Independent Bank Corp.

Welcome to the Independent Bank Corp third quarter 2023 earnings conference call. All participants will be in listen-only mode. If 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 when you're touched on the 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 call over to Jeff Tengel, CEO. Please go ahead.

Thanks, Anthony, and good morning, and thanks for joining us today. I'm accompanied this morning by CFO and Head of Consumer Lending, Mark Ruggiero. Our third quarter performance was a solid one given the macro environment. It included stable deposit flows, modest margin pressure, benign credit, higher fee income, and disciplined loan growth. Mark will take you through the details in a minute, but I thought I'd offer a few observations prior to. Needless to say, there are many near-term challenges confronting the banking industry. I feel we've weathered them quite well thus far. We continue to focus on our distinct strengths and expertise. It's this operational resiliency that has served us well through the years during a variety of credit and economic cycles. Rockland Trust competes in the areas where we can bring unique value, resources, and acumen. Our goal is to achieve top quartile performance while delivering a differentiated customer experience where each relationship matters. Equally important is knowing where we cannot offer a unique client experience and steering resources elsewhere. As we manage through this unprecedented rising rate environment and the lingering issues brought on by the pandemic, we also keep an eye towards the future. Trust me, there's no grandiose strategic vision being undertaken here. We're simply looking at the best way to capitalize on our inherent strengths in a rapidly changing competitive playing field, focusing on long-term value creation. We remain committed to our time-honored, disciplined approach to building profitable relationships and executing our community banking model that has served Rockland Trust so well over its 100-plus years. In some respects, it's getting back to basics, organic growth in the absence of M&A and focusing on being efficient and effective at $20 billion in assets. While M&A has been a significant value driver in the past and will again in the future, we are not sitting around waiting for the next deal. With that in mind, we do see near-term growth opportunities to exploit our proven operating model in a variety of ways, including leveraging the Rockland Trust business model in our newer markets like the North Shore and Worcester, continued investment in technology and data analytics to deliver actionable insights for our bankers, ongoing focus on organic loan and deposit growth in our legacy markets, and opportunistically attracting high performing talent who can drive revenue. Although the M&A activity continues to be somewhat muted, we will continue to be disciplined on the M&A front when conditions improve, poised to take advantage of opportunities that fit our historical acquisition strategy and pricing parameters. To summarize, We have everything in place to deliver the results the market has been accustomed to over the years, including a talented and deep management team, ample capital, highly attractive markets, good expense management, disciplined credit underwriting, strong brand recognition, operating scale, and an energized workforce. Before turning the call over to Mark, I'd like to note the $100 million share repurchase program we just announced. In this environment, we obviously take our capital position very seriously. At the same time, we recognize that perceived industry concerns can cause our stock's valuation to reach levels that we feel warrant repurchasing stock. With that in mind, this share buyback program allows us the flexibility to create long-term value over time. And on that note, I'll turn it over to Mark.

Thanks, Jeff. I will now take us through the earnings presentation deck that was included in our 8K filing and is available on our website in today's investor portal. Starting on slide three of the deck, 2023 third quarter gap net income was $60.8 million and diluted EPS was $1.38, which reflected another quarter of solid overall business activity amidst a very challenging environment. As Jeff alluded to in his comments, we grew total loans in a disciplined manner maintained a stable funding profile while growing household accounts, generated strong fee income, experienced credit quality trends in line with expectations, maintained low efficiency ratios, and authorized a new 100 million share repurchase program. In summary, these results produced a strong 1.25% return on assets, an 8.4% return on average common equity, and a 12.8% return on average tangible common equity. In addition, tangible book value grew 72 cents per share or 1.7% in the third quarter and is up almost 8% from the prior year period. Continuing to focus on a number of topics that are certainly top of mind, slide four summarizes our deposit activity for the quarter. Although total deposits declined by 189 million or 1.2% to 15.1 billion for the quarter, Average deposits remained relatively flat quarter over quarter. Approximately $240 million of the period end decline is attributable to municipal deposits, which is typically impacted by seasonal declines in the third quarter. In addition, the remixing of deposits was modest, with total non-interest-bearing deposits comprising 32% of total deposits at quarter end, representing no real change from the prior quarter. Reflecting a cumulative 20% deposit beta, the cost of deposits increased to a well-contained 1.07% for the third quarter, highlighting the differentiating value of our overall deposit franchise. In addition, new account opening activity remained strong on both the consumer and business front, with an increase in total households for the quarter of 0.9% or 3.7% annualized. Though balance sheet growth is muted given the overall macroeconomic challenges, we firmly believe that this steady and consistent quarterly growth in households throughout 2023 provides the impetus for our long-term relationship banking model that has served us well for decades. Slide five provides updated information regarding uninsured deposit and overall liquidity information with no meaningful changes in overall risk posture quarter over quarter. Moving to slide six, we summarize key information related to our securities portfolio, including updated information regarding book and fair values on both the available for sale and health maturity portfolios. As further support for the share buyback decision, we note that the tangible capital ratio remains at a strong 9.5%, even when factoring in the HTM, unrealized loss position net of tax. Turning to slide seven, Total loans increased 0.6% or 2.4% annualized to $14.2 billion for the quarter. The increase was fueled primarily by adjustable rate residential loans, while total commercial loans experienced a slight decline within this challenging environment. Evan said that new commercial closing activity has been solid, and we remain optimistic and open for business in our markets as we continue to see market disruption drive a steady flow of new relationship opportunities across both our commercial and small business segments. And while slide eight provides an overall snapshot of the makeup of the various loan portfolios, we will take a deeper dive into overall asset quality and, in particular, an update on non-owner-occupied commercial office exposure. So, regarding office commercial real estate exposure, we recognize this remains an area of deep interest. As we have noted in many conversations over the last couple of quarters, the ultimate credit performance will likely play out over time. As such, our goal is to be transparent to the investor community around the insights we gain as we continue to monitor and manage the portfolio. Slides 9 and 10 provide various updates and risk viewpoints on a number of factors. To highlight a few, I'll start with the current status update, which is positive. the one non-performing loan within the office CRE portfolio from last quarter has been fully resolved with a $5 million charge off taken during the quarter and the remaining $9 million paid in full subsequent to quarter end. As a reminder, this loan was largely reserved for last quarter. Total criticized and classified balances within the office portfolio are currently comprised of only 11 loans and are monitored closely by an experienced credit and workout team. In addition, we continue to closely monitor and provide insight on our top 20 office exposures, which make up approximately $504 million in balances, or 48% of the entire office portfolio. Within these top 20, we note zero non-performers, $56 million in a criticized status, and $28 million is classified, with every one of these loans recently reviewed for appropriate risk rating adjustments. The bigger credit picture across the broader loan portfolio is reflected in the graphs noted on slide 10. While we certainly aren't immune from the inevitable bumps and bruises in our industry through this cycle, we remain vigilant and confident in our approach to managing credit risk, as evidenced by the decrease in total non-performing assets and contained net charge-off and provision expense results in the quarter. Turning to slide 11, as anticipated, the continued pressure on cost of deposits outpaced asset yield repricing benefit, resulting in a 3.47 percent margin for the quarter, which reflects a seven basis point drop from the prior quarter, or only five basis points when excluding non-core items. I'll include specific margin guidance here in a couple minutes. but some key items regarding the margin that are worth noting are highlighted on this slide. In summary, we will experience margin benefit resulting from general asset repricing in the higher rate environment from both loans and securities, as well as the maturities of certain one-month SOFR macro level hedges. Assuming a more stabilized rate environment in the first half of 2024, we would anticipate this benefit will outweigh the increases in overall deposit costs, which will continue to be impacted by time deposit maturities. Moving to slide 12, fee income was up nicely for the quarter as overall deposit and ATM activity remained strong, and wealth management income experienced increased insurance and retail commission income to help offset the drop from seasonal tax preparation fee, recognized in the second quarter. The quarter also reflected approximately $2.7 million of combined benefit from gains on bank-owned life insurance and loan-related fees. Turning to slide 13, total expenses increased $2.2 million, or 2.3%, when compared to the prior quarter, reflecting increased commissions, retirement benefits, and consulting expenses. Also included in the quarter was $750,000 of outsized expense related to one-time severance costs and volatile unrealized losses on a trading securities portfolio. Lastly, as summarized on slide 14, we provide an updated set of guidance focused primarily on Q4 expectations. We expect low single-digit loan growth in the fourth quarter to be funded primarily from securities runoff. we anticipate flat to modest declines in total deposit balances, reflecting our typical Q4 seasonality impact. Using the current forward curve assumptions, we expect the margin to stabilize in the 335 to 340 range during the fourth quarter. Though ongoing uncertainty challenges credit quality assumptions across all loan portfolios, we anticipate provision for loan loss will continue to be driven primarily by the near-term performance of our investment commercial real estate portfolio. Regarding fee income, we anticipate Q4 results largely in line with Q3 when excluding the non-recurring items I just referenced. And for non-interest expense, we expect relatively flat to slightly increased levels as compared to Q3. That concludes my comments and we will now open it up for questions.