Independent Bank Corp (Massachusetts) (INDB) 2021 Q4 法說會逐字稿

Good day, and welcome to the Independent Bank Corp's Fourth Quarter 2021 Earnings Conference Call. (Operator Instructions)

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 our discussions today may include references to certain non-GAAP financial measures. Information about these non-GAAP measures, including reconciliations to GAAP measures, may be found in our earnings release and other SEC filings. These SEC filings can be accessed via the Investor Relations section of our website. 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.

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 Cozzone, 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 onetime 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 as flagship East Boston Savings Bank. Mark will be taking you 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 lingering uncertainty posed by the ongoing pandemic. The banking industry once again 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, the respectful carrying 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. In addition, core deposits grew organically by 18%. Robust demand deposit growth helped keep our funding costs quite low. The current 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 pay downs, relatively low utilization rates and PPP loan runoffs. And I can assure you, our loan officers remain very much in the deal flow. In fact, total commercial loan originations in 2021 rose by 29% to $1.85 billion, 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 for us with record closings of $1.2 billion. We had a record year in new consumer checking account opening and in home equity originations, too. Our credit picture (inaudible) remained as benign as ever. Nonperforming loans declined by nearly 60% last year, and our total loss rate for the year was a mere 1 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.

Beyond the numbers, we made major progress in advancing our franchise across a range of growth initiatives. First and foremost, of course, is closing the integration of East Boston Savings Bank, our largest acquisition to date. Within 48 hours of its closing in mid-November, we accomplished a systems and account conversion for nearly 120,000 accounts, closed or sold overlapping branches, changed signage and integrated related infrastructure. It brings a net addition of 25 branches, 115,000 deposit accounts of 65,000 households into our rank and it further cements our leading market position in Eastern Massachusetts geography that extends from Greater Boston all the way down to Cape Cod and the islands and, of course, out to Worcester.

Our footprint now contains 123 branches, which includes 1 mobile branch we acquired with East Boston Savings Bank, 9 mortgage centers, 10 investment offices and 19 commercial lending centers. We're excited about the opportunity to bring our more extensive product set to the East Boston customers. Not only is this acquisition a strategic homerun 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 didn't preclude us from moving forward on other key initiatives in 2021. These included expanding our presence in Worcester County, which now includes 7 branches, a commercial banking and investment management office and a growing customer base. Continually adding to our digital banking offerings, including a 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 solution. Pursuing an integrated and sharpened 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 included helping small business by cleaning -- completing the forgiveness processing for 99% of our 2020 PPP loans, while originating 3,700 new small business PPP loans last year. Extending -- we extended our community involvement and leadership commitment through a wide range of financial literature, scholarship, reading, volunteerism and charitable giving programs. And we continue to garner recognition and top-tier rankings from credible third parties for our customer service and satisfaction, financial performance, small business lending and corporate of quality practice.

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 business generation and analytical potential of Salesforce, which has now been integrated into all our major businesses lines, including our retail branch network; expanding our funds transfer offering to consumer -- customers by incorporating the Zelle digital payments network into our digital platform; further improving our loan processing efficiency by implementing nCino, the [end history] -- a leading online loan origination platform and, for our case, for loans under $2 million; continuing to build out our enterprise risk management program as befitting 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-based and consultative approach.

One thing, I want to point out is, as I mentioned before, we're 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 economy. Nationally, the focus continues to be on inflation with CPI jumping 7% on a yearly basis, that's a 42-year high. In response, the Fed has shifted to more hawkish tone and then signaled multiple rate hikes in 2022, which would provide a tailwind for the bank in the coming year, as Mark will discuss in a moment.

The labor market continues on the path to recovery and wages are rising. Locally, the Massachusetts economy -- economic recovery remains on track with third quarter growth of 3.7 compared to the 2.3 nationally. And in addition, the labor market in Massachusetts continued to outpace the nation with a strong labor force participation.

Now there is no question that the banking industry continues to face near-term challenges. These include margin pressure, high levels of liquidity, cycle of COVID variants, credit concerns induced by the protracted supply chain problems, inflation and, of course, competition from fintechs and nonbanks. 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 there's not a lot of magic here. It's just maybe a little bit, but 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 throughout. Now we continue to believe our future success demand is a healthy mix of scale, flexibility, efficiency and talent development. As to 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 Rockland Trust colleagues.

There's no question that the past 2 years has placed enormous strain on my colleagues that they've confronted each and every obstacle with poise and determination. Their ability to continue serving our customers in an exemplary fashion and produce record business results while facing significant East Boston integration efforts demanded to them is nothing short of remarkable and very noteworthy. I simply can't thank them enough.

Now we invest heavily in our workforce -- my colleagues to ensure their growth and well-being. And we're intensely proud to be recognized in the Boston Globe's Top Places to Work for the 13th consecutive year. In 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 and East Boston Savings Bank acquisition that closed on November 12, fourth quarter GAAP net income of $1.7 million and diluted EPS of $0.04 represents 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 a onetime provision of $50.7 million attributable to acquired nonpurchase credit deteriorated or non-PCD loans. When excluding these nonrecurring acquisition-related items and their related tax effect, 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 0.28% return on average common equity, while the operating basis results, excluding the nonrecurring items just noted, were 1.47% and 10.75%, respectively. 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 1.4% credit mark with a 25% purchase credit deteriorated allocation or PCD allocation; a combined loan interest and liquidity premium of $51.4 million; and a core deposit intangible asset of $10.3 million or 0.28% 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% have been achieved as of December 31, which includes the closing of 16 of the acquired East Boston Savings Bank in 2 legacy Rockland Trust Bank branches during the quarter, while also completing key system conversions, contract terminations and severance agreements during the quarter.

Associated with these facility exit events and contract terminations, along with professional and legal fees and other miscellaneous onetime items incurred, total pretax merger-related expenses for the quarter were $37.2 million, bringing the year-to-date amount to $40.8 million. In addition, approximately $5 million to $6 million of remaining merger costs are expected to be recognized in 2022 related to the final exit of certain facilities, resulting in the anticipated total deal-related onetime 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 onetime costs yet to be recognized. As such, as Chris mentioned, on the heels of the Meridian closing and in response to our strong pro forma capital position, a stock buyback plan was recently announced to allow for repurchases up to $140 million and will be in effect through January 18, 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 PPP 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 planned 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. A noteworthy 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 for my usual update on the PPP 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 PPP 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 1.8% or $216 million reflecting strong consumer deposit increases across demand deposits, savings and interest checking accounts. And despite East Boston's larger time deposit portfolio, core deposits at December 31 remained at a healthy 85% of total deposits. In addition, the majority of the acquired core deposits were immediately transitioned into Rockland's pricing structure and with benefit from the time deposit fair value mark accretion, the combined cost of deposits for the quarter remained at only 5 basis points.

Similar to prior quarters, the most common avenue for deployment of excess liquidity was in the securities portfolio. Security purchases in the fourth quarter totaled $445 million and were comprised of treasury and government agency securities with a weighted average yield of 1.4% and expected life of just over 6 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 flows in the portfolio.

Shifting gears to the income statement. Net interest income of $122.5 million reflects the 1.5-month lift from the Meridian acquisition with the reported margin for the quarter rising 27 basis points to 3.05%. Some noteworthy items in the margin include the following: inclusive of the merger impact, total average cash and securities as a percentage of earning assets remain at an elevated position at 29%, yet down slightly from 31% in the prior quarter. As noted previously, the PPP fee income was up significantly in the quarter. Total purchase account and accretion for the quarter was $1.9 million, consistent with the prior quarter. And excluding PPP fee income, purchase accounting accretion and other onetime items like prepayment penalties, the adjusted core margin for the quarter was 2.83% and versus 2.70% in the prior quarter.

Moving on to 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 recovery during the quarter. And 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 31 are approximately $383 million or 2.8% 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 $50.7 million attributable to non-PCD 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 1.08% as of December 31.

I'll now highlight some key fee income drivers for the quarter. Mortgage banking income decreased approximately $815,000 compared to the prior quarter as 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 $600,000 last quarter. And wealth management income stayed relatively consistent with the prior quarter as reduced insurance commission income offset the late December market appreciation benefit.

Total assets, as Chris mentioned, under administration at December 31 reached a record $5.7 billion, reflecting $40 million of net inflows for the quarter plus market appreciation. Total expenses for the quarter reflect a 1.5 month increase from the acquisition with $37.2 million of merger-related expenses for the quarter, which as I alluded to before, primarily consists 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 includes some noisy adjustments to account for the impact of the Meridian deal plus a $975,000 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-merger results, driving variation from 2021 fourth quarter results in most P&L components.

As previously noted, despite healthy loan closing expectations, loan balances for the year will likely contract at 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 core growth in the low to mid-single-digit range. Upon stabilization of those acquired balances, modest loan growth is 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 PPP fees and may reflect some quarter-over-quarter volatility due to purchase accounting loan accretion. However, assuming no changes in rates from the Fed, a continued measured approach of increasing securities balances and excluding PPP fee income and purchase accounting, we estimate the core margin to be in the 2.9% to 3% range for the full year.

In reiterating my prior comments on asset sensitivity, a Fed rate increase would drive a net positive on our full cash position in 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 in deposit pricing would be market-driven. With continued expected improvement in general economic factors and no major surprises from overall asset quality, the 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 following: 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. And assuming expectations over rate increases remain high, we anticipate loan level derivative income to increase from the full 2021 results, though 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 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 2021 results. And that is a direct result of inflationary pressures and continued investment in our risk and technology infrastructure.

And lastly, the full tax year -- the 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 best in benefits. That concludes my comments.

And we'll now open it up to questions.

(Operator Instructions) Our first question comes from Mark Fitzgibbon with Sandler O'Neill (sic) [Piper Sandler].

The first question I had for you is I heard your comments, Mark, about you're confident in the 45% cost saves. But I wondered if you could share with us sort of an updated timing of when you'll extract those cost saves? And I was curious if there's any further branch consolidations beyond what you've already done?

Sure, Mark. I'd say those cost saves are already achieved. There's very little, a few hundred thousand dollar 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 31.

And in terms of branch closing, nothing 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 been 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. $242 million is 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 are 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...

The commitment rate or...

I don't have that in front of me. I don't know, Gerry, if you have insight on that.

Mark, it's probably -- and I'm just -- it's hard on the -- it's a good 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 200 to 300 over LIBOR, now SOFR. And on the fixed rate side, it's probably in the high 3s to 4% as a range. Is that what you're looking for?

Yes, that's perfect, Gerry. And then I wondered what is the maturity schedule of the remaining COVID deferrals look like?

Yes. We've noted the majority of that will start to run off as we head out into the second half of 2022. We do still have some level of maturity that we extended on deferrals into 2023. And I believe even a very small percentage, but some acquired to the Meridian book that go out until late 2023 or 2024. But I believe it's well over half 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, say, a 25 basis point move in rates up. What does that mean for the margin?

Yes. It 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 1-month LIBOR and prime. But as I noted, we have the macro level hedges and some floors already embedded in the portfolio, so that brings the net population down to about 20% to 25% of the loan book. So that gives you -- if you just do the math, the 25 basis point rate increase on those numbers suggest a $12 million to $13 million lift pretax or about 2% to 2.5% increase on net interest income. And that's on a pretax basis.

Our next question comes from Dave Bishop with Seaport Research.

A quick question for you. Maybe following up on Mark's question there regarding the operating expense guidance. I was wondering if you could drill down just putting the math in terms of getting the cost saves upfront there. Looking at, Mark, maybe just trying to circle in on that, I'm getting to maybe a mid- to high $80 million range. Is that about right in terms of a ballpark for the first quarter with, like you said, the 2% to 3% inflation lift?

Yes. I think we -- I think about it in terms of a full year, Dave, if you just break it down into really 2 components, sort of the legacy expense run rate had been around $70 million to $72 million a quarter give or take -- a little bit higher in the fourth quarter with some onetime items. But if you put a mid-single-digit rate increase on that number and then the East Boston expense load prior to the acquisition, it 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 mentioned the macro hedges. We've seen a couple of other institutions unwind us. Is that something you can kind of contemplate if the Fed does get a little bit more hawkish than expected to unwind some of those macro hedges?

I think it still serves a good portion given that the totality of our balance sheet position at this point, Dave, where I think letting those run their natural course, where those will start to actually just by nature, mature heading into 2023. So I think it still gives us some protection here in the near term. So I think even with those in to be able to benefit from the 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 I appreciate the color or the update in terms of the loan attrition you expect from the Meridian side. I think it was like $700 million. Do you expect a similar amount on the deposit side as well in that ballpark or any sort of...

Yes. Sorry. Sorry, David, didn't mean to cut you off. You got a second part to that question?

No, that's fine.

Yes. It's actually -- certainly not to that degree on the deposit side. The time deposit portfolio is where we'll likely see most of the runoff. A lot of their larger broker deposits had already matured prior to the closing. So you saw 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. And we've had great momentum, great referrals, a lot of good energy around sort of the retail network there. So right now, the deposit base is looking strong, and it's tough to know how much of that will run off, but I would definitely not say to the level that we expect the loan attrition at.

Our next question comes from Laurie Hunsicker with Compass Point.

Just hoping we can go back here on interest rate sensitivity. I'm just extrapolating how you answered that question. I just want to make sure that I'm apples-to-apples as we think about this broadly against the bank spectrum. So if we look at this with a 100 basis point shock pro forma with EBSB, round numbers, you're at a positive 9% on NII. Am I thinking about that the right way?

That would be an immediate impact, Laurie. But what we don't -- 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 environment where we've been able to keep deposit betas very well contained and then often lag and increase 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 I think that 100 basis point rate shock that you referenced will likely suggest a 5% to 6% increase on net interest income, all in reflective of assumptions over deposit pricing. But that 9% to 10% number on the asset side is more immediate. Does that help?

Yes, that sure does. Because you guys were sitting at 8%, I guess, as of September layering an EBSB. Okay. So we're...

Yes, EBSB certainly mitigated a bit of the asset sensitivity as we expected it would, but 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 what you had laid out all the cost saves already achieved, that's wonderful. So just thinking about this, again, just to go back, I want to make sure I heard this right. If we think about a quarterly run rate, you're probably $89 million, $90 million or so a quarter. Is that the right way to be thinking about it?

No, when you said that, I realized I did the math in my head incorrectly to David's question. I was thinking of it as a $90 million 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. Dave's number was too high, but I take that back. I think you're both thinking of it correctly.

Okay. That's helpful. Okay. And then forward-looking 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 sort of assumptions are you using there?

Yes, I'd say the good news is that it should be pretty benign, Laurie, just because of where we landed with the non-PCD credit mark and the interest premium. Those are -- or should be washing each other out over the longer period of time. So those get applied on a loan level basis. So any given quarter, to the extent you may have a payoff on an individual loan that has an outsized 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 purchase accounting accretion in the margin.

So I think you're going to end up seeing numbers very similar to what we've been experiencing through much of 2021 due to still some of the prior acquisitions, and that's probably a $1 million to $2 million a quarter number in terms of benefit. So it should be pretty modest.

Okay. That's helpful. And then last question, Chris, can you update us? You've got amazing strong currency. You closed this deal to your point as a homerun. How are you thinking about acquisition next? Can you refresh us as to what you're looking for? What's the lowest you could go? How far afield you would go? Just any general comments would be very helpful.

Yes. Well, I will say generally that we believe that the majority of the economic activity in New England is Worcester East and you sort of sort of semi-circle south and north and the Atlantic Ocean. And we -- 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 a way more familiarity, and therefore, the cultural integration and the potholes that are out there, you can sort of see a little bit better if you have sort of being sort of next to the market. And often we know the lender is there. We know often we have common customers. But Mark, I think our common customers with East Boston was, I think, what, 15% or 16% of our portfolio was -- we had common customers. Is that about right?

On the commercial side, that's right, Gerry -- Chris.

So I mean that's a real advantage because it sort of puts you -- it sort of lowers the risk and improves the execution -- probability of execution success. We have never -- in all of the acquisitions we've done over the last 20 years, it's never been to seek somebody out and say, here is an offer. It's always been about building relationships over time and slow and steady, focusing on, as you say, Laurie, our currency, our strength of the franchise, being very methodical about making -- saying what we're going to do and then doing what we're saying, so having a high degree of integrity.

And so I await the next sort of time or board, a local board sort of adjacent or within our market sort of raises their hand and say, like, listen, we'd like to talk about strategic options and love to talk. I think I think you're right now they're at $20 billion. I think there will be some more size considerations than we've had in the past. I think our first acquisition, you remember way back in 2004 was $175 million asset bank. That was fabulous for them. It really got our feet wet. We got sort of kind of into that mode. And then Slade's Ferry was $600 million. Again, a great way to get our feet wet and so the rest is history.

I think we'd have to -- if a smaller institution of that size came on, I think we'd have to think long and hard and say, we'll see even if it move the dial. So I think as we're getting bigger, you're right, I mean the -- our size requirements are going to go up a bit. But no, we feel like this is a core competence, and we've developed it well. I will say, a $20 billion that we have work to do internally to sort of get our -- all our ERM sort of to really snappy, I mean -- we come a long, long way. But our expectations of ourselves is to take it even further. So that will continue. But now I'm here for conversations. Is that enough, Laurie?

Yes. Thank you.

(Operator Instructions) Our next question comes from Chris O'Connell with KBW.

So wanted to start off with some of the balance sheet management. I mean there's obviously a lot of moving parts here following the acquisition, EBSB on 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 you're seeing on the oncoming securities? And then also kind of longer term, how you see the cash balances kind of progressing over the course of the year here?

Yes. Certainly, as you said, Chris, a lot of moving pieces. I think the excess liquidity as a whole is certainly an area that we're anticipating and making decisions as the rate environment continues to unfold. But it's no secret what we anticipated as happening maybe sort of surge deposits out of the PPP 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 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. As we look out into 2022, we'll continue to do that. It won't be at the pace we've done the last couple of quarters, but I still think 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 in our purchases. We went out a little longer in sort of a 6- to 7-year part of the curve, and we're getting 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 barring any really unforeseen issues that combined cash and securities position of high 20% is still going to be here for most of 2022.

Got it. That's helpful. And then if you could talk about just the reserve and what you guys are reserving for kind of oncoming loans or loan originations at this point? It sounds like from your prepared comments that the reserve to loans is likely to trend a bit lower from here over the course of the year, given that 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.

Yes. I think that's been an interesting journey through this pandemic. And as that's shifted now to a lot of analysis over which businesses may be affected because of what needs to be closing or has now shifted to where were their supply chain issues to now where is their wage and sort of just manpower or womanpower issues. So the dynamic continues to change across our customer base. But we still think there's some risk out there in certain portfolios. And as a result, we haven't pulled back all of the reserve build that we did when we first had the onset of COVID.

So between that and the additional credit mark we just put on the acquired Meridian book. We think the allowance is at a very healthy level reflective of a conservative approach around still some element of risk in the environment. But as time goes on and if we continue to see the strong asset quality and minimal net charge-offs we've had, I think our models would suggest that we could continue to pull back on the allowance. I mentioned we're at 1.08% 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 is certainly not out of an 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 -- 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 risk in the today environment.

Yes, absolutely. That's very helpful. And then you guys noted the buyback authorization announcement here. And I was just curious as to what the plan is in terms of utilization of that? Is it contingent on kind of capital levels and growth from here? 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 at the market price as to where you'll be active?

Right. Yes. 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 in terms of the pricing and impact on tangible book, that's really sort of the governing principles that we think about in this buyback initiative. So it's opportunistic. We always think about a buyback as needing to still make sense from a tangible capital perspective.

So as I'm sure, hopefully, you can appreciate, we don't want to give specific guidance on sort of where we think that price point is. But we always look at a buyback strategy as sort of a tangible book dilution and earn-back equation. And with the buyback, we do get more comfortable thinking about an earn-back out in the 6- to 7-year range. So I think if you just do the math, that would suggest that with 3% to 3.5% initial tangible book dilutive, that's sort of the range we'd be comfortable at. If you start to get a lot above that range, I don't think it makes economic sense.

Great. Appreciate that. And you guys mentioned there's a pop in the loan level derivative income here in the fourth quarter as customer appetite increase triangulating somewhere between 2021 and 2020 levels likely for 2022. Just curious as to how the demand for that has been so far to start off the first quarter, if it could come in kind of relatively close to 4Q levels or the fourth quarter is a bit stronger?

Yes. I may ask Gerry to chime in as well, but I would just say, big picture here, Chris. It's very much sort of a collaborative effort of our folks in the treasury department working with our commercial lender group to identify opportunities where customers maybe 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 a lot of it is, to be honest, 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 was a very strong quarter for fee income. I wouldn't expect to see it replicated at that level out of the gate, but if it's $1 million to $1.5 million a quarter, those are levels that I think seem pretty sustainable in this environment.

This concludes our question-and-answer session. I would like to turn the conference back over to Chris Oddleifson for any closing remarks.

Great. Thank you, Anthony, and thank you, everybody, for joining us today, and we look forward to talking to you again in April after our first quarter. Have a good weekend. Bye.

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