Independent Bank Corp. (NASDAQ:INDB) Q4 2023 Earnings Call Transcript

Independent Bank Corp. (NASDAQ:INDB) Q4 2023 Earnings Call Transcript January 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 Fourth Quarter 2023 Earning Conference Call. All participants’ will be in a listen-only mode. [Operator Instructions] 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 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 conference over to Jeff Tengel, CEO. Please go ahead.

Jeff Tengel: Thanks, Betsy, and good morning and thank you for joining us today. I’m accompanied this morning by CFO and Head of Consumer Lending, Mark Ruggiero. Our fourth quarter and full-year performance was a solid one, all things considered. Mark will take you through the details in a few minutes. First, though, I’d just like to share some thoughts briefly. I’ve been at Rockland Trust now almost a year, and it’s been clear from my very first week here that our North Star is the connections we build with our customers, community members, and one another. What drives our colleagues is a shared vision to be the bank where each relationship matters. The resiliency and purpose that is inherent in our culture, combined with our strong balance sheet and a commitment to creating long term value, is the winning combination and secret sauce that has carried Rockland Trust through various credit and economic cycles over the last century and will carry us forward.

Thankfully, last year’s banking March Madness is in our rearview mirror, and with what appears to be a pause and possible rate cut by the Fed, the current backdrop appears to be stabilizing. While we don’t expect this year to be easy by any means, we will continue to focus on those actions we have control over and look to capitalize on our historical strengths. There’s no silver bullets 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. Our goal is to achieve top quartile financial performance while delivering a differentiated customer experience where each relationship matters. Evidence that this approach resonates with our commercial customers is our industry leading net promoter score as measured by Greenwich Associates.

In order to provide this differentiated experience, we need employees who feel a sense of purpose at work and supported in their efforts. That is why we are proud of being named a top place to work in Massachusetts by the Boston Globe for the 15th year in a row. 2024 will be about generating organic growth and expanding relationships, credit, risk management and expense control. At nearly $20 billion in assets, we believe we have the scale to invest in product capability to compete with larger institutions while delivering product and service locally. It is this high touch, high service level that differentiates us from many of our competitors. And while we may be in the early innings of managing through our commercial real estate office exposure, we will draw upon our decades of demonstrated credit and portfolio management skills to mitigate any inherent risks.

It’s difficult to paint the entire office portfolio with one brush because they all have unique characteristics. That is why we have action plans, if needed, tailored to each individual loan and relationship. 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. We recently hired a seasoned executive to manage our North Shore market, to leverage the market and branch presence we acquired from the East Boston Savings acquisition. We’ve continued to invest in technology and data analytics to deliver actionable insights for our bankers. As I’ve mentioned on previous calls, we are in the middle of upgrading our core FIS operating system to a newer version.

We are installing a new online account opening platform MANTL and we continue to leverage tools like Salesforce and nCino. Those are just a few examples of some of the projects that will enable us to deliver on our relationship promise. Ongoing focus on organic loan and deposit growth is another lever. We have a number of 2024 initiatives here to facilitate growth to include things like a bank at work program, a new inside sales team for commercial deposits and treasury management, recalibrating incentive programs to more heavily weight deposit gathering, and a focus on deposit-rich industry segments. We also expect to more fully leverage some of our industry verticals to drive growth in C&I. And finally, opportunistically attracting high performing talent who can drive revenue.

We’ve had some success in 2023 and expect our unique value proposition will resonate with talent in the market and enable us to continue that trend in 2024. While M&A activity remains somewhat muted, we will continue to 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. This pause in M& A activity has also allowed us to successfully deploy some of our excess capital via a stock buyback at what we believe were very attractive prices. The current environment has also allowed us to focus on upgrading and adding to our tech platform. I mentioned a number of examples a few minutes ago.

It has also allowed us to examine our internal processes in order to become more efficient and effective. Some examples of this strategic review, where we expect to create cost savings and efficiencies over time, are a more strategic look at our facilities management and our procurement functions. We will continue to be diligent and prudent managers of expenses while investing in talent and technology. 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 three of that deck. 2023 fourth quarter GAAP net income was $54.8 million and diluted EPS was a $1.26, with all major contributors, especially in line — essentially in line with expectations. Factoring into the EPS results, we bought back approximately 1.28 million shares during the fourth quarter at a total cost of $69 million, reflecting an average repurchase price of $53.73 per share. In summary, these results produced a strong 1.13% return on assets, a 7.51% return on average common equity, and an 11.50% return on average tangible common equity.

In addition, despite the buyback activity during the quarter, tangible book value per share grew an exceptional $1.53, or 3.6%, in the fourth quarter. I will now highlight a few key points in the additional slides provided. As noted on Slide four, total deposits declined $193 million or 1.3% to $14.87 billion for the quarter, while average deposits dropped 0.6%. Business customer cash flows drove most of the decrease as consumer and municipal balances remained fairly consistent quarter over quarter. The main deposit story has not changed much as we continue to see the impact from some product remixing, persistent competitive rate pressure and CD maturity repricing. The underlying dynamic in the current rate environment for the banking industry continues to be customer pursuit of higher yields.

Despite those headwinds, the long term stability of our deposit franchise remains intact, with total non-interest-bearing deposits comprising a healthy 30.7% at year end, in the fourth quarter cost of deposits of 1.31%, though up 24 basis points from the prior quarter, still reflects a strong cumulative deposit beta when compared to our peers. As a quick reflection back on full year 2023 results, we reaffirmed the message we shared on a number of occasions throughout this volatile period. We grew total households by 2.7% during the year, building on our already strong and established deposit base. The vast majority of balance outflows reflect usage of excess funds from still existing relationships, with no notable change or acceleration in closed accounts during the year.

We feel our loyal customer and deposit bases provide a real source of strength over both the near and long term. Jumping to Slide seven. Total loans increased $54 million, or 0.4%, to $14.3 billion for the quarter. The balance increase was driven primarily by adjustable rate residential loans, while C&I paydowns and a reduced appetite for commercial real estate drove a modest decline in total commercial balances during the quarter. The increase noted in commercial real estate is primarily driven by conversion of existing construction projects into permanent status. 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 along with an update on non-owner occupied commercial office exposure.

Moving to Slides nine and ten, which provide various updates and risk viewpoints on a number of factors, I’ll highlight a few now. First, total non-performing assets increased to $54.4 million, but still represent only 0.38% and 0.28% of total loans and assets, respectively. In terms of key drivers of non-performing assets, the remaining $9 million of outstandings from the previous office property foreclosure was paid in full, while the new to non-performing amounts are primarily driven by the migration of two commercial loans. Net charge-offs during the quarter were well contained and declined to $3.8 million or 11 basis points of loans on an annualized basis, and the provision for loan loss of $5.5 million brought the allowance to an even 1% of loans.

Within the closely monitored non-owner occupied office portfolio, there’s a couple of highlights worth noting. Total outstanding balances decreased modestly, while total criticized and classified balances remain very manageable at only 11 loans. In addition, we continue to closely monitor our top 20 office exposures, which make up approximately $516 million in balances or 49% of the office portfolio at year end. Within these top 20, we note zero non-performers, $55 million in a criticized status and only $19 million as classified. Turning to Slide 11, as anticipated, the continued pressure on cost of deposits outpaced asset yield repricing benefit, resulting in a 3.38% margin for the quarter, which reflects a 9 basis point drop from the prior quarter or 12 basis points when excluding non-core items.

While the margin results were in line with our previous quarter guidance, it is worth noting the recent emerging downward rate pressure on longer term fixed rate pricing. If this pressure remains for a prolonged period, some of the previously anticipated benefit from asset repricing would be negated and this dynamic is factored into the forward-looking guidance I’ll provide shortly. Moving to Slide 12, fee income remained strong and was fairly consistent with the prior quarter, which as a reminder, benefited from $2.7 million of non-recurring gains on bank-owned life insurance and loan related fees. In summary, deposit interchange and ATM fees remained strong and assets under administration on the wealth management side grew nicely by nearly 7% to $6.5 billion at year end, which should bode well for revenue moving forward.

Turning to Slide 13, total expenses increased $3 million, or 3% when compared to the prior quarter, and the increase was driven primarily by a onetime FDIC assessment accrual of $1.1 million and onetime charges of $657,000 related to the write-off of acquired facilities. And lastly, the tax rate for the quarter of 22.7% includes $840,000 of outsized benefit, with the largest component being the expiration and release of reserves on uncertain tax positions in conjunction with the October filing of the 2022 tax return. As we move to Slide 14 and focus on forward-looking guidance, we remain confident that we are well positioned to thrive when the environment begins to turn. Having said that, we recognize the level of uncertainty still driving near term impact on credit and funding pressures.

As such, we have provided some level of full year guidance while staying grounded in our operating assumptions to provide outlook over specific components limited to the near term. Big picture. We anticipate 2024 will bring modest loan and deposit growth versus 2023 year-end levels, with net growth likely skewed towards the second half of the year. More specifically, for the first quarter, we expect we will again experience our normal seasonal outflow of deposits, resulting in a low single digit decrease from December balances, but as I just mentioned, growth is projected for the second half of the year. Loan balances are anticipated to stay relatively flat for the first quarter as mortgage production starts to shift toward more saleable activity.

As I alluded to earlier, the shape of the curve matters and not all Fed reserve decreases are created equal. With the potential for a prolonged, even steeper inverted curve, loan and deposit pricing challenges will persist and we now expect the margin percentage to decrease and stabilize in the mid-320s range in the first-half of the year. As it relates to asset quality, we have no significant changes to our guidance regarding asset quality and provision for loan loss, which we believe will continue to be driven primarily by the near term performance of our investment commercial real estate portfolio. Regarding fee income and non-interest expense, we expect both to experience low single digit percentage increases in 2024 versus 2023 fourth quarter annualized levels, and similar to prior years.

Q1 expenses should reflect slightly higher salary and benefits expenses due primarily from increased payroll taxes. And to echo Jeff’s comments, controlling expense levels and seeking operating efficiencies are priority objectives for us. Lastly, the tax rate for 2024 is expected to be around 23% for the full year, down slightly from full year 2023 levels due in part to increased low income housing tax credit investments. That concludes my comments and we will now open it up for questions.

See also 18 High Growth Low PE Stocks and 11 High Growth Low/No Dividend Stocks to Buy.

Q&A Session

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

Mark Fitzgibbon: Hey guys, good morning and happy Friday.

Jeff Tengel: Good morning, Mark.

Mark Fitzgibbon: Mark, just to follow up on your guidance slide there. Deposits have been trending down for a while now. What gives you confidence that we’re going to see low single digit deposit growth in 2024? Is that a function of you guys sort of nudging rates up on deposits, or you feel like we’ve kind of gotten to the bottom and things are starting to normalize?

Mark Ruggiero: Yes, it’s been continuing to tick down as you suggest. It does feel like things will be stabilizing here in the very near term. When we look at the components of our deposit franchise, consumer balances actually stabilized very well in the fourth quarter and were relatively flat. And really, the decline we experienced in the fourth quarter was mostly business customers drawing on what appears to still be some level of excess liquidity. And we do see typically some year-end outflows, a lot of family owned businesses, a lot of small businesses where tax planning, tax distributions, year-end bonuses create some pressure on balances, that spills over into the first quarter as well. So I think there’s a little bit of that we’ll continue to see. But all in all, we’re growing households, we’re not seeing accounts close. So we do think we’re getting to a point here where the decline should bottom out.

Jeff Tengel: Also, if I could add, Mark, we have a number of initiatives, some of which I alluded to in my opening comments, really completely focused on gathering deposits, whether it’s modifying incentive compensation programs to skew towards deposits or inside sales groups, we have a number of initiatives focused on just that. It’s a focus of ours in 2024, to be sure.

Mark Fitzgibbon: Okay. And then I wondered if you could share with us what the spot NIM was in the month of December?

Mark Ruggiero: Yes. So December’s margin was 3.33%.

Mark Fitzgibbon: Okay. And then I think you mentioned there were two commercial loans for, I think, $26 million that migrated to non-accrual this quarter. What industry were those in? And maybe if you could just give some high level color on what the issues were.

Mark Ruggiero: Sure. Want me to take that, Jeff?

Jeff Tengel: Yes.

Mark Ruggiero: Okay. The largest was actually a C&I relationship. It’s actually a participated deal that is still in operations. It’s an ABL loan with essentially yell and iron equipment, much larger facility. That company declared bankruptcy, but is still in operations. We believe from initial appraisals that there’s some level of solid collateral protection. It’s just a matter of how those equipment sales will unfold and ultimately what sale price we would see get recognized on them. But that is actually a loan that we did do a specific impairment on and is included in our reserve. And then lastly — sorry, the second loan is actually an office loan that had matured in the fourth quarter. We did not renew that and is actually expected to go through to a sale of the note.

And we believe that sale will be at about $0.75 on the dollar. So that is the charge-off you’re seeing as well in the fourth quarter. It’s about a $2.8 million charge-off on an $11 million loan. So that net balance is one of the new to non-performers.

Mark Fitzgibbon: Okay. And I guess sort of a bigger picture question. Do you think bank M&A is sort of possible in this environment? Do we need interest rates to come down and sort of the regulatory environment to become more certain in order for you guys to consider doing an acquisition right now?

Jeff Tengel: Well, it all depends, right? It depends on how big the deal is. I’m speaking just for us. Obviously, a smaller deal, we think the regulatory environment might be a bit more accommodating versus a transaction that’s much larger, that has more integration risk and might be a bit more challenging. The numbers have gotten a little bit better. They’re moving in the right direction when we do our modeling. Not sure we’re quite there yet, but feels like we’re getting closer. So I would say net-net, as I sit here today, the possibility or the probability of the M&A environment feels better than it did three or six months ago. I don’t think it’s where it needs to be, but it’s trending in the right direction.

Mark Fitzgibbon: Thank you.

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

Steve Moss: Good morning, guys.

Jeff Tengel: Hi Steve.

Steve Moss: Just going back to the margin for a second here. Just curious, does your first half ’24, you guys mentioned you’re following the forward curve, I think, or the treasury curve, I should say. So, to me, that implies you’re not really dialing in any rate cuts in your margin guidance. Just curious, if the Fed were to cut this year, how you think that would impact the margin here?

Jeff Tengel: Yes, it’s certainly an interesting question, Steve. I mean, we would think longer term, that would certainly be beneficial to us. I think the ability to move on deposits over the long term would suggest it gives us margin stabilization and likely margin improvement going forward. I think the reality is the very short term, first quarter, second quarter, after a Fed cut, I think the challenge will be how quickly we can move on deposits. So we will have, net of our hedges, about 25% of our loans. That would reprice down on the short end of the curve. We have a number of overnight borrowings that would move as well to mitigate that. And we have purposely created most of our time deposits to be short term in nature, so that you should see maturities in repricing on the CD book benefit as well.