Independent Bank Corp. (NASDAQ:INDB) Q1 2024 Earnings Call Transcript

Independent Bank Corp. (NASDAQ:INDB) Q1 2024 Earnings Call Transcript April 19, 2024

Independent Bank Corp. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day, and welcome to the INDB Independent Bank First Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Should After today’s presentation, there will be an opportunity to ask questions. [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 discussions 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. Please also note that this event is being recorded. I would now like to turn the conference over to Jeff Tengel, CEO. Please go ahead.

Jeff Tengel: Thanks, Nick. Good morning, and thanks for joining us today. I’m accompanied this morning by CFO and Head of Consumer Lending, Mark Ruggiero. Our first 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 navigate this uncertain environment. We are laser-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 office portfolio, while working to create a more diversified loan portfolio. We know we have a CRE concentration, but it’s important to keep in mind that we’ve been here before. Throughout the last decade, we have made a number of acquisitions that, in some cases, created temporary CRE concentrations. Each time, we actively manage this segment while growing other parts of our business to bring us back in balance. We fully expect to do the same now. This historical context is important to note. We have the muscle memory and experienced staff to execute this same game plan. At the same time, we continue to emphasize deposit gathering and deposit pricing discipline. Our uptick in deposits at quarter end is a result of this renewed emphasis.

We believe our customer service is best-in-class and resonates with our commercial and retail customer base. It is this personal touch coupled with investments in technology that creates a winning customer experience. That is why Rockland Trust recently ranked number two in New England in JD Power’s 2024 U.S. Retail Banking Satisfaction Study. One of the several factors measured in the survey, our highest scores were in the categories of trust and people, a direct reflection of the meaningful relationships our colleagues build with those we serve. Our employees continue to be the driving force behind our success. We said last quarter that we didn’t expect this year to be easy, and it hasn’t been. But 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 long-term value creation. Another way we will create long-term value is through disciplined organic growth. We will do that by deepening relationships across all of our business lines. We have a differentiated business model where all of our lines of business work seamlessly across the enterprise. It may sound simple, but it’s been years in the making. Our retail branch colleagues work hand-in-hand with our commercial and mortgage bankers, our wealth management business, IMG, receives a majority of its new business leads from our commercial and retail colleagues. We are developing and enhancing measures and metrics to further drive this collaboration.

Gaining buy-in and successfully executing this model has earned us a competitive advantage. It is this operating model we are bringing to our new markets, Worcester and the North Shore, where we are starting to gain traction. We are also continuing to build out our commercial banking platform with an emphasis on C&I. We’ve made a number of strategic hires and expect more to come. We are very active in acquiring talent and view talent acquisition and retention as a top priority. Our business model, culture, and stability resonates with prospective employees no different than it does with prospective customers. Our commercial loan pipelines at quarter end were higher than a year ago and higher than the last quarter. I mentioned earlier that we are laser focused on our commercial real estate office exposure.

We are confident that our decades of demonstrated credit and portfolio management skills will help mitigate any inherent risks. Because each office loan has unique characteristics like lease role, maturity, geography, ownership, tenant makeup, it’s difficult to paint the entire portfolio with one brush. That’s why we have action plans tailored to each individual loan and relationship and review and discuss every large loan monthly. It is because of these unique characteristics that we believe the credit story will take time to fully play out. Although with each quarter that passes, we believe you’ll see the signs of our credit acumen and underwriting discipline mitigating this risk. 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 has 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. Finally, I would be remiss if I didn’t give a shout out to our fantastic colleagues. Their dedication and commitment to our customers, colleagues, and communities continue to amaze me. You can’t win in banking without the best people. And our JD Power recognition, our Greenwich Awards, or the myriad of other awards and recognition illustrate that our people are simply the best.

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 an acquirer of choice in the Northeast. And on that note, I’ll turn it over to Mark.

Mark Ruggiero: 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. Starting on Slide 3 of the deck, 2024 first quarter GAAP net income was $47.8 million and diluted EPS was $1.12, resulting in a 1% return on assets, a 6.63% return on average common equity, and a 10.15% return on average tangible common equity. Though expected margin compression weighed, to some degree, on overall results this quarter, we remain confident that the positive momentum in our core fundamentals position the bank well for net revenue growth in the near term. The central component of that positive momentum is reflected on Slide 4. Though average deposits declined in Q1 versus the prior quarter, which reflects our typical seasonality, we are encouraged by our consistent growth in new households over the last year and the rebound in balances in March, with period-end balances up $178 million or 4.8% annualized when compared to the prior quarter.

Municipal customer inflows drove most of the increase, while total consumer balances increased as well, driven by steady core household growth and continued time deposit demand. The deposit environment remains competitive, but the results of growing deposit balances for the first time since the fourth quarter of 2021 is a reflection of the deposit prioritization that Jeff alluded to in his comments. And we are doing so while not sacrificing our pricing discipline that has served us so well through this challenging environment. Though the continued demand for rate drove an increase in the cost of deposits to 1.48% for the quarter, our overall deposit profile positions us well for keeping deposit costs well contained in any rate scenario moving forward.

Moving to Slide 5, total loans increased $53 million or 1.5% annualized to $14.3 billion as of quarter end. The modest balance increase was driven primarily by net growth in combined commercial real estate and construction, as well as small business, while all other portfolios remained relatively flat quarter-over-quarter. New commercial real estate activity was diversified across a number of property types with no new activity in non-owner occupied office commercial real estate. Also worth noting on the heels of our efforts in 2023 to neutralize our interest rate sensitivity, we have successfully shifted the majority of our residential production to the saleable market. Pipelines across all loan portfolios remain solid, and we are definitely in the market for core relationship lending that meets our credit underwriting criteria.

Using that as a segue to provide an update on asset quality, Slide 6 provides details over a number of key asset quality metrics. To highlight a few, total non-performing loans remain relatively consistent at $56.9 million and represent 0.4% of total loans. Total non-performing assets of $57.1 million, which includes minimal other real estate owned, represents 0.3% of total assets. Notable activity for the quarter includes an $11.6 million office loan that moved to non-accrual, offset by the restoration of an $8.2 million relationship to accrual status, which contained both commercial real estate and C&I balances. With de minimis net charge-offs related to commercial real estate and only $274,000 of net charge-offs in total for the quarter, the provision of $5 million increased the allowance for loan loss ratio by 3 basis points in the quarter.

Moving to Slide 7, we have had a number of conversations with the investor community regarding our commercial real estate portfolio, and we recognize that providing additional insight into how much of that portfolio was owner-occupied has been helpful. And so, we updated the pie chart here to note total owner-occupied balances as a separate component. And in terms of a more detailed update over the non-owner-occupied office portfolio, we can move now to Slide 8. We had $41 million of loans in this segment mature in the first quarter with all loans either renewed or in the process of being renewed with no negative risk migration. The one previously mentioned loan that migrated to non-accrual was a 2023 fourth quarter maturity and potential loss exposure is appropriately captured in our Q1 provision levels.

And in terms of the minimal levels of office loans set to mature over the next few quarters, we are encouraged by the strong credit performance and risk rating assessments among that group. I echo Jeff’s earlier comments that we still expect to see some bumps in the road here, but we will continue our process of monitoring and working through the overall exposures in a very methodical manner. In terms of an update on our multifamily portfolio, which includes additional detail on Slide 9, we continue to see pristine asset quality metrics with our one notable previous quarter non-performing asset of $2.7 million paying off during the first quarter. Switching gears a bit, reflecting on pricing and net margin impact, the longer end of the curve remains stubbornly inverted and continues to pressure new pricing dynamics in this competitive environment.

As noted on Slide 10, with some level of increased loan yields more than offset by increased deposit costs, the net interest margin compressed 15 basis points to 3.23% on a reported basis in line with prior guidance. Appreciating that there is significant investor interest on understanding where and when the margin will bottom out, I would say we anchor that expectation in two major drivers. The first being the stabilization and or growth of total deposit levels and its offsetting impact on the need for higher cost wholesale funding. And secondly, the pace at which our rate-sensitive deposits move or reprice into higher rates. We believe both of those dynamics are nearing inflection points and will be reflected in the updated margin guidance I’ll touch upon shortly.

Moving to Slide 11 and noninterest items. Noninterest income reflects consistent levels with the prior quarter across all core line items with a decrease compared to the prior quarter driven mainly by lower swap fees and reduced benefit from volatile tax credit investments and equity securities valuations. I’ll provide a bit more color on our wealth business results here in a second. Before that, just touching upon total expenses, which decreased $860,000 or 0.9% when compared to the prior quarter, despite our typical payroll and occupancy-related increases in the first quarter. And this reflects a reduction in FDIC assessment expenses combined with the company’s focus on appropriate expense containment to counter the revenue challenges in this current environment.

We continue to believe this is an area that we can manage effectively, while not sacrificing investment in key strategic initiatives. Circling back to the fee income, as a quick update on our wealth management activity, we included some additional breakdown of the wealth business income on Slide 12 to provide more clarity over the quarterly results. As reflected, assets under administration grew nicely by 4% to a record $6.8 billion at quarter end, with the associated fee revenue up over 3%. Other wealth-related income is comprised primarily of retail, insurance, and other advisory services, with those components down slightly quarter-over-quarter. We continue to see solid activity of new money in this space, with recent hires contributing to an already strong sales force with a track record of consistent performance.

This is a key business for us and we believe a real source of competitive advantage versus many other comparable banks. And lastly, the tax rate of 23.6% was slightly higher than the guided 23%, due primarily to the discrete impact from equity award vesting in the current quarter. In closing out my comments, I’ll turn to Slide 14 to provide an update on our forward-looking guidance, which we want to reiterate continues to reflect a level of uncertainty over near-term credit and funding cost conditions. In terms of loan and deposit growth, we reiterate our full-year 2024 guidance of low single-digit percentage increases with expectations for relatively flat to modest growth in the near term. Regarding the net interest margin, there are still a number of moving pieces at play that make it difficult to predict specific results.

Last quarter, we highlighted the potential for net interest margin improvement in the second half of the year. One of the key conditions for that potential was resumed core funding growth, and as we noted earlier, the March results were encouraging on that front. Another obvious key component lies in the assumptions over the yield curve and its impact on pricing dynamics. With less certainty over the path of rate cuts from the Federal Reserve in 2024, a prolonged inverted yield curve will continue to pressure deposit costs in the near term, but on a positive note, to a lesser degree than prior quarters. Alternatively, we anticipate the inversion will also continue to somewhat limit the benefit of asset repricing. And lastly, we will continue to see securities payoffs and loan hedge maturities provide benefit to the margin over time.

Given all these moving pieces, we anticipate the margin for the second quarter to remain in the 3.20% to 3.25% range with expectations for modest improvement in the second half of the year. As it relates to asset quality, we have no changes to our guidance regarding asset quality and provision for loan loss, with office commercial real estate being the primary dynamic and we’ll continue to diligently work through maturities in that space. Regarding noninterest income, we expect low single digit percentage increases in Q2 versus Q1 levels, and we reaffirm a low single digit percentage increase for full year 2024 versus 2023. And similarly for noninterest expense, we anticipate low single digit percentage increases in Q2 versus Q1, as well as full-year 2024 versus 2023.

And lastly, the tax rate for the remainder of the year is expected to be around 23%. That concludes my comments and we will now open it up for questions.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.

Greg Zingone: Hey, good morning. This is Greg Zingone filling in for Mark at the moment.

Mark Ruggiero: Hey, Greg.

Greg Zingone: Hey. So I think you just said you are expecting modest improvement in the NIM in the second half of the year. How many rate cuts are you assuming in that?

Mark Ruggiero: Yes, we’re sort of following the market expectations there of minimal cuts, either one or two, and that’ll be later in the year. So in other words, we don’t expect it to have too much of an impact on 2024.

Greg Zingone: Okay. And then would you expect the tax rate to be in the 23.5% to 24% range for the remainder of the year?

Mark Ruggiero: No, I do think it’ll dip back down to around 23% for the rest of the year — right around 23%.

Greg Zingone: Okay. Then on credit, could you quickly summarize the largest credits that are part of your non-performing balance at quarter end?

Mark Ruggiero: Sure. So, within total non-performers, there’s really three larger commercial credits within our non-performing bucket. The first is a C&I relationship that’s a larger participated deal that we are not the lead in. We actually talked about that credit in a prior quarter. When it went non-accrual, we have reserve allocations within our individual evaluated loan methodology. We expect somewhere in a $4 million loss range given some of the valuations we have on the underlying collateral there. But that’s still a resolution that is to be determined, but we believe we have our loss exposure adequately reserved. The second non-performing asset is new to non-performing here in the first quarter. That’s the $11 million loan that I mentioned in my comments.

That’s another deal where we are not the lead. That’s a participated deal. That was an office loan that matured in the fourth quarter of 2023. There’s a major tenant there that’s looking to downsize its occupancy, and we’re seeing less commitment from the owner to fund tenant improvements. So right now, it looks as though a potential resolution could be through a short sale, and that may lead to about a 20% to 25% loss exposure, which was in fact included also in our Q1 provision. And then lastly, the third largest non-performer is about an $8 million office loan. That’s the loan we took a $2.5 million charge off in a prior quarter. So that loss has already been accounted for as well. So those are the three major components on the commercial side and the non-performing.

Greg Zingone: Awesome. Thank you. And then pivoting to the CD maturities, I think on Slide 10, were you expecting those to reprice that when they mature?

Mark Ruggiero: Yes. As I mentioned with less expectation for Fed cuts, I would imagine most of that will reprice up into the high four — we still have some promotional money out there at 5%. So, assuming the majority of that will move into our highest rate, I would expect on average that to reprice up into the high fours, call it 4.80%, 4.85% range.

Greg Zingone: And then last week, could you share with us any data on how that Worcester expansion is going?

Mark Ruggiero: Worcester expansion? Sorry.

Greg Zingone: Yes.

Jeff Tengel: Yes, we don’t have — we don’t break that out typically as a specific initiative, but I can tell you that we feel good about the progress we’re making. We’re growing loans and deposits in that market. And in general feel good about the progress that we’ve made. And we’re going to continue to, as I said earlier in my comments, bring our operating model to that market, continue to look for talented bankers to add to the mix. But again, feel good about the progress to date.

Greg Zingone: Awesome. Thanks so much.

Mark Ruggiero: Thank you.

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

Steve Moss: Good morning.

Mark Ruggiero: Good morning, Steve.

Jeff Tengel: Hi, Steve.

Steve Moss: Maybe just starting with the margin here, just curious, where are you at? At what rate are you adding new deposits these days? Just kind of thinking about your funding costs here and maybe where they peak out?

Mark Ruggiero: Yes, it depends. Steve, to be honest. I mean, I think the positives that we saw in late March, and I would expect to have some momentum heading into Q2, is to grow core deposits that are not rate sensitive. So, we’re starting to see some traction in our checking account activity, whether it’s non-interest bearing or some of our modestly priced savings accounts. So, I do think there’s a level to which our core lower cost deposits start to grow. But at the same time, we will absolutely continue to see demand in some of our commercial products, whether it’s our ICS product or CDs, that will continue to be high 4s, 5%. So you’re really seeing that mix of good core household operating accounts that are low cost and then those that are looking for rate again it’s continue to be in the 5% range.

Steve Moss: Okay. And then in terms of loan pricing these days with the uptick in the pipeline, just curious where are new loans and renewals coming on the books these days?

Mark Ruggiero: Yes, it’s been a challenge through the first quarter. As you can imagine, the mid-part of the curve continued to stay somewhat depressed. So in the first quarter, a lot of our fixed commercial pricing was probably in the mid to high sixes. Certainly anything priced off the short end of the curve was up around 8%. I think the positive there is that you’re starting to see the middle three to seven part of the curve move up a bit. So I would expect we should start to see our fixed rate commercial pricing back in the sevens here in the second quarter and anything tied to prime or SOFR continue to be in that 8% range.