Independent Bank Corp.

Okay, and welcome to the INDB independent ThinkCorp third quarter 2022 earnings call. All participants will be in listen-only mode. 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, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded. 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 FCC filings. We undertake no obligation to publicly update any such statements. In addition, some of our discussion today may include references to certain non-GAAP financial measures. Information about these non-GAAP measures, including reconciliation to GAAP measures, may be found in our earnings release and other SEC filings. These SEC filings can be accessed via the investor relations section of our website. I would now like to turn the conference over to Chris, President and CEO. Please go ahead.

Thank you, Dave, and good morning, everyone. And thanks, everybody, for joining us today. I'm once again joined by Mark Ruggiero, our Chief Financial Officer, and Rob Pizzone, our Chief Operating Officer. I'd like to begin by pointing out that the underlying strength of our franchise was on full display in the third quarter. For our long-term investors, you know that for years we have emphasized building core relationships versus having a transactional business orientation. No matter what the rate environment or liquidity means, we have incented colleagues to expand existing relationships and build new ones. As a result, we continue to generate record new core deposit accounts. This is occurring at both the absolute level and at the average per branch level. While our core deposit franchise has always been a source of tremendous economic value, with a rising interest rate environment, we are now seeing the impact in our NIM and net income. Net income for this past quarter rose to $71.9 million, or $1.57 per share, well above both prior quarter and prior year results. The returns in the quarter were quite strong as well, with a return on assets of 1.4%, and a return on tangible common of 15.3%. Mark will be taking you through the quarterly details shortly, but highlights include revenues with a major driver of performance rising 10% over prior quarter levels. Our balance sheet management and asset sensitivity has positioned us quite well to capitalize on the rising rate environment as evidenced by the significant increase in net interest margin, and Mark will be expanding on this topic in his comments. While loan levels were essentially flat this quarter due to paydowns and refinancings, we're still experiencing robust loan activity. Despite the slowing economy, total loan closings exceeded $800 million in the third quarter, while commercial pipelines were actually up this quarter. Core deposits rose to 88% of total deposits, which included healthy growth in non-interest-bearing deposits, while higher-priced deposits continued to attrite. The value of our powerful core deposit franchise simply cannot be understated. Fee revenues rose once again this quarter, and it was marked by strong retail transaction activity. Within investment management, our assets under administration levels held pretty constant as a continuing high volume of new money inflows has helped counter the reduction in market valuations. Expense levels continue to be intelligently managed as our operating efficiency measure dipped below 50% this quarter. Credit quality remains in good shape with negligible net losses, lower delinquencies, and stable non-performing levels experienced in the third quarter. And capital levels remained at comfortable levels, giving our board the confidence to approve a new stock repurchase program as covered in our earnings release. Beyond the quarter, we continue to advance the franchise on various fronts. For example, We recently appointed Don Mugford as our Chief Risk Officer. Don comes to us with over two decades of experience in risk management, audit, and quality assurance. This is an important step in achieving our goal to deepen our enterprise risk management infrastructure. We also continue to recruit experienced senior talent into our company who are attracted by both our business potential and operating culture. This continues in the third quarter of key hires into our commercial lending and investment management ranks. Such hiring will also serve to help us capitalize on the new business opportunities that we see in the former East Boston Savings Bank customer bases and markets. We've also recently begun deployment of Encino's industry-leading loan operating system with online origination capabilities for small business loans soon to follow. And lastly, in line with the growing strength and recognition of the Rockland Trust brand, we have embarked on a new advertising campaign that highlights our success in providing credit, banking services, and advice to local business owners. Turning to the economic picture, I'm sure you all have noticed that inflation continues to climb despite the Fed hiking rates at a blistering pace not seen in 40 years. In fact, a recent inflation report shows price increases are pretty broad-based and indicates ample momentum for further upward movement. Consumer spending has flattened, but consumers remain resilient, leaning on accumulated savings and tapping sources of credit to bolster spending. I think a cooling in the economic activity does seem inevitable. This combination of a surging inflation, a looming potential recession, and the unprecedented speed of Fed hikes does make for uncertain operating environments. As in all such prior periods, we bring a healthy mix of caution and preparedness to potential downside scenarios. As I've said before, we will remain disciplined and not engage in competitor practice not to our liking, especially on the credit side. Flexibility is key here, and we're focused on remaining nimble. In the near term, we will continue to benefit from the rising rates, holding to our asset sensitivity, and we'll also look to generate growth from existing operations. What is constant is our intense focus on building relationships combined with our caring, respectful, or relationship-oriented culture that has served us well over these many years. We believe that a great place to work leads to a great place to bank leads to solid financial performance, and that allows us to invest in our colleagues and customers. The Boston Globe has recognized us as a top place to work for over a decade. J.D. Power ranks us as number one in retail satisfaction in New England, and the results speak for themselves. Our discipline and careful management of our business prepares us well when a weak economy or underlying crisis emerges. I'll end with a reminder that we emerged from the great financial crisis with stronger capital and a more robust customer base. If we enter more difficult economic waters, we believe we will continue to distinguish ourselves. We are confident we have the capital, core deposit franchise, competitively advantaged businesses, attractive markets, and skilled colleagues manage anything that comes our way. And with that, I'll turn it over to Mark.

Thanks, Chris. I'll speak primarily to the earnings presentation deck that was included in our 8K filing last night and is also available on our website in today's investor portal. Jumping to slide four of that deck, 2022 third quarter gap net income rose to $71.9 million and diluted EPS was $1.57, reflecting 16% and 19% increases respectively from the prior quarter results. As Chris said, this performance serves as a great example of our core franchise value and profitable balance sheet positioning while remaining disciplined in this challenging environment. The third quarter results produced a 1.43% return on assets, a 9.90% return on average common equity, and a 15.26% return on tangible common equity for the quarter, all up significantly from the prior quarter results. In addition, this slide also summarizes the main drivers of the quarter performance that Chris just covered. Not reflected here, but worth noting, Tangible book value per share dropped 75 cents to 39.56 as of September 30th as a result of the repurchase of 443,000 shares during the quarter and additional other comprehensive losses offsetting the strong earnings in the quarter. The repurchase activity completes the program announced earlier this year. And as noted in our announcement last night, another $120 million share repurchase program was authorized. providing additional flexibility in optimizing our capital position moving forward. Turning now to the components of the quarter's results, slide five provides a high-level summary of the loan portfolios for the quarter. As noted here, reported balances are relatively flat, and when excluding PPP activity, growth for the quarter was 1.3% on an annualized basis. Similar to last quarter, the consumer portfolios experienced strong growth. And on the commercial side, despite very competitive pricing in the Northeast market, new commitment activity remained robust, with total balances decreasing as a result of continued elevated payoff activity within the commercial real estate category. Slide 6 provides some additional details around the loan activity for the quarter. As noted, new commercial commitments for the quarter were strong at $522 million, though down slightly from the prior quarter. while the approved pipeline of $383 million should suggest similar closing activity heading into Q4. In terms of commercial activity, we continue to see good opportunities across a number of asset types in diversified industries, with a few highlighted on this page. And what should be our last noteworthy impact from PPP, you can see the PPP balances paid down to $11 million as of September 30th, generating $400,000 of net fees recognized this quarter, compared to $1.8 million in the prior quarter, with immaterial amounts left to be recognized going forward. As noted on the right side of the slide, the consumer portfolios again yielded strong growth and balances, as approximately 90% of the quarter's mortgage activity was retained in the portfolio, while solid home equity demand and increased line utilization led to overall growth in that category. Moving to slide seven, again, echoing what Chris just stressed in his comments, deposit activity reflects the strong balance sheet position that we discussed last quarter. As overall decreases resulted from our ability to allow for the outflow of highly rate-sensitive balances and time deposits while staying focused on core relationships and operating accounts. With core deposits comprising 88% of total deposits as of September 30th, the cost of deposits increased from 5 to 15 basis points in the quarter, representing only a 5% cumulative deposit beta for the current rate cycle so far, or slightly over 7% when isolated to interest-bearing deposits only. As an aside, both numbers are slightly higher when you're looking at Q3 Fed increases only. With deposit pricing well in check, slide 8 shows additional details over the reported margin, as well as a breakdown of volatile or non-recurring items to reconcile back to a core net interest margin. Our overall asset sensitivity is clearly reflected in the results shown, with the core net interest margin results, which exclude net PPP fees, purchase accounting, and other non-recurring items, increasing 36 basis points as compared to the prior quarter. Also benefiting the margin, our decision to be patient in deploying excess liquidity in has allowed for a measured build of higher yielding securities balances into a gradually improving market, while still benefiting from yield increases on meaningful cash balances. This strategy is anchored in our interest rate management approach, summarized in the bottom right section of this slide. Net of our hedging portfolio, which now totals $1.5 billion in notional we anticipate 20 to 25% of our loan portfolio will immediately reprice with any future rate increases. And though deposit rate increases will likely accelerate going forward, we are still very well positioned to benefit from future rate increases while continuing to layer in protection to a down rate scenario. Moving on to asset quality, slide nine provides some key metrics worth highlighting. Non-performing loans stayed consistent at 56 million, The activity for the quarter included the positive resolution of a $24 million commercial real estate loan payoff, which resulted in a $1.3 million recovery of previously deferred interest, which was offset by a new to non-performing $24 million CNI loan. As a result of the commercial real estate non-performing payoff I just mentioned, total delinquencies dropped significantly to only 17 basis points of the portfolio, as the new to non-performing CNI loan is under a forbearance agreement and considered current. And net charge-offs were essentially zero for the quarter. In conjunction with the category shifts in non-performing assets and a relatively stable credit outlook, $3 million of provision for loan loss was recognized, slightly increasing the allowance for credit loss as a percentage of loans to 1.08%. Shifting gears to non-interest items, slide 10 provides details on non-interest income results for the quarter, a few of which I will highlight. Deposit account, interchange, and ATM fees all increased nicely from the prior quarter. Regarding investment management income, strong net inflows helped offset market depreciation as asset under administration dropped by only $65 million to $5.1 billion at September 30th. The modest reduction combined with the usual seasonal decrease in tax preparation fees led to an overall investment management income decrease of approximately $900,000 for the quarter. The $267 million of gross new money noted on this slide is reflective of our Salesforce team experiencing great momentum in both the legacy and newly acquired markets and geographies. And lastly, mortgage banking and loan level swap income continue to be challenged in this rising rate environment, as both of these income streams are impacted by our current position and ability to retain more fixed rate volume on the balance sheet as part of our strategy to protect against future down rate scenarios. Turning to the next slide, total operating expenses of $92.7 million reflect a 2.4% increase from the prior quarter. driven primarily by increased salaries and incentive compensation, as well as some larger non-recurring items such as elevated office equipment spend. And lastly, the tax rate for the quarter remained relatively consistent at 24.4%. In conclusion, and moving on to slide 12, I'll finish with a few updates regarding 2022 fourth quarter guidance, as we will provide full year 2023 guidance next quarter. As we think about our year-to-date results and the relative uncertainty over the general economic environment, we anticipate relatively flat loan and core deposit balances over the fourth quarter, with some modest level of continued reductions in time deposits. As I noted before, we feel very good about our overall balance sheet position and will continue to stay disciplined in our pricing, always focused on growing core relationships on both the loan and deposit side of the ledger, commensurate with overall economic growth. As a byproduct of this disciplined approach, assuming no changes to overall economic conditions, we anticipate credit loss and provision levels to be well contained. Regarding the net interest margin, without predicting the level of additional Fed Reserve rate hikes in Q4, we do anticipate further margin expansion in Q4, driven by the following assumptions. 100% cash balance betas, 20% to 25% loan betas, net of our hedges, and will also be applicable to the late September rate increase not yet reflected in the Q3 results, offset with a slight increase in the total deposit betas I referenced earlier to a 15% range. Regarding non-interest items, total non-interest income could experience modest decreases driven primarily by seasonal declines in deposit and interchange income. Regarding our overdraft program, we continue to work through expected program changes and anticipate an implementation date later in the year. As such, we will provide the dollar impact as part of our full year 2023 guidance next quarter. Non-interest expenses are expected to increase in the low single-digit percentage range, and lastly, the tax rate for the fourth quarter should approximate 25%. That concludes my comments, and with that, we'll now open it up to questions.