Independent Bank Corp.

Good day and welcome to the INDB first quarter 2023 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Before proceeding, please note that during this call, we will be making forward-looking statements. Actual results may differ materially from these statements due to a number of factors, including those described in our earnings release and other SEC filings. We undertake no obligation to publicly update any such statements. In addition, some of our discussion today may include references to certain non-GAAP financial measures Information about these non-GAAP measures, including reconciliation to GAAP measures, may be found in our earnings release and other SEC filings. These SEC filings can be accessed via the investor relations section of our website. Finally, please note this event is being recorded. I would now like to turn the conference over to Jeff Tangle, CEO. Please go ahead.

Thank you and good morning and thanks for joining us today. I'm thrilled to be hosting my first earnings call as CEO of Independent Bank Corp. I'm joined by CFO and Head of Consumer Lending, Mark Ruggiero. First, I'd like to give a shout out to my predecessor, Chris Odleson, who expertly guided Rockland Trust for the past 20 years and laid a strong foundation on which to build upon. So I've been at the helm for all of two and a half months now, and at least the first month was relatively calm. Since then, the challenges in the banking industry has taken center stage. So let me get to that topic right up front, given the intense interest regarding its impact on individual banks. Mark will take you through the details, but let me just say all in all, we're faring quite well. Total deposits were down 3.8% in the quarter in line with prevailing peer trends. We do feel some of this continues an outflow experienced in prior quarters. as depositors draw down on excess liquidity and or seek higher interest rates. That's not to say we've been immune from the volatile environment, but things have been manageable. At the very outset, we armed our frontline customer-facing colleagues with coaching and support to respond to questions and calm customer concerns. We also reconfirmed our access to multiple sources of liquidity that we've tapped into and can easily further avail ourselves should the need arise. But more than anything, it's been our history of focusing on core relationships that has provided considerable stability to our deposit base. In fact, household retention has remained at historic highs and new checking account activity continues to be strong. Also, some of our deposit outflow migrated over to our investment management group as we successfully manage our relationships across business lines. For many of you that already know us well, all of this should come as no surprise. That stability, coupled with our history of conservative risk management, a balanced business model, granular and diverse customer base, and a culture where each relationship matters, leaves us well-positioned to navigate whatever challenges the external environment throws at us. Notwithstanding all of that, we are by no means complacent as this interest rate cycle is still playing out amidst much uncertainty. We remain ever vigilant to the ongoing developments with elevated levels of communication and contingency plans in place. As our company has proven at the onset of prior banking challenges, we've pivoted quickly to prioritize safety and soundness considerations despite near-term earnings impacts. We remain steadfast in our resolve to weather the current uncertain environment and come out the other side stronger than ever. Zooming out, I'd like to share a few observations of the company from my initial few months. I was impressed by the Rockland Trust franchise from afar. I'm even more impressed being on the inside. The phrase that comes to mind is that in many ways, Rockland Trust is punching above our weight class. I've spent a considerable amount of my time thus far listening and learning, reassuring our employees that I have zero interest in changing the strategic direction or business model of the company. Chris and the team built a truly special company over the past 20 years. Why would I change that? I guess it would fall under the old adage, if it's not broke, don't fix it. My job is to preserve and build upon the unique culture that makes Rockland Trust so special. We will continue down the path of disciplined growth that we've become accustomed to. In closing, I just wanted to add that in the past few months, I've had the opportunity to meet and speak to a number of folks in the investment community, including our larger shareholders. Over the years, I've always found these dialogues healthy and insightful. These recent conversations have just reinforced my conviction that we're pursuing the right strategy and operating from a position of strength. I would now like to turn the call over to Mark.

Thanks, Jeff. I will now take us through the earnings presentation deck that was included in our 8 filing and is available on our website in today's investor portal. Slide four of the deck summarizes our first quarter results and key drivers. As noted, 2023 first quarter gap net income was $61.2 million and diluted EPS was $1.36, reflecting 20.5% and 19.5% decreases respectively from prior quarter results, largely due to higher funding costs on deposits and borrowings. These results produced a 1.30 return on assets, an 8.63% return on average common equity, and a 13.30% return on tangible common equity. Also noted on this slide, we highlight some of the primary drivers behind the first quarter results, many of which we will touch upon through the rest of the deck, in addition to further insight on key risk management updates that we recognize are of importance in this challenging environment. But before moving on, I'll highlight quickly the last two bullets noting we completed the full $120 million stock buyback during the quarter, and despite this activity, strong earnings and other comprehensive income resulted in a modest increase in tangible book value from $41.12 to $41.31. Addressing those key risk areas, we will focus first on deposit activity, which is obviously top of mind for many of you. Slide five includes our typical deposit charts, reflecting changes in balances for the quarter, as well as additional details over quarterly cost of deposits. And I will highlight deposit betas in a couple of minutes on a future slide. As noted, total deposits declined $607 million, or 3.8%, when compared to the last quarter. We attribute the runoff to a combination of factors, including seasonality, FDIC insurance protection, though to a loss of degree, an extremely competitive rate environment, which on a positive note included another $78 million that moved to our wealth management team. And lastly, as Jeff alluded to, general usage of excess liquidity due to inflationary and other factors. And we believe it is important to expand upon this last factor. Focusing on the excess liquidity impact, we continue to monitor activity very closely and note that the vast majority of deposit outflows is attributable to existing accounts of existing households. In other words, in many cases, customers redeploying their money. The level of deposit outflows attributable to lost households remains very low and it's consistent with historical levels of attrition. And further highlighting our longstanding history of focusing on core relationship accounts, a highly important metric for us in Q1 is the positive 0.5% growth in households, which led to record quote unquote new to bank deposit levels attributable to new households in the quarter. Continuing to focus on the strength of our deposit base, we move to slide six. but we have also included information over emerging risk data points such as uninsured deposit balances. As noted, our March 2023 estimated uninsured deposits of $4.7 billion represent approximately 30% of total deposits. And though not insured by the FDIC, another $659 million of municipal deposits, or 4.3% of total deposits, are collateralized by the bank, providing additional protection over those amounts. This results in a relatively low 25.8% of deposits being uninsured or uncollateralized. While we take comfort in the proving historical strength of our deposit franchise, we do not take it for granted. We take great pride in our relationship banking model and continue to work with and educate colleagues, customers, and outside centers of influence to ensure any and all concerns are addressed within our suite of product offerings. Turning now to slide seven, we provide some additional information regarding the company's overall liquidity position, which as Jeff stated, is a major priority for us. In summary, we manage liquidity risk by effective measuring and monitoring of both on and off balance sheet liquidity. And though various metrics are used across the industry to monitor on balance sheet liquidity, We highlight the key drivers of the changes in our on-balance sheet cash held primarily at the Federal Reserve and its correlated impact on the borrowings. As noted here, the increase in interest-earning cash to approximately $323 million reflects a proactive decision to bolster on-balance sheet liquidity through increased borrowings as a direct response to the emerging industry risks observed in the quarter. This action, along with the previously mentioned share repurchase activity and decline in overall deposit balances, resulted in approximately $880 million of borrowings with the Federal Home Loan Bank of Boston as of March 31st. Total borrowings of $992 million represent a low 6.1% of total funding liabilities. And from an interest rate management perspective, we entered into $300 million of hedges fixing the interest rate on $300 million of borrowings at a weighted average rate of 3.68% over an average term of three and a half years. Regarding our off-balance sheet borrowing capacity, you can see here that we have borrowing availability through various channels, including primarily the Federal Home Loan Bank of Boston, the Federal Reserve, and unpledged securities that could serve as additional collateral. I will also emphasize that in direct response to the emerging industry risk, we significantly increased our asset pledging and borrowing capacity at the Federal Reserve during the quarter and continue to assess additional strategies on an ongoing basis. We are keenly focused on the tracking and monitoring of deposits and liquidity to ensure there is a comprehensive analysis of balance sheet trends and the potential impact on our liquidity and interest rate risk management. The borrowing capacity at March 31st, 2023 represents approximately 132% of our estimated uninsured deposit exposure and 153% when also excluding collateralized deposits. Continuing the focus on interest rate and capital risk management, we have included some additional information on slide eight, summarizing key information related to our securities portfolio. The reported combined AFS and HTM security portfolios as of March 31, 2023 totaled $3.1 billion. The $19.3 million decrease from the prior quarter reflects principal paydowns of $43.6 million, offset by unrealized gains of $22.2 million in the available for sale securities portfolio for the quarter. The quarter end unrealized loss position on the AFS portfolio is $146 million, or 9.3% of the portfolio. Not included in the reported balances is another $158 million of unrealized losses on the held to maturity portfolio, or 9.4% of those balances. The average life of the entire portfolio is 4.5 years, with details of expected principal payments over the next four years included on this slide. With the AFS unrealized losses already included in our reported tangible capital ratios, We highlight our strong capital position by noting our tangible capital ratio remains strong at 9.4%, even when factoring in the held to maturity portfolio losses net of tax. While there is no denying that earnings growth will be challenged in this environment, as I stated earlier, we are confident that our patient and balanced approach to managing our balance sheet over the last three years has positioned us well. to adapt to the emerging risks and continue on our path of long-term growth. The remaining slides will provide detail on all the other components of the quarter's results, the highlights of which I will summarize quickly now. Referring to slides 9 and 10, our loan activity remains solid with total loan balances relatively flat for the quarter, reflecting a cautiously opportunistic posture to providing credit in this environment. Our long-standing focus on relationship banking continues to provide solid loan opportunities that meet our discipline pricing and credit philosophy. Appreciating the level of investor interest over commercial real estate exposure, I will reiterate that commercial real estate lending has been a long-standing core competency of this bank, with credit underwriting discipline and monitoring of the portfolio that has proven to mitigate credit loss over previous cycles. Recognizing there are unique dynamics in today's environment, and in particular relative to office-related classes, we provide additional information over the composition of that portfolio. While I won't go through all the details on slide 11, the data highlights a balanced and diverse portfolio with very strong current credit metrics, a portfolio which we continue to feel is very well managed. Staying on the topic of asset quality, we move now to slide 12. Further deterioration of the outlook over the large non-performing CNI syndicated credit that we mentioned last quarter brought the provision for the quarter to $7.25 million. We have now allocated a specific reserve to cover 100% of the $23.2 million outstanding balance of this loan. Separate from this individual credit, total non-performing assets, delinquencies, and overall asset quality remain strong and consistent with the prior quarter. Turning to slide 13 and the net interest margin, due primarily to the deposit runoff pressure noted earlier, the increase in wholesale borrowings and cost of deposits resulted in a six basis point reduction in the reported net interest margin to 3.79% for the quarter. When excluding non-core items, the core net interest margin decreased four basis points for the quarter. We also provide a snapshot of the cumulative beta impact on both the loan and deposit portfolios. And at 27% and 12%, respectively, we highlight these results are right in line with the assumptions used in building out our balance sheet and longer-term asset-sensitive profile. Noted on slide 14, Fee income results were in line with expectations, with a bright spot continuing to be our wealth management offering. Though the timing of inflows and lower average fee ratios on new money impacted quarter-over-quarter revenue, total assets under administration of $6.1 billion at March 31st reflect an increase of $352 million, or 6% from the prior quarter, fueled by net new money inflows and market appreciation. Similarly, on slide 15, the expense increase of 4% was also in line with expectations, reflecting seasonal increases in payroll taxes, increased FDIC insurance expense, and approximately $2 million of one-time costs associated with CEO transition. Lastly, as summarized on slide 16, as a result of the emerging environment and significant uncertainty over macroeconomic factors, we provide a limited set of guidance focused primarily on general trends over near-term expectations. With reduced total approved pipelines compared to the prior quarter, we now expect flat overall loan balances for the second quarter. With the March spot rate cost of deposits at 67 basis points, deposit pricing and overall market competitiveness remains high. We anticipate a continued shift into higher rate deposit products and overall deposit balance pressure will persist. Similar to Q1, we expect outstanding borrowing changes will primarily be a direct result of loan and deposit changes. We anticipate the culmination of these items will likely result in some level of further net interest margin contraction. With the large non-performing C&I credit now fully reserved, We anticipate provision for loan loss to decline from the Q1 levels, barring no significant changes to the overall credit environment. And lastly, regarding non-interest items, we anticipate flat to low single-digit increase in non-interest income, despite recent changes to overdraft fees, and relatively flat expenses as compared to Q1 totals. That concludes my comments, and we will now open it up to questions.