INDEPENDENT BANK CORP. The Company is a state chartered, federally registered bank holding company, incorporated in 1985. The Company is the sole stockholder ofRockland Trust , aMassachusetts trust company chartered in 1907. For a full list of corporate entities see Item 1 "Business - General."
All material intercompany balances and transactions have been eliminated in consolidation. When necessary, certain amounts in prior year financial statements have been reclassified to conform to the current year's presentation. The following should be read in conjunction with the Consolidated Financial Statements and related notes.
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 are used by management to make key decisions regarding the Company's balance sheet, liquidity, interest rate sensitivity, and capital resources and assist with identifying opportunities for improving the Company's financial position or operating results. The Company is focused on organic growth, but will also consider acquisition opportunities that are expected to provide a satisfactory financial return, including the recent acquisition ofMeridian Bancorp., Inc. ("Meridian") and its subsidiary,East Boston Savings Bank , which closed during the fourth quarter of 2021. The acquisition resulted in the net addition of twenty-seven branch locations and includes the acquisition of$4.9 billion in loans, and the assumption of$4.4 billion in deposits, and$576.1 million of borrowings, each at fair value. The acquired borrowings were paid off in full immediately subsequent to the acquisition. The Company's business has been, and continues to be impacted by the ongoing COVID-19 pandemic, however it remains committed to supporting and working with its customers as they navigate through uncertain times. While the full macroeconomic impacts of the COVID-19 pandemic have yet to be fully determined, overall conditions have begun to improve as a result of vaccine availability, leading to the re-opening of businesses and loosening of certain travel restrictions and social distancing measures. Despite the observed improvements, the future outlook with regard to the COVID-19 pandemic remains uncertain, with the possibility for resurgences of COVID-19 or other variants of the virus and other factors described under Item 1A. Risk Factors under "Risks Related to the COVID-19 Pandemic." As a result, the Company is not able to provide any assurances that the Company's earnings, asset quality, regulatory capital ratios and economic condition will not be adversely impacted on a short term or long term basis. 38 -------------------------------------------------------------------------------- Table o f Contents Interest-Earning Assets Management's asset strategy typically emphasizes loan growth, however, the mix of the Company's interest earning assets has experienced volatility in recent periods due to the unique operating environment. For 2021, the increase in interest-earning assets was driven primarily by an increase in commercial loan balances, primarily reflecting the acquisition of Meridian's$4.5 billion commercial portfolio, offset partially by a net reduction in PPP loan balances of$616.2 million during the year endedDecember 31, 2021 . The Company continued to experience elevated levels of interest earning cash, driven by significant growth in deposits during 2021, a portion of which the Company elected to deploy into investment securities resulting in net growth of the securities portfolio of$1.5 billion during the year. The following table summarizes the Company's interest-earning assets as ofDecember 31st for each year presented: [[Image Removed: indb-20211231_g6.jpg]] Management strives to be disciplined about loan pricing and considers interest rate sensitivity when generating loan assets. In addition, management takes a disciplined approach to credit underwriting, seeking to avoid undue credit risk and credit losses. 39 -------------------------------------------------------------------------------- Table o f Contents Funding and the Net Interest Margin The Company's overall sources of funding reflect strong business and retail deposit growth with a management emphasis on core deposit growth to fund loans. During 2021, the Company experienced significant growth in deposits, which increased$5.9 billion , or 53.9%, fromDecember 31, 2020 to$16.9 billion . This increase was primarily attributable to Meridian acquired deposit balances of$4.4 billion , along with robust new account opening activity. The following chart shows the sources of funding and the percentage of core deposits to total deposits as ofDecember 31st for the trailing five years:
[[Image Removed: indb-20211231_g7.jpg]]
The Company's core deposits decreased to 84.5% of total deposits atDecember 31, 2021 , in comparison to the prior year, reflective of a higher ratio of non-core time and brokered deposits acquired from Meridian. The cost of deposits at 40
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The Company's net interest margin was 3.02% for the year ended
The following table shows the net interest margin and cost of deposits trends for the trailing five year period: [[Image Removed: indb-20211231_g8.jpg]]
Noninterest Income
Non-interest income represented 20.9% of the Company's total revenue for 2021, and is primarily comprised of deposit account fees, interchange and ATM fees, investment management fees and mortgage banking income. The following chart shows the components of noninterest income over the past five years: [[Image Removed: indb-20211231_g9.jpg]] Expense Control Management seeks to take a balanced approach to noninterest expense control by monitoring ongoing operating expenses while making needed capital expenditures and prudently investing in growth initiatives. The Company's primary expenses arise fromRockland Trust's employee salaries and benefits, as well as expenses associated with buildings and equipment. Noninterest expense for the year endedDecember 31, 2021 was also inclusive of$40.8 million in merger related costs associated with the Meridian acquisition. 41
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The following chart depicts the Company's efficiency ratio on aU.S. GAAP basis (calculated by dividing noninterest expense by the sum of noninterest income and net interest income), as well as the Company's efficiency ratio on a non-GAAP operating basis, (calculated by dividing noninterest expense, excluding certain noncore items, by the sum of noninterest income, excluding certain noncore items, and net interest income) over the past five years: [[Image Removed: indb-20211231_g10.jpg]] *See "Non-GAAP Measures" below for a reconciliation toU.S. GAAP financial measures.
Capital
The Company's approach with respect to revenue and expense is designed to promote long-term earnings growth, which in turn contributes to capital growth. AtDecember 31, 2021 , the Company's tangible book value per share was$42.25 , representing an increase of 18.7% from the prior year, reflecting the immediate accretive impact of the Meridian acquisition, as well as earnings retention. The following chart shows the Company's book value and tangible book value per share over the past five years:
[[Image Removed: indb-20211231_g11.jpg]]
*See "Non-GAAP Measures" below for a reconciliation to
Cash dividends declared by the Company increased from an aggregate of
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2021 Results
Net income for 2021 was $121.0 million , or $3.47 on a diluted earnings per share
basis, as compared to $121.2 million , or $3.64 per diluted share, for the prior
year. While results for the year ended December 31, 2021 included $40.8 million
in merger related costs associated with the Meridian acquisition, they were
positively impacted by reduced levels of loan provisioning in comparison to the
prior year, as the Company recorded a total credit loss provision of $18.2
million in 2021, representing a decrease of 65.3% from $52.5 million for the
twelve months ended December 31, 2020 . The current year provision was the net
result of $50.7 million in initial allowance reserves recorded on non-purchased
credit deteriorated ("non-PCD") loans acquired from Meridian, partially offset
by a reversal of credit loss expense of $32.5 million , primarily reflecting
improvements in overall macro-economic forecast assumptions and continued strong
asset quality metrics.
Net income for 2021 and 2020 included items that are considered noncore, which
are excluded for purposes of assessing operating earnings. Net operating
earnings for 2021 were $187.6 million , or $5.38 on a diluted earnings per share
basis, an increase of 54.2% and 47.0%, respectively, when compared to net
operating earnings of $121.7 million , or $3.66 per diluted share, for the year
ended December 31, 2020 . See "Non-GAAP Measures" below for a reconciliation of
net operating earnings and diluted earnings per share to U.S. GAAP net income
and earnings per share, respectively.
2022 Outlook
During the Company's fourth quarter 2021 earnings call, the Company provided the following key expectations regarding business activity to serve as near term guidance into the year 2022: •Despite healthy loan closing expectations, loan balances for the year are expected to contract at a low single digit percentage, due primarily to reductions in the remaining PPP balances and a continued level of attrition attributable to Meridian balances, which is anticipated to offset legacy core growth in the low to mid single digit range. Upon stabilization of the acquired balances, modest net loan growth is expected, which is targeted for late 2022 and into early 2023. Additionally, any increases in line utilization would be expected to serve as a catalyst to stronger loan growth; •The outlook for deposit balances remain somewhat uncertain, with core household growth remaining a priority, while time deposit attrition and some modest level of acquired deposit balance runoff is expected in the first half of the year; •Net interest income is anticipated to include the recognition of the remaining$5.9 million in PPP fees, and may reflect quarter over quarter volatility due primarily to purchase accounting loan accretion. However, assuming no changes in interest rates from theFederal Reserve and a continued measured approach of increasing securities balances, and excluding PPP fee income and purchase accounting, management estimates the core margin to be in the 2.9 to 3.0% range for the full year; •Assuming continued expected improvement in general economic factors and no major change in overall asset quality, the provision for credit loss is expected to continue to track at levels below net charge-offs, which the Company anticipates to be well contained;
•Non-interest income is expected to be primarily impacted by the following:
•Reflecting the current rate environment and year end mortgage pipeline levels, a majority portion of closing activity is expected to be retained in the portfolio, which will drive decreases in mortgage banking income in the short term while contributing modestly to net interest income; •Wealth management income is expected to continue to reflect positive net inflows of new money plus market appreciation or depreciation impact; •Assuming that expectations overFederal Reserve interest rate increases remain high, management anticipates loan level derivative income to increase from the full year 2021 results, though likely lower than the Company's 2020 record levels; •Regarding non-interest expense, with the majority of the systems and contract terminations already completed in 2021, the Company is confident in the 45% cost savings assumptions originally announced with the Meridian deal, while increasing the legacy spending at a mid-single digit percentage rate when compared to pre-Meridian 2021 results; and, •The full year tax rate is expected to be in the 24-25% range, with a typical first quarter low point reflective of discrete equity compensation vesting benefits. 43 -------------------------------------------------------------------------------- Table o f Contents 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 credit losses, and the impact of income taxes and other noncore items shown in the table that follows. There are items that impact the Company's results that management believes are unrelated to its core banking business such as gains or losses on the sales of securities, merger and acquisition expenses, provision for credit losses on acquired portfolios, loss on extinguishment of debt, impairment, and other items, such as one-time adjustments as a result of changes in laws and regulations. Management, therefore, excludes items management considers to be noncore when computing the Company's non-GAAP operating earnings and operating EPS, noninterest income on an operating basis and efficiency ratio on an operating basis. Management believes excluding these items facilitates greater visibility into the Company's core banking business and underlying trends that may, to some extent, be obscured by inclusion of such items. Management also supplements its evaluation of financial performance with an 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) and with the Company's tangible common equity ratio (which is computed by dividing tangible common equity by tangible assets) which are non-GAAP measures. The Company has included information on these tangible ratios because management believes that investors may find it useful to have access to the same analytical tools used by management to assess performance and identify trends. The Company has recognized goodwill and other intangible assets in conjunction with merger and acquisition activities. 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, facilitates comparison of 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 financial results 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 period. The Company's non-GAAP performance measures are not necessarily comparable to similarly named non-GAAP performance measures which may be presented by other companies. The following table summarizes the impact of noncore items on net income and reconciles non-GAAP net operating earnings to net income available to common shareholders for the periods indicated: Net Income Diluted Earnings Per Share 2021 2020 2021 2020 (Dollars
in thousands, except per share data)
Net income available to common shareholders (GAAP)$ 120,992 $ 121,167 $ 3.47$ 3.64 Non-GAAP adjustments Provision for non-PCD acquired loans 50,705 - 1.45 -
Noninterest expense components
Add: loss on termination of derivatives - 684 - 0.03 Add: merger and acquisition expenses 40,840 - 1.17 - Noncore increases to income before taxes 91,545 684 2.62 0.03 Net tax benefit associated with noncore items (1) (24,899) (192) (0.71) (0.01) Noncore increases to net income$ 66,646 $
492 $ 1.91
Net operating earnings (Non-GAAP)$ 187,638 $
121,659 $ 5.38
(1)The net tax benefit associated with noncore items is determined by assessing
whether each noncore item is included or excluded from net taxable income and
applying the Company's combined marginal tax rate only to those items included
in net taxable income.
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The following table summarizes the impact of noncore items with respect to the
Company's total revenue, noninterest income as a percentage of total revenue,
and the efficiency ratio for the periods indicated:
Years Ended December 31
2021 2020 2019 2018 2017
(Dollars in thousands)
Net interest income $ 401,559 $ 367,728 $ 393,135 $ 298,165 $ 258,860 (a)
Noninterest income (GAAP) $ 105,850 $ 111,440 $ 115,294 $ 88,505 $ 82,994 (b)
Less:
Gain on sale of loans - - 951 - -
Noninterest income on an operating
basis (non-GAAP) $ 105,850 $ 111,440 $ 114,343 $ 88,505 $ 82,994 (c)
Noninterest expense (GAAP) $ 332,529 $ 273,832 $ 284,321 $ 225,969 $ 204,359 (d)
Less:
Loss on termination of derivatives - 684 - - -
Merger and acquisition expenses 40,840 - 26,433 11,168 3,393
Noninterest expense on an
operating basis (non-GAAP) $ 291,689 $ 273,148 $ 257,888 $ 214,801 $ 200,966 (e)
Total revenue (GAAP) $ 507,409 $ 479,168 $ 508,429 $ 386,670 $ 341,854 (a+b)
Total operating revenue (non-GAAP) $ 507,409 $ 479,168 $ 507,478 $ 386,670 $ 341,854 (a+c)
Ratios
Noninterest income as a % of
revenue 20.86 % 23.26 % 22.68 % 22.89 % 24.28 % (b/(a+b))
Noninterest income as a % of
revenue on an operating basis
(non-GAAP) 20.86 % 23.26 % 22.53 % 22.89 % 24.28 % (c/(a+c))
Efficiency ratio (GAAP) 65.53 % 57.15 % 55.92 % 58.44 % 59.78 % (d/(a+b))
Efficiency ratio on an operating
basis (non-GAAP) 57.49 % 57.00 % 50.82 % 55.55 % 58.79 % (e/(a+c))
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The following table summarizes the calculation of the Company's tangible common equity ratio and tangible book value per share for the periods indicated:
Years Ended December 31
2021 2020 2019 2018 2017
(Dollars in thousands, except per share data)
Tangible common equity
Stockholders' equity $ 3,018,449 $ 1,702,685
1,017,844 529,313 535,492 271,355 241,147
Tangible common equity
(Non-GAAP) 2,000,605 1,173,372 1,172,651 802,135 702,662 (b)
Tangible assets
Assets (GAAP) 20,423,405 13,204,301 11,395,165 8,851,592 8,082,029 (c)
Less: Goodwill and other
intangibles 1,017,844 529,313 535,492 271,355 241,147
Tangible assets (Non-GAAP) $ 19,405,561 $ 12,674,988 $ 10,859,673 $ 8,580,237 $ 7,840,882 (d)
Common shares 47,349,778 32,965,692 34,377,388 28,080,408 27,450,190 (e)
Common equity to assets ratio
(GAAP) 14.78 % 12.89 % 14.99 % 12.13 % 11.68 % (a/c)
Tangible common equity to
tangible assets ratio
(Non-GAAP) 10.31 % 9.26 % 10.80 % 9.35 % 8.96 % (b/d)
Book value per share (GAAP) $ 63.75 $ 51.65 $ 49.69 $ 38.23 $ 34.38 (a/e)
Tangible book value per share
(Non-GAAP) $ 42.25 $ 35.59 $ 34.11 $ 28.57 $ 25.60 (b/e)
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