :----------------------------- | :----------------------------- | | Net Interest Margin | 3.48% | 4.12% | | Interest Rate Spread | 3.27% | 3.85% | Provision For Credit Losses The provision for credit losses significantly increased, driven by the newly adopted CECL methodology and anticipated loan losses related to the COVID-19 pandemic Provision for Credit Losses - Three Months Ended June 30 | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | | :------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Provision for Credit Losses| $20,000 | $1,000 | Provision for Credit Losses - Six Months Ended June 30 | Metric | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | | :------------------------- | :------------------------------------------ | :------------------------------------------ | | Provision for Credit Losses| $45,000 | $2,000 | | Net Loans Charged-off | $584 | $333 | - The allowance for credit losses as a percentage of total loans was 1.20% at June 30, 2020, up from 0.76% at December 31, 2019[370] Noninterest Income Total noninterest income decreased slightly in Q2 2020 but increased for H1 2020, with decreases in fees offset by increases in mortgage banking and derivative income Noninterest Income - Three Months Ended June 30 | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | | :------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Deposit Account Fees | $2,829 | $5,080 | | Interchange and ATM Fees | $5,214 | $5,794 | | Mortgage Banking Income | $5,005 | $3,410 | | Loan Level Derivative Income | $2,864 | $932 | | Total Noninterest Income | $28,190 | $28,648 | Noninterest Income - Six Months Ended June 30 | Metric | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | | :------------------------- | :------------------------------------------ | :------------------------------------------ | | Deposit Account Fees | $7,799 | $9,486 | | Interchange and ATM Fees | $10,110 | $10,310 | | Mortgage Banking Income | $5,866 | $4,216 | | Loan Level Derivative Income | $6,461 | $1,573 | | Total Noninterest Income | $54,625 | $50,181 | - Mortgage banking income increased by 46.77% in Q2 2020 and 39.14% in H1 2020 due to increased volume[372][374] - Loan level derivative income increased by 207.30% in Q2 2020 and 310.74% in H1 2020 due to higher customer demand[372][374] Noninterest Expense Total noninterest expenses decreased significantly, primarily due to the absence of merger and acquisition expenses present in 2019 Noninterest Expense - Three Months Ended June 30 | Metric | Three Months Ended June 30, 2020 (in thousands) | Three Months Ended June 30, 2019 (in thousands) | | :------------------------- | :-------------------------------------------- | :-------------------------------------------- | | Salaries and Employee Benefits | $37,269 | $38,852 | | Merger and Acquisition Expenses | $0 | $24,696 | | Total Noninterest Expenses | $66,607 | $93,032 | Noninterest Expense - Six Months Ended June 30 | Metric | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | | :------------------------- | :------------------------------------------ | :------------------------------------------ | | Salaries and Employee Benefits | $74,618 | $71,969 | | Occupancy and Equipment Expenses | $18,590 | $15,554 | | FDIC Assessment | $503 | $1,394 | | Merger and Acquisition Expenses | $0 | $25,728 | | Total Noninterest Expenses | $133,447 | $149,343 | - FDIC assessment decreased due to small bank assessment credits allocated in H1 2020[382] Income Taxes The company's effective income tax rate for H1 2020 was significantly lower due to a discrete tax benefit from the CARES Act Income Tax Summary - Six Months Ended June 30 | Metric | Six Months Ended June 30, 2020 (in thousands) | Six Months Ended June 30, 2019 (in thousands) | | :------------------------- | :------------------------------------------ | :------------------------------------------ | | Combined Federal and State Income Tax Provision | $9,927 | $21,529 | | Effective Income Tax Rate | 16.12% | 24.64% | | Blended Statutory Tax Rate | 27.88% | 28.23% | - The lower effective tax rate in 2020 is due to a $4.7 million discrete tax benefit associated with the net operating loss (NOL) carryback provision of the CARES Act[381] Risk Management This section outlines the company's approach to managing significant risks, including credit, operations, compliance, strategic, reputation, market, and liquidity risks Credit Risk Credit risk is defined as the potential for customers or counterparties to default on obligations, requiring significant judgment regarding the collectability of the loan portfolio - Credit risk is the possibility that customers or other counterparties may not repay loans or other contractual obligations[385] - The company makes assumptions and judgments about the collectability of its loan portfolio, including creditworthiness and collateral value[385] Operations Risk Operations risk encompasses losses from human error, inadequate systems, and external factors, which the company mitigates through effective staff, systems, and infrastructure - Operations risk is the risk of loss from human behavior, inadequate or failed internal systems and controls, and external influences[386] - Mitigation involves effective colleagues, technical systems, operational infrastructure, and relationships with key third-party service providers[386] Compliance Risk Compliance risk is the potential for regulatory sanctions or financial loss due to non-compliance, which is mitigated through policies, training, and monitoring - Compliance risk is the risk of regulatory sanctions or financial loss from failure to comply with rules and regulations[387] - Mitigation includes written policies and procedures, staff training, and continuous monitoring of activities[387] Strategic and Reputation Risk Strategic and reputation risk involves potential loss from impaired reputation or failure to execute business plans, addressed through strategic planning and ethical standards - Strategic and reputation risk is the risk of loss due to impairment of reputation or failure to develop and execute business plans[388] - Mitigation strategies include annual strategic planning, competitive and technological observation, and adherence to ethical standards[388] Market Risk Interest rate risk is the company's most significant market risk, managed by the Asset Liability Committee using simulation models and hedging instruments - Interest rate risk is the company's most significant market risk exposure[389][390] - The company uses net interest income simulation models and hedging instruments (interest rate swaps, floors, and caps) to manage interest rate risk[392][393][399] - The company forecasts that its assets re-price faster than liabilities, benefiting from increasing market rates and contracting if rates decrease[394] Liquidity Risk Liquidity risk is the inability to generate adequate cash to meet obligations, managed by maintaining various liquidity sources with total unused capacity of $3.4 billion - Liquidity risk is the risk of not having adequate cash to meet ongoing obligations[402] - Primary sources of funds are deposits, borrowings, and the amortization, prepayment, and maturities of loans and securities[402] Unused Liquidity Capacity | Metric | June 30, 2020 (in thousands) | December 31, 2019 (in thousands) | | :--------------------------------------- | :--------------------------- | :------------------------------- | | Total Unused Liquidity Capacity | $3,433,440 | $3,352,611 | Off-Balance Sheet Arrangements There were no material changes in off-balance sheet financial instruments during the three months ended June 30, 2020 - No material changes in off-balance sheet financial instruments during the three months ended June 30, 2020[412] Contractual Obligations, Commitments, and Contingencies There were no material changes in contractual obligations, commitments, or contingencies during the three months ended June 30, 2020 - No material changes in contractual obligations, commitments, or contingencies during the three months ended June 30, 2020[413] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in pending lawsuits arising in the ordinary course of business, but management does not expect these to have a material adverse effect - The Bank is involved in pending lawsuits that arose in the ordinary course of business[417] - Management does not expect the final disposition of pending lawsuits to have a material adverse effect on the Company's financial position or results of operations[417] Item 1A. Risk Factors This section updates risk factors with a significant focus on the adverse impacts of the COVID-19 pandemic and risks associated with the Paycheck Protection Program (PPP) - The COVID-19 pandemic is adversely affecting the company and its stakeholders, with significant uncertainty regarding its full extent and duration[420] - The most notable impact to results in H1 2020 was a higher provision expense for credit losses ($45.0 million vs $2.0 million in H1 2019) due to COVID-19[425] - Participation in the SBA Paycheck Protection Program (PPP) exposes the company to additional risks of litigation and potential non-funding of loan guaranties by the SBA[430][431][432] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports the company's common stock repurchases during Q2 2020, noting the completion and termination of its 1.5 million share repurchase program Share Repurchases - Q2 2020 | Period | Total Number of Shares Purchased | Average Price Paid Per Share | | :---------------------- | :------------------------------- | :--------------------------- | | April 1 to April 30, 2020 | 333,681 | $65.65 | | May 1 to May 31, 2020 | 82 | $56.36 | | June 1 to June 30, 2020 | 814 | $71.75 | | Total | 334,577 | $65.67 | - The company repurchased 333,077 shares under its share repurchase program in April 2020, completing the 1.5 million share program, which was subsequently terminated[435] Item 3. Defaults Upon Senior Securities This item states that there were no defaults upon senior securities - No defaults upon senior securities[436] Item 4. Mine Safety Disclosures This item states that mine safety disclosures are not applicable to the company - Mine safety disclosures are not applicable[436] Item 5. Other Information This item states that there is no other information to report - No other information to report[436] Item 6. Exhibits This section lists the exhibits filed with the quarterly report, including certifications required by the Sarbanes-Oxley Act and interactive data files - Includes Section 302 and 906 Certifications of the Sarbanes-Oxley Act of 2002[439] - Includes Cover page interactive data file (formatted as inline XBRL)[439] Signatures This section contains the signatures of the company's President and Chief Executive Officer, and Chief Financial Officer, certifying the report - The report is signed by Christopher Oddleifson, President and Chief Executive Officer, and Mark J Ruggiero, Chief Financial Officer[443]