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INDB > SEC Filings for INDB > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for INDEPENDENT BANK CORP

Form 10-Q for INDEPENDENT BANK CORP


8-May-2014

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, 2013, filed with the Securities and Exchange Commission.

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q, both in the MD&A and elsewhere, contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are not historical facts and include expressions about management's confidence and strategies and management's expectations about new and existing programs and products, acquisitions, relationships, opportunities, taxation, technology, market conditions and economic expectations. These statements may be identified by such forward-looking terminology as "should," "expect," "believe," "view," "opportunity," "allow," "continues," "reflects," "typically," "usually," "anticipate," or similar statements or variations of such terms. Such forward-looking statements involve certain risks and uncertainties and our actual results may differ materially from such forward-looking statements. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements in addition to those risk factors listed under the "Risk Factors" section of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2013 include, but are not limited to:

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;

adverse changes in the local real estate market;

a further deterioration of the credit rating for U.S. long-term sovereign debt;

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;

higher than expected tax expense, resulting from failure to comply with general tax laws, changes in tax laws or failure to comply with requirements of the federal New Markets Tax Credit program;

unexpected changes in market interest rates for interest earning assets and/or interest bearing liabilities;

adverse changes in asset quality including an unanticipated credit deterioration in our loan portfolio;

unexpected increased competition in the Company's market area;

unanticipated loan delinquencies, loss of collateral, decreased service revenues, and other potential negative effects on our business caused by severe weather or other external events;

a deterioration in the conditions of the securities markets;

our inability to adapt to changes in information technology;

electronic fraudulent activity within the financial services industry, especially in the commercial banking sector;

adverse changes in consumer spending and savings habits;

the effect of new laws and regulations regarding the financial services industry including, but not limited to, the Dodd-Frank Wall Street Reform and Consumer Protection Act;

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

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; and

other unexpected material adverse changes in our operations or earnings.

Except as required by law, the Company disclaims any intent or obligation to update publicly any such forward-looking statements, whether in response to new information, future events or otherwise. Any public statements or disclosures by the Company following this Quarterly Report on Form 10-Q which modify or impact any of the forward-looking statements contained in this Quarterly Report on Form 10-Q will be deemed to modify or supersede such statements in this Quarterly Report on Form 10-Q.

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


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                           March 31,       December 31,      September 30,       June 30,        March 31,
                              2014             2013               2013             2013            2013
                                            (Dollars in thousands, except per share data)
Financial condition data
Securities available for
sale                     $    348,258     $     356,862     $      284,398     $   303,855     $   335,693
Securities held to
maturity                      375,556           350,652            317,373         225,278         209,090
Loans                       4,807,269         4,718,307          4,556,029       4,530,111       4,487,478
Allowance for loan
losses                        (53,629 )         (53,239 )          (53,562 )       (52,976 )       (51,906 )
Goodwill and core
deposit intangibles           182,051           182,642            160,562         161,089         161,616
Total assets                6,225,920         6,099,234          5,895,464       5,852,595       5,721,120
Total deposits              5,114,259         4,986,418          4,757,309       4,676,463       4,551,410
Total borrowings              422,565           448,488            507,681         557,300         550,782
Stockholders' equity          602,556           591,540            555,744         543,605         537,575
Income statement
Interest income          $     52,980     $      52,571     $       51,027     $    51,495     $    50,820
Interest expense                5,374             5,666              5,831           5,880           5,958
Net interest income            47,606            46,905             45,196          45,615          44,862
Provision for loan
losses                          4,502             3,150              2,650           3,100           1,300
Noninterest income             17,516            17,464             18,130          16,692          15,724
Noninterest expenses           41,887            47,845             40,722          42,164          42,920
Net income                     13,383            10,588             14,655          12,758          12,252
Per share date
Net income-basic         $       0.56     $        0.45     $         0.64     $      0.56     $      0.54
Net income-diluted               0.56              0.45               0.64            0.56            0.54
Cash dividends declared          0.24              0.22               0.22            0.22            0.22
Book value                      25.23             24.85              24.21           23.73           23.50
Performance ratios
Return on average assets         0.88 %            0.70 %             1.00 %          0.89 %          0.88 %
Return on average common
equity                           9.02 %            7.29 %            10.53 %          9.40 %          9.25 %
Net interest margin (on
a fully tax equivalent
basis)                           3.49 %            3.45 %             3.43 %          3.57 %          3.58 %
Equity to assets                 9.68 %            9.70 %             9.43 %          9.29 %          9.40 %
Dividend payout ratio           39.13 %           47.70 %            34.38 %         39.50 %             - %
Asset quality
Nonperforming loans            36,171            34,659             37,887          36,549          33,091
Nonperforming assets           46,521            43,833             48,879          48,105          46,815
Nonperforming loans as a
percent of gross loans           0.75 %            0.73 %             0.83 %          0.81 %          0.74 %
Nonperforming assets as
a percent of total
assets                           0.75 %            0.72 %             0.83 %          0.82 %          0.82 %
Allowance for loan
losses as a percent of
total loans                      1.12 %            1.13 %             1.18 %          1.17 %          1.16 %
Allowance for loan
losses as a percent of
nonperforming loans            148.27 %          153.61 %           141.37 %        144.95 %        156.86 %
Capital ratios
Tier 1 leverage capital
ratio                            8.60 %            8.64 %             8.64 %          8.56 %          8.51 %
Tier 1 risk-based
capital ratio                   10.76 %           10.78 %            10.82 %         10.62 %         10.57 %
Total risk-based capital
ratio                           12.52 %           12.58 %            12.69 %         12.49 %         12.43 %


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Executive Level Overview

Management evaluates the Company's operating results and financial condition using measures that include net income, earnings per share, return on assets and equity, return on tangible common equity, net interest margin, tangible book value per share, asset quality indicators, and many others. These metrics help management make key decisions regarding the Bank's balance sheet, liquidity, interest rate sensitivity, and capital resources and assist with identifying areas to improve. The Company is focused on organic growth, but will consider acquisition opportunities that provide a satisfactory financial return.

Loans and Asset Quality

Management's balance sheet strategy emphasizes commercial and home equity lending. The results depicted in the following table reflect the focus on those asset classes:
[[Image Removed]]

Commercial lending continued to drive loan growth during the first quarter of 2014, with March 31, 2014 commercial lending balances up 10.8% on an annualized basis compared to December 31, 2013.

Management strives to be disciplined about loan pricing and generates loan assets with interest rate sensitivity in mind. The Company has gradually and intentionally shifted its balance sheet composition so that its interest-rate risk position is fundamentally asset-sensitive.

Management takes a disciplined approach to credit underwriting seeking to avoid undue credit risk and loan losses. For first quarter 2014, net charge-offs were 0.35% of average loans, representing a five basis point increase over the prior quarter. The increase was driven by a relatively large charge off on a previously acquired commercial real estate loan. That same loan drove an increase in nonperforming loans during the quarter, and the ratio of nonperforming loans to total loans was 0.75% at March 31, 2014.


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Funding and the Net Interest Margin

Management emphasizes core deposit growth to fund loans, as depicted by the following chart:
[[Image Removed]]

Core deposits grew by 3.5% during the first quarter of 2014 and at March 31, 2014 represented 85.6% of total deposits.

The net interest margin was 3.49% for the quarter ended March 31, 2014, representing a slight increase from the linked quarter, benefiting from stable earning asset yields, a slightly lower cost of funds and a lower average cash position, as some excess cash was used to pay down borrowings.

Noninterest Income

Management continues to focus on growing noninterest income, however, seasonal fluctuations in deposit account fees and a significant decline in mortgage banking income, due to a reduction in volume experienced industry wide, impacted first quarter results. As such, noninterest income in the quarter, when excluding non-core items, was 25.02% of total revenue (net interest income plus noninterest income) on an operating basis. The following chart depicts noninterest income as a percentage of total revenue on an operating basis over the last five quarters:
[[Image Removed]]


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Expense Control

Management takes a balanced approach to noninterest expense control by paying close attention to the management of ongoing operating expenses while making needed capital expenditures and prudently investing in growth initiatives. The Company's primary expenses arise from Rockland Trust's employee salaries and benefits and expenses associated with buildings and equipment. During the first quarter of 2014, noninterest expense was well contained, as evidenced by a 2.4% decrease from the three month period ended March 31, 2013. The following chart shows the trend in the Company's efficiency ratio, on an operating basis (calculated by dividing noninterest expense by the sum of net interest income and noninterest income), over the past five quarters:

[[Image Removed]]

Tax Effectiveness

The Company participates in federal and state tax credit programs designed to promote economic development, affordable housing, and job creation. During 2014, the Company continues to participate in the federal New Markets Tax Credit program and has also made commitments into additional low-income housing tax credit investments. The Company has also established security corporation subsidiaries and, through its subsidiaries, purchased tax-exempt bonds. Federal and state tax credit program participation and other tax strategies permit the Company to operate in a tax effective manner and sometimes also creates a competitive advantage for Rockland Trust and its community development subsidiaries. During the first quarter of 2014, the Company achieved an effective tax rate of 28.6%.


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Capital

The Company's disciplined approach with respect to revenue, expense, and tax effectiveness is designed to promote long-term shareholder value. The Company's consistent profitability has steadily increased tangible book value per share and helped create the Company's strong capital position. The following chart shows the trend of the Company's tangible book value per share over the past five quarters:
[[Image Removed]]

This strong growth in capital has led to a consistent cash dividend which increased from $0.22 per share in each quarter of 2013 to $0.24 per share in the first quarter of 2014, a 9.1% increase.

2014 Results

Net income for the first quarter of 2014 computed in accordance with Generally Accepted Accounting Principles ("GAAP") was $13.4 million, or $0.56 on a diluted earnings per share basis, as compared to $12.3 million, or $0.54 for the prior year quarter. First quarter 2014 net operating earnings were $12.1 million, or $0.51 on a diluted earnings per share basis, a decrease of 8.9% and 12.1%, respectively, when compared to net operating earnings of $13.3 million, or $0.58 per diluted share, for the first quarter of 2013. The Company's GAAP net income during the first quarter of 2014 were impacted by a relatively large commercial real estate charge-off and the associated higher provisioning levels, as well as a tax exempt gain on life insurance benefits which is excluded from operating earnings.

2014 Earnings Outlook

Based upon the Company's assumptions over loan and deposit growth and despite the challenging interest rate environment, the Company anticipates 2014 diluted earnings per share performance to be in a range between $2.42 and $2.52.

Key assumptions in the 2014 outlook include:

Total loan growth of 4-5%;

Total deposit growth of 2-3%;

A net interest margin in the mid to low 3.40% range;

Stable asset quality outlook, with a provision for loan loss in the range of $11-$14 million and net charge-offs in the range of $9-$12 million;

Noninterest income growing by 3-4%;

Noninterest expense increasing by 3-4%;

An effective tax rate of 28-29%; and,


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Unadjusted Tangible Common Equity ratio increasing to a range of 7.25% to 7.50% by the end of 2014.

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 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.
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 March 31
                                                                                 Diluted
                                                 Net Income                Earnings Per Share
                                             2014          2013           2014             2013
                                                           (Dollars in thousands)
As reported (GAAP)
Net income available to common
shareholders (GAAP)                       $  13,383     $  12,252     $     0.56       $     0.54
Non-GAAP adjustments
Noninterest income components
Gain on life insurance benefits, tax
exempt                                       (1,627 )           -          (0.06 )              -
Noninterest expense components
Merger and acquisition expenses, net of
tax                                              66           856              -             0.04
Impairment on acquired facilities, net of
tax                                             298             -           0.01                -
Severance, net of tax                             -           192              -                -
Total impact of noncore items                (1,263 )       1,048          (0.05 )           0.04
As adjusted (Non-GAAP)                    $  12,120     $  13,300     $     0.51       $     0.58


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The following table summarizes the impact of noncore items on the calculation of the Company's efficiency ratio for the periods indicated:

                                                          Quarter-to-Date
                                          December 31,    September 30,
                        March 31, 2014        2013            2013         June 30, 2013     March 31, 2013
                                                      (Dollars in thousands)
Net interest income    $       47,606     $    46,905     $    45,196     $      45,615     $       44,862   (a)

Noninterest income
(GAAP)                 $       17,516     $    17,464     $    18,130     $      16,692     $       15,724   (b)
Net gain on sale of
nonequity securities                -            (258 )             -                 -                  -
Gain on life insurance
benefits                       (1,627 )          (227 )             -                 -                  -
Gain on extinguishment
of debt                             -               -            (763 )               -                  -
Noninterest income on
an operating basis     $       15,889     $    16,979     $    17,367     $      16,692     $       15,724   (c)

Noninterest expense
(GAAP)                 $       41,887     $    47,845     $    40,722     $      42,164     $       42,920   (d)
Merger & acquisition              (77 )        (6,219 )          (366 )            (754 )           (1,345 )
Severance                           -               -               -                 -               (325 )
Impairment on acquired
facilities                       (503 )             -               -                 -                  -
Noninterest expense on
an operating basis     $       41,307     $    41,626     $    40,356     $      41,410     $       41,250   (e)

Total revenue (GAAP)   $       65,122     $    64,369     $    63,326     $      62,307     $       60,586   (a+b)
Total operating
revenue                $       63,495     $    63,884     $    62,563     $      62,307     $       60,586   (a+c)

Ratios
 Efficiency ratio
(GAAP)                          64.32 %         74.33 %         64.31 %           67.67 %            70.84 % (d/(a+b))
Efficiency ratio on an
operating basis                 65.06 %         65.16 %         64.50 %           66.46 %            68.09 % (e/(a+c))

Noninterest income as
a % of revenue                  26.90 %         27.13 %         28.63 %           26.79 %            25.95 % (b/(a+b))
Noninterest income as
a % of revenue on an
operating basis                 25.02 %         26.58 %         27.76 %           26.79 %            25.95 % (c/(a+c))

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 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 three months of 2014. Please refer to the Annual Report on Form 10-K for the fiscal year ended December 31, 2013 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 increased by $16.3 million, or 2.3%, at March 31, 2014 as compared to December 31, 2013. Security purchases continue to be primarily comprised of agency mortgage-backed securities. The ratio of securities to total assets was 11.6% as of March 31, 2014 and December 31, 2013.
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 the first quarter of 2014 and 2013, the Bank originated residential loans with the intention of selling them in the secondary market, and to a lesser extent, to hold in the Company's residential portfolio. The following table shows the total residential loans that were closed and whether the amounts were held in the portfolio or sold/held for sale in the secondary market during the period indicated:
Table 1 - Closed Residential Real Estate Loans

                                             Three Months Ended March 31
                                                  2014                 2013
                                               (Dollars in thousands)
Held in portfolio                      $       11,659                $  4,038
Sold/held for sale in secondary market         23,421                  94,083
Total closed loans                     $       35,080                $ 98,121

The table below reflects the loans which were sold during the periods indicated:

Table 2 - Residential Mortgage Loan Sales

                                          Three Months Ended March 31
                                               2014                 2013
                                            (Dollars in thousands)
Sold with servicing rights released $        3,668               $  81,922
Sold with servicing rights retained         19,533                  21,914
Total loans sold                    $       23,201               $ 103,836


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As noted in the table above, loans may be sold with servicing rights released or with servicing rights retained. Upon sale, the mortgage servicing asset is established, which represents the then current estimated fair value based on market prices for comparable mortgage servicing contracts, when available, or alternatively is based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income, such as the cost to service, the discount rate, an inflation rate, ancillary income, prepayment speeds and default rates and losses. Servicing rights are recorded in other assets in the consolidated balance sheets, are amortized in proportion to and over the period of estimated net servicing income, and are assessed for impairment based on fair value at each . . .

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