Q1 2024 Independent Bank Corp Earnings Call
Operator: Good day, and welcome to the INDB Independent Bank First Quarter 2024 Earnings Conference Call. All participants will be in listen-only mode.
Good day and welcome to the I N D. B Independent Bank first quarter 2024 earnings conference call all participants will be in listen only mode.
Operator: Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, press star, then 1 on a touch-tone phone. To withdraw your question, press star, then 1; on a touch-tone phone, please press star, then 2.
Should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero.
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Operator: Before proceeding, please note that during this call, we will be making forward-looking statements. However, 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. 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.
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 S. E. SEC filings, we undertake no obligation to publicly update any such statements. In addition, some part.
<unk> today may include references to certain non-GAAP financial measures.
Information about these non-GAAP measures, including reconciliation to GAAP measures may.
To be found in our earnings release and other SEC filings.
Operator: 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.
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 Tango CEO. Please go ahead.
Jeffrey J. Tengel: 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.
Jeffrey J. Tengel: Thanks, Nick.
Jeffrey J. Tengel: Good morning, and thanks for joining us today.
Jeffrey J. Tengel: The company this morning by our CFO and head of consumer lending Mark Ruggiero.
Jeffrey J. Tengel: 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.
Jeffrey J. Tengel: As a customer focused community bank.
Mark J. Ruggiero: Mark will take you through the details in a few minutes after I share some thoughts.
Jeffrey J. Tengel: 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 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 Cree concentration, but it's important to keep in mind that we've been here before.
Mark J. Ruggiero: 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.
Mark J. Ruggiero: 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.
Mark J. Ruggiero: One of those priorities is actively managing our commercial real estate office portfolio.
Mark J. Ruggiero: While working to create a more diversified loan portfolio.
Mark J. Ruggiero: We know we have a free concentration, but it's important to keep in mind that we've been here before.
Jeffrey J. Tengel: Throughout the last decade, we have made a number of acquisitions that in some cases created temporary CRE concentrations. Each time, we actively managed this segment while growing other parts of our business to bring us back into balance. We fully expect to do the same now.
Mark J. Ruggiero: Throughout the last decade, we have made a number of acquisitions that in some cases created temporary Cree concentrations.
Mark J. Ruggiero: Each time, we actively manage this segment well growing other parts of our business to bring us back in balance we fully expect to do the same now.
Mark J. Ruggiero: This historical context is important to note we have the muscle memory and experienced staff to execute the same game plan.
Jeffrey J. Tengel: 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 J.D.
Mark J. Ruggiero: At the same time, we continue to emphasize deposit gathering and deposit pricing discipline.
Mark J. Ruggiero: Our uptick in deposits at quarter end as a result of this renewed emphasis.
Mark J. Ruggiero: We believe our customer service is best in class and it resonates with our commercial and retail customer base.
Mark J. Ruggiero: It is this personal touch coupled with investments in technology that creates a winning customer experience.
Mark J. Ruggiero: That is why Rockland Trust recently ranked number two in new England in J D. Power's 2020 for U S retail banking satisfaction study.
Jeffrey J. Tengel: 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.
Mark J. Ruggiero: One of the several factors measured in the survey our highest scores where in the categories of trust and people are direct reflection of the meaningful relationships. Our colleagues built with those we serve our.
Mark J. Ruggiero: Our employees continue to be the driving force behind our success.
Mark J. Ruggiero: We said last quarter that we didn't expect this year to be easy and it hasn't been.
Jeffrey J. Tengel: But we will continue to focus on those actions we have control over and look to capitalize on our historical strength. 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.
But we will continue to focus on those actions, we have control over and look to capitalize on our historical strengths.
Mark J. Ruggiero: 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.
Mark J. Ruggiero: Another way, we will create long term value is through disciplined organic growth.
Mark J. Ruggiero: We will do that by deepening relationships across all of our business lines.
Jeffrey J. Tengel: 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. In fact, 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.
Mark J. Ruggiero: We have a differentiated business model, where all of our lines of business works seamlessly across the enterprise. It may sound simple, but its been years in the making our retail branch colleagues worked hand in hand, with our commercial and mortgage bankers, our wealth management business I M. G receives a majority of its new business leads from our commercial and retail.
Mark J. Ruggiero: Colleagues.
Mark J. Ruggiero: We are developing and enhancing measures and metrics to further drive this collaboration.
Mark J. Ruggiero: Gaining by and then successfully executing this model has earned us a competitive advantage.
Mark J. Ruggiero: It is this operating model, we are bringing to our new markets. What's your in the north shore, where we are starting to gain traction.
Jeffrey J. Tengel: 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 resonate 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.
Mark J. Ruggiero: We are also continuing to build out our commercial banking platform with an emphasis on C&I.
Mark J. Ruggiero: We've made a number of strategic hires and expect more to come.
Mark J. Ruggiero: We are very active in acquiring talent and talent acquisition and retention is a top priority.
Mark J. Ruggiero: Our business model culture, and stability resonates with prospective employees no different than it does with prospective customers are.
Mark J. Ruggiero: Our commercial loan pipelines at quarter end were higher than a year ago and higher than the last quarter.
Jeffrey J. Tengel: 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 risk. Because each office loan has unique characteristics like lease role, maturity, geography, ownership, and 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.
Mark J. Ruggiero: I mentioned earlier that we are laser focused on our commercial real estate office exposure.
Mark J. Ruggiero: We are confident that our decades of demonstrated credit and portfolio management skills will help mitigate any inherent risk.
Mark J. Ruggiero: Because each office loan has unique characteristics like lease roll maturity geography ownership tenant makeup it's difficult to paint the entire portfolio with one brush.
Mark J. Ruggiero: That's why we have action plans tailored to each individual loan and relationship and review and discuss every large law monthly.
Mark J. Ruggiero: It is because of these unique characteristics that we believe the credit story will take time to fully play out.
Jeffrey J. Tengel: 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's been a proven value driver in the past, and we expect it to be one in the future. Additionally, given our level of excess capital, we routinely discuss and evaluate the economics of another stock buyback.
Mark J. Ruggiero: Although with each quarter that passes we believe you'll see the size of our credit acumen and under underwriting discipline mitigating this risk.
Mark J. Ruggiero: Yeah.
Mark J. Ruggiero: As we focus on these priorities, we continue to actively assess M&A opportunities.
Mark J. Ruggiero: Well M&A activity remained 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's been a proven value driver in the past and we expect it to be one in the future.
Mark J. Ruggiero: Additionally, given our level of excess capital, we routinely discuss and evaluate the economics of another stock buyback.
Jeffrey J. Tengel: Finally, I would be remiss if I didn't give a shout out to our fantastic colleagues, their dedication and commitment to our customers. My 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.
Mark J. Ruggiero: Finally, I would be remiss, if I didn't give a shout out to our fantastic colleagues their dedication and commitment to our customers.
Mark J. Ruggiero: Colleagues and communities continue to Amaze me you can't win in banking without the best people at our J D power recognition, our Greenwich Awards or the myriad of other awards and recognition illustrates 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.
Mark J. Ruggiero: Including a talented and deep management team ample.
Jeffrey J. Tengel: 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. Thanks, Jeff.
Ample capital highly attractive markets good expense management disciplined credit underwriting strong brand recognition.
Mark J. Ruggiero: Operating scale, a deep consumer and commercial customer base, and an energized and engaged workforce.
Mark J. Ruggiero: In short I believe we are well positioned for not only navigate through the current challenging environment, but to take market share and continue to be an acquirer of choice in the northeast.
Mark J. Ruggiero: And on that note I'll turn it over to Mark.
Mark J. Ruggiero: Thanks Jeff. I will now take us through the earnings presentation deck that was included in our 8k filing and is available on our website in today's investor portal. Starting on slide three of the deck, 2024 first quarter gap 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 positions the bank well for net The central component of that positive momentum is reflected in slide 4.
Speaker Change: 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 and today's investor portal.
Mark J. Ruggiero: Starting on slide three 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 of $6 six 3% return on average common equity and a 10.15% return on average tangible common.
Mark J. Ruggiero: Equity.
Speaker Change: So I would expect that margin compression wave 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.
Speaker Change: The central component of that positive momentum is reflected on slide four.
Mark J. Ruggiero: 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.
Speaker Change: 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 four 8% annualized when compared to the.
Speaker Change: Higher quarter.
Speaker Change: Municipal customer in Florida drove most of the increase while total consumer balances increased as well driven by steady core household growth and continued time deposit demand.
Mark J. Ruggiero: The deposit environment remains competitive, but the results of growing deposit balances for the first time since the fourth quarter of 2021 are a reflection of the deposit prioritization that Jeff alluded to in his comment. And we are doing so while not sacrificing our price and discipline that has served us so well through this challenging environment.
Speaker Change: The deposit environment remains competitive, but the result of growing deposit balances for the first time since the fourth quarter of 2021 as a reflection of the deposit prioritization that Jeff alluded to in his comments.
Speaker Change: And we are doing so while not sacrificing our pricing discipline that has served us so well through this challenging environment.
Mark J. Ruggiero: Though the continued demand for rates 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.
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 and any rate scenario moving forward.
Speaker Change: Moving to slide five total loans increased $53 million or 1.5% annualized to $14 3 billion as of quarter end.
Speaker Change: 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.
Speaker Change: Commercial real estate activity was diversified across a number of property types with no new activity in non owner occupied office commercial real estate.
Mark J. Ruggiero: 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 six provides details on 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.
Speaker Change: 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 salable market.
Speaker Change: Pipelines across all loan portfolios remained solid and we are definitely in the market for core relationship lending that meets our credit underwriting criteria.
Speaker Change: Using that as a segue to provide an update on asset quality slide six provides details over a number of key asset quality metrics to highlight a few total nonperforming loans remained relatively consistent at $56 9 million and represent 4% of total loans.
Speaker Change: Total nonperforming assets of $57 1 million, which includes minimal other real estate owned represents 3% of total assets.
Mark J. Ruggiero: Notable activity for the quarter included 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 included 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 three basis points in the quarter.
Notable activity for the quarter includes an $11 6 million dollar office loan that moved to non accrual.
Speaker Change: Offset by the restoration of an $8 2 million dollar relationship to accrual status, which contained both commercial real estate and C&I balances.
Speaker Change: With de Minimis net charge offs related to commercial real estate and only 274000 of net charge offs and total for the quarter the provision of $5 million increase the allowance for loan loss ratio by three basis points in the quarter.
Mark J. Ruggiero: 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 is owner-occupied has been helpful, 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 on the non-owner-occupied office portfolio, we can move now to slide 8.
Speaker Change: Moving to slide seven 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.
Speaker Change: And in terms of a more detailed update over the non owner occupied office portfolio. We can move now to slide eight.
Mark J. Ruggiero: 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 level. 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.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: 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.
Mark J. Ruggiero: In terms of an update on our multi-family 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 in understanding where and when the margin will bottom out, I would say we anchor that expectation in two major drivers.
Speaker Change: In terms of an update on our multifamily portfolio, which includes additional detail on slide nine we continue to see pristine asset quality metrics with our one notable previous quarter nonperforming asset of $2 7 million is paying off during the first quarter.
Speaker Change: 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 323% on a reported basis in line with prior guidance.
Speaker Change: Appreciating that there is significant investor interest on understanding where and when the margin will bottom out.
Mark J. Ruggiero: The first being the stabilization and or growth of total deposit levels and its offsetting impact on the need for higher-cost wholesale funding. 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, non-interest items.
Mark J. Ruggiero: Non-interest 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 in 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, 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.
Speaker Change: Yes.
Noninterest income reflects consistent levels with the prior quarter across all core line items, but the decrease compared to the prior quarter, driven mainly by lower swap fees and reduced benefit from volatile tax credit investments in equity securities evaluations.
Speaker Change: Provide a bit more color on our wealth business results here in a second.
Speaker Change: Before that just touching upon total expenses, which decreased 860000 or 0.9% when compared to the prior quarter. Despite our typical payroll and occupancy related increases in the first quarter and.
Speaker Change: 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.
Speaker Change: We continue to believe this is an area that we can manage effectively while not sacrificing investments in key strategic initiatives and.
Mark J. Ruggiero: We continue to believe this is an area that we can manage effectively while not sacrificing investment in key strategic initiatives. Circling back to 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 on the quarterly results. As reflected, assets under administration grew nicely by 4% to a record $6.8 billion at quarter end, with associated fee revenue up over 3%.
Speaker Change: And circling back to the fee income as a quick update on our wealth management activity. We included some additional breakdown in the wealth business income on slide 12 to provide more clarity over the quarterly results.
Speaker Change: 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%.
Speaker Change: 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 contributed 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.
Mark J. Ruggiero: 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 it is a real source of competitive advantage versus many other comparable businesses. And lastly, the tax rate of 23.6% was slightly higher than the guided 23%, due primarily to the discrete impact of equity award vesting in the current quarter.
Speaker Change: And lastly, the tax rate of 23, 6% was slightly higher than the guided 23% due primarily to the discreet impact from equity award vesting in the current quarter.
Speaker Change: In closing out my comments I will 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.
Speaker Change: 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.
Mark J. Ruggiero: 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 parts at play that make it difficult to predict specific results.
Speaker Change: Regarding the net interest margin there is 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.
Speaker Change: In other obvious key component lies in the assumptions over the yield curve and its impact on pricing dynamics.
Mark J. Ruggiero: 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.
Speaker Change: With less certainty over the path of rate cuts from the federal reserve in 2020 for 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.
Speaker Change: Alternatively, we anticipate the inversion will also continue to somewhat limit the benefit of asset repricing.
Operator: 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 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 benefits to the margin over time.
Speaker Change: And lastly, we will continue to see securities pay offs and loan hedge maturities provide benefit to the margin over time.
Speaker Change: Given all these moving pieces and 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.
Speaker Change: 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 will continue to diligently work through maturities in that space.
Speaker Change: Regarding noninterest income, we expect low single digit percentage increases in Q2 versus Q1 levels and we reaffirm our low single digit percentage increase for full year 2024 versus 2023.
Operator: 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. 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 non-interest 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.
Speaker Change: 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.
Speaker Change: And lastly, the tax rate for the remainder of the year is expected to be around 23%.
Speaker Change: That concludes my comments and we will now open it up for questions.
Speaker Change: Yeah.
Speaker Change: We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Speaker Change: If you are using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
Operator: Similarly, for non-interest 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.
Speaker Change: At this time, we will pause momentarily to assemble our roster.
Speaker Change: Yes.
Speaker Change: The first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.
Speaker Change: Hey, Good morning. This is Greg <unk> filling in for Mark at the moment.
Greg: Hey, Greg.
Greg: So I think you just said.
Operator: We will now begin the question and answer session. To ask a question, you may press star, then one, on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the key. If at any time your question has been answered and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. The first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.
Greg: You expecting modest improvement in the NIM in the second half of the year, how many rate cuts are you assuming in that.
Greg: Yeah, we're sort of following the market expectations there.
Greg: You know minimal cuts either one or two and that would be later in the year.
Greg: So in other words, we don't expect it to have too much of an impact on 2024.
Greg: Okay.
Greg: And then would you expect the tax rate need in 'twenty, two and a half of 24% range for the remainder of the year.
Speaker Change: No I do think it'll it'll dip back down to around 23% for the rest of the year.
Speaker Change: Right around 23.
Speaker Change: Okay.
Speaker Change: Then on credit could you quickly summarize the largest credits that are part of your nonperforming balance at quarter end.
Greg Zingone: Hey, good morning. This is Greg Zingone filling in for Mark at the moment. Okay, so I think you just said you're expecting a modest improvement in NIM in the second half of the year. How many rate cuts are you assuming in that?
Speaker Change: Sure. So within total non performers, there's really three larger commercial credits within our nonperforming bucket.
Mark J. Ruggiero: Yeah, we're sort of following the market expectations there of, you know, minimal cuts, either one or two, and that would be later in the year. So in other words, we don't expect it to have too much of an impact on 2024.
Speaker Change: The first is a C&I relationship that's a larger.
Speaker Change: All participated deal that we are not the lead and we actually talked about that credit in the prior quarter.
Speaker Change: When it went non accrual we have reserve allocations within our individual evaluated alone methodology.
Mark J. Ruggiero: And then would you expect the tax rate to be in the 23.5% to 24% range for the remainder of the year? No, I do think it'll...
Speaker Change: We expect somewhere.
Speaker Change: And a $4 million loss range given some of the valuations we have on the underlying collateral there, but thats still.
Mark J. Ruggiero: No, I do think it'll dip back down to around 23% for the rest of the year.
Speaker Change: A resolution that is to be determined, but we believe we have a loss exposure adequately reserved.
Mark J. Ruggiero: Then on credit, could you quickly summarize the largest credits that are part of your non-performing balance at Kodaran?
Speaker Change: The second nonperforming asset is as new to nonperforming here in the first quarter, that's the $11 million.
Mark J. Ruggiero: Sure. So, within total non-performers, there are 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.
Speaker Change: Loan that I mentioned in my comments, that's another deal where we are not the lead up to participated deal.
Speaker Change: That was an office loan that matured in the fourth quarter of 2023.
Speaker Change: Hum.
Speaker Change: The major tenant there thats looking to downsize its occupancy and we're seeing less commitment from the owner to fund tenant improvements.
Mark J. Ruggiero: 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 in the lead. That's a participated deal.
Speaker Change: 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.
Speaker Change: And then lastly, the third largest nonperformer is about an 8 million dollar office loan. That's the loan we took two and a half million dollar charge off in.
Speaker Change: In a prior quarter.
Mark J. Ruggiero: 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 percent loss exposure, which was, in fact, also included in our Q1 provision.
Speaker Change: So that loss has already been accounted for as well. So those are the three major components on the commercial side and the nonperforming.
Speaker Change: Awesome. Thank you Oren pivoting to the CD maturities I think on slide 10, what are you expecting those to replace that with immature.
Speaker Change: Yeah.
Oren: As I mentioned with with less expectation for fed cuts I would imagine most of that we'll reprice up into the high <unk> we have still.
Mark J. Ruggiero: 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-performers.
Oren: We still have some promotional money out there at 5%.
Speaker Change: Assuming the majority of that will move into our highest rate I would expect on average that to reprice up into the high fours, let's call. It 480 485 range.
Speaker Change: Okay, and then lastly.
Mark J. Ruggiero: And then pivoting to the CD maturities, I think on slide 10, were you expecting those to reprice when they mature? Yeah.
Speaker Change: Could you share with us any data on how that withdrew extension is gone.
Speaker Change: We'll start expansion side.
Speaker Change: Yes.
Speaker Change: Yeah, we don't have we don't break that out typically.
Mark J. Ruggiero: Yeah, you know, as I mentioned, with less expectation for Fed cuts, I would imagine most of that will reprice up into the high 40s, still have some promotional money out there at 5%. So, you know, assuming the majority of that will move into our highest rate, I would expect, on average, that to reprice up into the high fours, you know, call it 480, 485.
Speaker Change: As a specific initiative, but I can tell you that we we feel good about the progress, we're making we're growing loans and deposits in that market.
Speaker Change: In general feel good about about the progress that we've made.
Speaker Change: And we're going to continue to so as I said earlier in my comments.
Speaker Change: Bring our operating model to that market continue to look for talented <unk>.
Mark J. Ruggiero: And then lastly, could you share with us any data on how that Worcester extension is going?
Speaker Change: Bankers to add to the <unk>.
The mix, but again feel good about the progress to date.
Mark J. Ruggiero: Worcester Expansion. Sorry. Yeah. Yeah, we don't have, we don't break that out typically.
Speaker Change: Awesome. Thanks, so much.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Steve Moss with Raymond James. Please go ahead.
Mark J. Ruggiero: Yeah, 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, we 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.
Stephen M. Moss: Good morning.
Stephen M. Moss: Steve.
Stephen M. Moss: Yeah.
Speaker Change: Maybe just two.
Stephen M. Moss: Starting with the margin here just curious.
Stephen M. Moss: Where are you 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.
Yes.
Stephen M. Moss: It depends Steve to be honest I mean, I think the positive is 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.
Operator: Our next question comes from Steve Moth with Raymond James. Please go ahead.
Stephen M. Moss: You know, maybe just starting with the margin here, just curious, you know, 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.
Stephen M. Moss: Checking account activity, whether it's noninterest bearing or some of our modestly priced savings accounts. So I do think there is a level two which are core lower cost deposits start to grow but at the same time, we will absolutely continue to see demand and some of our <unk>.
Mark J. Ruggiero: Yeah, you know, it depends, Steve, to be honest. I think the positive 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 at which our core, lower cost deposits will start to grow.
Commercial products, whether it's our IC Ics product or C. D's that we will continue to be high for us 5%.
Stephen M. Moss: So youre really seeing that mix of.
Stephen M. Moss: Good core household operating accounts.
Mark J. Ruggiero: But at the same time, we will absolutely continue to see demand for some of our commercial products, whether it's our ICS product or CDs, that will continue to be high force, 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 rates, again, it's continued to be in the five.
Stephen M. Moss: Our low cost and then those that are looking for rate again, it's continue to be in the 5% range.
Stephen M. Moss: Okay.
Stephen M. Moss: And then in terms of loan pricing these days with the uptick in the pipeline just curious.
Where where are new loans and renewals coming on the books. These days.
Stephen M. Moss: Yeah.
Stephen M. Moss: Been a challenge through the first quarter as you can imagine the.
Stephen M. Moss: The mid part of the curve continued to stay somewhat depressed so in the first quarter.
Mark J. Ruggiero: And then, in terms of loan pricing these days, what's the uptick in the pipeline? Just curious, where are new loans and renewals coming from on the books these days?
Stephen M. Moss: A lot of our fixed commercial pricing.
Stephen M. Moss: And probably the mid to high sixes.
Stephen M. Moss: Lee anything priced off the short end of the curve was up around 8% I think the positive the areas that youre starting to see the middle three to seven year part of the curve move up a bit. So I would expect we should start to see you know our fixed rate commercial pricing back in the seventh here in the second quarter and anything tied to prime or so for <unk>.
Mark J. Ruggiero: Yeah, 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, you know, 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, you know, the middle three to seven year part of the curve move up a bit.
<unk> to be in that 8% range.
Stephen M. Moss: And I also think as we continue to try and emphasize C&I a lot of that.
Mark J. Ruggiero: So I would expect we should start to see, you know, our fixed rate commercial pricing back in the sevens here in the second quarter, and anything tied to prime or SOFR will continue to be in that 8% range.
Stephen M. Moss: Our lines of credit that tend to be close.
Stephen M. Moss: Floating and so we will get the benefit from that as we continue to emphasize that that segment.
Stephen M. Moss: We're not as big of an impact I will just add Steve that we are seeing a bit of an uptick lately and home equity utilization as well on our line side, which is all prime based.
Mark J. Ruggiero: And I also think as we continue to try and emphasize C&I, a lot of that is, you know, our lines of credit.
Mark J. Ruggiero: not as big of an impact on the...
Stephen M. Moss: So we're seeing a little bit of a lift there on the home equity side as well.
Stephen M. Moss: Okay.
Mark J. Ruggiero: And in terms of just, you know, the construction balances you guys had have come down, probably by 20% year over year. Just curious, you know, are we getting closer to a bottom in commercial construction? Or do you see further runoff in that portfolio?
Stephen M. Moss: And in terms of just the construction balances that you guys had come down.
Stephen M. Moss: Probably call it 20% year over year.
Speaker Change: Just curious.
Speaker Change: Or are we getting closer to a bottom in commercial construction or do you see further runoff in that portfolio.
Mark J. Ruggiero: I think we're probably going to see further runoff, you know, with some, you know, ups and downs. I don't know that it's going to be a linear line going down, but we're obviously much more disciplined, or I should say we still are very disciplined as the market has made it more difficult for a lot of the construction loans to pencil out because of the interest rate environment and the increase in construction costs. So I don't see that number increasing much from here. And again, if anything, I think it'll be down.
Speaker Change: I think we're going to.
Speaker Change: Probably see further run off with with some ups and downs I don't know that its going to be a linear line down that.
Speaker Change: We're obviously much more disciplined.
Speaker Change: Or I should say, we still are very disciplined as the market is because it made it more difficult for the a lot of the construction loans to pencil out because of the interest rate environment and the.
Speaker Change: The increase in construction costs so.
Speaker Change: So I don't I don't see that that.
Speaker Change: That bucket increasing much from here and again, if anything I think it'll be down.
Stephen M. Moss: Thank you. I appreciate that.
Speaker Change: Okay.
Speaker Change: Okay.
Speaker Change: Great that and then in terms of the the office portfolio two questions on that.
Stephen M. Moss: And then in terms of the office portfolio, you know, two questions on that. What was the class of the office property that went into non-performance status this quarter, you know, class A, B, or C? Any colleague can give you around the rate of occupancy for that long.
Speaker Change: With the class was the <unk>.
Speaker Change: Office property that went to non performing status this quarter class a b or C.
Speaker Change: Any any color you can give around the rate of occupancy that loan.
Mark J. Ruggiero: The one that went non-performing is, I believe, a Class B, but I don't have that at my fingertips here, Steve.
Speaker Change: The one that went non performing.
Speaker Change: I believe as a class b, but I don't have that at my fingertips here Steve.
Stephen M. Moss: Okay, and that's all right. What was the second part of your question? The occupancy, if you have that by any chance.
Stephen M. Moss: Okay, and sorry, what was the second part of your question.
Speaker Change: The occupancy if you have that by any chance so that that's where we have.
Mark J. Ruggiero: Yeah, so that's where we have the situation with the major tenant looking to downsize, and they take up about half of that building, and the rest of the occupancy there has been somewhat challenged, looking to be trending towards somewhere in the 50 to 60% range, which is why there's expectation that this may come to a sale or some sort of resolution here in the near term with some pressure on the valuation to the extent of a 20-25% loss exposure.
Speaker Change: The situation with the major tenant looking to downsize and they take about up about half of that building and the rest of the occupancy there has been somewhat challenged so it's.
Speaker Change: Looking to be trending towards somewhere in the 50% to 60% range.
Speaker Change: Which is why there is expectation that this may come to a a sale or some sort of resolution here in the near term.
Speaker Change: With some some pressure on the valuation to to the extent of our 20% to 25% loss exposure.
Mark J. Ruggiero: Right, okay. And then just in terms of the other office property, the $8 million one that was not performing in the fourth quarter, just curious, is that, I was thinking that was going to be resolved here in the near term? Any update on the resolution there? Yeah.
Speaker Change: Right Okay.
And then just in terms of the other office <unk>.
Speaker Change: Property, the $8 million one non performing in the fourth quarter, just curious is that right.
Speaker Change: I was gonna be resolved here in the near near term just any update on the resolution there. Yeah. We were hoping so to unfold there was a pending note sale on that as we talked about it last quarter. Unfortunately that deal fell through but right now there is an expectation or negotiations that we.
Mark J. Ruggiero: Yeah, we were hoping so too. There was a pending note sale on that, as we talked about it last quarter. Unfortunately, that deal fell through. But right now, there's an expectation or negotiations that we may, again, this is a club deal. We're not the only participant on this one, but there's potential for a direct workout with the borrower at a discounted sort of payoff price. And if that plays out the way it is, we would expect that the loss there would be pretty much in line with the charge-off we took based on where we thought the note sale was going to happen.
Speaker Change: Again this is a.
You know this is a club deal we're not the only participant on this one but there's.
Speaker Change: <unk> for a direct work out with the borrower at a discounted sort.
Speaker Change: Pay off price and if that plays out the way. It is we would expect that the loss there.
Speaker Change: Yeah, it would be pretty much in line with the charge off we took based upon where we thought the note sale what's going to happen.
Stephen M. Moss: Okay, great. I appreciate all the calls. I'll step back.
Speaker Change: Okay great.
Speaker Change: I appreciate all the color I'll step back.
Speaker Change: Thank you.
Operator: Our next question comes from Lori Hunsicker with Seaport Research. Please go ahead.
Speaker Change: Our next question comes from Laurie Hunsicker with Seaport Research. Please go ahead.
Laura Katherine Havener Hunsicker: Good morning. I just wanted to stay with Steve's line of questioning in the office and, obviously, outside of the office. Things look great. I appreciate your new multifamily slide.
Laura Katherine Havener Hunsicker: Yeah, Hey, good morning.
Laura Katherine Havener Hunsicker: Sorry, just wanted to stay with that line of questioning on the Opex and obviously outside of office things look great. Appreciate your at your new multifamily side.
Laura Katherine Havener Hunsicker: But just going back to the first credit that came on last quarter, it started at $11.3 million. You had $2.8 million of charge-offs, so it was down to $8.5 million. But that's still an $8.5 million credit.
Laura Katherine Havener Hunsicker: But yes.
Laura Katherine Havener Hunsicker: Just going back here.
Laura Katherine Havener Hunsicker: That said the first credit that came on last quarter and it was it started and I have in my notes it started at $11 3 million.
Laura Katherine Havener Hunsicker: $2.8 million of charge offs pay downs.
Laura Katherine Havener Hunsicker: $5 million that scale and $8 5 million dollar loan.
Mark J. Ruggiero: It is, yes, so that is still in NPI; I think it's actually paid down to about $8 million or so. Sorry, but that's the one I was just alluding to that had the pending note sale at one point that may now go through with a different resolution.
Laura Katherine Havener Hunsicker: It is yes, so that is still in.
Laura Katherine Havener Hunsicker: N P. I think it's actually paid down to about.
Laura Katherine Havener Hunsicker: $8 million or so Laurie, but that's the one I was just.
Laura Katherine Havener Hunsicker: Alluding to that had the pending sale at one point I know may go through what they are.
Mark J. Ruggiero: But we still believe that's the right value based on our understanding of where that could get resolved. Perfect. And then, do you, okay, so you don't have any other specific reserve against it?
Laura Katherine Havener Hunsicker: Resolution, but we still believe that's the right value based on our understanding of where that could get resolved.
Laura Katherine Havener Hunsicker: I don't know and then at this point.
Speaker Change: Okay. So you don't have any other specific reserve against that it's down to $8 million correct. Okay.
Laura Katherine Havener Hunsicker: It's down to $8 million? Correct. OK, and then you're charged down to eight, right? down to eight. Okay, great. And then the $11 million, and I think you flagged this as showing early stage delinquency last quarter. I'm assuming it's the same one that just went. What did you set aside in provision this quarter, if we look at your provision? What's marked for that? Yeah, so we took about a $2.5 million specific allocation on that loan.
Speaker Change: Okay, and then you're charged down to eat right.
Speaker Change: Okay, Great and then your the 11 million and I think you flagged. This is showing in early stage delinquency last quarter I'm, assuming it's the same one that just went.
Speaker Change: What did you set aside in provision this quarter, we look at your provision what what occupancy.
Speaker Change: So we took about a $2 5 million dollar specific allocation on that loan.
Mark J. Ruggiero: Okay, great, and then... Just looking here at your criticized link quarter in office, maybe just help us think about that. That went from 55 million up to 115 million link quarter. Certainly no surprise we're seeing weakness, but just can you help us think about that and what we should be watching or worried about here, how you're thinking about that. Any color would be helpful. Thanks.
Speaker Change: Okay great.
Speaker Change: And then.
Speaker Change: Just looking here at your criticize your linked quarter criticized in office, maybe just help us think about that that went from 55.
Speaker Change: And up to 115 million linked quarter.
Speaker Change: Certainly no surprise, we're seeing weakness can you help us think about those and what we should be watching or worried about here, how you're thinking about that any any color would be helpful.
Laura Katherine Havener Hunsicker: Sure. And I want to make sure I heard you right. You have in your material that went from $85 to $115?
Sure. So the and I think so I want to make sure I heard you right you have in your material that went from 85 to $1 15.
Laura Katherine Havener Hunsicker: I had it going from $55 million last quarter, criticized. $55 million up to $115 million this quarter, at $55.3 million last quarter and now at $114.9 million. Okay.
Speaker Change: I had it going from $55 million last quarter criticized.
Speaker Change: $55 million up to $115 million. This quarter, 55, 3 million last quarter and now at $114 9 million.
Mark J. Ruggiero: Maybe that's the wrong number, but I mean, maybe it's... Oh, no, no, you're right. Some of it actually, actually, some of it, I think, is improvement going from classified to criticized. But the biggest one I think it's worth noting, there's one new relationship that Downgraded to criticize, which is the $30 million that you see reflected in our material as a Q4 maturity. So that's a syndicated deal. It's a much larger relationship.
Okay, maybe that's the wrong number I bet I mean, maybe if.
Speaker Change: No no no no youre right some of it actually actually some of it I think is improvement going from classified.
Speaker Change: To criticize but the biggest one I think that's worth noting there is one new relationship that downgraded to criticized which is the $30 million that you see reflected in and our material as of Q4 maturity. So that's all a syndicated deal its a much larger relationship it's really our only.
Mark J. Ruggiero: It's really our only true downtown Boston financial district exposure. The occupancy on that property is pretty good, at 85%. It got downgraded because the debt service coverage had dropped a little bit, over 1%. So the FDIC, as part of their SNCC review, actually downgraded that to 7%. So we have some insight based on our conversations with the lead bank suggesting there's still adequate value from an LTV perspective. We'll see how this plays out as we come up to a Q4 maturity. But we believe there's plenty of protection there and it's probably a relationship we'd look to exit.
Speaker Change: True downtown Boston Financial District exposure.
Speaker Change: The occupancy on that property is pretty good at 85%.
They got downgraded because the debt service coverage had dropped a little bit over 1%. So the FDIC as part of their Snick review actually downgraded that to the seven.
Speaker Change: So we have some insight based on our conversations with the lead bank, suggesting that still.
Speaker Change: Adequate value from an LTV perspective.
Speaker Change: You know, we'll see how this plays out as we come up to the Q4 maturity, but we believe this there's plenty of protection there and it's probably a relationship to be honest, we we'd look to exit if we can.
Mark J. Ruggiero: They have a couple other tenants, I think that they're getting ready to sign up, that'll, I think, push the occupancy up into the.
Speaker Change: They have a couple of other tenants I think that or they're getting ready to sign up that'll I think pushed the occupancy up into the ninety's.
Laura Katherine Havener Hunsicker: So we don't feel like there's any lost content at all. Okay. Okay. Very helpful. Okay, and then just switching back to margin, what was your March spot margin?
Speaker Change: Okay. So we don't have we don't feel like there's any loss content at all of that.
Speaker Change: Okay. Okay.
Speaker Change: Yes.
Speaker Change: Very helpful. Okay, and then just switching quickly back to the margin.
Speaker Change: What was your March spot margin.
Mark J. Ruggiero: Margin was 321. I think what's interesting about that too, Laurie, if... We talked a lot about the pickup in period end deposits, so even for most of March, the average deposits were in the 14-8 range, which means we had a higher allocation of wholesale borrowings. Again, just later in that month, having some core deposit growth already provides a bit of a boost to that level heading into April. So I just wanted to put that caveat on the 321. It's really reflective of the lower deposit balances as well.
Speaker Change: March margin was $3 21.
Speaker Change: And I think what's interesting on that too Laurie.
Speaker Change: We talked a lot about the pickup in period end deposits. So even from US most of March the average deposits were in the 14 eight range, which means we had.
Speaker Change: A higher allocation of wholesale borrowings so.
Again, just later in the in that month, having some core deposit growth already provides a bit of a boost to that level you know heading into April.
Speaker Change: So I'm just trying to put that caveat on the 321 is really reflective of the.
Laura Katherine Havener Hunsicker: Got it. Got it. And just remind us when, in the quarter, Mark, did you guys actually redeem the $50 million in sub-debt? What was the time?
Speaker Change: The lower deposit balances as well.
Speaker Change: Got it got it and just remind us when women the corner Mark did you guys actually redeem the $50 million in sub debt what was the timing on that.
Mark J. Ruggiero: That was late February or early March. So, but that was at 475 prior to redemption. If we held on to that, that would have repriced to a floating rate. So you really just shifted a $4.75 fixed debt to borrowings at 5%, so it wouldn't have too much impact. Okay, perfect, perfect.
Speaker Change: That was late February early March so, but that was at $4 75.
Speaker Change: Prior to redemption, if we held on to that that would have repriced to a floating rate.
Speaker Change: So you really just shifted a 475 fixed debt.
Speaker Change: Borrowings at 5% so it won't help too much impact now.
Speaker Change: Okay perfect perfect and then Jeff just last question for you you mentioned considering another buyback obviously your ear, you're down substantially below where you're desperate for cats can you help us think a little bit more about that.
Laura Katherine Havener Hunsicker: And then just this last question for you. You mentioned considering another buyback. Obviously, you're down substantially below where you just repurchased.
Mark J. Ruggiero: Can you help us think a little bit more about that? Yeah, we've had a pretty consistent answer here that I think we'll obviously continue to weigh that as a tool that we think we would be able to use as a toolkit to be opportunistic with. You mentioned our valuation and our levels of capital. I think you'll certainly suggest it's something we would want to be considering to have available. So we haven't made a decision yet. Obviously, we haven't announced anything yet about that, but I think it's safe to say it's something we will continue to talk about here in the near term. Great
Jeffrey J. Tengel: Yeah. It's you know we've had a pretty consistent answer here that I think will we'll obviously continue to weigh that as a tool that we think we would be able to.
Jeffrey J. Tengel: Having the tool kit to be opportunistic with you mentioned are.
Jeffrey J. Tengel: Valuation and our levels of capital I think Youll certainly suggested something we would want to be considering to have available. So we haven't made a decision obviously, we haven't announced anything yet there, but I think it's safe to say, it's something we will continue to talk about here in the near term.
Laura Katherine Havener Hunsicker: Great. Thanks for taking my question. Thank you.
Speaker Change: Great. Thanks for taking my question.
Operator: Again, if you have a question, please press star, then 1. Our next question comes from Chris O'Connell with KBW. Please go ahead.
Speaker Change: Thank you.
Speaker Change: Again, if you have a question. Please press Star then one.
Speaker Change: Our next question comes from Chris O'connell with K BW. Please go ahead.
Chris O'connell: Hey, good morning.
Chris O'connell: I just wanted to follow up on, you know, the kind of robust capital levels that you guys have here and, you know, the opportunity to, you know, kind of deploy that going forward. You know, you have enough capital, and the securities yields. It's still a big book, and, you know, the yield is still just under 2%. I mean, is there any potential, you know, for securities restructuring at some point in 2024?
Chris O'connell: So just wanted to follow up on the.
Chris O'connell: The kind of robust capital levels that you guys have here.
Chris O'connell: The opportunity to deploy.
Chris O'connell: Deploy that going forward.
Chris O'connell: You have enough capital in securities yields.
It's still a big booking the yields still just under 2% I mean is there any potential for securities restructuring at some point in 2024.
Mark J. Ruggiero: Yeah, it's a strategy we've done some analysis on, Chris, and I think, you know, it's one that, Personally, I've struggled a little bit with just the optics of taking the loss now to improve the earnings.
Speaker Change: Yeah, It's it's a strategy we've we've done some analysis on.
Speaker Change: And I think it's.
Speaker Change: One that.
Speaker Change: Personally I've I've struggled a little bit with.
Speaker Change: Just the the optics of of taking the loss now to improve the earnings I would say I think there's better margin now.
Mark J. Ruggiero: I would say there's better margin now where that structure probably makes a bit more sense. But we're getting to a point now where I think we even have this material on one of the slides. If you look at what's expected to pay off on the securities portfolio in the near term, that book will probably get down to 13.5% of total assets by the end of the year. And that's really a level where we'd be much more comfortable.
Speaker Change: Where that structure, probably makes a bit more sense, but we're getting to a point now where you know I think we even out this material. It on one of the slides. If you look at what's expected to pay off on the securities portfolio in the near term.
Speaker Change: Book will get down to probably 13, 5% of total assets by the end of the year and that's really a level, where we'd be much more comfortable you know where we're a bank that historically has operated around 12% to 13% of assets in the securities book, So accelerating to get to that level I think.
Mark J. Ruggiero: We're a bank that historically has operated around 12% to 13% of assets in the securities book. So accelerating to get to that level isn't completely off the table. But even just allowing for normal payoffs, we get there relatively quickly, and I think that's a much better balance sheet profile for the longer term that we'd like to be in. So, in the long way of saying, we'll continue to assess that opportunity. But it isn't something that I would think we feel compelled to do, given the trajectory of where it's already headed.
Speaker Change: Isn't completely off the table, but even just allowing for normal payoffs.
We get there relatively shortly and I think that's a much better balance sheet profile for the longer term that we'd like to be in so long way of saying well, we'll continue to assess that opportunity, but it isn't something that I would I think you know we feel compelled to do given the trajectory of where it's already heading.
Chris O'connell: Got it, and you guys mentioned, you know, still looking at M&A opportunities as always. I mean, has there been any uptick in conversations there, you know, at all in your market?
Speaker Change: Got it.
Speaker Change: And you guys mentioned still looking at M&A opportunities.
Speaker Change: As always.
Speaker Change: And has there been any uptick in conversations there.
Speaker Change: At all and in your markets.
Mark J. Ruggiero: Not really. I mean, not appreciably, you know; it continues. I think everybody is continuing to struggle with the same issues around trying to make the math work and uncertainty around the regulatory environment.
Speaker Change: Not really I mean, not appreciably Ah.
Speaker Change: It continues I think everybody is continuing to struggle with the same.
Speaker Change: Issues around trying to make the math work and uncertainty around the regulatory environment.
Speaker Change: Got it.
Chris O'connell: and then, you know, just circling back to office here. For the total office portfolio, do you guys have a reserve number that's applied against the entire portfolio?
Speaker Change: And then just circling back to office here.
Speaker Change: For the total.
Speaker Change: Office portfolio do you guys have a reserve number.
Speaker Change: That's applied against that entire portfolio.
Mark J. Ruggiero: Yeah, we don't disclose anything publicly there. You know, we still have... Our formal pool allocation is total commercial real estate and construction, but we do look through to the underlying property types to guide how much, from a qualitative perspective, we would want to be allocating to that total pool. So, you know, I would say we definitely have increased reserve allocation as a result of the office book. I would say we do some..., some analysis to support the overall allocation by looking at risk ratings and stressing valuations on those that are criticized and classified. That type of analysis, you know, probably suggests that.
Speaker Change: Yeah, we don't disclose anything publicly there we still have.
Speaker Change: Our formal pool allocation as total commercial real estate and construction.
Speaker Change: But we do look through to the underlying property types to guide how much from a qualitative perspective, we would want to be allocating to that that total pool.
Speaker Change: So I would say, we definitely have increased reserve allocation as a result of the office book.
Speaker Change: You know I would say, we do some some analysis to support the overall allocation by looking at risk ratings and distressing.
Speaker Change: <unk> on those that are criticized and classified and you know.
That type of analysis, you know probably suggest that.
Mark J. Ruggiero: I think, though not publicly disclosed, we probably intuitively are around 2.5% to 3% on the office book with the rest of commercial real estate at, call it, 75 basis points. And we think that reserve allocation is actually pretty conservative in terms of allocating loss, and containment where we see the risk in the criticizing classified bucket.
Speaker Change: Yeah.
Speaker Change: Not publicly disclosed.
Speaker Change: <unk> intuitively are around 2.5% to 3% on the office book with the rest of commercial real estate are call it 75 basis points.
Speaker Change: And we think that reserve allocation.
Speaker Change: It was actually pretty conservative in terms of allocating loss containment, where we see the risks in the criticized and classified bucket.
Chris O'connell: And I appreciate the detail on the 2024 maturities. Do you have any idea what portion of the 2025 maturities are currently criticized?
Speaker Change: Great that's helpful.
Speaker Change: And I appreciate the detail on the two.
Speaker Change: 2024 maturities.
Speaker Change: Do you have what portion of the 2025 maturities are currently criticized.
Mark J. Ruggiero: I do. Of the 2025 maturities, there's one large criticized loan that's a $50 million exposure in 2025. That's the biggest, really the only notable criticized loan in 2025. And that one where we've had conversations with the bar about that, you know, we don't have a near-term expectation of that, but it's something we'll provide a bit more of an update as well over the next couple of quarters.
Speaker Change:
Speaker Change: Two of the 2025 maturities.
Speaker Change: There is one large criticized.
Speaker Change: Loan that's a 50 million dollar exposure in 2025.
Speaker Change: That's the biggest really the only notable criticized loan in 2025.
Speaker Change: And not one where we've had conversations with the bar that you know we don't have a.
Speaker Change: Near term expectation of that but it's it's something we'll provide a bit more of an update is as we go over the next couple of quarters.
Chris O'connell: really helpful. And is there anything else? I mean, you mentioned, you know, the multifamily, you know, improvement from the one credit this quarter, and the additional detail on the slides, you know, all very solid. I mean, are there any other areas outside of office that you guys are seeing, you know, any sort of, you know, outsized credit pressure at this time? Yeah, not really.
Speaker Change: It's really helpful.
Speaker Change: Is there anything else I mean, you mentioned.
Speaker Change: The multifamily.
Speaker Change: The improvement from the one credit this quarter.
Speaker Change: And any additional detail on the slides.
Speaker Change: It's very solid I mean is there any other areas outside of office.
Speaker Change: That you guys are seeing any sort of.
Speaker Change: Outsized credit pressure at this time.
Mark J. Ruggiero: Yeah, not really. If you zoom out a little bit and look at our levels of criticized and classified assets together, it's actually very stable, not just over the last couple quarters, but it's very consistent with the last few years, which is, again, why we feel relatively comfortable with where we are in this credit environment because the level of criticized classified assets is not remarkably different. It's really no different than it has been over the last several years.
Speaker Change: Yeah, not really I mean, if you zoom out a little bit and look at our levels of criticized and classified assets together.
Speaker Change: It's actually very stable not just over the last couple of quarters, but it's very consistent with the last few years, which is again why we feel relatively comfortable with.
Speaker Change: Where we are in.
Speaker Change: The credit environment because of the level of criticized and classified assets is not over.
Speaker Change: Remarkably different its really no different than it has been over the last several years.
Chris O'connell: Great. And then last one, do you have the amount of... you know, non-floating rate loans that are set to reprice or mature in 2024?
Speaker Change: Great and then last one do you have the amount of.
Speaker Change: Non floating rate loans that are set to reprice or mature in 2024.
Mark J. Ruggiero: in 2024. I do not have it in front of me, but it's it's not a significantly, you know, we have Obviously, the week... You said the non-floating rate, so the adjustable rate. Yeah, RFX. Yeah, I don't have it in front of me, but I can get you I can get you that.
Speaker Change: In 'twenty 'twenty four I do not in front of me, but it's it's not a significantly you know I mean, we have.
Speaker Change: Obviously, the <unk> piece.
Speaker Change: The non floating rate so adjustable rate.
Speaker Change: Yeah are fixed.
Speaker Change: Yeah, I don't have it in front of me, but I can get you I can get you that.
Speaker Change: Okay.
Speaker Change: That's all I had thank you.
Operator: This concludes our question and answer session. I would like to turn the conference back over to Jeff Tengel for any closing remarks.
Speaker Change: Thank you.
Speaker Change: This concludes our question and answer session.
Speaker Change: I would like to turn the conference back over to Jeff Tangle for any closing remarks.
Jeffrey J. Tengel: Thanks, Nick, and thank you for your continued interest in Independent Bank Corp. Have a great day.
Jeffrey J. Tengel: Thanks, Nick and thank you for your continued interest in independent Bank Corp have a great day.
Operator: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Jeffrey J. Tengel: Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Jeffrey J. Tengel: Yeah.
Jeffrey J. Tengel: [music].