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INDB > SEC Filings for INDB > Form 10-Q on 6-Nov-2012All Recent SEC Filings

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Form 10-Q for INDEPENDENT BANK CORP


6-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the consolidated financial statements, notes and tables included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011, filed with the Securities and Exchange Commission.
Cautionary Statement Regarding Forward-Looking Statements A number of the presentations and disclosures in this Form 10-Q, including, without limitation, statements regarding the level of allowance for loan losses, the rate of delinquencies and amounts of charge-offs, and the rates of loan growth, and any statements preceded by, followed by, or which include the words "may," "could," "should," "will," "would," "hope," "might," "believe," "expect," "anticipate," "estimate," "intend," "plan," "assume" or similar expressions constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements, implicitly and explicitly, include the assumptions underlying the statements and other information with respect to the beliefs, plans, objectives, goals, expectations, anticipations, estimates, intentions, financial condition, results of operations, future performance and business, of the Company including the Company's expectations and estimates with respect to the Company's revenues, expenses, earnings, return on average equity, return on average assets, asset quality and other financial data and capital and performance ratios.
Although the Company believes that the expectations reflected in the Company's forward-looking statements are reasonable, these statements involve risks and uncertainties that are subject to change based on various important factors (some of which are beyond the Company's control). The following factors, among others, could cause the Company's financial performance to differ materially from the Company's goals, plans, objectives, intentions, expectations and other forward-looking statements:
a weakening in the United States economy in general and the regional and local economies within the New England region and the Company's market area, which could result in a deterioration of credit quality, a change in the allowance for loan losses, or a reduced demand for the Company's credit or fee-based products and services;

adverse changes in the local real estate market could result in a deterioration of credit quality and an increase in the allowance for loan losses, as most of the Company's loans are concentrated within the Bank's primary market area, and a substantial portion of these loans have real estate as collateral;

a further deterioration of the credit rating for U.S. long-term sovereign debt could adversely impact the Company. Although the downgrade by Standard and Poor's of U.S. long-term sovereign debt did not directly impact the financial position for the Company, a further downgrade as a result of an ability by the federal government to address the so-called "fiscal cliff" or raise the U.S. debt limit could result in further downgrades which in turn could cause a re-evaluation of the 'risk-free' rate used in many accounting models, other-than-temporary-impairment of securities and/or impairment of goodwill and other intangibles;

acquisitions may not produce results at levels or within time frames originally anticipated and may result in unforeseen integration issues or impairment of goodwill and/or other intangibles;

the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Board of Governors of the Federal Reserve System, could affect the Company's business environment or affect the Company's operations;

the effects of, any changes in, and any failure by the Company to comply with tax laws generally and requirements of the federal New Markets Tax Credit program in particular could adversely affect the Company's tax provision and its financial results;

inflation, interest rate, market and monetary fluctuations could reduce net interest income and could increase credit losses;

adverse changes in asset quality could result in increasing credit risk-related losses and expenses;

competitive pressures could intensify and affect the Company's profitability, including continued industry consolidation, the increased financial services provided by nonbanks and banking reform;

a deterioration in the conditions of the securities markets could adversely affect the value or credit quality of the Company's assets, the availability and terms of funding necessary to meet the Company's liquidity needs, and the Company's ability to originate loans and could lead to impairment in the value of securities in the Company's investment portfolios, having an adverse effect on the Company's earnings;

the potential need to adapt to changes in information technology could adversely impact the Company's operations and require increased capital spending;


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the risk of electronic fraudulent activity within the financial services industry, especially in the commercial banking sector due to cyber criminals targeting bank accounts and other customer information, which could adversely impact the Company's operations, damage its reputation and require increased capital spending;

changes in consumer spending and savings habits could negatively impact the Company's financial results;

new laws and regulations regarding the financial services industry including, but not limited to, the Dodd-Frank Wall Street Reform and Consumer Protection Act, may have a significant effect on the financial services industry in general, and/or the Company in particular, the exact nature and extent of which is uncertain;

changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) generally applicable to the Company's business could adversely affect the Company's operations; and

changes in accounting policies, practices and standards, as may be adopted by the regulatory agencies as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board, and other accounting standard setters, could negatively impact the Company's financial results.

If one or more of the factors affecting the Company's forward-looking information and statements proves incorrect, then the Company's actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this Form 10-Q. Therefore, the Company cautions you not to place undue reliance on the Company's forward-looking information and statements.
The Company does not intend to update the Company's forward-looking information and statements, whether written or oral, to reflect change. All forward-looking statements attributable to the Company are expressly qualified by these cautionary statements.
Selected Quarterly Financial Data
The selected consolidated financial and other data of the Company set forth below does not purport to be complete and should be read in conjunction with, and is qualified in its entirety by, the more detailed information, including the Consolidated Financial Statements and related notes, appearing elsewhere herein.

                                                       Three Months Ended
                     September 30,       June 30,        March 31,        December 31,       September 30,
                          2012             2012             2012              2011               2011
                                          (Dollars in Thousands, Except Per Share Data)
FINANCIAL CONDITION
DATA:
Securities
Available for Sale  $      323,156     $    338,331     $    362,109     $      305,332     $       293,073
Securities Held to
Maturity                   186,842          188,450          200,921            204,956             220,552
Loans                    4,056,135        3,980,789        3,869,756          3,794,390           3,723,125
Allowance for Loan
Losses                     (49,746 )         48,403           48,340             48,260              47,278
Goodwill and Core
Deposit Intangibles        137,293          139,924          140,323            140,722             141,103
Total Assets             5,192,094        5,124,564        4,985,739          4,970,240           4,899,766
Total Deposits           4,117,847        4,078,133        3,945,713          3,876,829           3,787,533
Total Borrowings           489,899          476,217          484,115            537,686             568,264
Stockholders'
Equity                     492,965          483,592          478,863            469,057             461,066
Nonperforming Loans         31,081           31,322           31,646             28,953              26,625
Nonperforming
Assets                      41,529           43,857           40,736             37,149              36,647
INCOME STATEMENT:
Interest Income     $       48,555     $     48,426     $     47,796     $       48,382     $        48,935


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Interest Expense           5,717            5,798            5,943            6,528            7,261
Net Interest Income       42,838           42,628           41,853           41,854           41,674
Provision for Loan
Losses                     3,606            8,500            1,600            3,800            2,000
Noninterest Income        16,108           14,983           13,909           14,315           12,315
Noninterest
Expenses                  40,052           36,999           37,358           36,952           35,423
Net Income                11,601            8,874           12,183           11,169           11,959
PER SHARE DATA:
Net Income-Basic    $       0.54     $       0.41     $       0.57     $       0.52     $       0.56
Net Income-Diluted          0.53             0.41             0.56             0.52             0.56
Cash Dividends
Declared                    0.21             0.21             0.21             0.19             0.19
Book Value                 22.75            22.36            22.16            21.82            21.48
PERFORMANCE RATIOS:
Return on Average
Assets                      0.91 %           0.71 %           1.00 %           0.91 %           0.99 %
Return on Average
Common Equity               9.39 %           7.34 %          10.31 %           9.45 %          10.28 %
Net Interest Margin
(on a Fully Tax
Equivalent Basis)           3.72 %           3.80 %           3.82 %           3.78 %           3.84 %
Equity to Assets            9.49 %           9.44 %           9.60 %           9.44 %           9.41 %
Dividend Payout
Ratio                      39.23 %          51.19 %          37.26 %          36.57 %          34.10 %
ASSET QUALITY
RATIOS:
Nonperforming Loans
as a Percent of
Gross Loans                 0.77 %           0.79 %           0.82 %           0.76 %           0.72 %
Nonperforming
Assets as a Percent
of Total Assets             0.80 %           0.86 %           0.82 %           0.75 %           0.75 %
Allowance for Loan
Losses as a Percent
of Total Loans              1.23 %           1.22 %           1.25 %           1.27 %           1.27 %
Allowance for Loan
Losses as a Percent
of
Nonperforming Loans       160.05 %         154.53 %         152.75 %         166.68 %         177.57 %
CAPITAL RATIOS:
Tier 1 Leverage
Capital Ratio               8.73 %           8.68 %           8.77 %           8.61 %           8.59 %
Tier 1 Risk-Based
Capital Ratio              10.72 %          10.64 %          10.71 %          10.74 %          10.62 %
Total Risk-Based
Capital Ratio              12.71 %          12.63 %          12.73 %          12.78 %          12.67 %

Executive Level Overview During the third quarter of 2012 the Company continued to experience business volume growth, as indicated by the growth rates in the commercial and home equity loan portfolios. The Company's deposits also grew in the third quarter with core deposits now comprising 84.3% of total deposits. Growth in noninterest income year-over-year was solid at 17.2%. On an operating basis, excluding the proceeds from life insurance policies in 2012 and the gain on the sale of securities in 2011, noninterest income growth was still strong at 16.0% as compared to the prior year. Noninterest expense growth was well managed with a year-over-year increase of only 5.2%, and on an operating basis, which excludes the merger and acquisition


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expenses and goodwill impairment in 2012, only increased by 2.0% year-over-year. The following table illustrates key performance measures for the periods indicated:

                                             Three Months Ended September 30,          Nine Months Ended September 30,
                                                 2012                 2011                2012                 2011
                                                                          (Dollars in Thousands, Except Per Share Data)
NET INCOME                                $        11,601       $        11,959     $       32,658       $       34,267
DILUTED EARNINGS PER SHARE                           0.53                  0.56               1.51                 1.60
RETURN ON AVERAGE ASSETS                             0.91 %                0.99 %             0.87 %               0.97 %
RETURN ON COMMON AVERAGE EQUITY                      9.39 %               10.28 %             9.01 %              10.10 %
NET INTEREST MARGIN                                  3.72 %                3.84 %             3.78 %               3.94 %

The Company's net interest margin of 3.72% in the third quarter was well managed but has decreased when compared to the 3.84% of the year ago period due to the industry-wide pressure on interest margins caused by the prolonged low rate environment and disciplined interest rate risk management. Management has countered this ongoing pressure on earning asset yields by decreasing the Company's costs of funds, which decreased to 0.50% at September 30, 2012, down from 0.68% as of September 30, 2011. However, with limited ability to further reduce the overall cost of funds, management anticipates maintaining the net interest margin at this level to be challenging and expects the net interest margin to be in the 3.60%'s in the fourth quarter of this year.
Consistent with the Company's strategic emphasis, the commercial loan portfolio was a driver of loan growth during the three months ended September 30, 2012, as evidenced by annualized growth for the quarter of 11.4%. The home equity portfolio also experienced annualized growth of 9.0%, driven largely by the demand for first position mortgage refinancing fueled by historically low interest rates.
Deposits increased to $4.1 billion, an increase of $39.7 million, or 3.9% on an annualized basis, for the three months ended September 30, 2012. The Company continues to focus on improving the mix of deposits with core deposits increasing by $53.8 million, or 6.3% on an annualized basis, to $3.5 billion with growth occurring in both consumer and business customer segments. In terms of asset quality, the Company continues to experience strong credit metrics as compared to peers in the industry. Loan delinquency measures range from stable to improving and nonperforming assets remain in a manageable position.


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The following table shows the levels of the Company's nonperforming loans over the trailing five quarters:
[[Image Removed]]
The Company considers a loan to be in early stage delinquency when it is between 30-89 days past due and a loan is considered to be in late stage delinquency when it is 90 days or more past due. Loan delinquency, both early and late stage, remained well contained as of September 30, 2012.


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The chart below shows the level of delinquencies over the trailing five quarters:
[[Image Removed]]
Net loan charge-off activity decreased on a quarter-to-quarter basis due largely to a customer loan fraud detected in the prior quarter, which resulted in a $4.0 million charge-off last quarter. The Company's net loan charge-offs over the last five quarters are shown in the table below:
[[Image Removed]]
The provision for loan losses was $3.6 million, $3.8 million, and $2.0 million for the three months ended September 30, 2012, December 31, 2011, and September 30, 2011, respectively, and exceeded net charge-offs in all quarters. The allowance for loan losses as a percent of loans was 1.23% at September 30, 2012 and 1.27% at both December 31, 2011 and September 30, 2011.
The Company's organic customer growth continued to be strong in the third quarter of 2012 providing deposit, loan and


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fee income opportunities. Noninterest income increased over the prior quarter by 7.5% to $16.1 million. The largest increase in noninterest income is due to the Company receiving $1.3 million of net proceeds from life insurance policies, which is tax-exempt income to the Company. Growth in noninterest income year-over-year was solid at 17.2%. On an operating basis, excluding the proceeds from life insurance policies in 2012 and the gain on the sale of securities in 2011, noninterest income growth was still strong at 16.0% as compared to the prior year.
Noninterest expense increased over the prior quarter by 8.3% to $40.1 million. The increase is mainly due to increases in incentive compensation of $1.2 million, merger and acquisition expenses of $595,000, and a $2.2 million goodwill impairment charge, which represents the total amount of goodwill relating to Compass Exchange Advisors, LLC ("Compass"), which was acquired in January 2007. Compass is a wholly-owned subsidiary of the bank that provides like-kind exchange services pursuant to section 1031 of the Internal Revenue Code. The Company determined the goodwill associated with this purchase to be impaired due to the prolonged low rate environment and the Federal Reserve Bank's stated intent to maintain low rates for the foreseeable future. Noninterest expense was well managed with a year-over-year increase of 5.2%, however, excluding the merger and acquisition expenses and goodwill impairment in 2012 noninterest expense increased only modestly by 2.0% for the same period. Management anticipates that the continuation of solid fundamentals and strong asset quality metrics will continue to drive the Company's results. Management expects net charge-offs for the year to be in the range of $15-$16 million and loan growth to be in the range of 7.0% to 8.0% particularly in the commercial category where pipelines are strong and the Company expects first position home equity to slow with a modest growth for the remainder of the year. Management is also focused on integration planning for the upcoming acquisition of Central Bancorp, Inc. in the fourth quarter and anticipates a customer conversion during the first quarter of 2013. At the beginning of 2012 management provided diluted earnings per share estimates of $2.05 to $2.15 for 2012 as compared to the diluted earnings per share of $2.12 for 2011. Management believes the $2.05 to $2.15 estimate to still be accurate and anticipates being in the middle of that range.
Non-GAAP Measures
When management assesses the Company's financial performance for purposes of making day-to-day and strategic decisions, it does so based upon the performance of its core banking business, which is primarily derived from the combination of net interest income and noninterest or fee income, reduced by operating expenses, the provision for loan losses, and the impact of income taxes. The Company's financial performance is determined in accordance with Generally Accepted Accounting Principles ("GAAP") which sometimes includes gains or losses due to items that management does not believe are related to its core banking business, such as gains or losses on the sales of securities, merger and acquisition expenses, and other items. Management, therefore, also computes the Company's non-GAAP operating earnings, which excludes these items, to measure the strength of the Company's core banking business and to identify trends that may to some extent be obscured by gains or losses which management deems not to be core to the Company's operations. Management believes that the financial impact of the items excluded when computing non-GAAP operating earnings will disappear or become immaterial within a near-term finite period. Management's computation of the Company's non-GAAP operating earnings information is set forth because management believes it may be useful for investors to have access to the same analytical tool used by management to evaluate the Company's core operational performance so that investors may assess the Company's overall financial health and identify business and performance trends that may be more difficult to identify and evaluate when noncore items are included. Management also believes that the computation of non-GAAP operating earnings may facilitate the comparison of the Company to other companies in the financial services industry.
Non-GAAP operating earnings should not be considered a substitute for GAAP operating results. An item which management deems to be noncore and excludes when computing non-GAAP operating earnings can be of substantial importance to the Company's results for any particular quarter or year. The Company's non-GAAP operating earning information set forth is not necessarily comparable to non-GAAP information which may be presented by other companies.


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The following table summarizes the impact of noncore items recorded for the time periods indicated below and reconciles them in accordance with GAAP:

                                                       Three Months Ended September 30,
                                                   Net Income
                                               Available to Common                 Diluted
                                                  Shareholders                Earnings Per Share
                                               2012            2011           2012           2011
                                                            (Dollars in Thousands)
AS REPORTED (GAAP)
Net Income available to Common
Shareholders (GAAP)                       $    11,601       $  11,959          0.53           0.56
Non-GAAP Measures:
Non-Interest Income Components:
Proceeds from Life Insurance Policies,
tax exempt                                     (1,307 )             -         (0.06 )            -
Non-Interest Expense Components:
Merger and Acquisition Expenses, net of
tax                                               352               -          0.02              -
    Goodwill Impairment, net of tax             1,317               -          0.06              -
TOTAL IMPACT OF NON-CORE ITEMS                    362               -          0.02              -
AS ADJUSTED (NON-GAAP)                    $    11,963       $  11,959          0.55           0.56



                                                       Nine Months Ended September 30,
                                                  Net Income
                                             Available to Common                 Diluted
                                                 Shareholders               Earnings Per Share
                                              2012          2011           2012            2011
                                                           (Dollars in Thousands)
AS REPORTED (GAAP)
Net Income available to Common
Shareholders (GAAP)                       $   32,658     $  34,267     $     1.51       $    1.60
Non-GAAP Measures:
Non-Interest Income Components:
Net Gain on Sale of Securities, net of
tax                                                -          (428 )            -           (0.02 )
    Proceeds from Life Insurance
Policies, tax exempt                          (1,307 )                      (0.06 )
Non-Interest Expense Components:
Merger and Acquisition Expenses, net of
tax                                              749             -           0.03               -
Goodwill Impairment, net of tax                1,317             -           0.06               -
TOTAL IMPACT OF NON-CORE ITEMS                   759          (428 )         0.03           (0.02 )
AS ADJUSTED (NON-GAAP)                    $   33,417     $  33,839     $     1.54       $    1.58

Critical Accounting Policies
Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. The Company believes that the Company's most critical accounting policies are those which the Company's financial condition depends upon, and which involve the most complex or subjective decisions or assessments.
There have been no material changes in critical accounting policies during the first nine months of 2012. Please refer to the 2011 Form 10-K for a complete listing of critical accounting policies.


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FINANCIAL POSITION
Securities Portfolio The Company's securities portfolio consists of securities available for sale and securities which management intends to hold until maturity. Securities decreased by $8.5 million, or 1.7%, at September 30, 2012 as compared to December 31, 2011. The ratio of securities to total assets as of September 30, 2012 was 9.8%, compared to 10.4% at December 31, 2011. The Company continually reviews investment securities for the presence of other-than-temporary impairment ("OTTI"). Further analysis of the Company's OTTI can be found in Note 3 "Securities" within Notes to Consolidated Financial Statements included in Item 1 hereof.
As of December 31, 2011 securities classified as trading were $8.2 million and were comprised of a community development mutual fund investment and securities that are held solely for the purpose of funding certain executive nonqualified retirement obligations. During the first quarter of 2012, management reclassified these securities to be available for sale.
Residential Mortgage Loan Sales The Company's primary loan sale activity arises from the sale of government sponsored enterprise eligible residential mortgage loans to other financial institutions. During 2012 and 2011, the Bank originated residential loans with the intention of selling them in the secondary market. Loans may be sold with servicing rights released or with servicing rights retained. A mortgage servicing asset is recognized when a loan is sold with servicing rights retained. During the three and nine months ended September 30, 2012 the Company sold $83.5 million and $222.8 million of mortgage loans . . .

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