Fundamentals strength helped counter ongoing impact of Coronavirus pandemic

ROCKLAND, Mass.--(BUSINESS WIRE)-- Independent Bank Corp. (Nasdaq Global Select Market: INDB), parent of Rockland Trust Company, today announced 2020 third quarter net income of $34.9 million, or $1.06 per diluted share, compared to net income of $24.9 million, or $0.76 per diluted share, reported for the second quarter of 2020. Excluding a loss on terminated hedges of $684,000, operating net income was $35.4 million, or $1.07 per diluted share, for the third quarter of 2020. Net income for the year-to-date period was $86.5 million or $2.59 on a diluted per share basis, a decrease of $31.2 million, or 26.5%, as compared to the same period in 2019. On an operating basis, net income for the 2020 year-to-date period was $87.0 million, or $2.61 on a diluted per share basis, representing a decrease of $50.1 million, or 36.5%, as compared to the same period a year ago, which included adjustments for mergers and acquisitions, as well as a gain on sale of loans. Decreases in the current year-to-date results are primarily driven by the negative impact of the elevated provision for credit losses, with the impact of the Coronavirus ("COVID-19") pandemic continuing to be the primary driver of the higher provision levels. Please refer to Appendix D for additional information regarding the Company's Current Expected Credit Losses assumptions and results.

Rockland Trust continues to monitor the COVID-19 pandemic impact on our colleagues, customers, and the communities we serve. The safety of our colleagues and customers continues to be of the utmost importance, while the Company simultaneously continues to serve customer needs.

“Our financial position remains strong. Our solid fundamentals entering the COVID-19 pandemic continue to serve us as we navigate the ongoing impacts of the pandemic,” said Christopher Oddleifson, the Chief Executive Officer of Independent Bank Corp. and Rockland Trust Company. “At Rockland Trust, the bank Where Each Relationship Matters®, my colleagues and I are energized by a shared sense of mission as we continue to stay focused on serving our customers and our communities as we all move forward together. We have helped over 6,100 borrowers obtain Paycheck Protection Program ("PPP") loans, with a total principal amount of approximately $810 million. These funds represent critical lifelines for these small businesses and are being deployed with the goal of saving numerous jobs that would otherwise be lost in the communities we serve. I would like to thank my colleagues for their continued professionalism and dedication during these trying times. Our unwavering dedication to our customers, our communities and to each other is what truly sets us apart.”

BALANCE SHEET

Total assets of $13.2 billion at September 30, 2020 increased by $151.2 million, or 1.2%, from the prior quarter, and increased by $1.6 billion, or 14.2%, as compared to the year ago period. Total asset growth for the third quarter is primarily attributable to increases in interest-earning cash balances resulting from strong deposit growth along with net loan growth.

Total loans rose by $45.5 million, or 0.5% (1.9% annualized), when compared to the prior quarter, fueled by a healthy increase in commercial loan balances of $145.0 million, or 2.1% (8.5% annualized), during the third quarter. Growth across all commercial categories, with the exception of small business, reflects strong closing activity in all major commercial products, as well as a stabilization of line utilization levels, which experienced significant decreases during the early months of the COVID-19 pandemic. Within the consumer portfolios, the low rate environment has driven record mortgage banking volumes and results, while portfolio balances further declined as the majority of residential mortgage production continues to be sold into the secondary market. On the home equity side, despite strong closing activity, portfolio growth continues to be challenged by attrition.

Deposit balances of $10.9 billion at September 30, 2020 increased by $134.5 million, or 1.3%, (5.0% annualized), from the prior quarter, as a combination of various government stimulus programs and a customer focus on retaining liquidity continued to fuel significant growth during the quarter. In addition to balance increases from existing customers, strong new customer account activity remained a bright spot throughout the uncertain economic conditions. As time deposits continued to run off, core deposits represented 88.0% of the total deposits at September 30, 2020, which, combined with reductions in rates across all products, has led to a total cost of deposits for the third quarter of 0.20%, representing a reduction of 8 basis points when compared to the prior quarter.

The securities portfolio decreased by $68.1 million, or 5.8%, when compared to the prior quarter, reflecting $28.4 million of purchases offset by paydowns, called securities, and maturities.

Total borrowings remained consistent with the prior quarter, reflecting only 2.7% of total funding liabilities. In relation to its funding strategy, in light of the steady buildup of its liquidity position, the Company decided to exit its $100 million hedge against the Federal Home Loan Bank ("FHLB") borrowings during the third quarter, resulting in a $684,000 loss included in non-interest expense. In addition, the outstanding borrowings associated with the hedge were paid in full in October 2020.

Stockholders' equity at September 30, 2020 increased slightly by 1.1%, or 4.3% annualized, as compared to the prior quarter. Despite the repurchase of 1.5 million shares that was executed over the first half of 2020, stockholders' equity increased by 0.4% when compared to the year ago period, reflecting strong earnings retention and an increase in accumulated other comprehensive income of $22.4 million, offsetting the $95.1 million impact of the stock repurchases. Book value per share increased by $0.52, or 1.0%, to $51.27 during the third quarter as compared to the prior quarter. The Company's ratio of common equity to assets of 12.83% decreased by 1 basis point from the prior quarter and decreased by 175 basis points from the same period a year ago. The Company's tangible book value per share at September 30, 2020 rose by $0.58, or 1.7%, from the prior quarter to $35.17, representing an increase of 5.4% from the year ago period. The Company's ratio of tangible common equity to tangible assets of 9.17% at September 30, 2020 is 5 basis points higher than the prior quarter and 125 basis points below the year ago period, largely attributable to the increase in the Company's balance sheet and stock repurchase activity.

NET INTEREST INCOME

Net interest income for the third quarter remained relatively flat at $90.9 million compared to $91.1 million for the prior quarter, as increases in earning assets were offset by margin compression. The 2020 third quarter net interest margin of 3.13% represents a reduction of 12 basis points from the prior quarter. The table below illustrates the changes within the net interest margin for the third quarter:

Please refer to Appendix C for additional details regarding the net interest margin, including a three-quarter trend of an adjusted core margin.

NONINTEREST INCOME

Noninterest income of $29.3 million for the third quarter of 2020 was $1.2 million, or 4.1%, higher than the prior quarter. Significant changes in noninterest income for the third quarter compared to the prior quarter included the following:

• Deposit account fees increased by $599,000, or 21.2%, primarily driven by an increase in overdraft fees.
• Interchange and ATM fees decreased by $2.2 million, or 41.6%, reflecting the impact of the Durbin Amendment, which the Company became subject to effective July 1, 2020 as a result of crossing the $10 billion asset threshold, offset by increased activity compared to the prior quarter.
• Investment management income increased by $275,000, or 3.8%, due primarily to an increase in market valuation. Assets under administration at September 30, 2020 increased 3.3% to $4.5 billion.
• Mortgage banking income grew by $2.7 million, or 53.9%, due primarily to increased gain on sale of loans plus continued strong demand largely driven by the low rate environment.
• Although remaining at an elevated level of $2.5 million, loan level derivative income decreased by $407,000, or 14.2%.
• Other noninterest income increased by $494,000, or 14.8%, primarily attributable to increases in investment income and business and consumer credit card fee income, partially offset by reduced unrealized gains on equity securities.

NONINTEREST EXPENSE

Noninterest expense of $66.7 million for the third quarter of 2020 was relatively consistent with the prior quarter. Significant changes in noninterest expense for the third quarter compared to the prior quarter included the following:

• Salaries and employee benefits increased $1.1 million, or 3.1%, mainly due to increases in base salaries, incentive programs and retirement benefits, partially offset by decreases in payroll taxes.
• FDIC assessment increased by $531,000, as the prior quarter included a partial benefit from the allocation of small bank assessment credits, which resulted in a reduced assessment.
• During the third quarter, the Company recorded a $684,000 loss on the termination of a swap derivative contract with a notional amount of $100.0 million.
• Other noninterest expense decreased by $2.4 million, or 13.3%, primarily due to decreases in equity compensation related to director expenses incurred during the prior quarter, along with decreases in prepayment fees on borrowings, retail branch traffic control and consultant fees.

The Company generated a return on average assets and a return on average common equity of 1.07% and 8.21%, respectively, for the third quarter of 2020, as compared to 0.79% and 5.97%, respectively, for the prior quarter. On an operating basis, return on average assets and return on average common equity were 1.08% and 8.32%, respectively, for the third quarter.

ASSET QUALITY

During the third quarter, the Company recorded total net charge-offs of $4.1 million, or 0.17% of average loans on an annualized basis, the majority of which were associated with a large relationship within the hotel industry. In addition, nonperforming loans increased to $98.0 million, or 1.04% of total loans at September 30, 2020 as compared to the prior quarter level of $48.8 million, or 0.52% of total loans at June 30, 2020. The increase in nonperforming loans reflects primarily the migration of three large commercial relationships, all related to industries previously identified as being highly impacted by the COVID-19 pandemic. This increase also resulted in a reduction of interest income of $1.6 million for the third quarter, which was included in the net interest margin compression noted above. Despite the increase in charge-offs and nonperforming loans, the Company recorded a $7.5 million provision for credit losses, reduced significantly from the $20.0 million recorded last quarter, as the third quarter activity reflected loss exposure that was substantially reflected in the June 30, 2020 credit reserve assumptions. The allowance for credit losses on loans was $115.6 million at September 30, 2020, or 1.23% of total loans, as compared to $112.2 million at June 30, 2020, or 1.20% of total loans. Please refer to Appendix E for information regarding loan exposures within industries deemed highly impacted.

As a result of the COVID-19 pandemic, many loans have had terms modified. Total loans subject to deferral decreased by $590.1 million for the third quarter, to $583.8 million, or 6.2% of total loans, at September 30, 2020. The majority of these loans that have been granted deferrals continue to be characterized as current loans. Delinquency as a percentage of total loans was 0.31%, representing an increase of seven basis points from the prior quarter. Please refer to Appendix F for additional details regarding loans whose terms have been modified as a result of COVID-19.

CONFERENCE CALL INFORMATION

Christopher Oddleifson, Chief Executive Officer, Robert Cozzone, Chief Operating Officer, Mark Ruggiero, Chief Financial Officer, and Gerard Nadeau, President and Chief Commercial Banking Officer will host a conference call to discuss third quarter earnings at 10:00 a.m. Eastern Time on Friday, October 23, 2020. Internet access to the call is available on the Company’s website at www.RocklandTrust.com or via telephonic access by dial-in at 1-888-336-7153 reference: INDB. A replay of the call will be available by calling 1-877-344-7529, Replay Conference Number: 10146947 and will be available through November 6, 2020. Additionally, a webcast replay will be available until October 23, 2021.

ABOUT INDEPENDENT BANK CORP.

Independent Bank Corp. (Nasdaq Global Select Market: INDB) is the holding company for Rockland Trust Company, a full-service commercial bank headquartered in Massachusetts. Rockland Trust was named to The Boston Globe’s “Top Places to Work” 2019 list, an honor earned for the 11th consecutive year. In addition to this recognition, Rockland Trust was ranked the #1 Bank in Massachusetts, according to Forbes 2020 World’s Best Banks list. Rockland Trust is deeply committed to the communities it serves as reflected in the overall “Outstanding” rating received in its most recent Community Reinvestment Act performance evaluation. Rockland Trust offers a wide range of banking, investment, and insurance services. The Bank serves businesses and individuals through approximately 100 retail branches, commercial and residential lending centers, and investment management offices in eastern Massachusetts, including Greater Boston, the South Shore, the Cape, and Islands, as well as in Worcester County and Rhode Island. Rockland Trust also offers a full suite of mobile, online, and telephone banking services. Rockland Trust is an FDIC member and an Equal Housing Lender. To find out why Rockland Trust is the bank “Where Each Relationship Matters®,” please visit RocklandTrust.com.

This press release contains certain “forward-looking statements” with respect to the financial condition, results of operations and business of the Company. These statements may be identified by such forward-looking terminology as “expect,” “achieve,” “plan,” “believe,” “future,” “positioned,” “continued,” “will,” “would,” “potential,” or similar statements or variations of such terms. Actual results may differ from those contemplated by these forward-looking statements.

Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, but are not limited to:

• further 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, including future weakening caused by the COVID-19 pandemic;
• the length and extent of economic contraction as a result of the COVID-19 pandemic;
• unanticipated loan delinquencies, loss of collateral, decreased service revenues, and other potential negative effects on our business caused by severe weather, pandemics or other external events;
• adverse changes or volatility in the local real estate market;
• adverse changes in asset quality and any unanticipated credit deterioration in our loan portfolio including those related to one or more large commercial relationships;
• 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;
• additional regulatory oversight and related compliance costs, including the additional costs associated with the Company's increase in assets to over $10 billion;
• 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;
• changes in market interest rates for interest earning assets and/or interest bearing liabilities and changes related to the phase-out of LIBOR;
• increased competition in the Company’s market areas;
• adverse weather, changes in climate, natural disasters, the emergence of widespread health emergencies or pandemics, including the magnitude and duration of the COVID-19 pandemic, other public health crises or man-made events could negatively affect our local economies or disrupt our operations, which would have an adverse effect on our business or results of operations;
• a deterioration in the conditions of the securities markets;
• a deterioration of the credit rating for U.S. long-term sovereign debt;
• inability to adapt to changes in information technology, including changes to industry accepted delivery models driven by a migration to the internet as a means of service delivery;
• 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 laws and regulations regarding the financial services industry;
• changes in laws and regulations (including laws and regulations concerning taxes, banking, securities and insurance) generally applicable to the Company’s business;
• the Company's potential judgments, claims, damages, penalties, fines and reputational damage resulting from pending or future litigation and regulatory and government actions, including as a result of our participation in and execution of government programs related to the COVID-19 pandemic;
• 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 including, but not limited to , changes to how the Company accounts for credit losses;
• cyber security attacks or intrusions that could adversely impact our businesses; and
• other unexpected material adverse changes in our operations or earnings.

Further, the foregoing factors may be exacerbated by the ultimate impact of the COVID-19 pandemic, which is unknown at this time. Statements about the COVID-19 pandemic and its potential impact on our business, financial condition, liquidity and results of operations may constitute forward-looking statements and are subject to the risk that actual results may differ, possibly materially, from what is reflected in such statements due to factors and future developments that are uncertain, unpredictable and, in many cases, beyond our control, including the scope, duration and extent of the pandemic and any resurgences, actions taken by governmental authorities in response to the pandemic and the direct and indirect impact on the Company’s employees, customers, business and third-parties with which the Company conducts business.

The Company wishes to caution readers not to place undue reliance on any forward-looking statements as the Company’s business and its forward-looking statements involve substantial known and unknown risks and uncertainties described in the Company’s Annual Report on Form 10-K and subsequent Quarterly Reports on Form 10-Q (“Risk Factors”). 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 release which modify or impact any of the forward-looking statements contained in this release will be deemed to modify or supersede such statements in this release. In addition to the information set forth in this press release, you should carefully consider the Risk Factors.

This press release contains financial information determined by methods other than in accordance with accounting principles generally accepted in the United States of America (“GAAP”). This information includes operating net income and operating earnings per share ("EPS"), operating return on average assets, operating return on average common equity, core net margin, tangible book value per share and the tangible common equity ratio.

Operating net income, operating EPS, operating return on average assets and operating return on average common equity exclude items that management believes are unrelated to its core banking business such as merger and acquisition expenses, and other items, if applicable. The Company’s management uses operating earnings and related ratios and operating EPS to measure the strength of the Company’s core banking business and to identify trends that may to some extent be obscured by such items. Management reviews its core net interest margin to determine any items that may impact the net interest margin that may be one-time in nature or not reflective of its core operating environment, such as out-sized cash balances, unique low-yielding loans originated through government programs in response to the pandemic, or significant purchase accounting adjustments. Management believes that adjusting for these items to arrive at a core margin provides additional insight into the operating environment and how management decisions impact the net interest margin. Similarly, management reviews certain loan metrics such as growth rates and allowance as a percentage of total loans, adjusted to exclude loans that are not considered part of its core portfolio, which includes loans originated in association with government sponsored and guaranteed programs in response to the pandemic, to arrive at adjusted numbers more representative of the core growth of the portfolio and core reserve to loan ratio.

Management also supplements its evaluation of financial performance with analysis of tangible book value per share (which is computed by dividing stockholders' equity less goodwill and identifiable intangible assets, or "tangible common equity", by common shares outstanding), the tangible common equity ratio (which is computed by dividing tangible common equity by "tangible assets", defined as total assets less goodwill and other intangibles). The Company has included information on tangible book value per share and the tangible common equity ratio because management believes that investors may find it useful to have access to the same analytical tools used by management. As a result of merger and acquisition activity, the Company has recognized goodwill and other intangible assets in conjunction with business combination accounting principles. Excluding the impact of goodwill and other intangibles in measuring asset and capital values for the ratios provided, along with other bank standard capital ratios, provides a framework to compare the capital adequacy of the Company to other companies in the financial services industry.

These non-GAAP measures should not be viewed as a substitute for operating results and other financial measures determined in accordance with GAAP. An item which management deems to be noncore and excludes when computing these non-GAAP measures can be of substantial importance to the Company’s results for any particular quarter or year. The Company’s non-GAAP performance measures, including operating earnings, operating EPS, operating return on average assets, operating return on average equity, tangible book value per share and the tangible common equity ratio, are not necessarily comparable to non-GAAP performance measures which may be presented by other companies.

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(1) Estimated number for September 30, 2020.
(2) See Appendix A for detailed reconciliation from GAAP to Non-GAAP ratios.