Independent Bank Corp.

Good morning, and welcome to the Independent Bank Corp First Quarter 2022 Earnings Conference Call. Before proceeding, let me mention that this call makes the same forward-looking statement with respect to the financial condition, results of operation, and business of Independent Bank Corp. Actual results may be different. Factors that may cause actual results to differ include those identified in our annual report on Form 10-K and our earnings press release. Independent Bank Corp cautions you against unduly relying upon any forward-looking statements and disclaims any intent to update publicly any forward-looking statements, whether in response to new information, future events, or otherwise. Please note that during this call, we will also discuss non-GAAP financial measures as we review Independent Bank Corp's performance. These non-GAAP financial measures should not be considered replacements for and should be read together with gap results. Please refer to the investor relations section of our website to obtain a copy of our earnings press release, which contains reconciliations of these non-gap measures to the most directly comparable gap measures and additional information regarding our non-gap measures. Also, please also note that this event is being recorded. I'd now like to send the conference over to Chris Omneson, President and CEO. Please go ahead.

Thank you, Anthony, and good morning, everyone. Thank you for joining us today. With me, as always, is Mark Ruggiero, our Chief Financial Officer, and we're once again joined by Rob Guzzone, our Chief Operating Officer. Following last year's strong performance, we kicked off 2022 with solid results driven by our core underlying fundamentals. Excluding merger-related charges, operating net income for the first quarter came in at $58.2 million, or $1.23 per share. Needless to say, profound macroeconomic and geopolitical uncertainty persist, but we've been able to keep our heads down and focus on the day-to-day tasks to service the needs of our growing customer ranks. Mark will be taking you through the quarter shortly, but highlights include, while underlying loan growth continues to be masked by the ongoing expected runoff in the PPP and and acquired East Boston Savings Bank portfolios. Origination volumes across the board continue to be strong, and our loan pipeline continues at robust levels as well. Core deposit levels continue as a major source of strength and carry great intrinsic value in the rising rate environment. The total cost of deposits remained at a very low five basis points. The core net interest margin rose nicely this quarter while we remained well positioned for rising rates. Our investment management business continues to shine despite compressed market valuations for much of the quarter. Our assets under administration remain at the record level of $5.7 billion. Tight expense control remained in place as our operating efficiency ratio remained well below 60%. And our capital levels remain in excellent shape. So we're off to a good start in 2022. Beyond the numbers, we continue to move the franchise forward in a host of ways. Most importantly, the integration with East Boston Savings Banks is proceeding very smoothly. We're especially encouraged by the high deposit retention rates we've experienced. The assimilation of the branch network and personnel has been excellent, and we're already getting good traction with expanding relationships with East Boston's customers with our expanded product set. Similar opportunities are being actively pursued across the full range of our consumer, commercial, and investment management businesses. We continue to make inroads into the coveted Worcester market in central Massachusetts. We'll be opening a new branch in Westboro next month, bringing our total retail footprint to eight branches in this region, which also serves as a nice complement to our existing commercial banking and investment management presence there. New business generation in this market has been quite good over the past two years. We continue to expand our digital banking capabilities to keep pace with the customer preferences in this arena. Most recently, we incorporated Zelle Digital Payments into our mobile banking system, continued the rollout of our Your Banking digital platform, and are planning for an Encino implementation, greatly enhancing our commercial and business loan front-end system. And we continue to attract experienced professionals into our ranks who are attracted to both our growth potential and corporate culture. Now, just one example, just this past quarter, We've added five senior professionals in our investment management business, some of whom will help us capitalize on the opportunities with the East Boston Savings customer base. One accomplishment we're especially proud of is having just received the number one ranking in New England in the J.D. Power 2022 U.S. Retail Banking Customer Satisfaction Study. This is the third such time we received top ranking in this highly regarded survey. And what is particularly noteworthy is that we achieved this honor even while we were engaged in assimilating East Boston Savings and its large customer base. This recognition is a true testimony to the enormous care, respect, and relationship orientation of my Rockland Trust colleagues. Turning to the economic picture, Overall economic activity was robust to end 2021, with fourth quarter 2021 GDP growth of 6.9% nationally and 7.8% locally. The labor market continues to be a bright spot both nationally and locally in March. Unemployment hit a post-pandemic low, and labor force participation rose to a post-pandemic high, and we hope that continues as hiring does remain challenging. Needless to say, the focus remains heavily on inflation, with a surge in The Fed continues to emphasize our hawkish tone for iterating commitment to combat inflation with rate hikes, and Mark will address the impact on rising rates in his comments. Versus a year ago, we certainly entered the new year as a materially different company with $20 billion in assets, 123 branches, 19 commercial banking centers, 10 investment management centers, and 9 mortgage locations. Yet we work very hard to maintain the same focus and discipline that has served us well over these many years, which, at its core, is a relentless focus on relationship banking, which extends across all the customers and communities we serve. We foster an environment of highly engaged colleagues who provide exemplary service to our customers, who in turn reward us with more business. As such, we remain confident in our ability to continue growing our franchise and delivering solid results. I'm pleased to say that our board of directors shares that view and recently approved a 6% increase in our dividend to continue to reward our loyal shareholders. And with that, I'll turn it over to Mark.

Thank you, Chris. Before we get into the details, just a reminder that we provided a deck to accompany the financial update for the quarter, and I'll be referring to that deck throughout my prepared comments. As such, as noted on slide four of that deck, 2022 first quarter gap net income was $53.1 million and diluted EPS was $1.12, reflecting the first full quarter of operations subsequent to the mid-November merger with Meridian Bancorp and its East Boston Savings Bank subsidiary. When excluding pre-tax one-time merger expenses of $7.1 million and their related tax effect, Operating net income and diluted EPS were $58.2 million and $1.23 respectively for the first quarter. As noted on this slide, key drivers of the quarterly results include 3.3% annualized net loan growth when excluding PPP loans, despite the expected runoff in the recently acquired East Boston Savings Bank commercial real estate portfolio. In addition, we continued modest cash deployment into the securities portfolio, And this combination led to a core net interest margin of 3% when excluding purchase accounting and PPP-related impact, up nicely from the prior quarter. Despite an uptick in non-performing assets, we continued to experience strong asset quality with minimal credit losses, resulting in a negative $2 million provision for the quarter. In addition, the quarter saw solid fee income results, a few components of which I'll provide more detail on in a little bit. and overall operating expenses were in line with our merger-related cost-save expectations. In summary, review the quarter's results as a reflection of our strong core fundamentals in a balance sheet position and poised to increase profitability moving forward. On a gap basis, the results reflect a 1.06% return on assets and 7.16% return on average common equity, while the operating basis results, excluding the non-recurring merger expenses just noted, were 1.17% and 7.85%, respectively. And although unrealized losses on the AFS securities portfolio resulted in a $1.10 decline in tangible book value per share, the return on tangible common equity for the quarter on an operating basis was a solid 11.86%. As we move to slide five, we'll now cover some key components of the quarter results. As shown here, inclusive of PPP, the loan portfolio stayed essentially flat at $13.6 billion. However, as I mentioned, excluding PPP, total loans grew at a healthy 3.3% annualized rate for the quarter. Excluding PPP loans, the majority of this growth occurred in the CNI and residential portfolios. with line utilization increases driving growth in CNI, while the vast majority of mortgage production for the quarter was retained on balance sheet. The 1.2% decline in commercial real estate was primarily due to continued attrition of the East Boston Savings Bank balances, which was in line with expectations, while the legacy book experienced solid net growth for the quarter. Turning to slide six, we'll cover some additional insight into loan activity for the quarter. As noted on the left side, commercial loan origination activity was strong for the quarter, with total closed commitments of $392 million, and we remain optimistic for continued strong closing activity with a March 31st approved commercial pipeline of $307 million, up from the prior quarter level of $242 million. As for opportunities in our market, we continue to see the majority of CREE and construction activity centered around 1 to 4 family, condo, and apartment asset classes, as well as pockets of office and industrial buildings. While on the CNI side, the majority of activity was in the technical service and retail trade industries. Also noted on this slide, you can see the PPP balances paid down to $100 million as of March 31st, generating $3.4 million of net fees recognized this quarter, compared to $7.5 million in the prior quarter, with remaining unearned net fees totaling $2.4 million. On the right side of the slide, we reflect some key metrics around the consumer books, including data on both mortgage and home equity closings, which were both very strong for the quarter. As alluded to before, 83% of the quarter's mortgage activity was retained in the portfolio, as the company's overall asset sensitivity and secondary pricing volatility allowed for a more consistent flow of closings into the balance sheet. And although home equity balances continue to be muted by low line utilization, strong current pipelines and application volume should improve future results. Moving to slide seven, deposit activity for the month reflects a continued focus over core household growth. With volatility over municipal and larger business deposits, resulting in relatively flat overall core deposit balances, while higher cost time deposits continued to roll off. Core deposits as of March 31st now make up 85.8% of total deposits and allowed for the cost of deposits to remain at a low five basis points for the quarter, which also serves as a reminder that we certainly believe this strong deposit base will prove its value in the likely future rising rate environment. which I will provide a little more color on shortly. Turning to slide eight, we continue to provide insight on our reported net interest income and net interest margin, along with details over PPP, purchase accounting, and other volatile or non-recurrent items to reconcile back to a core net interest margin. And as you can see here, the reported net interest income and margin increase over the prior quarter reflects the full quarter benefit of the East Boston acquisition. offset by 4.1 million and 1.1 million reductions in net PPP fees and purchase accounting respectively versus the prior quarter. Excluding these and other smaller non-recurring items, the core margin was 3 percent, up nicely from the prior quarter level of 2.83 percent. As we think about the margin going forward, balance sheet asset sensitivity is certainly a topic that is of importance given future expectations. As noted on the slide, any movement in short-term interest rates, primarily Fed funds, one-month LIBOR, term SOFR, or prime, we would see immediate repricing benefit in our Federal Reserve cash balances of $1.7 billion and approximately 33% of our loan book that is tied to these indices. Partially offsetting the loan benefit, we have about $900 million of macro-level hedges and another subset of loans with index floors that are currently in the money, which on a combined basis mitigate approximately 11 to 12 percent of that immediate loan pricing benefit. Moving over to asset quality, slide nine provides some key metrics worth highlighting. As noted previously, non-performing loans increased to 56.6 million as of March 31st, driven primarily by a large commercial syndicated credit that is expected to be worked out with zero loss. Net charge-offs remained benign at $400,000 or one basis point on an annualized basis. Total delinquencies ticked down to only 0.29% of the portfolio. And lastly, total loan deferrals at March 31st were approximately $305 million or 2.2% of the total portfolio, reflecting a $78 million decrease from the prior quarter. Consistent with the strong current asset quality metrics and outlook, a $2 million credit reserve release was recognized, reducing the allowance for credit loss as a percentage of loans to basis points to 1.06 as of March 31st. Shifting gears to non-interest items, slide 10 provides details on non-interest income results for the quarter. And as noted here, deposit account fees increased nicely from the prior quarter. As mentioned earlier, with only 17% of the closing activity driven to the secondary market, mortgage banking income decreased to $1.4 million, which is inclusive of a positive $257,000 mortgage servicing asset increase. Similarly, our capacity to absorb more fixed rate volume directly on balance sheet has momentarily resulted in decreased swap volume, resulting in a reduction in swap fee income to $600,000 for the quarter. In wealth management, income decreased primarily as a result of market depreciation for most of the quarter. However, as Chris mentioned, with an exceptionally strong quarter of new money inflows, as of March 31st, total assets under administration rebounded back to $5.7 billion. Turning to the next slide, total expenses of $95.5 million reflect a full quarter of the post-East Boston Savings Bank pro forma results. including $7.1 million of merger-related expenses. Excluding the merger expenses, total expenses are reflective of quickly meeting our East Boston Savings 45% cost-save target. Having said that, we are working through a couple of remaining lease terminations that will have modest one-time costs in the future, the timing of which will be dependent on executing final negotiations. Lastly, the tax rate for the quarter was 24.4%. Finishing up on slide 12, there's an update on full year guidance provided last quarter. We essentially reaffirmed the majority of key drivers noted here on slide 12 with a couple of updates or points of emphasis noted. Regarding loan growth on the heels of slightly better results in Q1 than planned, we anticipate better first half results than originally expected with modest low single digit growth for the full year. Also, with the March rate increase and some level of future rate height expectations at almost near certain levels, the guidance we provided earlier regarding the immediate asset repricing impact will certainly drive core net interest margin benefit going forward. All other elements of our prior guidance remain generally unchanged, with the one exception noted being a reduced level of loan level derivative income for the full year. That concludes my comments and we'll now open it up to questions.