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.

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…

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…

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.

Hey guys, good morning and happy Friday.

Good morning, Mark.

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?

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.

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.

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

Yes. So December's margin was 3.33%.

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.

Sure. Want me to take that, Jeff?

Yes.

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.

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?

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.

Thank you.

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

Good morning, guys.

Hi Steve.

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?

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. But how quickly we can move on some of our exception and rack rate deposit pricing, I think that'll still be partly driven by competitive pressures in our market. So I think that's a little bit of where there's probably some wild card as to whether you can completely negate the asset repricing down and fully offset, or whether that'll take a little bit of time to materialize.

Right, okay, that's fair. And then, Mark, you also mentioned -- excuse me -- downward pressure on new loans here, given the change of the yield curve. Just curious, where is loan pricing these days? And also just curious, you have lower construction balances here if that's also kind of driving a component of your loan yields lower going forward?

Yes, it is. Some of the products that are typically priced off the short end of the curve, like construction, we've seen declining and less opportunity there. So that's somewhat of a little bit of not a new trend, but we're seeing more of that. And my reference to the yield curve, when you look at anywhere between the three or seven year part of the curve, just from September to where we are today, on average, it's down about 50 or 60 basis points. So we'd like to think we can still get some fixed rate commercial pricing around 7% in this environment. But that is down from how we were thinking about it just a few months ago. And I think on the consumer side, similarly, home equity continues to be pretty constrained in terms of net growth because of the high rate on lines of credit. So we're not seeing much of an ability to increase there. And customers are just not drawing on some of these lines as well. So utilization rates both on home equity and the C&I business are at low points over the last year or so. So it's been a combination of things that we're putting a little bit more pressure on what we still think will be benefit of asset and loans repricing. But I think it's going to be a bit more mitigated than how we were thinking about it.

One other thing I would…

Sorry.

Sorry, Mark. I was just going to add one other thing to that, which is, as you think, longer term, as we move forward and we begin to focus a bit more on the C&I segment of our business, those typically are going to be a lot of lines of credit, which will be priced very short term, right, typically off of SOFR, and so I think kind of long term secular trend would be a greater percentage of our loan portfolio would be floating rate versus fixed rate.

Okay, that's all very helpful. And then maybe just on the credit front here, delinquencies were up 44 bps this quarter versus 22 last. Just curious what's driving that, if you have any color there.

Yes, the biggest drivers are the two new to non-performers as well. So those were performing as of last quarter. Those are now new to delinquency. And there's essentially one other office loan that is now early stage delinquency that'll be maturing here in the first quarter in 2024. We're working with that borrower to see what the resolution may be, but basically limited to three loans, the two that are non-performing and one other office.

Okay, maybe, just curious, you mentioned that office loan maturing here, you have $125 million of office loans maturing in the upcoming year. Just curious, do you expect that'll be the primary source of potential credit issues and that drives your loan loss provision as you guys referenced in the deck? Or will maybe potential office NPAs just be idiosyncratic? Just kind of any color you can give there.

I'll start, Mark, I think you hit the nail on the head. It's going to be idiosyncratic. As I said in my prepared remarks, it's difficult to paint that portfolio with one brush. Every loan has unique characteristics, whether it's location, sponsor, resources that they can bring to the party as we look at extending, or if they look to refinance elsewhere. So each one is different. We feel pretty good as we sit here today about managing through that because we are on top of all of them. But I don't think we necessarily feel like we're going to see a bunch of new non-performers out of that $125 million of maturing loans.

I concur. When you look out over the other portfolios, there's really been no uptick of any note in terms of delinquencies or early downgrade credit migration. So the rest of the portfolio continues to feel really good. And even the near term on the office side, when you look out over even just as short term as the next two quarters, it's really just a handful of larger credits that we have really good eyes and ears on and working directly with the borrowers to hopefully find good resolution plans. So it does feel very well contained.

Appreciate all the color. Thanks, guys.

Welcome.

The next question comes from Laurie Hunsicker with SRP. Please go ahead.

Yes, hi, thanks. Good morning, Jeff and Mark. Just staying on office -- of the office loan that's in an early stage delinquency, how much is that loan and is it Class A or Class B? Anything that you can share on that?

Yes, that balance is about $11 million. I believe it's a Class A, Laurie, that one -- to be fully transparent, we may see that move to non-performing in the first quarter, but again, we're working closely with the borrower on that and I think if there's any loss exposure there, it feels pretty well contained.

That's also one. We're not the agent. We participate in somebody else's deal in that.

Okay. And then of the $125 million that's maturing in '24, how much of that matures in the first quarter?

In the first quarter, it's probably a little under half. There's $34 million, $35 million comprised of just two loans and then much smaller after that. So if I had to peg a number, I don't have all the details in front of me. It's probably around somewhere in the 30% to 40% range.

Okay.

One of those we've already actually are in the process of renewing as we speak, and we think we'll resolve and have a three year extension on it at really good debt service and LTV level. So one out of those two is already in the works of being renewed and we feel good about.

Okay. And then what are the actual loan balances on the two commercial loans that came over? How big was the ABL loan? I mean, I'm thinking it's $17 million. But do you have a…

The ABL was $17.5 million and the office loan came in at $11 million, but we wrote off $2.8 million of it. So it's in NPAs at the.net, call it $8.5 million.

Got you. Okay. And then was that Class A or Class B?

The write-off?

Correct.

That's a -- the office -- yes, that was a Class B.

That was a Class B. Okay. And then I know you had $100 million in office mature in the fourth quarter. Was this $11 million or $8.5 million net loan one of the ones that hit a maturity wall? Was that what drove this in the first quarter or anything you can share on that?

Yes, it did hit maturity in the fourth quarter and we elected not to renew on that one.

Got you. Oh, yes, you did say that in your comments. Thank you. Okay, great. And then just one last question. Just going back to the deposit side here. Just thinking about sort of the mix shift change and maybe just the overall, your loans to deposits sitting at 96% or if we're backing out CDs, that's 112%. How should we think about those ceilings? How do you think about as high as you want to get there? How should we be thinking about that? Thanks.

Yes, I'll start. We're pretty close to being where we want to be. I mean, we don't have a bright line on it, but we definitely would have a very, very strong preference at having a loan to deposit ratio less than one, which is why we're very focused on growing deposits in 2024.

Great. Okay. Thanks for taking my questions. Appreciate the detail.

Sure.

[Operator Instructions] The next question comes from Chris O'Connell with KBW. Please go ahead.

Morning.

Hi Chris.

Yes, I was just hoping to hone in on some of the fee and expense guide, specifically on the fees with the 1Q number being relatively flat to the 4Q number. Other income has been pressed up over the past couple of quarters quite a bit. I know you guys noted a couple of kind of seasonal or one-time-ish factors in Q4. How do you see that settling out into the first quarter?

Yes, the total fee income. I think the strength of the total fee income will continue to be primarily on the heels of the wealth management group. We mentioned in our comments the AUA being up to $6.5 billion. That should bode very well for strong revenues heading into 2024. And we're not necessarily banking on significant increases, but we are optimistic that in this environment we're continuing to see more of the mortgage production shift to saleable. Now, overall volumes are down, but we should see some level shift back to saleable and hopefully give us a little bit of lift on mortgage banking income. Our deposit fees, we feel, are very stable. We think there's probably some pressure coming on the regulatory front, perhaps on overdraft, but I think we have already made changes and have most of that behind us. So we might see some modest decreases related to overdraft. But all in all, there's been good momentum on deposit interchange, ATM fees, etc. And then lastly, I was going to mention in some of the conversations earlier around pricing. We think this opportunity is -- this environment gives us opportunity to think hard again about swaps for some of our commercial lending and whether we can shift pricing strategies to take on a bit more swap volume and generate additional fees there. So I think there's a few levers there that bode well and have run rate for increase in the very near term, and that's what's anchored in our guidance.

Great, that's helpful. And then on the expense side, you guys mentioned the initiatives that you have going on, including the potential for some cost savings on the branch and fulfillment side. Any sense of the timing of how that could play out over the course of the year? And is those potential cost savings, is that embedded in the overall expense guide?

They're not embedded in the overall expense guide. So those would be just incremental savings that we would experience, and I think the facilities -- on the facility side, that probably would be skewed towards the back half of the year or maybe even bleed into next year. So a little bit of both. On the procurement side, I think we'll see some savings from that in 2024, but we haven't put a number on that yet.

Got it. Any sense of the potential range, even if pretty wide, as to what the magnitude of those cost savings could be once all said and done?

Yes, I don't have an estimate, Mark. I don't know if you do. We'd be speculating at this point.

Yes, I think it's fair to say it isn't at a range where it's worth highlighting at this point, but we'll give more guidance on that probably in the next quarter or two as we hopefully get to a little bit more of a clearer path on some of it.

Yes. And honestly, that's not a game changer for us, to be sure, but it's really illustrative of a whole host of things that we're looking at as we examine our expense base and as we think about the environment that we're in. So I mentioned that in my prepared remarks as an example of some of the things that we're looking at. There's a whole host of other examples I could have given you. Each one of them, in and of themselves, aren't going to move the needle, but when you add them all up, we think it all just kind of funnels back into being good expense managers.

Got it. And on the deposit side, how much of the CD portfolio, I guess, has yet to reprice? I guess start there.

Yes, the impact is becoming less and less, which is the good news moving forward. And then in Q1, we expect about $800 million to mature and reprice. But I guess the positive there is that the weighted average coupon on that pool right now is high 3s, about 3.8%. So the repricing dynamic now is not as severe as it once was. And then I believe it's another $750 million or so in Q2 that is set to mature. That is also at a high 3.8% weighted average coupon. So assuming today's rain environment stays as is, you'd see that level potentially price up anywhere up to a full percentage point. But we hope that that would be more like a 50 or 75 basis point increase over the next couple of quarters in terms of the impact from CDE pricing.

Great. That's perfect. Thanks for taking my questions.

Sure. Thank you.

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

Just one follow-up for me on the buyback here. You guys bought $600 million worth of stock, and I know you have $100 million authorized. Just curious about your thoughts on the pace here going forward and how you guys are thinking maybe about issuing a new repurchase plan.

Yes. Mark, do you want to take kind of the pace of play to date?

Sure. Yes. As you mentioned, you're spot on. There's about $30 million left under the existing plan. I think our posture hasn't changed. It's there to be opportunistic. We continue to think about executing on that plan through the lens of ensuring appropriate initial capital dilution and feel comfortable about the earn back and executing on that. So that'll serve as the framework through the first quarter. Meaning really just opportunistic on depending where the stock price is, barring all other things, staying equal. And then I think it's fair to talk about and be thinking about re-upping on a plan. Given our overall capital levels, we still feel we have really good handle on credit and stabilization of the funding. So I think as a tool for deployment of capital going forward, we haven't made any decisions on that, but I think it's fair to suggest that would be a lever we would continue to look to throughout most of 2024, again being very opportunistic over where it makes sense to execute.

Okay, appreciate that. And then one more, if I may, Mark, on the margin going back, you guys had some swap expirations in the second half of this past year. Just curious if there are any swap expirations in 2024 or 2025 that we should expect to help the margin.

Yes. In fact, we have probably on average, about $100 million matures on a quarterly basis throughout 2024. So I know for sure it's $100 million in Q1, and then it's somewhere between $50 million and $100 million in the out quarters as well. So that's a reason why we've always talked about stabilization of the margin. There's a couple of levers like that. It's the hedge maturities. It's allowing the securities portfolio to continue to run off without essentially just either paying down borrowings or holding cash at 5%. A lot of what's running off on the securities book is at weighted average coupons of about one, one and a quarter. So we're seeing good lift just from hedge maturities and securities runoff. In addition, to the loan repricing dynamic that we've been talking about. So at some point, once the deposit pressures subside, I think those three factors will be enough to offset and maintain the margin at the level we've got it to.

Okay, thank you very much. Appreciate all the color.

No problem.

The next question comes from Laurie Hunsicker from SRP. Please go ahead.

Yes, hi. Thanks. Good morning. Just one follow up, Mark. The non-interest income of $32 million. The other piece that was $7.8 million, looks outsized, looks a little bit outsized. Can you help us think about what's non-recurring in that?

Yes. We have a big piece in this quarter is our unrealized gains on equity. We have a very small equity securities portfolio that's tied to a defined benefit plan that requires mark to market accounting. So you see a little bit of volatility each quarter. If it's a loss, you'll typically see that get recognized through other non-interest expense. If it's a gain, you'll see it go through other non-interest income. That was about $700,000 this quarter. So I think your Q3 number in quarters prior to that are probably the right level for that line item.

Great. Thanks.

Okay.

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

Thank you for your continued interest in Independent Bancorp, and we will talk to you next quarter. Have a good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.