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INDB > SEC Filings for INDB > Form 10-Q on 6-Nov-2013All Recent SEC Filings

Show all filings for INDEPENDENT BANK CORP

Form 10-Q for INDEPENDENT BANK CORP


6-Nov-2013

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, 2012, 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, continued uncertainty regarding the impact of the recent shutdown of the U.S. federal government or the occurence of another federal government shutdown 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 previous downgrade by Standard and Poor's of U.S. long-term sovereign debt did not directly impact the financial position of the Company, an inability by the federal government to raise the U.S. debt limit or otherwise 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;

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;

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,
                               2013             2013            2013             2012               2012
                                             (Dollars in thousands, except per share data)
Financial condition data
Securities available for
sale                     $      284,398     $   303,855     $   335,693     $     329,286     $      323,156
Securities held to
maturity                        317,373         225,278         209,090           178,318            186,842
Loans                         4,556,029       4,530,111       4,487,478         4,519,011          4,056,135
Allowance for loan
losses                          (53,562 )       (52,976 )       (51,906 )         (51,834 )          (49,746 )
Goodwill and core
deposit intangibles             160,562         161,089         161,616           162,144            137,293
Total assets                  5,895,464       5,852,595       5,721,120         5,756,985          5,192,094
Total deposits                4,757,309       4,676,463       4,551,410         4,546,677          4,117,847
Total borrowings                507,681         557,300         550,782           591,055            489,899
Stockholders' equity            555,744         543,605         537,575           529,320            492,965
Income statement
Interest income          $       51,027     $    51,495     $    50,820     $      51,414     $       48,555
Interest expense                  5,831           5,880           5,958             5,935              5,717
Net interest income              45,196          45,615          44,862            45,479             42,838
Provision for loan
losses                            2,650           3,100           1,300             4,350              3,606
Noninterest income               18,130          16,692          15,724            17,016             16,108
Noninterest expenses             40,722          42,164          42,920            45,050             40,052
Net income                       14,655          12,758          12,252             9,968             11,601


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Per share date
Net income-basic         $       0.64     $      0.56     $      0.54     $      0.45     $      0.54
Net income-diluted               0.64            0.56            0.54            0.45            0.53
Cash dividends declared          0.22            0.22            0.22            0.21            0.21
Book value                      24.21           23.73           23.50           23.24           22.75
Performance ratios
Return on average assets         1.00 %          0.89 %          0.88 %          0.73 %          0.91 %
Return on average common
equity                          10.53 %          9.40 %          9.25 %          7.68 %          9.39 %
Net interest margin (on
a fully tax equivalent
basis)                           3.43 %          3.57 %          3.58 %          3.68 %          3.72 %
Equity to assets                 9.43 %          9.29 %          9.40 %          9.19 %          9.49 %
Dividend payout ratio           34.38 %         39.50 %             - %         93.60 %         39.23 %
Asset quality
Nonperforming loans            37,887          36,549          33,091          28,766          31,081
Nonperforming assets           48,879          48,105          46,815          42,427          41,529
Nonperforming loans as a
percent of gross loans           0.83 %          0.81 %          0.74 %          0.64 %          0.77 %
Nonperforming assets as
a percent of total
assets                           0.83 %          0.82 %          0.82 %          0.74 %          0.80 %
Allowance for loan
losses as a percent of
total loans                      1.18 %          1.17 %          1.16 %          1.15 %          1.23 %
Allowance for loan
losses as a percent of
nonperforming loans            141.37 %        144.95 %        156.86 %        180.19 %        160.05 %
Capital ratios
Tier 1 leverage capital
ratio                            8.64 %          8.56 %          8.51 %          8.65 %          8.73 %
Tier 1 risk-based
capital ratio                   10.82 %         10.62 %         10.57 %         10.36 %         10.72 %
Total risk-based capital
ratio                           12.69 %         12.49 %         12.43 %         12.23 %         12.71 %

Executive Level Overview

During the third quarter of 2013 the Company reported strong net income and earnings per share. Third quarter results reflected the Company's focus on noninterest income and good expense management. While the Company continued to experience strong loan originations, the rate of payoffs in the commercial portfolio and continued payoff trends in the residential portfolios suppressed overall loan growth. Deposit balances increased during the third quarter, with core deposits now comprising 85.3% of total deposits. Deposit growth followed advertising campaigns launched in the second quarter and reflects the Company's continued success at strengthening existing customer relationships and adding new ones. Significant deposit growth, combined with modest loan growth, increased the Company's overall liquidity position, but contributed to a net interest margin decrease for the quarter. Management worked to offset strain on the net interest margin by deploying a portion of the Company's excess liquidity to opportunistically prepay Federal Home Loan Bank Advances and purchasing additional securities.


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The following table illustrates key performance measures for the periods indicated, with the nine month period ended September 30, 2012 results affected by a loan fraud of approximately $4.0 million, or $0.11 per share.

                                         Three Months Ended September 30         Nine Months Ended September 30
                                            2013                 2012               2013                 2012
                                                      (Dollars in thousands, except per share data)
Net income                            $       14,655       $       11,601     $       39,665       $       32,658
Net income on an operating basis      $       14,420       $       11,963     $       40,937       $       33,417
Noninterest income                    $       18,130       $       16,108     $       50,545       $       45,000
Diluted earnings per share            $         0.64       $         0.53     $         1.73       $         1.51
Return on average assets on an
operating basis                                 0.98 %               0.93 %             0.96 %               0.89 %
Return on common average equity on an
operating basis                                10.36 %               9.68 %            10.05 %               9.22 %
Net interest margin                             3.43 %               3.72 %             3.53 %               3.78 %

The Company is focused on growing noninterest income and management continues to emphasize its importance in this prolonged low interest rate environment. The following chart shows the steady increase in noninterest income as a percentage of total revenue over the past five years:

[[Image Removed]]

The Company's focus on both personal and business checking accounts, as well as increased debit card usage, has led to increased interchange revenues and higher overall deposit account fees. Investment management income continues to be an increasingly important contributor to the noninterest income category as assets under administration have grown to $2.2 billion. In addition, commercial loan closings have resulted in significant loan level derivative income for the quarter and year to date.
The net interest margin for the quarter decreased to 3.43%, down 14 basis point from the prior quarter, as excess liquidity from strong deposit growth was not deployed quickly and the reduced yield on loans was unable to be offset by a lower cost of funds. The Company is focused on maintaining a relatively stable net interest margin while continuing to position itself to take advantage of future rate increases, as shown in the chart below, which reflects the estimated impact on the Company's net interest income, assuming a static balance sheet, under the following four gradual (12 to 24 month) shifts in interest rates:


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1.Down 100 basis points over 12 months (parallel yield curve shift)
2.Up 200 basis points over 12 months (parallel yield curve shift)
3.Up 400 basis points over 24 months (parallel yield curve shift)
4. Flat up 500 basis points over 12 months (asymmetrical yield curve shift with short-term rates rising 500 basis points and overall flatting of the yield curve)

[[Image Removed]]

The Company is fundamentally positioned for a rising rate environment. Management's balance sheet strategy continues to favor short duration assets, such as commercial loans and home equity lines of credit, funded by core deposits. The following tables show trends over the past five years in the Company's interest-earning assets and funding mixes:

[[Image Removed]]


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Asset quality remains strong, as net charge-offs decreased to $5.3 million during the nine months ended September 30, 2013, or 0.16% on an annualized basis of average loans, as compared to $12.2 million, or 0.42% annualized, for the nine months ended September 30, 2012. The prior year was negatively impacted by an isolated loan fraud of $4.0 million, inflating the prior year metrics. Accordingly, the provision for loan losses decreased to $7.1 million, as compared to $13.7 million in the first nine months of 2012. The allowance for loan losses as a percentage of loans was 1.18% and 1.15% as of September 30, 2013 and December 31, 2012, respectively. Nonperforming loans were $37.9 million, or 0.83% of total loans, at September 30, 2013, an increase from the year ago period's nonperforming loans of $31.1 million, or 0.77%. The increase in nonperforming loans is driven by an increase in the commercial and industrial and commercial real estate category. Delinquency as a percentage of loans remains low at 0.90% at September 30, 2013, a slight increase when compared to 0.79% at September 30, 2012.

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 believes are unrelated to its core banking business and will not have a material financial impact on operating results in future periods, 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 such gains or losses.
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.


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Non-GAAP operating earnings should not be considered a substitute for GAAP 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.
The following tables 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
                                                                                Diluted
                                                 Net Income                Earnings Per Share
                                             2013          2012           2013            2012
                                                           (Dollars in thousands)
As reported (GAAP)
Net income available to common
shareholders (GAAP)                       $  14,655     $  11,601     $     0.64       $    0.53
Non-GAAP measures
Noninterest income components
Proceeds from life insurance policies,
tax exempt                                        -        (1,307 )            -           (0.06 )
Gain on extinguishment of debt, net of
tax                                            (451 )           -          (0.02 )             -
Noninterest expense components
Merger and acquisition expenses, net of
tax                                             216           352           0.01            0.02
Goodwill impairment, net of tax                   -         1,317              -            0.06
Total impact of noncore items                  (235 )         362          (0.01 )          0.02
As adjusted (NON-GAAP)                    $  14,420     $  11,963     $     0.63       $    0.55

                                                       Nine Months Ended September 30
                                                                                Diluted
                                                 Net Income                Earnings Per Share
                                             2013          2012           2013            2012
                                                           (Dollars in thousands)
As reported (GAAP)
Net income available to common
shareholders (GAAP)                       $  39,665     $  32,658           1.73       $    1.51
Non-GAAP measures
Noninterest income components
Proceeds from life insurance policies,
tax exempt                                        -        (1,307 )            -           (0.06 )
Gain on extinguishment of debt, net of
tax                                       $    (451 )   $       -          (0.02 )             -
Noninterest expense components
Severance, net of tax                           192             -           0.01               -
Merger and acquisition expenses, net of
tax                                           1,531           749           0.06            0.03
Goodwill impairment, net of tax                   -         1,317              -            0.06
Total impact of noncore items                 1,272           759           0.05            0.03
As adjusted (NON-GAAP)                    $  40,937     $  33,417           1.78       $    1.54

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.


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There have been no material changes in critical accounting policies during the first nine months of 2013. Please refer to the 2012 Form 10-K for a complete listing of critical accounting policies.

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 increased by $94.2 million, or 18.6%, at September 30, 2013 as compared to December 31, 2012, as management has deployed excess cash by purchasing additional securities in 2013. The ratio of securities to total assets as of September 30, 2013 was 10.2%, compared to 8.8% at December 31, 2012.
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.

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 2013 and 2012, 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, 2013 the Company sold $71.9 million and $259.4 million of mortgage loans compared to $83.5 million and $222.8 million for the three and nine months ended September 30, 2012.
When a loan is sold, the Company enters into agreements that contain representations and warranties about the characteristics of the loans sold and their origination. The Company may be required to either repurchase mortgage loans or to indemnify the purchaser from losses if representations and warranties are breached. The Company incurred no material losses during the three and nine months ended September 30, 2013 or 2012, and therefore at this time, has not established a reserve for loan repurchases as future material losses are not expected to be probable.
Forward sale contracts of mortgage loans, considered derivative instruments for accounting purposes, are utilized by the Company in its efforts to manage risk of loss associated with its mortgage loan commitments and mortgage loans held for sale. See Note 7, "Derivative and Hedging Activities" within Notes to Consolidated Financial statements included in Item 1 hereof for more information on mortgage loan commitments and forward sales agreements.
Loan Portfolio Management continues to focus on growth in the commercial and home equity lending categories, while placing less emphasis on the other lending categories. Management believes this emphasis is prudent, given the prevailing interest rate and economic environment, as well as strategic priorities. At September 30, 2013, the Bank's loan portfolio increased slightly to $4.6 billion. Loans grew in the commercial portfolio by $157.2 million from December 31, 2012, or 6.8% on an annualized basis. Offsetting the growth in commercial, the residential portfolio decreased by $116.4 million compared to December 31, 2012, or 25.4% on an annualized basis, as prepayment activity increased in the consumer real estate portfolio during the year, due to the low interest rate environment.


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