Good morning and welcome to the Independent Bank Corp. Second Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. After today's presentation, there will be an opportunity to ask questions. 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 SEC filings. We undertake no obligation to publicly update any such statements. In addition some of discussion today may include references to certain non-GAAP financial measures. Information about these non-GAAP measures including reconciliation to GAAP measure 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. Finally, please also note that this event is being recorded. I would now like to turn the conference over to Chris Oddleifson, President and CEO. Please go ahead sir.

Good morning everyone and thank you for joining us today. I'm once again accompanied by Mark Ruggiero, our Chief Financial Officer; and Rob Cozzone, our Chief Operating Officer. Our second quarter performance is a strong one which is driven by the business fundamentals of our franchise. Net income for this past quarter came in at $61.8 million or $1.32 per share, nicely above both prior quarter and prior year results. Mark will be covering the quarter in greater detail, but highlights include underlying loan activity remains encouraging with net growth of 5% on an annualized basis exclusive of PPP loan runoff. My colleagues are quite active in meeting the credit needs of our customers. In fact, loan closings in the second quarter grew by 35% over the first quarter volumes to nearly $1 billion and loan pipeline stand at healthy levels as well. Core deposits have now reached 87% of total deposits and remain a source of great strength and economic value. Higher cost CDs continued to iterate allowing us to maintain a very low five basis points total deposit costs. Our balance sheet management has enabled us to clearly benefit from rising rates as evidenced by the notable increase in net interest margin this quarter. And we were positioned to continue to benefit from further rate increases that are widely expected. Mark will comment on this in a moment. Fee revenues were strong this quarter across a range of sources. Our investment management business continues to excel and we're encouraged by the volume of new inflows along with the ongoing success of our internal referrals. Expense levels remained well-managed as our operating efficiency measured declined to 52% this quarter. Credit quality continues to be benign with minimal net losses and stable non-performing levels experienced in the second quarter, and…

Thank you, Chris. And similar to last quarter, my comments will refer to the information contained within the earnings presentation deck that was included in our 8-K filing last night, and it's also available on our website and today's investor portal. So, jump into slide four of that deck. 2022 second quarter GAAP net income was $61.8 million and diluted EPS was $1.32, both reflecting notable increases from the prior quarter operating results. Worth noting there were no non-GAAP related items within the second quarter. Our key drivers for the quarter include 4.9% annualized net loan growth when excluding PPP loans, driven by strong consumer loan activity. In addition to overall reductions in cash balances, we continued modest cash deployment into the securities portfolio, continuing to remix the balance sheet for enhanced profitability. The core net interest margin, which excludes purchase accounting and PPP-related impact, increased to 3.23% for the quarter, up from 3% in the prior quarter and the reported margin was up nicely as well. And I'll provide some more detail into the impact and benefit of the rising rate environment here and a little bit. New core deposit account activity remains strong with the overall reduction in deposit balances being driven primarily by lower time deposit balances. Provision for the quarter was zero, reflecting continued strong asset quality metrics. In addition, the quarter included higher fee income and a modest increase in operating expenses, both of which I'll provide more detail on shortly. And lastly, the company bought back 1.3 million shares under its share repurchase program during the quarter. So, in summary, we certainly view the quarter's results as a great reminder of our strong core fundamentals and evidence of a balance sheet positioned to increase profitability and shareholder value moving forward. On both the GAAP…

We will now begin the question-and-answer session. Our first question will come from Mark Fitzgibbon with Sandler O'Neill. Please go ahead.

Hey, guys, good morning and Happy Friday.

Happy Friday, MARK.

First, I wondered if you could share with us what the commercial line utilization rate was in the second quarter, I think it was 30% in the prior quarter?

Sure. Yes. So, it only upticks slightly, but certainly trending in the right direction. So, a couple of components within the commercial buckets, Mark, our general C&I line of credit utilization was 31.5%. We also look at our ABL subset within C&I or asset-based lending. That went from 48.9% to 49.2%. So, just a modest uptick there. And on the construction side, that was slightly modestly up as well from 57.1% to 57.9%. So, all just generally, up nominally, but still well below pre-pandemic levels.

Okay, great. And then secondly, I wondered if you could give us an update on that one large $24 million syndicated loan that went non-accrual last quarter. I think you had said previously you thought it would sort of cure in the next quarter or two. Any update on that?

Yes, it's still going through negotiations. This is -- as you mentioned, a larger syndicated credit, so we are not the lead bank on that relationship. But the expectation is still a full refinance, but the timing has pushed out a bit. So, we're now looking at potentially an early fourth quarter resolution versus the original guidance, but certainly we expect no losses on it and a full resolution. It's just pushing out a bit later in the calendar.

Okay, great. And then next Mark, we don't see a lot of banks buying back stock at two times tangible book. Can you kind of walk us through your thinking on buying stock back at that level? I guess I'm curious, why not let capital build up, especially given what you described as kind of looming recessionary fears, or pay it out in the form of a dividend, so -- to avoid the tangible book dilution? Just curious on that.

Certainly a valid question and something we were very careful in assessing and reviewing when we make that decision. I'd say it's a combination of a couple of things, Mark, but the first being we certainly are operating at what we would still continue to deem as excess levels of capital versus our optimal operating level. So, I think a level of repurchase activity, we've always felt made sense given our overall levels of capital. And I think really, as this -- despite the rest of recessionary concerns, the rising rate environment gives us significant earnings power going forward. So, we are comfortable that when you look at the buyback levels at the rate we did, we believe our earnings power will accrete that value back in a reasonable amount of time that we still believe good shareholder value in the long-term. So, it is at a higher level, but I think our earnings power accretes that back in a reasonable and sufficient timeline.

Okay. And then lastly, of the $226 million resi mortgages you guys booked on the balance sheet this quarter, are those mostly hybrid arms? Or is there some 30-year volume in there? And maybe what is the average rate look like on that stuff?

Yes, that's almost all 30-year volume for the most part, Mark. And the average rate in the second quarter had uptick to the high threes, that still sounds low given today's -- certainly the new volume is coming on significantly higher than that, but for most of the second quarter, we were still talking mid to high three percentages. So, that's what came on in Q2.

Great. Thank you.

Sure.

Our next question will come from Laurie Hunsicker with Compass Point Research. Please go ahead.

Yes. Hi, good morning.

Good morning Laurie.

Wondered if you could help us think about accretion income. Yes, any direction you can give us on accretion income, obviously saw reversal this quarter, just because it's so impactful into NII?

Yes. Sure. So, the purchase accounting for the current quarter, we actually had -- we don't have too many of these left in the portfolio, but there are still some individual loans that have a premium fair value mark associated with them, primarily on the East Boston acquired loans. So, as those were -- the more higher propensity to reap to prepay given the rate environment and refinance, we did see a few loans there with higher premiums on them pay off in the current quarter driving that negative purchase accounting impact. I continue to feel comfortable that in the long run, we still have significant net discount or credit marks within the portfolio that will accrete positive purchase accounting. And I think I would peg that my expectation would be somewhere in the in the $1 million per quarter range. I'd say Q2 was hopefully an anomaly in terms of having that negative impact.

Okay, that's very helpful. And then looks like on your expenses, your occupancy went down, can you just remind us I know you had originally said you were targeting 80% cost save with EBSB acquisition by 2022? Are we already there yet? Are you ahead of schedule? Or how should we be thinking about that number?

No, we're there -- all the occupancy cost saves have been achieved. But the biggest driver, to be quite honest, is the snow removal. So, the first quarter number within those results was $1.2 million. So, $1.2 million of that, I believe $1.7 million decline is literally tied to snow removal costs. And then just the timing of some of the final exits we had on the East Boston portfolio that probably accounted for $200,000 to $250,000 of benefit Q1 versus Q2. But as we sit here on June 30th, all those cost savings have been achieved and you should see now Q2 serving has a good run rate going forward.

Okay, that's perfect. And then just kind of more macro is we're starting to see some warning signals, some cracks in credit, can you can you help us think about a few things maybe give us a refresh on your office, any details around office, including what's right in Downtown Boston, anything on leverage lending? And then just generally any stressors within the legacy EBSB book, I know they were very, very discounted on an LTV basis. But any stressors you're seeing there, they had larger CRE loans compared to you? Just anything you can help us think about on those three buckets?

Sure. I think you hit on some buckets that we certainly are -- have always paid close attention to, but I think we would view as making sure we understand where there may be emerging risk. The first asset class you referred to on the office space side, in terms of just big picture metrics that makes up about 15% of the commercial real estate book. So, that's about $1.5 billion of outstanding balances in higher on the exposure side. We have very little Downtown Boston exposure within that book. Less than $300 million of that is in Boston Proper, there's probably another $100 million or so that is in neighboring Greater Boston cities like Brighton and Jamaica Plain et cetera. But when you pull in some of those neighboring towns, it's still well under $400 million of Downtown Boston exposure. So, most of our office spaces suburban office. Those properties still seem to be doing well. We haven't seen any worsening conditions there. We typically see those with shorter lease terms, which give us some greater comfort on the underwriting side. And we've always through the good times and during risky times, we always try and get personal guarantees. We look to limit our exposure to single tenant relationships. We look to match up no terms and have evidence of lease terms that extend close to the maturity date. So, I think that discipline serves us very well and it's -- as you mentioned, it's an area we're going to continue to monitor closely. But our overall LTVs are still very strong and that portfolio as a whole, closer to around 60% and -- given today's value, so I think we feel as good as we can right now. In terms of some other categories you mentioned, the leveraged…

That's great. That's super helpful. And then just last question. Chris, can you help us think about M&A and how you potentially are thinking about it differently if you're thinking about it differently with the thought of higher interest rate marks laying on tangible book and obviously you very, very strong stock currency, how you would think about credit marks? You're a very disciplined, very strong acquirer and so we just love your high level thoughts on generally how you're thinking about it. Thanks.

Very, very high level the -- we've had a tremendous success with our M&A transactions over the years. You're right, we are very disciplined. We do believe though, we would like that to continue over time. I mean the -- and as franchises become available, we'd like to be at the table. Having said that, the uncertainty, so when you're looking down the barrel of the next couple of years, certainly would warrant no further discussion and probably some additional scenario thinking about some of the implications of that. And so I can't tell you exactly where we come out on any particular scenario, but you're right in saying that it would require a lot more thought now than I think it has in the past. Mark, would you have anything to add to that?

No, I think you summed it up well, Chris.

Yes, I mean, we still have a nice currency advantage or I'd like to be able to use it.

Great. Thank you.

Our next question will come from Chris O'Connell with KBW. Please go ahead.

Hey, good morning, gentlemen. Circle back, at I may have missed it with the initial buyback question. But did you guys indicate if you guys would be continuing to utilize that buyback going forward or not?

We didn't provide direct guidance there, Chris, but through Q2, the level of activity amounted to about 75% of what we had originally authorized. So, right now, there would be fairly modest impact if we were to continue repurchasing in the third quarter. But again, it'll be--

Okay.

As always, it's going to be dictated by stock price and our decision at what the appropriate level the buyback is.

Okay, got it. And of the legacy EBSB loans that you guys are kind of continuing allow to fall off in the back half of this year, what's the average rate on those?

Inclusive of the marks we put on for the most part, I believe they were in the -- I don't have the exact numbers to be honest, Chris, but I'm guessing they were around 3%, 4% because of the marks on them. And to be quite honest, we're seeing a pretty competitive environment out there. So, what we are seeing exit is often priced very competitively and at rates that in many instances where we haven't been willing to compete at.

Got it. And I guess on that front, could you give us an update on where origination yields are coming on out on both the commercial side and the resi side?

Sure. No, it's been -- we've been able to really mirror what you've seen occur on the curve. So, when you look at the swap curve or the FHLB curve, that five to seven year part of the curve is up 50 to 60 basis points on average quarter-over-quarter. So, we are experiencing that type of lift in terms of our new originations. So, on the commercial side, we've been getting in the mid 4% range. On the resi, we've moved up on portfolio pricing into the high 4%, close to 5% range in terms of recent volume coming on the books. So, certainly, we've seen nice increases in terms of new originations quarter-over-quarter.

Great. And then on the deposit costs, obviously, have held flat so far and the runoff should help in terms of managing that going forward. Have you got -- have you guys thought about when there might be more widespread increases in your deposit costs, the timing of that? And how you see it progressing in the near-term?

Yes. No, very on-point question there, Chris. We've already made decisions, as of late that will certainly increase deposit costs heading into the third quarter. Just the timing of those decisions manifest themselves yet in the Q2 results. So, we do anticipate based on just the decisions we've made to-date, the cost of deposits increasing by about four or five basis points in the third quarter, so going to about 10. If we do get another rate increase here in July, which is very highly likely, I would expect we'll be making additional moves in the quarter. The timing is a bit TBD there, but I think you'll see cost of deposits certainly start to move north of 10 basis points and likely uptick towards the 15 basis point range depending on what we get for rate increases.

Okay, that's very helpful. Thank you. And then I know you guys have -- deferrals have come down quite a bit. In the vast majority, it seems like are set to mature in the fourth quarter of this year. Have you guys evaluated those recently? And how do you think that'll play out in terms of coming back on as full thing?

Yes, for the most part, we would expect the majority of that to come back to full payment status. If you recall a number of those at the time were in asset classes like hotel and accommodation and we took a pretty proactive approach and extending those out for a fairly lengthy amount of time under the CARES Act provisions. That's an asset class space that has really bounced back very strongly, in fact, a lot of our hotel book is really performing at a very strong levels. So, I don't have all of the breakdown, but I do know that was a meaningful component of our deferral and I would expect those asset classes to bounce back without any issues. But I can provide more details if needed, Chris, after the call.

Okay, that's great. That’s all I had for now. Thank you.

Thank you.

Thanks Chris.

There no more remaining questions at this time. And with that, we will conclude our question-and-answer session. I'd like to turn the conference back over to Chris Oddleifson for any closing remarks.

Thank you, Joe and thank you everybody for joining us today. We look forward to chatting with you in three months regarding our third quarter 2022 results. Have a good weekend. And for those of you in hot area of the country, which I imagine as most of you, stay cool this weekend. Be safe. Bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.