Independent Bank Corp.

Good day and welcome to the Independent Bank Corp. Second Quarter 2024 Earnings Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's remarks, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Before proceeding, please note that during today's call today, 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 of 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 that this event is being recorded. I would now like to turn the conference over to Jeff Tangle, CEO. Please go ahead, sir.

Thanks, Cole, and good morning, and thanks for joining us today. I'm accompanied this morning by CFO and Head of Consumer Lending, Mark Ruggiero. Our second quarter performance continues to demonstrate the resilience of our franchise in a difficult environment and is a testament to our long-term proven operating model as a customer-focused community bank. Mark will take you through the details in a few minutes after I share some thoughts. While the current higher for longer interest rate sentiment clearly creates a challenging environment not only for Rockland Trust but for the entire industry, We continue to definitely manage this uncertain environment as we have through countless other macro challenges over the years. We remain focused on a number of key strategic priorities, all centered around protecting short-term earnings while positioning the bank for earnings growth when the overall environment improves. One of those priorities is actively managing our commercial real estate portfolio with particular emphasis on our office portfolio while working to create a more diversified loan portfolio. We are pleased to see a reduction in our CRE concentration at the end of the second quarter. We'll continue to drive this percentage down through normal amortization and the exit of transactional business. By exiting transactional business, we will free up capacity to continue to support our legacy commercial real estate relationships. We will also look to remix the balance sheet towards more CNI. While a competitive market to be sure, our robust pipeline is a testament to our strength in this space. Our relationship managers continue to get top scores in the Greenwich surveys, and we continue to actively recruit new talent in the greater Boston market. Many of these new hires come from larger banks, but are attracted to our culture and our operating philosophy. Another priority is prudently growing deposits, which has been a historical strength of ours. Mark will provide additional color in a few minutes, but in the second quarter, we grew deposits, grew the number of households we served, and maintained our net interest margin. We also grew our assets under administration to a record $6.9 billion in the second quarter. Our wealth management business continues to be a key value driver for our customers and the company as a whole. It works seamlessly with retail and commercial to deliver a differentiated experience that resonates with our clients. And underscoring all of this is our historical discipline credit underwriting and portfolio management. Rockland Trust's solid loan underwriting has consistently resulted in low loan losses through various economic cycles, and we think this environment will be no different. The risk profile is further bolstered by our strong capital position. As we focus on these priorities, we continue to actively assess M&A opportunities. While M&A activity remains somewhat muted, we will be disciplined and poised to take advantage of opportunities that fit our historical acquisition strategy and pricing parameters when conditions improve. It's been a proven value driver in the past, and we expect it to be one in the future. We've said the past couple of quarters that we didn't expect this year to be easy, and it hasn't been, but we are pleased with the trends and results noted through the first half of the year. We will continue to focus on those actions we have control over and look to capitalize on our historical strengths. There's no magic to our value proposition. We do community banking, really well and believe our current market position presents a high level of opportunity. We remain focused on that long-term value creation. 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, a deep consumer and commercial customer base, and an energized and engaged workforce. In short, I believe we are well positioned to not only navigate through the current challenging environment, but to take market share and continue to be the acquirer of choice in the Northeast. 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, 2024 second quarter GAAP net income was $51.3 million and diluted earnings per share was $1.21, resulting in a 1.07% return on assets, a 7.10% return on average common equity, and a 10.83% return on average tangible common equity. In addition, we highlight the 85 cent increase in tangible book value per share. As Jeff alluded to, the second quarter results are a reflection of the solid core banking franchise that has generated strong financial results on a consistent basis over the last two decades. Expanding a bit on some of these core drivers, we will turn to slide four, noting the strength and stability of the company's deposit base. We have consistently highlighted our core household growth over the last couple of years, and you can see that focus play out in the second quarter results, with period end balances up $366 million or 9.8% on an annualized basis, while average deposits were up $270 million or 7.4% on an annualized basis. All customer segment balances increased in the quarter, with municipal deposits being the principal driver. And while demand for rate continues to drive overall time deposit increases in the consumer segment, second quarter period end balances still reflect a very healthy overall composition, with total non-interest-bearing demand deposits comprising 28.7% of total deposits. The value of this deposit franchise is not only reflected by the strong percentage of non-interest bearing DDA, but the 100 plus year focus on core operating accounts has resulted in another large portion of deposits in less rate sensitive, smaller balance savings and interest bearing checking accounts. This total deposit composition resulted in the still relatively low overall cost of deposits of 1.65% for the quarter. up 17 basis points versus Q1. However, the deposit growth and corresponding reduction of wholesale borrowings resulted in an overall funding cost increase of only eight basis points, a key driver of the margin stabilization noted in the quarter. Moving to slide five, total loans increased $70.3 million, or 2% annualized, to $14.4 billion as of quarter end. Again, reflecting the company's strategic intent that Jeff just mentioned, total C&I balances increased approximately $22.7 million, or 5.8% on an annualized basis, while combined CRE and construction balances were essentially flat. New commercial activity was diversified across a number of industries and property types, with a net reduction in non-owner-occupied commercial real estate. An approved commercial pipeline of $269 million at June 30th represents a 10% increase versus the prior quarter and should bode well for disciplined new origination activity heading into the third quarter. In addition, the small business portfolio continues to steadily rise, and the consumer portfolios are also reflected low single-digit percentage growth in line with overall expectations, reflecting solid new origination activity in both residential and home equities. Shifting gears to asset quality, slide six provides details over a number of key asset quality metrics. To highlight a couple, total non-performing loans remained relatively consistent at $57.5 million, or 0.4% of total loans, with a notable decrease in new to non-performing activity versus the prior couple of quarters. Included on this slide, we have added some additional detail on the five largest non-performing loans. It should be noted that the current expected loss exposure on these loans has already been accounted for in either charge loss or specific reserves already reflected in the allowance. The allowance for loan loss ratio of 1.05% reflects a two basis point increase from the prior quarter. Jumping to slide eight, we highlight the key components of our non-owner occupied office portfolio, which remains in good stead as we work through the challenging environment. First, we had no new non-performing loans in this category. Regarding past due exposures, we continue to work with borrowers, and in some cases other banks were applicable, to find appropriate resolutions. Updated information in the quarter drove modest increases in the reserve allocations of these credits, as I just noted on slide six. Regarding second quarter maturities, we had approximately 36 million of loans in this segment mature during the quarter. with all loans either paid off, renewed, or extended with no negative risk migration. And lastly, in terms of the office loans set to mature over the next few quarters, we remain diligent in assessing all options to determine the best resolutions on a case-by-case basis. Moving to the multifamily portfolio and the information noted on slide 9, we continue to see pristine asset quality metrics with no non-performing assets in this portfolio. Switching gears to slide 10, we highlight the net interest margin stabilizing in the second quarter as expected, with the reported margin of 3.25% reflecting a two-basis point increase versus the prior quarter. The near-term factors of loan asset repricing, securities cash flow deployment, and hedge maturities combined for overall asset yield increases in the quarter that offset the increase in funding costs which, as I previously mentioned, saw a lower increase versus the prior quarter. Moving to slide 11, non-interest income rose nicely, driven by strong deposit-related fee income, mortgage banking, and wealth management, the latter of which saw increases in the second quarter from tax preparation fees, increased insurance commissions, as well as the increase in overall assets under administration to the record $6.9 billion as of June 30th. Total expenses were relatively flat when compared to the prior quarter, with modest increases and decreases versus the prior quarter across various components. The second quarter expense levels also benefited from an $800,000 adjustment associated with the valuation of the company's split dollar life insurance liabilities. And lastly, the tax rate of 22.7% was slightly lower than the prior quarter, which was impacted by equity award vesting activity in that quarter. In closing out my comments, I'll turn to slide 14 to provide a brief update on our forward-looking guidance, which we want to reiterate continues to reflect the level of uncertainty over near-term credit conditions. In terms of loan and deposit growth, we reiterate our full-year 2024 guidance of low single-digit percentage increases with expectations for flat to low single-digit percentage growth in the near term. Regarding the net interest margin, assuming either no Fed reserve cuts or a September 25 basis point cut, we anticipate the margin for the third quarter to be in the 325 to 330 range. As it relates to asset quality, we anticipate modest charge-off activity in the second half of the year that has already been accounted for by the specific reserve allocations, as I previously noted. with provision expense being driven by any other emerging credit trends that are not already captured in the reserve. Regarding non-interest income, we reaffirm a low single-digit percentage increase for full year 2024 versus 2023 with relatively flat third quarter totals versus Q2 levels. And for non-interest expense, we reaffirm low single-digit percentage increases for full year 2024 versus 2023 as well as for third quarter versus second quarter numbers. Lastly, the tax rate for the remainder of the year is expected to be around 23%. And that concludes my comments. We'll now open it up for questions.