Q3 2021 Independent Bank Corp (Massachusetts) Earnings Call
Good day and welcome to the Independent Bank Corporation third quarter 2021 earnings call. All participants will be in listen only mode should you need assistance. Please seemed like conference specialist by pressing Star then zero.
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Before proceeding let me mention that this call may contain forward looking statements with with respect to financial condition results of operations and business of independent Bank corporations.
Actual results may different be different factors that may cause actual results to differ include those identified in our annual report on our Form 10-K, and our earnings press release Independent Bank Corp. Cautions you against unduly ruling relying upon any forward looking.
Athletes and disclaims any intent to update or publicly.
Any forward looking statements.
They are in response to new information future events or otherwise.
Also please note that during this call. We will also discuss certain non-GAAP financial measures as we review Independent Bank Corporation.
Statements performance.
These non-GAAP financial measures should not be considered replacements for and should be read together with GAAP results.
Please refer to the Investor Relations section.
Of our website to obtain a copy of earnings press release, which contains reconciliations.
<unk> of these non-GAAP measures to the most directly comparable GAAP measures and additional information regarding our non-GAAP measures.
Finally, please also note. This event is being recorded I would now like to turn the conference over to Chris I'll leave Sydney, President and CEO. Please go ahead.
Thank you Scott.
Good morning, everyone. Thank you for joining us today with me as usual is Mark Ruggiero, Our Chief Financial Officer, We are joined by Rob Chris Allen, Our Chief operating Officer, and Gerry Nadeau, President of Rockland Trust, and our Chief commercial banking officer.
We remain encouraged by our ability to consistently perform through.
Through this uncertain environment as demonstrated by solid third quarter results.
Excluding M&A charges operating net income for the quarter totaled $41 $1 million or $1.25 per share well ahead of both prior quarter and prior year results.
Mark will be covering the details shortly but highlights include the following points while loan levels were essentially flat due to stubbornly high pay down activity, our closing volumes and pipelines are quite robust as our lenders remain very much in the deal flow total loan originations.
So for the first nine months grew to $2.4 billion, a healthy 17% up on prior year volumes for the comparable period.
Deposit generation remains quite strong across both the commercial and consumer sectors demand deposits alone rose by 5% this quarter.
As we continue to generate record levels of new account openings.
While this influx continues to add to excess liquidity levels and puts pressure on the interest margin. We believe strong deposit generation will pay dividends in the long run.
Yeah.
<unk> revenues were of particular strength this quarter.
With every core fee category experiencing growth mortgage banking has become a real source of strength for us and our investment management group continues to excel as we maintained our record assets under management level credit quality remains in great shape with another quarter of lower nonperforming loans and negligible.
Legible net charge offs operating expense levels were actually slightly down in the third quarter as we carefully balance investing in our growth with a disciplined management of costs.
Returns remained at attractive levels with an operating return on assets of nearly one 2%.
While we take great.
Great Pride in is a steady growth intangible book value per share, which rose again this past quarter. This marks the 31st two consecutive quarter of growth in this key measure keep in mind that this has been achieved despite completing five separate acquisitions over this period. This is a clear indication.
The priority, we place on protecting and growing shareholder value.
As to current priorities the highest of course relates to the closing and integration of Meridian Bancorp and its flagship greater Boston area Bank subsidiary East Boston savings Bank much progress is being made towards completion all required.
<unk> shareholder approvals are received in August of <unk>.
<unk> received from the two federal banking regulators.
Wait final approval from the state regulator, which typically follows the federal approvals.
We have reached agreements to sell eight of the overlapping branches targeted for closure to accommodation of a.
Community Bank and credit Union.
These agreements only include the physical branch facilities as we intend to maintain the existing customer relationships more importantly, all employees and they involve branches are to be retained which was a very important consideration for us.
And.
Locally we continue to conduct in depth training of our soon to be new colleagues, including a focus on our Rockland Trust deeper product set in both the commercial and consumer areas.
And over 300 East Boston savings Bank employees have indicated they will continue their careers with us, which we are thrilled about.
Internal use new colleagues will be a great addition to Rockland Trust and importantly, they bring with them excellent relationships with their customers and communities they've worked hard over the years to cultivate.
Richard Gaziano, who is chairman and CEO of Meridian.
Orchestrated and led our east Boston's growth he.
Pleasure to work with as we collaborate and engage in a critical work.
Planning a successful integration, we expect to close in.
November.
We also continue to move forward on other important initiatives. We recently opened our third retail branches within the city of Worcester. This brings our total.
He's been a footprint to seven and the broader Worcester County, as part of a carefully planned expansion in this targeted market.
Our reach is further strengthened by our robust commercial banking and investment management presence.
Establishing new relationships and expanding existing relationships remains central to our growth mission.
Branch, who assist us in these endeavors, we continue to deploy salesforce technology and capability throughout our bank.
We are engaged in a project to further streamline our commercial loan origination process designed to enhance the overall customer experience with us.
And we continue to develop our risk management and technology infrastructure.
<unk> structure to align with our growing size and sophistication as a company.
Despite the unique challenges presented by the pandemic and the economic recovery continues to push forward and show its robustness. The challenges are well known supply chain issues told provide uncertainty labor market constraints are still a drag.
Rag on growth.
Although month over month trends are going in the right direction inflation remains a concern to nevertheless nationally consumer spending continues to improve with a strong increase in September and that will likely provide a healthy tailwind heading into.
Q4 locally the.
Very strict UCITS economic recovery remains on track with Q2.
GDP growth of 8% to compared to a six 7% figure nationally.
And additional labor market in Massachusetts has continued to outpace the nation with interesting leisure and hospitality, providing the strongest rebound.
Needless to say that.
Massive operating environment continues to be impacted by the ongoing uncertain overall certainty regarding.
Regarding the pace of the economic recovery in a prolonged political gridlock I get we feel we have the necessary franchise and business mix to continue to persevere and perform in the short term while remaining confident about our long term potential.
<unk> now I wish to commend our hardworking Rockland Trust colleagues.
And our East Boston savings Bank partners for their dedication and commitment to ensuring a smooth integration effort of our two banks, while continuing to make superior service levels to our customers. Thank you and before.
For closing I would like to also take a moment to welcome Susan Perry Eau de as the newest member of our board of Directors Susan's experience in multiple service industries, and our deep knowledge of information systems and technology will be invaluable to our board's oversight role, we very much look forward to working with her.
With that I'll turn it over to Mark Mark Thank.
Thank you, Chris third quarter, GAAP net income of $40 million and diluted EPS of $1 21 represent increases of approximately six 5% and six 1% respectively from prior quarter results the.
The increase was driven primarily.
Really by further negative provision levels and higher noninterest income offset by a decrease in P. P. P fee income.
Both the third and second quarter results included merger related expenses associated with the pending Meridian Bancorp merger.
Excluding merger and acquisition expenses operating net income and diluted.
Would EPS were $41 4 million and $1 25 for the third quarter, reflecting a six 7% and six 8% increase respectively from last quarter's non-GAAP operating results.
On a GAAP basis, the results reflected a 111% return on assets and nine point.
4% return on average common equity, while the operating results, excluding M&A, where 1.15% and $9 three 5% respectively.
The GAAP based return on average tangible common equity for the quarter was $13 two 1% while the operating result was $13.
051 percent and the tangible book value per share rose another 46.
To $37.24 as of September 30 of 2021.
I'll now summarize the major drivers behind the quarterly results.
Changes in loan balances continue to be skewed by PPP loan activity.
But to a much lesser degree than in the prior quarters total loan balances decreased by $131 million or one 5% for the quarter with $99 million of the decrease attributable to PPP loans.
The drivers behind the relatively flat loan growth across the entire portfolio when excluding PPP.
<unk> continue to reflect the dynamics. We've described on prior calls strong pipelines and closing activity being negated by elevated payoffs and low line utilization.
Excluding PPP loans total commercial loans stayed flat yet included another healthy quarter of $470 million in total.
Delving further into commercial loan funding activity in the third quarter for.
For commercial real estate, we continue to see the majority of our activity centered around residential property assets, including both single and multifamily developments as well as pockets of opportunity in industrial and auto.
Owner occupied office space.
Construction balances increased nicely in the quarter as one to four family apartment and condo development activity remains strong.
Regarding C&I fundings were driven by activity across a diverse set of industries, yet continue to be challenged by low utilization rates within the port.
Portfolio.
In fact total C&I line utilization rates are down about 8% to 10% from pre COVID-19 levels on toll current aggregate exposure of approximately $1 9 billion.
We do envision loan growth here to pick up when these rates and variably returned to more normalized levels.
In our small business portfolio continued its modest growth which is encouraging.
On the consumer side residential balances decreased by $17 4 million or one 4%, reflecting a solid quarter of $250 million in loan closings, yet due to continued competitive rate pressures only 20 only.
Only 26% of the current quarter closings were retained in the portfolio and 74% sold in the secondary market versus a 45, 55% split in the prior quarter.
In home equity balances continued to be impacted by payoffs and similar challenges over low line utilization rates.
Reinforced.
Enforcing expectations around strong closing activity through the rest of 2021 the approved commercial loan pipeline as of September is approximately 292 million, while the low rate environment continues to drive solid residential and home equity application volume.
And as a quick update on the P. P P portfolio.
Folio over 98% of our 2020 originated PPP loans have been successfully forgiven and the associated fees have been recognized in earnings.
As expected the fee income recognized in the third quarter dropped to approximately $2 2 million compared to $7 2 million in the prior.
Quarter driving the decrease noted in interest income for the current quarter.
As of September 30th 'twenty, 'twenty, one and inclusive of the 2021 P. P. P. Originations, we now have approximately $384 million of Outstandings and $16 3 million of deferred fees remaining to.
We recognized the.
The majority of which should be recognized in 2022, assuming successful forgiveness and repayment outcomes.
Total deposits increased by two 3% or $273 million, reflecting increases across all core deposit products and both personal and business.
And this deposit categories.
As Chris alluded to core households are up another 1% in the quarter and three 6% on a year to date basis.
With time deposits continuing to run off core deposits now comprised 92% of total deposits and the cost of deposits for the third quarter dropped another two.
Two basis points to a mere five basis points.
It's been no secret that our successful core deposit generation has generated significant excess liquidity that remains challenging to deploy in this environment. Yet we do feel the expanded customer base and low cost funding provided represents a real long term.
Okay.
While maintaining enough dry powder for more profitable deployment in the future. We did accelerate our securities purchasing activity investing an additional $733 million during the quarter.
All security purchases in the quarter were comprised of Treasury and government Agency Securities.
With the weighted average expected life of four years.
And we believe this approach continues to be prudent while our crystal ball is no better than others. We do anticipate some level of short term rate increases in the not too distant future and therefore, the strategy has been to deploy excess liquidity at a level that balances some measure.
<unk> of increase short term profitability, while maintaining an asset sensitive profile poised to benefit from future rate increases.
Shifting gears to the income statement net interest income of $90 1 million decreased by $3 3 million or three 5% compared to the prior quarter, while the reported.
Margin decreased 21 basis points to 278% for the third quarter.
The decreases are almost entirely related to the already noted 5 million dollar reduction in PPP fees and increases in lower yielding short term assets with the increased level of cash and securities continue to suppress the mark.
In the near term, but to a lesser degree.
On a positive note when excluding the impact of P. P. P fees the core loan yields held up nicely during the quarter with modest compression mitigated by the decrease in funding costs.
The asset quality picture remains quite benign nonperforming loans decrease.
Arginase further by $2 million to a modest $45 8 million or five 2% of the total portfolio as of September 30th net charge offs for the quarter were negligible.
Delinquencies increased due primarily to one modest sized commercial credit, but remained low at only 21 basis.
At this point of the portfolio.
In total loan deferrals stayed consistent at approximately $223 million or two 5% of the total portfolio and remains concentrated in the accommodation industry.
Given all of these strong factors noted an improvement economic forecast a negative 10.
Kris solid provision for bad debts was recognized in the third quarter.
Lowering the allowance for credit loss as a percentage of loans from 1.15% to 1.05% as of September 30th we.
We experienced broad based improvement in noninterest income, which increased nicely by $1 5 million or 6%.
Million.
Driven by stronger deposit accounts deposit account fees mortgage banking wealth management and swap income.
The mortgage banking income results reflect strong closing and pipeline activity with further pressure on margins as expected while the wealth management income results included increased insurance.
<unk> income and increased fees from assets under administration.
Total assets under administration at September 30th were $5 4 billion and reflect approximately $50 million of net asset inflows for the quarter offset by modest market depreciation.
On the expense side total ripped.
<unk> expenses were basically flat when compared to the prior quarter inclusive of $1 9 million in merger related expenses versus $1 7 million in the prior quarter.
All other expenses reflected various quarter over quarter swings, but remained relatively consistent in total.
Lastly, the tax rate increased.
The 26, 1% for the third quarter.
<unk> the improved profitability.
As we look out into the fourth quarter and to serve as a big picture update on the pending east Boston savings acquisition.
We provide the following near term guidance, which we'll update following the yearend as.
As Chris noted.
Dissipate the Meridian Bancorp East Boston savings Bank merger to close in mid November.
The various components of the earnings stream attributable to the deal continue to be fine tune in general we reaffirm our big picture deal metrics as announced regarding initial tangible book value and earnings accretion.
We entered that being said one particular item to note is an update from guidance provided last quarter with the continued flow of excess liquidity over the last six months.
The net interest margin on a pro forma basis may see some modest tick down.
Regarding stand alone Rockland Trust guidance.
Long.
Loan growth is expected to mirror Q3 results such that continued payoffs will mitigate strong anticipated closing activity, resulting in relatively flat balances.
As noted before any increase in line utilization could serve as a catalyst to stronger loan growth.
<unk> growth is expected to be.
In the low single digits.
Near term deployment of excess liquidity will likely continue to be in the form of increased securities balances.
Similar to prior quarters guidance, assuming an anticipated trend of improving general economic factors and no major surprises from overall asset quality the provision for credit losses.
Loss will likely continue to track at levels below net charge offs.
Noninterest income will likely decrease slightly to two slightly due to seasonal declines from deposit fees.
Reduced mortgage banking income attributable to compressed gain on sale margins and a likely increase in production retained in the portfolio.
As well as reduced equity investment gains, which benefited both Q2 and Q3 results of approximately $1 million in each quarter.
Noninterest expense is expected to increase slightly that concludes my comments, we will now open it up to questions.
We will now begin the question.
And the answer session to ask a question you May Press Star then one on your touch telephone if youre using a speakerphone. Please pick up the handset before pressing the keys.
Any time your question has been addressed and you would like to withdraw your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question will come from Mark Fitzgibbon from Piper Sandler. Please go ahead.
Good morning.
Good morning, Mark.
Just to clarify Mark your guidance for the fourth quarter is independent Standalone it doesn't incorporate.
The impact of Meridian.
That's right that the components over sort of loan deposit and fee and expenses all standalone guidance that's right.
Gotcha Okay.
And then I guess I was curious.
I heard what you said about.
Provisions being less than charge offs, but do you think we're getting close to the end of reserve releases for the company.
Onyx ex the impact of Meridian.
Yeah, It's a great question Mark.
I think to put the numbers in perspective, if you look back at 2020 for the full year, we had $52 million and provision.
And through 2021, we've pulled back about 17.
<unk> million dollars of that so.
Certainly some.
Some headroom there in terms of where we were comfortable with the allowance as a percentage of loans at seasonal adoption.
I'm, certainly not suggesting that is $25 million to $30 million of additional release, but I do think we're.
We're being cautious.
We're continuing to understand the environment and the risk associated with it but I do think there is.
Another couple of quarters here, where additional releases may be appropriate if.
The picture stays positive.
Okay, and then I was.
Curious Chris it sounded like you were really optimistic that you'd be able to close this transaction mid November but it feels like the regulators have been dragging their heels a little bit on on deals generally I guess I'm curious what gives you so much confidence that youll be able to get it done in mid November.
Mark.
We are.
Put it in constant contact with the regulators in understanding sort of where they are in the process and they are tracking right along with past acquisitions Theres no.
Yellow flags or anomalies and things things are clicking along I mean per usual our sense is that the what we're hearing in the marketplace about deals being.
Pools being dragged out or really for larger institutions at this point and are not impacting transactions of our size. So we.
We feel like we have a clear road ahead.
<unk> per pack, our experience and our current conversations with them.
And to be clear, we do have when you do already have.
Have approval from the two federal regulators, both the fed reserve and FDIC have already approved its just the division of banks that is pending right now.
Okay.
And then I wondered if you could share with us what the maturity schedule of the $223 million is loans on deferral looks like I think last quarter. You said most of it was in 2000.
So to those deferrals mature, but I wonder if you could just give us an update on that.
Sure so about $40 million of that is set to mature here in the fourth quarter of 2021, and then as you stated the rest of that a very small amount and actually trickles into 2023 about $8 million, but the rest of it will mature.
2000, and 2022, the bulk of that being in the back half of the year.
And just one final question if I could.
I was curious if you could give us an update on the Worcester expansion sort of progress to date, maybe loans and deposit balances would be great. Thank you.
Sure I know robs on the phone and as always eager.
<unk> talked about all the great things that are happening in the worst or so maybe Rob if you want to share that.
Sure Good morning, Mark.
As you probably heard Chris mentioned in his opening comments Mark we just opened our third city of Worcester branch.
So.
In addition to the city of Westar, We also opened a branch last year in Shrewsbury and.
In total our deposits are at about $65 million across those branches that is not a western county, the part of it.
In total are in excess of that.
If you include the Milford acquisition.
And we're lining up another branch and that expansion hope.
Hopefully for the first quarter of 2022, I don't have the loan portfolio information Jerry I don't know if you do.
Yes, just on the commercial side that this is just in the wister lending team. So this is not necessarily.
Really all of our commercial loans and Wister in Worcester County, just out of the new team that we put in will start at the end of September the Outstandings were about $75 million.
Thank you.
Awesome.
Yeah.
Our next question will come from David Bishop from.
Port Research partners. Please go ahead.
Yes, good morning, gentlemen, good morning.
Okay.
Just remind us maybe what.
The interest rate risk positioning looks like or will look like post meridian I know this balance sheet restructuring here and now there's been some moving parts, obviously with the deployment.
From Securities, but just curious if theres been a material change in the interest rate positioning intra quarter.
Yeah, David they are slightly liability sensitive so matching up with our balance sheet. It will moderate our asset sensitivity sensitivity to a degree.
But we will still continue to be.
Appointment of fairly asset sensitive on a pro forma basis, and I think to give it some perspective.
<unk> historically talked a lot about our one month LIBOR and prime based loans, which currently make up about 45% of our loan portfolio today on a pro forma basis that were.
Probably around 30% 35%.
So those are the loans that would reprice immediately with any sort of fed rate increase so we still we still will be an asset sensitive bank just to a slightly lesser degree.
Got it and then any.
In terms of.
Drop.
<unk> is in place.
You have to see from a fed rate move to penetrate those laws.
Yes.
We have we have done a nice job of putting floors in place on a lot of our recent commercial activity and if youre asking the question in this direction.
We think in 'twenty five.
Basis point rate increase approximately $650 million of that one month LIBOR book will not get the benefit because they are already in the money what the flaws we've put on.
Our next question will come from Kelly Motta from K BW. Please go ahead.
Hey, good morning, Thanks for the question guys.
Kelly made to turn back.
Just wanted to turn back to loan growth.
Your prepared remarks, you mentioned that utilization rates.
It potentially be a catalyst for growth going forward, if they ticked up can you remind us where you go.
Right.
That compares to.
When you had historically been.
Before Wow, Thank you sure so.
As I noted in the comments, especially on.
C&I in particular general C&I utilization rates right now are about 35%.
And that's about eight or 10 basis points lower from where we were pre COVID-19.
The other big line pool is on the home equity side, which has a similar.
Home equity line of credit utilization is also around 35% today and historically pre COVID-19 those levels were more in the low 40% range. So those are also down.
All at seven 8% from where we were.
So both of those carry.
Three aggregate exposure of $1 $7 billion each.
So there's certainly some level of increase loan outstandings to the extent any of that lining utilization picks up.
Great.
Thank you.
Welcome.
Again, if you have a question. Please press Star then one.
Our next question will come from Laurie Hunsicker from Compass point. Please go ahead.
Hi, good morning morning.
Just touching on a couple of things here your eight brands.
But our credit union and to her but one.
Is there an expected gain or loss on that and what is the timing.
And is there a change in terms of how we should be thinking about expenses or was that.
Initially part of the plan in terms of your expense guide with the merge.
Yeah. That's all initially part of the plan far east from a timing standpoint it'll be.
We're looking to structure it effectively right after the legal close.
But these were our branches that we had already modeled and anticipated would be closing as part of the merger.
And we had modeled one time costs associated with exiting those branches.
The numbers are still being fine tuned it a bit but it should not materially change any of the assumptions that we considered when we thought about cost saves for onetime costs and exiting those branches.
Alright.
Okay.
And then.
Just back to your comments on margin obviously you all.
New York had 71 this quarter.
DSD with three of five.
So kind of putting that behind you can you just help us think about them.
While the asset reduction is playing into that and if we're lucky.
Looking at that.
I'm coming up with somewhere between <unk> to call.
Call It 75 to 78.
Core margin as we sort of fast forward two quarters now.
Is that is that sort of a right starting point.
You may be thinking about.
On a combined.
Mhm.
Sorry, Laurie just confirming that number you just referenced is.
But were you referring that on a combined basis, a couple of quarters out.
Yeah, correct pro forma thank you have a lot going on.
Your typical America, just because of the asset reduction.
To make sure that I'm thinking about it the right way in terms.
Starting point.
No. There is a lot of moving pieces you are right and.
If you look at our starting point.
Yeah.
I reaffirm what you're what you're suggesting is that we're currently at about two 7% I think heading out into 2022, depending on the timing of the PPP.
See a little bit of a lift there, but will likely have some other.
Modest compression mitigating that so I think you stay in that range of where we are now.
As you mentioned east Boston has experienced some attrition in their commercial book so their margin has come down.
They've done a really nice job moving on.
On the funding side to mitigate that but.
But I think youll see some modest compression if you think about their book as a stand alone basis as well.
We will get some lift is in is in our ability to restructure the balance sheet.
Even after we close so a lot of the loan run off.
As part of what we modeled.
We made we've seen that accelerate and we'll be looking to.
Spend a lot of time and effort.
Making sure that we can mitigate the attrition and look for opportunities for growth post close so.
So we don't input anticipate we will see the level of runoff that we thought post close because it.
So happened to some degree, but what we will be able to do is pay down their <unk> borrowings immediately and allow for some higher cost time deposit run off as well so that on a net basis will give us a lift in the margin. So that I think you get closer back to 3%.
All things being equal in that scenario.
And they had about I don't know $600 million or something in borrowings is that 560, <unk> Yep Yep alright.
Okay, Great and then how should we be thinking about tax rate next year.
Yeah, we continue to guide that.
Ascent, but about 25% Lori this quarter it ticked up a bit because we had.
At the time through the first couple of quarters.
The tax rate forecasted and to anticipate the level of loan loss recovery.
Provision recovery.
So we had a little bit of a modest uptick to sort of rightsize the year to date tax.
That too for that improvement in profitability, but I think youll see it turned to <unk> to.
To trend back to 25%.
Okay, Okay, Great and then Chris just one question for you know that.
Now that we're right here.
The last standing on how are you thinking about forward looking M&A would you be.
<unk> opportunity presented or how are you thinking about that.
Okay.
Oh.
Generally of course, we're going to be ready and intuitive, but I'd be interested in.
Continuing what appears to be sort of a track record every year to doing an acquisition.
In an ideal world.
Yes.
Lori I'd like.
To get through this acquisition and give everybody a really nice holiday because they work really hard.
And.
Maybe it's something that will surface next year.
That that would be my sort of preference in terms of timing, but in terms of a set.
Our trend I think.
Nationally M&A is going to continue it's been continuing for this 1985 and it's going to continue here that the number of banks that are eligible will certainly have been diminished over the years, but there are some really really nice banks that'd be a great combination with Rockland Trust in and maybe some day they raise.
Their hand, and we'd love to have a conversation.
Great. Thanks for taking my question.
I always can count on you for that question Laurie I look forward to it each quarter.
Okay.
This concludes our question and answer session I would like to turn the conference back over to Chris for any closing.
Great. Thank you everybody for joining us today.
And we will talk to you in January and have a great day, great fourth quarter Goodbye.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.