Independent Bank (INDB) - 2021 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements The unaudited consolidated financial statements for the three months ended March 31, 2021, show an increase in total assets to $13.77 billion from $13.20 billion at year-end 2020, driven by growth in deposits and securities, with net income for the quarter at $41.7 million, a significant increase from $26.8 million in the prior-year period, primarily due to a negative provision for credit losses in Q1 2021 compared to a large provision in Q1 2020 Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and equity at specific points in time Consolidated Balance Sheet Highlights (in thousands USD) | Account | March 31, 2021 | December 31, 2020 | Change | | :--- | :--- | :--- | :--- | | Total Assets | $13,773,914 | $13,204,301 | +4.3% | | Net Loans | $9,139,142 | $9,279,474 | -1.5% | | Total Securities | $1,431,430 | $1,162,317 | +23.2% | | Total Deposits | $11,593,524 | $10,993,170 | +5.5% | | Total Liabilities | $12,058,543 | $11,501,616 | +4.8% | | Total Stockholders' Equity | $1,715,371 | $1,702,685 | +0.7% | - The increase in total assets was primarily driven by a $515.5 million increase in interest-earning deposits with banks and a $269.1 million increase in total securities[11] - Total loans decreased by $146.2 million, while the allowance for credit losses decreased by $5.8 million[11] - Deposit growth was strong, increasing by $600.4 million, led by a $373.9 million rise in noninterest-bearing demand deposits[11] Consolidated Statements of Income This section outlines the company's financial performance over a period, detailing revenues, expenses, and net income Consolidated Income Statement Highlights (in thousands USD, except per share data) | Account | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | YoY Change | | :--- | :--- | :--- | :--- | | Net Interest Income | $95,584 | $94,304 | +1.4% | | Provision for credit losses | $(2,500) | $25,000 | -110.0% | | Noninterest Income | $25,246 | $26,435 | -4.5% | | Noninterest Expenses | $69,682 | $66,840 | +4.3% | | Net Income | $41,711 | $26,751 | +55.9% | | Diluted EPS | $1.26 | $0.78 | +61.5% | - The significant increase in net income was primarily driven by a $2.5 million negative provision for credit losses in Q1 2021, compared to a $25.0 million provision in Q1 2020 at the onset of the COVID-19 pandemic[15] - Mortgage banking income saw substantial growth, increasing to $5.7 million from $0.861 million in the prior-year quarter[15] Condensed Notes to Consolidated Financial Statements The notes provide detailed information supporting the financial statements, covering accounting policies, securities portfolio composition, loan quality and allowance for credit losses, derivative activities, fair value measurements, revenue recognition, and subsequent events, including a significant planned acquisition - Note 3 (Securities): Total securities increased to $1.43 billion. The portfolio is comprised of trading, equity, available-for-sale (AFS), and held-to-maturity (HTM) securities. No provision for credit losses was recorded on AFS or HTM securities during the quarter[33][34][36] - Note 4 (Loans and ACL): The allowance for credit losses (ACL) decreased by $5.8 million to $107.5 million, driven by a $2.5 million negative provision and $3.3 million in net charge-offs. The negative provision reflects improved macroeconomic assumptions and asset quality[49][52] - Note 6 (Derivatives): The company uses interest rate swaps for cash flow hedging and customer accommodation. The total notional amount of interest rate derivatives designated as cash flow hedges was $1.025 billion as of March 31, 2021[86][91] - Note 12 (Subsequent Event): On April 22, 2021, the Company announced a definitive agreement to acquire Meridian Bancorp, Inc. in a stock transaction valued at approximately $1.15 billion[173][175] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance for Q1 2021, highlighting a 55.9% increase in net income year-over-year, driven by a negative provision for credit losses and strong mortgage banking income, covering the impact of the COVID-19 pandemic, participation in the PPP, the announced acquisition of Meridian Bancorp, and providing an outlook for the remainder of 2021, with key areas of focus including loan portfolio trends, deposit growth, net interest margin expansion, asset quality improvements, and capital management Executive Level Overview This section provides a high-level summary of the company's financial performance, strategic initiatives, and outlook - Net income for Q1 2021 was $41.7 million ($1.26 per diluted share), up 55.9% from $26.8 million ($0.78 per diluted share) in Q1 2020, positively impacted by a $2.5 million release of provision for credit loss[201] - The company announced the signing of a definitive merger agreement with Meridian Bancorp, Inc. on April 22, 2021, which is expected to close in Q4 2021[185] - The company remains an active participant in the Paycheck Protection Program (PPP), funding an additional $340.0 million in Q1 2021, bringing total outstanding PPP loans to $846.3 million at quarter-end[186] - 2021 Outlook: Management expects challenged net loan growth, modest core margin compression (excluding PPP and excess liquidity), very modest provision levels in a stable economy, and an effective tax rate of approximately 25%[202] Financial Position This section analyzes the company's balance sheet, including trends in loans, deposits, asset quality, and capital adequacy - Total loans decreased by 1.6% during the quarter to $9.25 billion, as strong originations were offset by paydowns and refinancing activity, with commercial loans (excluding PPP loans) decreasing 1.70%[219] - Total deposits grew by $600.4 million (5.5%) to $11.6 billion, driven by government stimulus payments and PPP loan fundings, with core deposits rising to 90.9% of total deposits[192][273] - Nonperforming assets decreased to $59.2 million (0.43% of total assets) from $66.9 million (0.51% of total assets) at year-end 2020[181][236] - The allowance for credit losses decreased to $107.5 million (1.16% of total loans) from $113.4 million (1.21% of total loans) at year-end 2020, reflecting improved economic forecasts and asset quality[256] Capital Ratios | Ratio | March 31, 2021 | December 31, 2020 | Minimum for Capital Adequacy | | :--- | :--- | :--- | :--- | | Common equity tier 1 capital ratio | 13.16% | 12.67% | 4.5% | | Tier 1 risk-based capital ratio | 13.85% | 13.34% | 6.0% | | Total risk-based capital ratio | 15.61% | 15.13% | 8.0% | | Tier 1 leverage capital ratio | 9.63% | 9.56% | 4.0% | Results of Operations This section details the company's income and expenses, analyzing key drivers of profitability - Net interest income on a fully tax equivalent basis was $95.8 million, a 1.3% increase from Q1 2020, with the net interest margin at 3.25%, up 15 basis points from Q4 2020, primarily due to increased PPP fee recognition[193][291] - A negative provision for credit losses of $2.5 million was recorded, compared to a $25.0 million provision expense in Q1 2020, due to an improved economic outlook[304] - Noninterest income decreased 4.5% YoY to $25.2 million, as lower deposit and interchange fees offset a 567% surge in mortgage banking income[306] - Noninterest expense increased 4.3% YoY to $69.7 million, driven by higher salaries and benefits, consulting expenses, and FDIC assessment fees[308][312] Risk Management This section discusses the company's strategies and exposures related to market risk, credit risk, and liquidity risk - The company's primary market risk is interest rate risk, with simulation models indicating the bank is asset-sensitive, meaning net interest income is forecasted to benefit from rising interest rates[321][325] Interest Rate Sensitivity (Year 1 NII Change) | Rate Shock (basis points) | March 31, 2021 | March 31, 2020 | | :--- | :--- | :--- | | -100 | (2.8)% | (1.1)% | | +100 | 6.8% | 3.7% | | +200 | 14.5% | 8.1% | - Liquidity risk is low, with a strong liquidity position due to significant deposit growth from PPP funding and government stimulus, and the company had $3.7 billion in additional borrowing capacity as of March 31, 2021[333][340][342] Quantitative and Qualitative Disclosures About Market Risk This section refers to the 'Risk Management' section within Item 2 for disclosures about market risk, primarily interest rate risk, where the company uses net interest income simulation models and other analyses to quantify and manage this risk, and is currently positioned to benefit from rising interest rates - The report incorporates by reference the information from the 'Risk Management' section of the MD&A to satisfy the disclosure requirements for market risk[348] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures and concluded they were effective as of March 31, 2021, with no material changes to internal control over financial reporting during the quarter, and the shift to remote work due to COVID-19 has not had a material impact - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[349] - No material changes were made to the company's internal control over financial reporting during the first quarter of 2021[350] PART II. OTHER INFORMATION Legal Proceedings The company is involved in pending lawsuits that arose in the ordinary course of business, and management does not expect the final disposition of these lawsuits to have a material adverse effect on the company's financial position or results of operations - The company states that pending lawsuits from the ordinary course of business are not expected to have a material adverse effect on its financial condition[351] Risk Factors This section updates the company's risk factors, highlighting new risks associated with the announced acquisition of Meridian Bancorp, Inc., including the potential failure to complete the merger, difficulties in integration, and the possibility that expected benefits and cost savings may not be realized - A new risk factor was added concerning the acquisition of Meridian Bancorp, Inc., announced on April 22, 2021[354] - Risks include the failure to complete the merger due to not meeting closing conditions (such as shareholder or regulatory approvals), which could adversely affect business and financial results[354][356] - The company also notes that the integration of Meridian may be more difficult, costly, or time-consuming than expected, and anticipated cost savings and synergies may not be realized[357] Unregistered Sales of Equity Securities and Use of Proceeds During the first quarter of 2021, the company repurchased 16,405 shares of its common stock at an average price of $85.28 per share, made to satisfy tax withholding obligations related to the vesting and exercise of employee equity compensation grants and not part of a publicly announced plan or program Issuer Purchases of Equity Securities (Q1 2021) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | Jan 2021 | 2,316 | $76.97 | | Feb 2021 | 10,010 | $81.88 | | Mar 2021 | 4,079 | $98.36 | | Total | 16,405 | $85.28 | - The shares were withheld in connection with equity compensation grants to satisfy tax withholding obligations and were not part of a publicly announced repurchase program[358] Exhibits This section lists the exhibits filed with the Form 10-Q, including the Agreement and Plan of Merger with Meridian Bancorp, Inc., and certifications by the CEO and CFO as required by the Sarbanes-Oxley Act of 2002 - Key exhibits filed include the merger agreement with Meridian Bancorp, Inc. and Sarbanes-Oxley Act Sections 302 and 906 certifications[363]