Independent Bank Corp.

Good morning and welcome to the INDB Independent Bank Corporation second 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 your 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 also note that this event is being recorded. I would now like to turn the conference over to Jeff Tangle, CEO. Please go ahead.

Good morning, and thanks for joining us today. I'm joined this morning by CFO and head of consumer lending, Mark Ruggiero. Our second quarter performance was a solid one, marked by healthy new loan volumes with moderating attrition, stable deposit levels, higher fee income, contained expenses, and ample liquidity and capital. While the current rate environment continues to pressure earnings in the banking industry, we are continuing to act on our longstanding strategies and are well positioned when things begin to turn. Mark will take you through the quarter, but I'd first like to offer some observations following my first full quarter as CEO. Beyond addressing the current industry dynamics, my efforts have been focused on continuing to personally engage with all of my Rockland Trust colleagues, deepening my understanding of individual business units, and sizing up additional growth opportunities for future consideration. In a nutshell, I came away even more impressed and excited about our franchise and the opportunities in front of us. Rockland Trust has a solid foundation and a number of attributes that position us for future success. We operate in markets with highly attractive demographics. that has guided our thoughtful acquisition and organic growth initiatives over the years. It's a market with household income levels and projected growth that are above national averages with multiple growth industries and a deep labor pool arising out of the many universities in the region. We have a business mix and a full suite of commercial and consumer product offerings, which meets the increasingly sophisticated needs of our client base. that is complemented by a large and scalable investment management business and an extensive retail branch network. Our footprint now extends from greater Boston west to Worcester and down through Cape Cod and the islands with number one share in key local markets while the number of households served continue to reach record levels. I've been very impressed by the caliber of both customer facing and support staff and the depth and quality of the senior manager ranks. many of whom have decades of experience at Rockland Trust. We have a passion for service excellence and have the highest net promoter score in our market, evidencing our culture where each relationship matters. We have a disciplined operating philosophy that has guided Rockland Trust over its 100 plus years. Our risk management culture is deeply embedded throughout all levels of the company. This discipline has allowed us to emphasize those businesses where we have a competitive advantage and to avoid pursuing activities where we can't add value. When you put all that together, Rockland Trust has consistently demonstrated solid profitability with an EPS compound annual growth rate of 10% over the past 10 years. We have a track record of strong performance on ROA, ROTC, efficiency ratio, credit costs, and cost of deposits. This has led to consistent growth in tangible book value per share through multiple cycles and despite multiple acquisitions. At the same time, we've been investing in our technology. We leverage best-in-class applications like Salesforce.com and Encino. We're rolling out a new online account opening application. We've invested in other customer experience-driven technologies, including applications geared towards guiding our customers through their financial journey with personalized insights, advice, and automated money management. We are continuing to use RPA to help increase our productivity in repetitive tasks. And finally, we're upgrading our core platform that will modernize and improve the front-end user experience and advance day-to-day operational efficiencies. Before turning it over to Mark, I want to publicly thank Chris Odleson, our now retired CEO, who has provided invaluable advice and insights during my onboarding. Chris has been extremely helpful in accelerating my learning curve, and he is a ready source of ongoing counsel should the need arise. And on that note, I'll turn it over to Mark.

Thank you, 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. As Jeff hit upon many of the themes noted on slide two, I will move to slide three of the deck, which summarizes our second quarter results and key drivers. 2023 second quarter gap net income grew to $62.6 million in diluted EPS of $1.42, which reflected modestly higher loan balances, stable deposit levels, competitively higher funding costs, and higher fee income. along with the full quarter benefit of our first quarter buyback activity. These results produced a 1.29% return on assets, an 8.78% return on average common equity, and a 13.54% return on tangible common equity. And despite additional other comprehensive losses, tangible book value grew 57 cents, a 1.4% in the second quarter. I will now discuss the primary drivers behind the second quarter results as highlighted on this slide. As we move to slide four, we will focus first on deposit activity which remains top of mind. Total deposits declined minimally by 24.1 million or 0.2% to 15.25 billion when compared to last quarter. While the cost of deposits increased from 59 basis points in Q1 to 85 basis points in Q2, driven primarily by a continued shift to a more normal overall funding profile, the modest balance change for the quarter reflects a meaningful stabilization of our overall deposit balances. Our longstanding focus on core relationship accounts drove a healthy 1.1% increase, or 4.4% annualized, and total households for the quarter, as we are really starting to see our award-winning customer service and market reputation really resonate with both existing and new customers amidst the market disruption in our footprint. Continuing to focus on the strength of our deposit base, slide five provides updated information regarding uninsured deposit balances, also reflecting stable levels when compared to the prior quarter. Turning now to slide six, We provide additional information regarding the company's overall liquidity position, including details around the measuring and monitoring of both on and off balance sheet metrics. The Q2 activity reflected in our interest earning cash position includes a couple of items worth highlighting. First, in response to the stabilizing deposit environment we just talked about, we reduced the amount of proactive borrowings from $300 million to $100 million during the quarter. In addition, you can see the rest of the quarterly cash activity is primarily a function of our core operating business and balance sheet changes for the quarter. Regarding our off-balance sheet borrowing capacity, we pledged additional securities during the second quarter to increase our overall borrowing capacity at the Federal Home Loan Bank of Boston, and we continue to track and monitor deposit activity to ensure appropriate risk mitigation as evidenced by our strong uninsured coverage metrics noted on this slide. Another important element of both our interest rate and capital risk management, slide seven summarizes key information related to our securities portfolio, which totaled $3 billion at quarter end, with an unrealized loss position on the AFS portfolio of 160 million, or 10.4% of the portfolio. Not included in the reported balances is another $180 million of unrealized losses on the held to maturity portfolio, or 11.1% of those balances. The average life of the entire portfolio was approximately 4.5 years, with details of expected principal repayments over the next three years included on this slide. In terms of the portfolio impact on capital, we highlight that the tangible capital ratio remains very strong at 9.4%, even when factoring in the health to maturity portfolio, unrealized losses, net of tax. Moving to slide eight, total loans increased 1.4%, or 5.5% annualized, to $14.1 billion for the quarter, driven primarily by disciplined growth in our residential real estate and overall commercial portfolios, which are also benefiting from lower attrition levels. While we remain cautious in our approach to new loan opportunities, we are optimistic over second half deal flow. Our approved commercial pipeline at quarter end sits at a healthy $239 million and is anchored in our core relationship-based lending that has served us well over many years. And on the consumer portfolios, we are prioritizing saleable or variable rate portfolio products on the residential lending side, in addition to a stable home equity pipeline. And while slide nine provides an overall snapshot of the makeup of the various loan portfolios, we will dive a bit deeper into overall asset quality and non-owner occupied commercial real estate exposure. Regarding the latter, we move to slide 10, which provides a number of details over that portfolio. As indicated, while we disclose owner-occupied and mixed-use balances in the top chart, our enhanced disclosure and credit risk monitoring is primarily focused on the approximately $1.07 billion of non-owner-occupied office portfolio. Big picture, the current quarter migration of a $14.2 million loan into non-performing is driving the majority of the additional reserve allocation provided for in the quarter, while we continue to closely monitor the remaining exposure for any further degradation. As we work through that enhanced monitoring, we remain cautious yet comforted in the current status, noting that within our top 20 largest office balances, there is zero non-performing and zero delinquent loans within that group. And noted on slide 11, the story embedded in the graphs presented here are fairly straightforward. As I mentioned, during the second quarter, we fully charged off the $23 million CNI loan that had already been fully reserved for as of last quarter, accounting for the vast majority of charge-offs in the quarter. Regarding that loan, we are still working through remediation efforts, and any possible loss recovery is unknown at this point. As I noted on the previous slide, the provision for loan loss in the quarter was driven primarily by one office CRE loan that moved to non-performing status, and all other asset quality metrics remain stable. Turn into slide 12 in the net interest margin. The full quarter of increased wholesale borrowings and higher deposit costs resulted in a 25 basis point reduction in the reported net interest margin to 3.54% for the quarter. When excluding non-core items, the core net interest margin decreased 26 basis points for the quarter. And as noted in the charts below, we now peg the cumulative data impact on both the loan and deposit portfolios at 28% and 16% respectively. Though deposit rate pressures will persist, on a positive note, the relative stability of the deposit balances experienced in the second quarter, along with asset repricing and hedge maturities benefit, should provide a path to future margin stability in the second half of the year. Noted on slide 13, fee income increased nicely in the quarter, fueled by increased wealth management fees, loan level derivative swap income, and other miscellaneous items. Another solid quarter of new money inflows in our wealth business along with market appreciation drove an overall increase in assets under administration to a record $6.3 billion on June 30th, a $159 million or 2.6% increase over the prior quarter. As further evidence of our focus on operating leverage, total expenses noted on slide 14 decreased by $3.1 million or 3.1% when compared to the prior quarter as we continue to ensure there is an appropriate balance of near-term expense discipline while not sacrificing investment in the company's future value initiatives. Lastly, as summarized on slide 15, we provide an updated set of guidance focused primarily on general trends over near-term expectations. As noted, we now expect relatively flat loan balances for the second half of the year. Though deposit balances are stabilizing, we further expect remixing of non-interest bearing deposits into term deposits, which will continue to pressure the net interest margin in the near future. Using the forward curve assumptions, we expect the margin to stabilize in the 335 to 340 range during the second half of the year, likely in the fourth quarter. Similar to the first half of the year, we expect changes in our borrowings levels will primarily be a direct reflection of loan and deposit changes. With the level of uncertainty still impacting all loan portfolios, we anticipate provision for loan loss will be driven primarily by the near-term performance of our investment commercial real estate portfolio and the office exposure in particular. Regarding fee income, we anticipate flat to low single-digit percentage increases when compared to Q2 results, and for non-interest expense, we also expect relatively flat to slightly increased levels as compared to Q2. That concludes my comments, and I'll now turn it back to Jeff. I'm sorry, we're actually going to take questions now.