Independent Bank Corp.

Good day and welcome to the Independent Bancorp Third Quarter 2024 Earnings Call Conference 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 1 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 discussions today may include references to certain non-GAAP financial measures. Information about these non-GAAP measures including reconciliation to gap 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.

Thank you. Good morning and thanks for joining us today. I'm accompanied this morning by CFO and head of consumer lending, Mark Ruggiero, I'm pleased to report that our third quarter performance felt like a bit of an inflection point with margins improving and deposits showing continued growth. This performance reflects our team's continued commitment to developing and deepening customer relationships. As we discussed last quarter, we have one large commercial real estate office loan that matures in the first quarter of 2025, which is experiencing stress. While this loan is current and continues to pay, we proactively moved it to NPA status given the uncertain outlook and lack of commitment from the sponsor. Recall this loan came over with the East Boston Savings Acquisition and has been adversely rated since close. A sizable reserve was set up in the third quarter in anticipation of its ultimate resolution, and we are actively exploring all avenues for resolution prior to maturity. Mark will have more on how this loan impacted our third quarter results. However, we believe it is a one-off situation and further demonstrates our longstanding position of addressing problem loans head-on and not kicking the can down the road. Absent the elevated provision, our quarter was strong with all the fundamentals of our franchise intact and performing well. Pre-provision net revenue ROA was 1.54% in the quarter versus 147 last quarter, and tangible book value is up 9% year over year. We remain focused on a number of key strategic priorities, all centered around protecting short-term earnings while positioning the bank for earnings growth as the overall environment improves. As we've mentioned on previous calls, we are actively managing our commercial real estate exposure with particular emphasis on office while working to create a more diversified loan portfolio. We will continue to reduce this concentration 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. At the same time, we are working to reorient the balance sheet towards more CNI. Over the last nine months, we've made steady progress towards generating solid CNI volume while reducing overall CRE balances. We will continue to focus on CNI through strategic hires in our core markets while evaluating select industry verticals. Our robust pipeline, which is up 9% linked quarter, is testament to our strength in this space. We continue to add new talent to our commercial banking team in the greater Boston market, and our value proposition and community banking model resonates. 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 third quarter, We grew deposits, grew the number of households we serve, and expanded our net interest margin. Just as important with the likelihood of additional rate cuts by the Fed, the value of our franchise will stand out. Our ability to proactively manage our most rate sensitive customers is a reflection of our high touch service model that has consistently resulted in peer leading deposit costs. We anticipate no difference in the upcoming loosening cycle. In addition to our strong deposit trends, Our wealth management business continues to be a key value driver. We grew our AUA to a record $7.2 billion in the third quarter. This offering works seamlessly with our retail and commercial colleagues to deliver a differentiated experience that resonates with our clients. The breadth of these services provides a one-stop shopping experience for our clients that includes not only investment management, but financial planning, estate planning, tax prep, insurance, and business advisory services. This full suite of products is a differentiating factor for IMG in our markets. 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. While we clearly have some legacy acquired loans we are working through, the core franchise continues to perform as it has in past cycles. As we focus on these priorities, we continue to actively assess M&A opportunities. While M&A activity does seem to be picking up a bit, we will be disciplined and poised to take advantage of opportunities that fit our historical acquisition strategy and pricing parameters. It's been a proven value driver in the past and we expect it to be one in the future. Additionally, given our level of excess capital, we routinely discuss and evaluate the economics of another stock buyback. 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 represents a high level of opportunity. we remain focused on long-term value creation. Underscoring every measure of success is a talented team of engaged, passionate, and highly talented colleagues focused on making a difference for the customers and communities we serve. That's why we're proud to be named a top place to work in Massachusetts by the Boston Globe for 15 consecutive years, a top charitable contributor by the Boston Business Journal for the last 11 years, and the number one bank in Massachusetts, according to Forbes' list of best in state banks for 2024. 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 take market share and continue to be an inquirer 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 8 filing and is available on our website in today's investor portal. Starting on slide three of the deck, 2024 third quarter gap net income was $42.9 million. And diluted EPS was $1.01, resulting in a 0.88% return on assets, a 5.75% return on average common equity, and an 8.67% return on average tangible common equity. And as Jess just described in his comments, the quarter results were heavily impacted by the outsized provision associated with one large office loan, which I'll be covering shortly. Many aspects of the bank's strong fundamentals were on display here for the quarter, including a $1.38 increase in tangible book value per share. We have always prioritized sustainable tangible capital growth, and that is evidenced by the 9% growth in tangible book value per share over the last year, despite increased provision versus our historical normal levels. Turning to slide four, we highlight a real franchise strength that we believe to be a key differentiator. As noted here, period and deposit balances increased slightly, while average deposits grew 2.2% or almost 9% annualized for the quarter. With strong growth and non-interest bearing business checking accounts, we are confident that the overall deposit composition has stabilized and is well positioned to reprice effectively with expected Fed rate cuts. As we often highlight, core households grew another 1% for the quarter, reflecting a consistent flow of net new account opening activity. These accounts then get nurtured by our high service level business model to build profitable relationships over time. As anticipated in our margin guidance last quarter, this return of deposit growth has allowed for a meaningful reduction in wholesale borrowings, leading to an overall increase in funding costs of only one basis point in the quarter. Moving to slide five, payoff activity in the construction book was the primary driver behind the reduction in commercial loan balances with total loans decreasing $40 million or 0.3% for the quarter. Despite the relatively flat loan balances, there are several positives to highlight. The approved commercial pipeline is $294 million at September 30th and reflects a 9% increase over the prior quarter approved pipeline. Yet to date, commercial close commitments exceed $1 billion, with notable increases in CNI activity that are currently being muted by persistent low levels of line utilization. And in general, with the rate environment shifting, we are starting to see some optimism in our commercial borrowers to reengage with various projects, and we are excited for growth prospects over the near term. On the consumer side, positive home equity trends and increased line utilization have driven nice growth for the quarter, while mortgage closings are up with continued shifts to more saleable activity. And as a reminder, though we have no clear prediction over future long-term rates, back in the 2019-2020 easing cycle, we saw our strength in both mortgage banking and swap offerings serve as a natural hedge against pressure on longer-term rate reductions. Shifting gears to asset quality on slide six, Jeff addressed the most significant developments behind the data reflected here. To reiterate, the quarter included the migration of a large $54.6 million office relationship from a prior acquisition to non-performing status, with higher provision levels reflecting the establishment of a $22.4 million specific reserve on that exposure. While final resolution is not very clear at the moment, the reserve reflects consideration of several different valuation data points received during the quarter. In addition, a previous $5.9 million reserve on a large CNI credit was charged off during the quarter in conjunction with the commencement of a collateral liquidation plan. We continue to closely monitor all criticized and classified loans, with total adversely rated loans actually declining during the quarter. Separate from the activity already discussed, I'll highlight some other key information on slide eight related to the office portfolio. Focusing on upcoming maturities, the $30 million syndicated loan that is set to mature in the fourth quarter was downgraded to classified due to recent tenant developments that will further pressure debt service, with negotiations still ongoing regarding the need for a multiple bank involvement consensus over extension requests. And as I just mentioned, the details surrounding the large 2025 first quarter maturity have already been addressed. In reviewing the remaining calendar year 2025 maturities, the majority are pass rated with no significant concerns currently identified. This isn't to say that we may not see future blips in credit, but all in all, we continue to feel good about the portfolio outside of the current loss reserves. Switching gears now to slide 10. We highlight the net interest margin improved as expected by four basis points in the third quarter to 3.29%, and as noted earlier, was driven primarily by the stabilization of the overall funding profile. As we think about margin expectations going forward, we recognize there is a lot of uncertainty related to assumptions over future Fed reserve cuts and the overall shape of the forward curve. As such, I would highlight the following key data points to help suggest a positive margin expansion over the longer-term horizon. First, total loan exposure net of hedges that are subject to short-term Fed Reserve cuts is approximately 20% of the portfolio. Long-term deposit betas on the way down should mirror results experienced on the way up, which would suggest an approximate 30% to 35% beta. However, the timing could be impacted to some degree by scheduled time deposit maturities. And on an annual basis, approximately 12% to 15% of the loan book is expected to generate cash flows that will be subject to repricing. Currently, those cash flows are expected to generate a positive spread over current yield of approximately 100 to 150 basis points. I will provide specific fourth quarter margin guidance here in a couple of minutes. Moving to slide 11, non-interest income increased again for the quarter, driven by strong deposit-related fees and interchange income. And in addition, total assets under administration in our wealth segment reached another record $7.2 billion as of September 30th, with overall income increasing slightly despite the elevated tax preparation fees recognized in the prior quarter. Total expenses increased slightly versus the prior quarter as expected. And included in the third quarter were a couple of outsized items worth highlighting, the first being a negative adjustment associated with the valuation of split dollar life insurance liabilities of approximately $853,000, which was essentially offset by a one-time credit received of $1.1 million related to our debit card processing agreement. And lastly, the tax rate for the quarter was 22.4%. 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 the interest rate environment in near-term credit conditions. In terms of loan and deposit growth, we anticipate low single-digit percentage increases for Q4, which would result in 2024 full-year loan growth in the low single-digit percentage range and full-year deposit growth in the low to mid single-digit percentage range. Regarding the net interest margin, inclusive of the 50 basis point cut announced in September, we anticipate the margin to contract slightly or zero to five basis points in the near term, reflecting the fact that some level of deposit repricing benefit will lag in terms of being able to fully offset the decrease in loan yields. Along those lines, each Fed cut would likely create a similar short-term drag on the margin. However, as I just noted earlier, With 30% to 35% deposit beta assumptions expected to offset net 20% repricing on the loan portfolio, future Fed rate cuts that lead to a flat or positively sloped yield curve will ultimately lead to an improved margin going forward. Regarding asset quality, we anticipate charge-off activity in the short term centered around the existing specific reserves identified on page 6 of the deck. while provision expense will be driven by any other emerging credit trends 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 Q4 totals versus Q3 levels. And for non-interest expense, we reaffirm low single-digit percentage increases for full year 2024 versus 2023, as well as for Q4 versus Q3. And lastly, the tax rate for the fourth quarter is expected to be around 22%. As is typical, we will provide full-year 2025 guidance next quarter, and we're optimistic about all the positive developments that Jeff cited that bode well for the future. With that, we'll now open it up for questions.