INDB - NASDAQ

Good day and welcome to the INDB First Quarter 2023 Earnings Call. [Operator Instructions] 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 maybe 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 Tengel, CEO. Please go ahead.

Thank you and good morning and thanks for joining us today. I am thrilled to be hosting my first earnings call as CEO of Independent Bank Corp. I am joined by CFO and Head of Consumer Lending, Mark Ruggiero. First, I’d like to give a shout out to my predecessor, Chris Oddleifson, who expertly guided Rockland Trust for the past 20 years and laid a strong foundation on which to build upon. So I have been at the helm for all of 2.5 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 upfront, 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 are 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 drawdown on excess liquidity and/or seek higher interest rates. That’s not to say we have 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 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 amid 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 pivoted quickly to prioritize safety and sound as considerations despite near-term earnings impacts. We remain steadfast in our results to weather the current uncertain environment and come out the other side stronger than ever.

Thanks, Jeff. I will now take us through the earnings presentation deck that was included in our 8-K filing and is available on our website in today’s investor portal. Slide 4 of the deck summarizes our first quarter results and key drivers. As noted, 2023 first quarter GAAP 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 and 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 5 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 a 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 long-standing 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 "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 6 where 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 proven 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 7, 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 our 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 to 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 31. 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 3.5 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 un-pledged 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 31, 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 8 and 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 pay-downs of $43.6 million, offset by unrealized gains of $22.2 million in the a vailable 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 4 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 3 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 disciplined 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 credit metric – 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 nonperforming C&I in 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 nonperforming assets, delinquencies and overall asset quality remains 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 6 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 4 basis points for the quarter. We also provide a snapshot of the cumulative beta impact on both the loan and deposit portfolios, in 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 the 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 31 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 the 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 borrowings 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.

[Operator Instructions] The first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.

Hey, guys. Good morning and happy Friday.

Hey, Mark. Happy Friday, Mark.

Mark, I saw your guidance for flat loan balances for the year. Would you also expect balance sheet footings to be flattish for the year as well?

Yes. In terms of – help me out there, Mark, what you mean. Just total assets?

Yes. Yes.

I mean we talked a little bit, it isn’t a big number, but we do have a level of cash on balance sheet today. Based on some proactive borrowings, that’s a number that we will continue to monitor as the environment plays out. But I think all in all, that won’t have too big of an impact on total footings. So I’d say period end March serves as a good proxy for total assets over the course of the year.

Okay. And then secondly, would you expect the NIM compression in the second quarter to look sort of similar to what we saw in the first quarter? Or is it a little less because you don’t have the sort of the extra liquidity to take on the way you did in the first quarter?

Yes, it’s a tough question, Mark. And to be honest, I’m sure you can appreciate it, really it’s going to depend on the overall balance of deposits as that has a direct impact on kind of our level of borrowings. So just to give you some perspective, our March spot margin was 3.7% or 3.70%. And that included only a portion of the cash that we had borrowed during the first quarter. So when you reflect that, we could keep the $300 million of cash on the balance sheet, although that has no impact on absolute levels of net interest income. That will also create a bit of a drag on the margin to the tune of about 4 or 5 basis points. So I think you’re starting at a point of 3.70%. There’ll be a little bit of a drag from the cash we’re holding on the balance sheet. And I do think you’ll see the cost of deposits continue to go up from those March levels. I just – I really can’t predict exactly where that endpoint will be. But I think it’s reasonable to suggest we will continue to tick down from that March level.

Okay. And obviously, you guys bought a lot of stock during the first quarter at an average price, I think, of $74. Is it logical then that you’re going to be even more aggressive at $58?

Yes. I think we’re probably going to hit the pause button on any stock buybacks at the moment and just kind of assess the situation as we move through the second quarter. It’s always something that’s that it’s kind of a tool in our toolbox. But at the moment, we’d like a bit more clarity and certainty about what the future rate environment looks like.

Okay. Great. And then, Jeff, now that you’ve sort of been in the driver seat for a little bit here. As you look at the various loan books and business lines that Independent has. Are there any sort of areas where you think there is an opportunity to shrink or sell pieces of the business?

Not really. I think we’re – most of the loan portfolios in the lines of business we’re in, I think we feel pretty good about and don’t really have – there is not any hotspots that we feel like are we’re taking too much risk or that the performance isn’t what we’d like. I would – if anything, I think I’d like to sort of double down on a number of – our middle market C&I business, for example, is one that I hope we can continue to make progress on. But I haven’t seen anything that gave me pause that suggests that we would exit any of the businesses.

Great. And then lastly, do you think M&A is possible in this environment? And if so, what would be sort of at the top of your wish list? Thank you.

That’s a good question. I’d like to believe that M&A is possible in this environment. It might take a bit longer to get through the regulatory process would be my guess. But that’s something that, I guess, whether it’s us or somebody else is just going to have to test and see what that process looks like today. And as I’m sure you can appreciate, and I think our M&A strategy is going to look very similar to what it was during Chris’ tenure here. It would be filling in existing markets where we’re already doing business with or in adjacent markets that would really begin to round out our franchise.

No, I would just add, Mark. I mean, the obvious is the purchase accounting noise that would be created in this environment, you really have to get comfortable that you can look through that and look at the real economics of any deal. But I think you certainly have to be appreciative of the accounting marks in this environment and understanding where there may be. As expected, initial capital dilution and likely higher earn back as a result of accounting, I always – we’re big proponents of having that internal rate of return governor to really kind of weed through that noise and make sure a deal makes sense.

Thank you.

You are welcome.

Our next question comes from Steve Moss with Raymond James. Please go ahead.

Good morning.

Good morning, Steve.

Maybe just starting with the deposits here, deposit costs. Just curious what you guys see for interest-bearing deposit pricing and kind of how are you thinking about those costs migrating higher? If you could quantify how much those costs could head higher in the upcoming quarter or two?

Yes. As I alluded to earlier, Steve, it’s a tough one to pick a number for sure. But I think from just a practical perspective, a lot of what we’re seeing is for customers that are looking for rate on the consumer side and to some degree on some of our small business side. Our CD offering has really resonated. We have a 4.25% 5-month CD. We’ve incented higher rates on the short end of the curve, obviously, in this environment, and that’s been working really well in terms of retaining balances. We also have some promotional money in our money market loyalty accounts, and we do a lot of kind of what I would call exception pricing because of the great job we’ve done in building a deposit franchise where we really have that relationship with the customer. We often have the ability to have the conversation with the customer looking for rate or looking for a type of product. And as such, we’re able to deploy a strategy where it’s much more kind of exception basis versus having to reprice broader pockets of the deposit base. So that has worked well. But as you would imagine, a lot of that pricing is up in the 4% in this environment. And again, the story we’ve been talking about is often when a customer has a competitive rate that they are seeing in our market, if we can get to a in 25 or 50 basis points of that competitive rate, our relationship will usually retain that deposit. And we don’t take that for granted. It’s not to say we can only play a defensive game here. So we’re obviously being proactive in looking at where it makes sense to continue to price up deposits. But for those at a rate-sensitive money market or a CD offering right now in the 4s is likely doing the job. I mean that’s the dynamic, Steve, that’s created the increase that you’ve seen. And as I referenced, our March cost of deposits was up to 67 basis points. So you figure that’s 7 or 8 basis points kind of over the course of that month. I think in the very near-term, that’s probably a likely projection heading into Q2, we will see kind of where we are at the end of the quarter.

Okay. And maybe just on the non-interest-bearing side, with kind of the ongoing remixing kind of how much do you – how much you ultimately think could remix here over the next couple of quarters? I realized that’s tough, but when you look at customer liquidity, how much do you think could be excess if you have any kind of sensitivities or quantifying that?

Yes. Again, it’s a tough one because typically, the first quarter, I don’t want to dismiss. We usually have some seasonality here in the first quarter. Right now, you’re seeing a lot of outflow related to tax payments. So it’s tough to really parse out what’s normal course of business versus what may be something else. But I think it’s just – it’s reasonable to suggest that. I would think it will start to level off towards the end of the quarter from the pace we’ve experienced in the first quarter, but I really don’t – not comfortable sort of predicting a number at this point.

Okay. And then maybe just in terms of – on the office disclosures here, wondering if you guys could provide any color on the underlying loan to value, debt service coverage. And maybe even how much may be maturing in the next 12 months?

Yes. The loan-to-value is – I don’t know what the number is. I think it’s pretty low. I think it’s in the like of 50% or 60%. But the problem with that calculation is a lot of those loan-to-value calculations are based on older appraisals. And so because of that, it’s not really a good measure because they are not all sort of mark-to-market, if you will. The debt service coverage, I think, is maybe a better indication of the health of the portfolio and the debt service coverage in our office book is north of 1 5. So we feel pretty good about that. And we have roughly about $400 million of the office portfolio that is going to reprice in the next couple of years, which we think is a pretty manageable number. And I think the whole office – the story around office is going to play out relatively slowly. I think it’s not going to be a tsunami just because the lease maturities are staggered, the loan maturities are staggered, companies are still determining how much space they actually want upon lease maturities. So that’s still a bit of an unknown. So there is a number of factors that are all variable and is all going to occur over 2, 3, 4 years. So because of all of that, we feel pretty good about our office portfolio.

Okay. Great. And maybe just one last one for me in terms of loan pricing, you guys mentioned pipelines have declined. Just kind of curious what you’re seeing in the market for loan rates these days?

Yes. I would say in the middle market where we’re playing, it’s still fairly aggressive. But I would also tell you, historically, we’ve been very disciplined in our pricing. And so our spreads haven’t changed all that much because they haven’t needed to because we continue to be very disciplined in that regard. So again, feel pretty good about the overall yield on our loan book and don’t think that they are going to widen out dramatically nor are they going to come in. I’m talking about the credit spread.

Right. In terms of – just in terms of some numbers there, in terms of what funded in the first quarter on the commercial side, a lot of it was around 6%, low-6s. A lot of the commitments that were booked in the first quarter that will drive fundings going forward, that has certainly gone up into the 7% range or even higher in some cases. So, we are seeing nice lift in terms of the absolute level of interest rates. As the portfolio churns, it’s just – and I think what you are hearing similar to other institutions, the level of attrition has certainly slowed down. So, it’s really less closings needed to get to flat and/or modest growth. So, although the impact may not be as big, we are seeing a nice lift in terms of overall interest rates on the commercial side. On the consumer side, it continues to go up. I would say most of our resi production has been in the high-5% range, looking to get 6%, but that’s an area we will continue to monitor closely going forward.

Okay. Great. Thank you very much for all the color. Appreciate it.

Thank you.

I can chime in and Jeff, feel free to add on. But I would say generally, no, we are not seeing pockets of stress, but we are obviously being very selective here, Chris, right, in terms of which asset classes, the types of sponsors. Again, I highlight we are a relationship bank, and we have done business in the commercial space with borrowers and sponsors over a number of projects. We know them very well and that’s probably where we will continue to see opportunity that we are comfortable with. So, it’s been still primarily driven by one to four family kind of construction, apartment condo developments. There is some level of industrial and mixed-use. Again, that with the right credit box fits our profile and we are comfortable with. But I would say if a sponsor or a borrower that we don’t have that relationship with, there is a little bit of a higher hurdle to clear, I would suggest.

Thank you.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Jeff Tengel for any closing remarks.