Q4 2021 Independent Bank Corp (Massachusetts) Earnings Call
Okay.
Good day and welcome to the independent Bank Corp's fourth quarter 'twenty, one 2021 earnings conference call.
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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, maybe found in our earnings release and other SEC filings.
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Now I'd like to turn the conference over to Chris All the Sun President and CEO . Please go ahead.
Thank you Anthony and good morning, and happy new year to everyone. Thank you for joining us today.
With me is Mark Ruggiero, our Chief Financial Officer, Rob because one our chief operating officer, and Gerry Nadeau, President of Rockland Trust, and our Chief commercial banking officer.
We capped the year with another strong and well rounded quarterly performance. Excluding one time charges operating net income for the fourth quarter rose to $65 $7 million or $1 63 per share.
The quarter also marked a major milestone as we closed on the Meridian Bancorp acquisition and its flagship East Boston savings Bank.
Mark will be taking through the quarter shortly I'll be focusing my comments on the year just concluded.
Needless to say 2021 was another year of challenges and the lingering uncertainty posed by the ongoing pandemic.
The banking industry. Once again, he was confronted with having to meet the pressing needs of customers and communities, while dealing with tight staffing and economic disruptions, while certainly not immune from these issues, they're respectful carrying a relationship oriented culture at Rockland Trust was instrumental navigating these times.
Financially, we performed quite well operating earnings for the year grew by over 50% to 187 $6 million or $5 38 per share and.
In addition, Cortez posits grew organically by 18% rolled out robust demand deposit growth helped keep our funding costs quite low.
Low rate environment has temporarily masked the intrinsic value of our core deposit franchise, but we strongly believe in its long term potential.
Organic loan growth continues to be constrained by elevated levels of paydowns relatively low utilization rates and P. P. P long run off and I can assure you our loan officers remain very much in the deal flow in fact total commercial loan originations in 2020 and were always by 29% to 185 billion.
Dollars and our pipelines remain strong our investment management business continues to be a real bellwether for us with a 20% increase in revenues last year.
Total assets under administration rose significantly to a record $5.7 billion driven by strong market net new inflows and added business from our various acquired customer bases.
Our mortgage operation has become another source of strength, where I sweat record closings out of $1 $2 billion, we had a record year of new consumer checking account opening and in home equity originations to our.
Our credit picture for sure has remained as benign as ever.
Nonperforming loans declined by nearly 60% last year and our total loss rate for the year was a mere one basis point.
And our capital levels remain in excellent shape as a sign of confidence. Our board has just provided authorization for a share repurchase program and best of all tangible book value per share continued its upward trajectory, having grown 19% in the past year to $42.25.
And now has risen for 32 consecutive quarters.
The numbers, we made major progress in advancing our franchise across a range of growth initiatives first and foremost of course, those closing and integration of East Boston savings Bank, our largest acquisition to date within 48 hours of its closing in mid November we accomplished our systems and account conversion for nearly 120000.
A couch closed or sold overlapping branches change signage and integrated related infrastructure. It brings a net addition of 25 branches 115000 deposit accounts at 65000 households into our ranks and have further cements, our leading market position in eastern Massachusetts, geography that makes sense.
From greater Boston, all the way down to Cape Cod and the islands.
Uh huh.
And of course out the westar or.
<unk> now contains 123 branches, which includes one mobile branch, we acquired East Boston savings Bank nine mortgage centers 10 investment officers of 19 commercial lending centers.
We are excited about the opportunity to bring our more extensive product set to the east Boston customers.
Not only is this acquisition of strategic home run, but a financial one as well as it is immediately accretive to both earnings and tangible book value per share.
So while this integration effort was our highest priority it certainly doesn't preclude us from moving forward in other key initiatives in 2021, and these included expanding our presence in Worcester County, which now includes seven branches of commercial banking and investment management office and a growing customer base.
Continually adding to our digital banking offers offerings.
Offerings, including our service, we have named your banker, which allows customers to connect virtually to a dedicated banker. We also implemented a new streamlined home equity origination solutions.
Pursuing an integrated and sharper marketing program across the full range of media online and direct mail vehicles, which led to solid growth in core households checking accounts.
Mortgage and home equity applications.
We also go to helping small businesses by cleaning the completing the forgiveness processing for 99% of our 'twenty 'twenty P. P. P loans, while originating 3700, new small business P. P. P loans last year.
Extending our we extended our community involvement and leadership commitment through a wide range of financial literally scholarship reading volunteerism and charitable giving programs.
And we continue to Gardner rec.
Our recognition and top tier rankings from incredible third parties for our customer service and satisfaction for Nashville formats, small business lending and corporate equality practices.
Looking ahead, our near term priorities include continuing progress on these initiatives along with expanding our relationships with our new east Boston customers capitalizing on the new best New business generation and analytical potential of sales force, which has now been integrated into all of our major business lines, including our retail.
Branch network.
Expanding our funds transfer offering to consumer customers by incorporating the zelle digital payments that work into our digital platform.
Further improving our loan processing efficiency by implementing encino.
And history of leading online loan origination platform.
And for our case for loans under $2 million continuing to build out our enterprise risk management program. That's been fitting for the now $20 billion asset bank, we've become and of course continue to seek to optimize our branch network as we enhance our advice space and consultative approach, but one thing I want to point.
Now as I've mentioned before we were not following industry trends and closing lots of branches as we believe they are a valuable source of new business referrals for us.
A quick look at the economic economy nationally the focus continues to be on inflation with the C. P. I jumping 7% on a yearly basis. That's a 42 year high in response to fed has shifted to more hawkish tone, and then singled multiple rate cuts in 2022, which would provide a tailwind for the bank in the coming year as Mark was just.
In a moment.
The labor market continues down the path of recovery and wages are rising locally the Massachusetts economy economic recovery remains on track with the third quarter a growth of three seven compared to $2 three nationally.
In addition, the labor market in Massachusetts continues to outpace the nation with a strong labor force participation now.
There's no question that the banking industry continues to face near term challenges and these include margin pressure.
High levels of liquidity cycle of Covid variance credit concerns news by the protracted this supply chain problems.
Inflation and of course competition from Fintech and non banks, but what gives me confidence here is that we've become seasoned at managing and making decisions during difficult times, while planting the seeds for future growth now theres not a lot of magic cure. It just it's just a maybe a little bit but just it's mostly the highly disciplined.
Approach to focus intensely on our customers capitalize on the strength of our brand understand our real competitive advantage and maintaining that long term perspective throw out now.
We continue to believe our future success demands that healthy mix of scale flexibility efficiency and talent development.
After that last ingredient.
I have to say that it's not an exaggeration to attribute the full measure of our success to the extraordinary efforts and dedication to our our Rockland Trust colleagues Theres no question that the past two years has placed an enormous strain on my colleagues that they've comprises each and every obstacle with poise and determination.
Their ability to continue serving our customers and exemplary fashion and produced a record business results, while facing a significant east Boston integration efforts demanded of them is nothing short of remarkable and very noteworthy I simply can't thank them enough.
We invest heavily in our workforce I've got my colleagues to ensure their growth and wellbeing and we're intensely proud to be recognized in our Boston Globe's Top places. It works every for the 13th consecutive year and our particular category. We're the only bank in that grouping.
That concludes my comments.
I'll turn it over to Mark.
Thank you, Chris driven primarily by the upfront cost of the Meridian Bancorp in East Boston Savings Bank acquisition that closed on November 12.
Fourth quarter GAAP net income of $1 7 million and diluted EPS of four cents represent significant decreases from prior quarter results. The company recorded pretax onetime merger expenses of $37 2 million as well as provision for credit loss of $35 7 million, which includes.
The one time provision of $50 7 million attributable to acquired non purchase credit deteriorated or non P. C D loans.
When excluding these nonrecurring acquisition related items and their related tax effects operating net income and diluted EPS were $65 7 million and $1 63 for the fourth quarter, reflecting a 59% and 30% increase respectively from last quarter's non-GAAP operating results.
On a GAAP basis, the results reflect a 0.04% return on assets and point to 8% return on average common equity while the operating basis results. Excluding the nonrecurring items, just noted were 1.47% and 10, 75% respectively and.
In addition, the return on tangible common equity for the quarter was $15, 92% on an operating basis.
Also up nicely from the prior quarter.
I'll now summarize some key metrics associated with the closing of the Meridian acquisition.
Total deal consideration was approximately 1.3 billion comprised of the issuance of $14 3 million shares valued at approximately 1.29 billion plus $12 million associated with the cash out of stock options.
Total assets acquired totaled $6 4 billion at fair value, including $4 9 billion in total loan balances outstanding.
Total deposit balances acquired were $4 4 billion long term borrowings of 576 million at fair value were immediately paid in full shortly after the closing.
Key purchase related accounting marks include a $67 2 million or one 4% credit mark with a 25% purchase credit deteriorated allocation or P. C D allocation.
Combined loan interest and liquidity premium of $51 4 million and a core deposit intangible asset of $10 3 million or point to 8% of core deposit balances.
With other modest fair value adjustments included total goodwill recognized was $478 9 million.
And as previously indicated we reaffirm that the net amortization or accretion of these fair value marks are anticipated to offset and have very little impact on earnings results going forward.
As a result of the simultaneous closing convert our cost save assumptions of 45% had been achieved as of December 31st which includes the closing of 16 of the acquired East Boston savings Bank and two legacy Rockland Trust Bank branches during the quarter, while also completing key system conversions contract terminations.
Severance agreements during the quarter.
Associated with these facility exit events and contract terminations, along with professional and legal fees and other miscellaneous one time items incurred.
Total pre tax merger related expenses for the quarter were $37 2 million, bringing the year to date amount to $40 8 million in.
In addition, approximately five to 6 million of remaining merger costs are expected to be recognized in 2022 related to the final exit of certain facilities.
<unk> and the anticipated total deal related one time cost to be slightly less than originally announced.
In summary, the immediate impact of the merger is very positive, reflecting an 11, 4% or approximately $4.25 increase in tangible book value inclusive of the remaining one time costs yet to be recognized.
As such and as Chris mentioned on the heels of the of the Meridian clothing and in response to our strong pro forma capital position. Your stock buyback plan was recently announced to allow for repurchases up to $140 million and will be in effect through January 18th 2023.
I will now shift gears to cover key business drivers and other aspects of our pro forma financial position and conclude with guidance for 2022.
Along those lines regarding our fourth quarter results as noted in our earnings release the increase in total loans of $4 8 billion reflect the acquired balances offset by $129 million of attrition on an organic basis.
When excluding the $208 million reduction in P. P. P loan balances net organic loan growth totaled $78 million in the quarter or slightly under 4% on an annualized basis.
The drivers behind the Rockland legacy activity reflect many themes, we have talked about throughout the year strong closing activity, primarily associated with residential and condo development classes low line utilization rates and continued elevated levels of payoffs.
As a reminder, our expectations regarding the east Boston loan portfolio plan for an overall reduction in balances of $700 million.
Approximately $500 million of that has occurred from announcement through year end, while additional expected attrition will certainly be a restraint on loan growth through 2022.
Of note worthy change versus prior quarters, the residential loan portfolio increased by $43 million on an organic basis, reflecting strong jumbo loan production in the quarter.
The approved commercial loan pipeline inclusive of east Boston sits at $242 million at year end and the low rate environment continues to drive solid residential and home equity application volume in light of the usual seasonal decline.
And from my usual update on the P. P. P portfolio net fee income recognized in the fourth quarter was approximately $7 5 million compared to $2 2 million in the prior quarter.
As of December 31, 2021 total P. P. P. Outstandings are approximately $216 million, which includes $35 million associated with the east Boston acquisition.
And lastly, approximately $5 9 million of net deferred fees are remaining to be recognized in 2022 with most of that expected in the first half of the year.
On an organic basis, excluding the east Boston merger total deposits increased by one 8% or 216 million, reflecting strong consumer deposit increases across demand deposit savings and interest checking accounts.
And despite east Boston larger time deposit portfolio core deposits at December 31st remained at a healthy 85% of total deposits and.
In addition, the majority of the acquired core deposits were immediately transitioned into rockland pricing structure and with the benefit from the time deposit fair value Mark accretion the combined cost of deposits for the quarter remained at only five basis points.
Similar to prior quarters, the most common avenue for deployment of excess liquidity was in the securities portfolio.
Geraghty purchases in the fourth quarter totaled $445 million and were comprised of Treasury and government agency securities with a weighted average yield of one 4% and expected life of just over six years.
We continue to reaffirm the strategy of deploying excess liquidity at a level that balances. Some measure of increased short term profitability, while maintaining an asset sensitive profile poised to benefit from future rate increases.
And as a reminder, on that front, although the east Boston loan portfolio is comprised of more fixed rate and longer term adjustable rate loans. The pro forma balance sheet remains heavily asset sensitive with $2 $1 billion in cash at the fed and approximately 20% to 25% of loans that will be expected to.
Benefit immediately with the federal reserve rate increase net of the macro level hedges and loan rate floors in the portfolio.
Shifting gears to the income statement net interest income of $122 5 million reflects the one and a half months lift from the Meridian acquisition with a reported margin for the quarter Horizon's 27 basis points to three point <unk>, 5%.
Some noteworthy items in the margin include the following.
Allusive of the margin impact total average cash and securities as a percentage of earning assets remain at an elevated position of 29% yet down slightly from 31% in the prior quarter.
No one had previously the P. P. P fee income was up significantly in the quarter total.
Total purchase accounting accretion for the quarter was $1 9 million consistent with the prior quarter.
And excluding P. P. P fee income purchase accounting accretion and other one time items like prepayment penalties.
Adjusted core margin for the quarter was 2.83% versus 270% in the prior quarter.
Moving onto credit asset quality remains very strong and in particular nonperforming loans at December 31 were $27 8 million and include $4 5 million acquired in the Meridian deal.
Despite this acquired amount nonperforming loans decreased by $18 million from the prior quarter, reflecting a large $15 6 million note sale in October which resulted in a $2 5 million dollar recovery during the quarter.
As such total net recoveries for the quarter were $2 4 million.
Total delinquencies increased modestly to only 0.34% of the portfolio.
And lastly updated for the acquisition total loan deferrals at December 31st or approximately $383 million or two 8% of the total portfolio with the majority continuing to remain concentrated in the accommodation industry.
The provision for credit loss of $35 7 million in the quarter reflects the 57 million attributable to non P. C. D acquired loans offset by an additional $15 million reserve release reflective of the strong asset quality metrics just discussed.
Inclusive of the acquisition impact the allowance for credit loss as a percentage of loans is now one point to 8% as of December 31st.
I'll now highlight some key fee income drivers for the quarter.
Mortgage banking income decreased approximately 815000 compared to the prior quarter, there's only 52% of the production was sold in the secondary market versus 74% last quarter.
As a result of increased expectations for rising rates loan level swap demand increased with fees for the quarter of $2 4 million up nicely from the $600000 last quarter and.
In wealth management income stayed relatively consistent with the prior quarter as reduced insurance Commission income offset the late December market depreciation benefit.
Total assets as Chris as Chris mentioned under administration at December 31st reached a record $5 7 billion, reflecting $40 million of net inflows for the quarter plus market appreciation.
Total expenses for the quarter reflect the one and a half month increase from the acquisition with $37 2 million of merger related expenses for the quarter, which is alluded to before primarily consist of severance and other onetime costs.
Other noteworthy items for the quarter as compared to the prior quarter included increased incentive compensation Commission expense and consulting costs.
Lastly, the tax benefit for the quarter include some noisy adjustments to account for the impact of the Meridian deal plus a $975000 true up benefit associated with the filing of the 2020 corporate tax returns.
I will now close out with full year 2022 guidance.
In the near term, it's worth noting that the first quarter of 2022 will be the first full quarter of the post margin results driving a V.
Asian from 'twenty to 'twenty, one fourth quarter results and most P&L components.
As previously noted despite healthy loan closing expectations loan balances for the year will likely contract out a low single digit percentage due to reductions in the remaining PPP balances and a continued level of attrition attributable to the east Boston balances.
Offsetting legacy coal legacy core growth in the low to mid single digit range.
Upon stabilization of those acquired balances modest loan growth as expected, which is targeted for late 2022 early 2023.
And as noted last quarter any increase in line utilization would certainly serve as a catalyst to stronger loan growth.
In addition deposit balances remain a bit uncertain with core household growth always remaining a priority yet time deposit attrition and some modest level of acquired deposit balance runoff is expected in the first half of the year.
Net interest income is anticipated to include the recognition of the remaining $5 9 million in P. P. P fees and may reflect some quarter over quarter volatility due to purchase accounting loan accretion. However, assuming no changes in rates from the fed it continued measured approach of increase in securities.
Ounces and excluding P. P. P fee income and purchase accounting, we estimate the core margin to be in the two 9% to 3% range for the full year.
And reiterating my prior comments on asset sensitivity.
Third rate increase would drive a net positive on a full cash position and approximately 20% to 25% of the loan book on a net basis.
In addition, the rate increase would have very little impact on outstanding borrowings, while any changes into product in deposit pricing would be market driven.
With continued expected improvement in general economic factors and no major surprises from overall asset quality provision for credit loss will likely continue to track at levels below net charge offs, which we anticipate to be well contained.
Noninterest income is expected to be primarily impacted by the fallen reflecting the current rate environment and year end mortgage pipeline levels. A majority portion of closing activity is expected to be retained in the portfolio, which will drive decreases in mortgage banking income in the short term, while contributing modestly to net interest income.
Wealth management income will continue to reflect positive net inflows of new money, plus any market appreciation or depreciation impact.
Assuming expectations over rate increases remain high we anticipate loan level derivative income to increase from the full 2021 results they'll likely lower than our 2020 record levels.
And with a portion of their interchange income now capped by Durbin. The Meridian acquisition is expected to have only modest direct lift to fee income for much of the year, yet upside potential remains tied to successful integration of a much broader mortgage banking product set and wealth management offering to these new customer bases.
Regarding noninterest expense as noted earlier with the majority of the systems and contract terminations are already behind US we are confident in the 45% cost save assumptions originally announced with the Meridian deal.
While increasing the legacy spending at a mid single digit percentage rate when compared to pre meridian in 2020 . One results and that is a direct result of inflation of inflationary pressures and continued investment in our risk and technology infrastructure.
And lastly, the full tax year.
Full tax rate to be in the 24% to 25% range with our typical first quarter being the low point reflective of discrete equity compensation vesting benefits.
That concludes my comments and we'll now open it up to questions.
Oh.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
Okay.
Okay.
Our first question comes from Mark Fitzgibbon with Sandler O'neill.
You May go ahead.
Hey, guys. Thank you and good morning.
Mark good morning.
First question I had for you is I heard your comments Mark about your confidence in the 45% cost saves, but I wondered if you could share with us sort of an updated timing of when you will extract those cost saves and I was curious if theres any further branch consolidations beyond what you've already done.
Don.
Sure Mark I'd say those cost saves are already achieved there's very little you know a few hundred thousand dollar impact.
Impact expected in the first quarter for a few locations that we've closed we just haven't been able to fully negotiate.
Sort of the final exit so the accounting requires us to push a little bit of that into 2022, but.
Barring that all cost saves are already achieved as of December 31st.
And in terms of branch closing you know nothing is in is on the short term horizon I think we've.
The decisions, we made around the Meridian acquisition, we and where we stand today with the branch footprint, we feel very good about so there's nothing we're always assessing we're always looking at.
Opportunities and what makes sense, but right now there's nothing slated in the near term.
Okay, and then I Wonder if you could just clarify what you had said about the loan pipelines I thought I caught that it was $242 million and the pipelines were particularly strong in resi mortgage and home equity is that did I hear that correctly that is correct. Yes, yes, yeah 242 and is the are the.
The commercial approved pipeline.
And usually we see a bit of a decline this time of year on the consumer book, which is still the case compared to where we were at Q3, but.
We still see a lot of good opportunity both in mortgage and home equity and a pretty optimistic heading into 2022 on those fronts. Mark do you have a sense what the average pipeline rate is on the commercial stuff.
In terms of our commitment rate or.
I don't have that in front of me I know if Jerry you have insight on that.
Hi, Mark Good morning, good morning Gerry.
Mark, it's probably and I'm just you know it's hard on the quick question I have to think about but I would say more than probably 75% of it is floating so it's probably.
Somewhere on average between two to 300 over LIBOR now sulfur and on the fixed rate side, it's probably in the high threes to 4% is the range.
Got it.
Yeah, that's perfect Gerry Thank you.
And then I wondered.
What is the maturity schedule of the remaining Covid deferrals look like.
Yeah.
The majority of that will start to run off as we head into the second half of 2022.
We do still have some level of maturity.
We extended on deferrals into 2023, and I believe even.
A very small percentage, but some.
Quite to the Meridian book that go out into the late 2023 or 2024.
But I believe it's well over half of of those deferrals are expected to mature here in the upcoming 12 months.
Okay, and then lastly, Mark I was curious if you could just help us think about that you know say, a 25 basis point move in rates up.
What is that mean for the margin.
Yeah. It certainly certainly gives us a nice lift in terms of the immediate impact as I sort of noted certainly all $2 billion of the cash position would reprice.
And when we think about our loan book around 34% of it is actually tied to one month LIBOR and prime but as I noted we have on the macro level hedges and some floors already embedded in the portfolio. So that brings the net.
Net.
Population down to about 20% to 25% of the loan book. So that gives you you know if you just do the math of 25 basis point.
Rate increase on those numbers suggest that you know of 12 to 13 million dollar lift pretax or about 222 to two 5% increase on net interest income.
Hum.
That's on a pretax basis.
Okay.
Great. Thank you.
Sure.
Thanks Mark.
Yes.
Our next question comes from Dave Bishop with Seaport Research you May go ahead.
Hey, good morning, gentlemen.
Hi, David.
Sorry.
Background noise there.
A quick question for you maybe following up on Mark's question. There regarding the the operating expense guidance I was wonder if you could drill down I'm, just putting them out in terms of getting the cost saves upfront, they're looking at Mark maybe just trying to circle in on that I'm getting to maybe a mid to high $80 million range.
About right in terms of a ballpark for the first quarter with like you said that the 2% to 3% inflation lift.
Yeah I think.
But I think about it in terms of our full year, Dave If you just break it down into really two components sort of the legacy <unk>.
Expense run.
Run rate had been around $70 million to $72 million.
Ill give it to a little bit higher in the fourth quarter with some some one time items, but.
If you put a.
A mid single digit rate increase on that number and then the east Boston expense load prior to the acquisition was right around $100 million on an annual basis, and that's where you would extract the 45% cost saves off of that number.
So I think if you put those pieces together.
Your number I think sounds a little high from where we'd be landing, but not too far off.
Okay got it I appreciate that and then also circling back to.
That last question you met you mentioned the macro hedges, we've seen a couple of other institutions on blind dose is that something you can contemplate if the fed does get a little bit more hawkish unexpected unwind some of the macro hedges.
Yeah, I think it's still serves a good portion of our.
Given that the totality of our balance sheet position at this point, Dave where I think letting those run their natural course will those will start to actually just by nature of mature heading into 2023. So I think it still gives us.
Some protection here in the near term. So I you know I think I think even with those in to be able to benefit from the from any sort of increases in rates. We feel very good about that benefit even net of the hedges. So I don't think we'd be looking to sort of accelerate unwinding those in the near term.
Okay got it and then.
Appreciate the color or the update in terms of the loan attrition do you expect from the the Meridian side I think it was like $700 million do you expect a similar amount on the deposit side as well, but in that ballpark are.
You know any sort of way.
Yes, sorry, sorry, David I mean to cut you off you had a second part to that question.
That's fine.
Yeah, you know it's actually.
Certainly not to that degree on the deposit side.
But the time deposit portfolio is where we'll likely see most of the run off a lot of their larger broker deposits had already matured prior to the closing so.
So you saw some some downtick on their total deposits through the announcement to the closing date. So subsequent to the closing we've actually had very good success in retaining the majority of their deposits in.
We've had great momentum great referrals, a lot of good energy around sort of the retail network. They are so.
Right now the deposit base is looking strong and it's tough to know how much of that will run off but I.
Definitely not say to the level that we expect the loan attrition out.
Got it appreciate the color sure.
Thanks, Dave.
Our next question comes from Laurie Hunsicker with Compass point.
You May now go ahead.
Yeah, Hey, Thanks, Good morning, Hey, good morning Laurie.
Just hoping we can go back here on.
On our interest rate sensitivity I'm just extrapolating.
My question I, just want to make sure that I'm, an apples to apples as we think about this broadly yet again.
The bank spectrum. So if you look at this with a 100 basis point sock pro forma with UBS the round numbers.
You're at a positive 9% on NII am I thinking about that the right way.
That'd be an immediate impact Laura.
What we don't what I, what isn't factored into that is obviously some level of deposit repricing over time.
So I do want to be clear that that would be the immediate benefit of the asset repricing.
As you know we've been very successful in prior interest rate.
Where.
We've been able to do.
To keep deposit betas, very well contained in an orphan lagging and increased deposit prices out of the gate. So at some point, we would expect to give a portion of that back on the deposit side.
And when you think about sort of our SEC public disclosures, there's an assumption baked in there so.
So I think that 100 basis point rate shock that you reference will likely suggest a.
5% to 6% increase on net interest income all in reflective of assumptions over deposit pricing.
That 9% to 10% number on the asset side.
This is more immediate.
Does that help got it yeah, that's sort out because you guys were sitting at 8% I guess as of September .
Okay.
Oh, Yeah, ABS B sorry.
Certainly mitigated a bit of the asset sensitivity as we expected it would but still you know still poised to benefit on a net basis.
Got it okay, perfect and then just going back to expenses. So it looks like you're obviously ahead of ahead of what you have laid out them all.
All the cost savings already achieved that's wonderful so they're just thinking about that.
Again, just to go back and want to make sure I heard this right. If we think about a quarterly run rate Youre, probably 80 $990 million or so a quarter is is that the right way to be thinking right now and you said that I realized I did the math in my head incorrectly to Davids question I was.
I was thinking of it as a 90 a quarter.
Getting to an annualized number so I think both of you are sort of on the right track there I apologize for that.
Okay. That's.
This number was too high but I.
I take that back I think you both thinking of it correctly.
That's helpful. Okay, and then forward booking accretion income how should we be thinking about that do you have any and I realize it's a moving number but do you have any approximation what accretion income is going to look like in your net interest income for 2022, what what sort of assumptions are you using there.
Yeah, I'd say that well the good news is that it should be pretty benign Laurie just because of where we landed with the.
Non P C D credit Mark and the interest premium those are.
Should be washing each other out over the longer period of time. So you know those get applied on a loan level basis. So any given quarter to the extent you may have a pay off on an individual loan that has an outsize mark either way it could create a little bit of noise, but over time those numbers will wash each other out and actually create very little.
<unk>.
Purchase accounting purchase accounting accretion in the margin. So I think you're going to end up seeing a number is very similar to what we've been experiencing through much of 2021 due to still some of the prior acquisitions and that's probably you know a $1 million to $2 million a quarter number in terms of benefit.
It should be pretty modest.
Okay. That's helpful. And then last question so Chris can you can.
Can you update us you've got amazing strong currency you close the deal to your point, Mike How are you thinking about acquisitions when you refresh that.
Yeah.
What you are asking for what's the lowest you could go how far afield you would go just any general comments would be very helpful thing.
Yes, well I'll.
I will say generally that.
We believe that the majority of the economic activity in New England is Worcester east and use it as sort of semi circle, south and north and kept the Atlantic Ocean.
And we are so that's sort of our focus area. The other thing that I think is really important to keep in mind is that we have a really good history of thinking about acquisitions that are adjacent to or within our market now knowing sort of because we have no way more familiarity.
And therefore, the cultural integration and the.
And if you know the potholes that are out there.
You can sort of see a little bit.
Better if you had to sort of being instead of next to market. It often and we know the lenders. There. We know that often we have common customers Barth Mark I think our common customers with east Boston was.
Think about 15 or 16% of our portfolio as we had common customers is that about right on the commercial side, that's right Gerry.
So I mean, that's that's a real advantage because it sort of puts you at sort of lowers the risk and that improves the.
Excellent execution probability of execution success.
Now we are we.
We we have never end.
And all the acquisitions, we've done over the last 20 years, it's never been a dull.
Seek somebody out and say here is an offer it's always been about building relationships over time.
And a slow and steady focusing on that.
Or as you say Laurie our currency our strength of the franchise.
Being very methodical about it.
Making it.
Saying, what we're gonna do when they're doing what we're saying so we know that having that high degree of integrity.
And so no.
I await the next set of time, our board of local aboard sort of an adjacent or within our markets that are raising their hand, and say like listen we'd like to talk about strategic options and.
Loved it off the top I think I think youre right now they're at 20 billion I think.
I think there'll be some more size considerations that we've had in the past I think our first acquisition you remember way back in 2004 was $175 million asset bank.
It was fabulous for that it really get our feet wet we got sort of forgotten kind of into that mode. And then slides very was a six.
600 million again, a a great way to get our feet. If we went down so the rest is history.
I think we would have it if a if a smaller institution of that size came along I think we'd have to think long and hard and say.
Well, it's even move the dial so I think as we're getting bigger you're right. I mean, there are our size requirements are going to go up with it.
But now we feel like this is a core competence that we've developed it well.
I will say at $20 billion that we have a.
Our work to do internally to sort of get our all our E. R. M. Instead of really snappy and they've made because I'm out what we called a long long way, but our expectations of ourselves is to take it even further.
So that that'll that'll continue but now.
I'm I'm here for conversations.
Is that enough Laurie.
Yeah. Thank you.
Yeah.
Again, if you have a question. Please press Star then one.
Our next question comes from Chris O'connell.
With K B W.
Now go ahead.
Yeah.
Good morning, gentlemen, Hi, Chris.
Okay.
So wanted to start off.
With some of the balance sheet management, I mean, theres, obviously, a lot of moving parts here following the acquisition.
P B S b.
Both the asset and liability side, but just trying to get a sense of.
The securities outlook going forward and how much you guys are planning to add to that book over the course of 2022.
And what the yields on that Youre seeing on.
Coming Securities and then also kind of longer term.
And how you see the cash balances kind of progressing over the course of the year here.
Yeah, certainly as you said, Chris a lot of moving pieces and I think the excess liquidity as a whole certainly an area that you know where we're anticipating and you know.
Making decisions as the rate environment continues to unfold, but it's no secret.
What.
What we anticipated is happening maybe sort of surge deposits I'm out of the P. P P environment and certainly a lot of excess liquidity.
For a lot of our customers that seems to be sticking on balance sheet to a much higher degree than what was originally anticipated. So you know as you've noted over the last couple of quarters, we have been a bit more aggressive in terms of putting some of that into the securities book.
You know as we look out into 2022, we'll continue to do that you know it wont be at the pace.
We've done the last couple of quarters, but I still think you know what you saw here in the fourth quarter enough purchasing to increase the securities book.
Call it $75 million to $100 million on a quarterly basis is sort of how we're thinking about the strategy heading into 2022.
As you noted we are seeing some nice lift in the longer end of the curve I mentioned here in the fourth quarter, we extended a bit more than in our purchases we went out a little longer.
Sort of the six to seven year part of the curve and we're getting you know rates and yields on those securities in the mid 1%, sometimes even high 1%. So I think that's certainly a nice benefit to the churn of the portfolio as we think about it going forward.
But I think you know barring any really unforeseen issues that combined.
Cash and securities position of high 20% is still going to be here for most of 2022.
Yeah.
Got it that's helpful. Thank you.
And then if you could talk about just the reserve than what you guys are reserving for them for kind of the oncoming loans or loan originations at this point.
It sounds like from your prepared comments that the reserve to loans is likely.
And a bit lower from here.
Over the course of the year.
And it should be coming in the provision should be coming in below net charge offs.
Just trying to get a sense of the magnitude maybe of that at the end of the road.
Yeah, you know I think.
No. That's that's been an interesting journey through this pandemic and has that shifted now too.
Lot of analysis over which businesses may be affected because of what what needs to be closing or are you. Now has now shifted to where their supply chain issues to know where is their wage and sort of just manpower womanpower issues.
So you know the the dynamic continues to change across our customer base, but we still think theres some risk out there in certain portfolios and as a result, you know we havent pulled back all of the reserve build that we did win when we first had the onset of Covid. So.
Between that and the additional credit Mark we are we just put on the acquired Meridian book.
Thank the the allowances at a very healthy level.
Reflective of our conservative approach around still some element of risk in the environment.
But you know as time goes on and if we continue to see the strong asset quality and in minimal net charge offs. We've had I think our models, which suggests that we could continue to pull back on the allowance.
I mentioned were at 1.8%.
Today.
Whether it's net charge offs that don't need to have direct provision to replenish or actual release of allowances I think a path to get closer to 1% over the next 12 months I'm certainly no.
Not out of and expectation again, all things being equal based on sort of a fairly benign credit environment.
So I don't know if that helps but it's you know there's a lot of moving pieces to where we land on the provision each quarter, but I think we feel very very good about the allowance being able to support what we think is this risk in the in the in the <unk>.
<unk> environment.
Yeah, absolutely that's very helpful.
And then you guys noted.
The buyback authorization announcement here.
<unk>.
And was just curious as to why.
What the.
The plan is in terms of utilization of that.
Is it contingent on kind of capital levels and grow through year.
Or do you plan to take kind of a measured approach over the course of the year.
And what the.
Thresholds are I guess on pricing.
With the market price is to where you'll be active.
Right Yep.
Yep.
I think to hit on a couple of points embedded in the question certainly overall capital levels are very very healthy.
So I think there'd be an appetite for buyback based on the sheer magnitude of overall capital.
The second part of your question you know in terms of the pricing and impact on tangible book you know, that's really sort of the governing principles that we think about and this buyback initiatives. So it's opportunistic we always think about a buyback is needing to still makes sense from a tangible capital perspective.
So as I'm sure I hopefully you can appreciate we don't want to give specific guidance on sort of where we think that price point is but you know we always look at a buyback strategy is sort of a tangible book dilution and earn back equation and you know with a buyback we do get more comfortable thinking about.
And earn back out in the six to seven year range. So you know I think if you just do the math that would suggest that you know of 3% to 3.5% initial tangible book dilute of.
Let you know that that's sort of the range we'd be comfortable at you know if you start to get above that range I don't think it makes economic sense.
Great Dupree.
I appreciate that and.
You guys mentioned, you know theres pop in the loan level derivative income here.
In the fourth quarter as you know the customer appetite increase.
And.
Triangulating somewhere between 2021, and 2020 levels likely for 2022, just curious as to how the demand for that has been so.
So far to start start off the first quarter.
It could come in kind of.
Relatively close to <unk> levels or for the fourth quarter is a bit stronger.
Yeah, I may ask Gerry to chime in as well, but I would just say big Big picture here Chris.
It's it's very much.
Sort of a collab.
Collaborative effort of our folks in the Treasury Department working with our commercial lender group.
To identify opportunities where.
Customers may be just coming to the table looking for fixed rate pricing and our ability to think about giving them options between a pure balance sheet fixed rate price or a swap.
And just introducing those conversations so I you know a lot of it has to be honest you know predicated on sort of our strategy to introduce as many of those conversations as we can.
And I think that has been something we've sort of talked a lot about here internally and that was evidenced in the fourth quarter, where we had a lot more of those conversations and we're able to execute on some more swaps that you know that was a very strong quarter for fee income.
I wouldn't expect to see it replicated at that level out of the gate, but you know if it's a million to a million and a half a quarter I'm. You know those are levels that I think seem pretty sustainable in this environment.
Great.
<unk>.
That's all I had I'll step out for now thanks.
Thanks, Chris.
This concludes our question and answer session.
Great.
Oh, sorry, I would like to turn the conference back over to Chris Odd loosen credit closing remarks alright.
Alright, Thank you Anthony and thank you everybody for joining us today and.
And we look forward to who.
Talking to you again in April after our first quarter, having a weekend bye.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.