Independent Bank (INDB) - 2021 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) This section presents Independent Bank Corp.'s unaudited consolidated financial statements and detailed notes for the periods ended June 30, 2021 Consolidated Balance Sheets As of June 30, 2021, total assets increased to $14.19 billion from $13.20 billion at December 31, 2020, driven by a significant rise in interest-earning deposits with banks and securities Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Assets | $14,194,207 | $13,204,301 | | Total Securities | $1,682,751 | $1,162,317 | | Net Loans | $8,836,631 | $9,279,474 | | Goodwill | $506,206 | $506,206 | | Total Liabilities | $12,452,585 | $11,501,616 | | Total Deposits | $11,986,971 | $10,993,170 | | Total Borrowings | $171,713 | $181,060 | | Total Stockholders' Equity | $1,741,622 | $1,702,685 | Consolidated Statements of Income For the second quarter of 2021, net income was $37.6 million, a 50.9% increase from $24.9 million in Q2 2020, primarily due to a $5.0 million negative provision for credit losses Consolidated Income Statement Highlights (in thousands, except per share data) | Metric | Q2 2021 | Q2 2020 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | Net Interest Income | $93,354 | $91,098 | $188,938 | $185,402 | | Provision for Credit Losses | $(5,000) | $20,000 | $(7,500) | $45,000 | | Noninterest Income | $24,967 | $28,190 | $50,213 | $54,625 | | Noninterest Expenses | $73,302 | $66,607 | $142,984 | $133,447 | | Net Income | $37,572 | $24,902 | $79,283 | $51,653 | | Diluted EPS | $1.14 | $0.76 | $2.40 | $1.54 | Consolidated Statements of Cash Flows For the six months ended June 30, 2021, net cash provided by operating activities significantly improved to $117.8 million, leading to a $959.8 million net increase in cash and cash equivalents Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $117,753 | $(13,362) | | Net cash used in investing activities | $(111,117) | $(468,471) | | Net cash provided by financing activities | $953,158 | $1,436,579 | | Net increase in cash and cash equivalents | $959,794 | $954,746 | Note 3 - Securities As of June 30, 2021, the company held $1.68 billion in total securities, primarily composed of available-for-sale and held-to-maturity portfolios, with no credit loss provision recorded Securities Portfolio Summary as of June 30, 2021 (in thousands) | Security Type | Fair Value | | :--- | :--- | | Trading Securities | $3,439 | | Equity Securities | $22,975 | | Available for Sale (AFS) | $794,516 | | Held to Maturity (HTM) | $877,801 (Fair Value) | - The company did not record any provision for estimated credit losses on AFS or HTM securities during the first six months of 2021[42][47] - As of June 30, 2021, all held-to-maturity securities held by the Company were rated investment grade or higher[49] Note 4 - Loans, Allowance for Credit Losses, and Credit Quality The allowance for credit losses decreased to $102.4 million at June 30, 2021, driven by a $7.5 million negative provision reflecting improved macroeconomic forecasts and reduced nonaccrual loans Change in Allowance for Credit Losses (ACL) - Six Months Ended June 30, 2021 (in thousands) | Description | Amount | | :--- | :--- | | Beginning Balance (Jan 1, 2021) | $113,392 | | Charge-offs | $(4,167) | | Recoveries | $632 | | Provision for credit loss expense | $(7,500) | | Ending Balance (June 30, 2021) | $102,357 | - The decrease in the allowance was primarily driven by a $5.0 million negative provision in Q2 2021, reflecting improvements in the overall macro-economic forecast and strong asset quality metrics[56] Asset Quality Indicators (in millions) | Metric | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Nonaccrual Loans | $47.8 | $66.9 | | Troubled Debt Restructurings (TDRs) | $39.7 | $39.2 | | Active COVID-19 Loan Deferrals | $233.8 | $173.6 | Note 6 - Derivative and Hedging Activities The company uses derivative instruments, primarily interest rate swaps and collars, to manage interest rate risk, with total cash flow hedges at $1.025 billion as of June 30, 2021 Cash Flow Hedges as of June 30, 2021 (in thousands) | Derivative Type | Notional Amount | Fair Value | | :--- | :--- | :--- | | Interest rate swaps on borrowings | $75,000 | $(845) | | Interest rate swaps on loans | $550,000 | $20,985 | | Interest rate collars on loans | $400,000 | $15,964 | | Total | $1,025,000 | $36,104 | - The company expects approximately $19.3 million to be reclassified from OCI to interest income and $713,000 to interest expense from cash flow hedges over the next twelve months[97] - Customer-related loan level swaps had a notional amount of $1.61 billion as of June 30, 2021, with offsetting positions to mitigate risk[103] Note 10 - Commitments and Contingencies The company's off-balance sheet commitments increased to $3.64 billion as of June 30, 2021, primarily due to higher commitments to extend credit Off-Balance Sheet Commitments (in thousands) | Instrument | June 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Commitments to extend credit | $3,638,399 | $3,301,692 | | Standby letters of credit | $20,592 | $20,686 | | Loan exposures with recourse | $233,167 | $303,265 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's Q2 2021 financial condition and results, highlighting the Meridian Bancorp acquisition, portfolio performance, and capital - On April 22, 2021, the Company announced a definitive merger agreement to acquire Meridian Bancorp, Inc. in a transaction valued at approximately $1.15 billion, expected to close in Q4 2021[192] - Q2 2021 net income was $37.6 million ($1.14 per diluted share), a 50.9% increase from Q2 2020, primarily due to a $5.0 million release of provision for credit losses[209] - The net interest margin for Q2 2021 decreased by 26 basis points from the prior quarter to 2.99%, heavily impacted by an increased excess liquidity position[200] - 2021 Outlook: Management anticipates low single-digit annualized commercial loan growth (ex-PPP), muted deposit growth, and a provision for credit losses likely remaining below net charge-offs[210] Financial Position As of June 30, 2021, the company's financial position was characterized by strong liquidity and capital, with increased securities, decreased loans, improved asset quality, and robust capital ratios - Total loans decreased by $453.9 million (4.83%) from year-end 2020, primarily due to a net reduction in PPP loan balances. Excluding PPP loans, total loans declined by $144.6 million (1.68%)[235] - Nonperforming assets decreased to $47.8 million (0.34% of total assets) at June 30, 2021, down from $66.9 million (0.51% of total assets) at December 31, 2020[251][252] - The allowance for credit losses decreased by $11.0 million (9.7%) to $102.4 million at June 30, 2021, compared to year-end 2020, reflecting improved economic assumptions[275] Capital Ratios | Ratio | June 30, 2021 | Dec 31, 2020 | Minimum Requirement | | :--- | :--- | :--- | :--- | | Common equity tier 1 capital ratio | 13.31% | 12.67% | 7.0%* | | Tier 1 risk-based capital ratio | 13.98% | 13.34% | 8.5%* | | Total risk-based capital ratio | 15.67% | 15.13% | 10.5%* | | Tier 1 leverage capital ratio | 9.41% | 9.56% | 4.0% | *Includes 2.5% capital conservation buffer Results of Operations For Q2 2021, net interest income increased, but net interest margin compressed due to excess liquidity, while a negative provision for credit losses improved net income despite higher noninterest expenses Key Operating Metrics - Q2 2021 vs Q2 2020 | Metric | Q2 2021 | Q2 2020 | | :--- | :--- | :--- | | Net Interest Income (FTE) | $93.6M | $91.3M | | Net Interest Margin | 2.99% | 3.25% | | Provision for Credit Losses | $(5.0)M | $20.0M | | Noninterest Income | $25.0M | $28.2M | | Noninterest Expense | $73.3M | $66.6M | - The decrease in noninterest income was driven by a $2.3 million decline in mortgage banking income and a $2.7 million drop in loan level derivative income compared to Q2 2020[332] - The increase in noninterest expense was primarily due to a $5.4 million rise in salaries and employee benefits and $1.7 million in merger and acquisition expenses[336] Risk Management The company manages strategic, credit, liquidity, market, operational, and reputation risks through a "three lines of defense" model, maintaining strong liquidity and asset-sensitive net interest income - The company manages seven major risk types: strategic, culture, credit, liquidity, market, operational, and reputation risk[344] Interest Rate Sensitivity (Impact on Net Interest Income) | Rate Shock Scenario | Year 1 Impact (June 30, 2021) | | :--- | :--- | | -100 bps | (3.3)% | | +100 bps | 9.3% | | +200 bps | 19.6% | - As of June 30, 2021, the company had significant available liquidity, including $1.36 billion in additional FHLB capacity and $1.17 billion from the Federal Reserve[356] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section incorporates market risk disclosures from the 'Risk Management' section, focusing on interest rate risk management through simulation models and hedging instruments - The information required for this item is included in the 'Risk Management' section of Item 2, MD&A[378] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal control over financial reporting during Q2 2021 - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of the end of the reporting period[379] - No changes in internal control over financial reporting occurred during Q2 2021 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting[380] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in pending lawsuits arising in the ordinary course of business, which management believes will not have a material adverse effect on financial position or results - Management does not expect pending lawsuits, which arose in the ordinary course of business, to have a material adverse effect on the Company's financial position or results of operations[382] Item 1A. Risk Factors This section updates the company's risk factors, highlighting new risks associated with the pending acquisition of Meridian Bancorp, Inc., including potential failure to complete the merger and integration challenges - A new risk factor has been added concerning the failure to complete the acquisition of Meridian Bancorp, Inc., which could negatively impact future business and financial results[385] - Another new risk factor addresses the possibility that the acquisition of Meridian may be more difficult, costly, or time-consuming than expected, and that expected benefits may not be realized[388] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q2 2021, the company repurchased 278 shares of common stock at an average price of $81.72 per share to satisfy tax withholding obligations for equity compensation grants Issuer Purchases of Equity Securities - Q2 2021 | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | April 2021 | 145 | $83.65 | | May 2021 | 82 | $79.52 | | June 2021 | 51 | $79.79 | | Total | 278 | $81.72 | Item 6. Exhibits This section provides an index of exhibits filed with the Form 10-Q, including the merger agreement with Meridian Bancorp, Inc., Sarbanes-Oxley Act certifications, and Inline XBRL documents - The exhibit index lists the Agreement and Plan of Merger with Meridian Bancorp, Inc., CEO/CFO certifications under Sarbanes-Oxley Sections 302 and 906, and XBRL data files[394]