Q4 2020 Independent Bank Corp (Massachusetts) Earnings Call
[music].
Good morning, and welcome to the fourth quarter 'twenty 'twenty earnings call.
All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on I touched on phone to withdraw your question. Please press Star then two.
Before proceeding let me mention that this call may contain forward looking statements with respect to the financial condition results of operations and business of Independent Bank Corp. Actual results may be different factors that may cause actual results to differ include those identified in our annual report.
On form 10-K, and our earnings press release.
Independent Bank Corp, cautions you against unduly relying upon any forward looking statements and disclaims any intent to update publicly any forward looking statements whether in response to new information future events or otherwise. Please note that during this call we will also.
Certain non-GAAP financial measures as we review independent Bank Corp's performance.
These non-GAAP financial measures should not be considered replacements for and should be read together with GAAP results.
Please refer to the Investor Relations section of our website to obtain a copy of our earnings press release, which contains reconciliations of these non-GAAP measures to the most directly comparable GAAP measures and additional information regarding our non-GAAP measures.
Note that this event is being recorded I would now.
So like for trying to conference over to Chris Oddly sudden president and CEO. Please go ahead.
Good morning, Matt.
Happy new year to everyone and thank you for joining us today.
With me as usual is Mark Ruggiero, our Chief Financial Officer, We will again be joined by Rob <unk>, Our Chief operating officer, and Gerry Nadeau President of Rockland Trust on our Chief commercial banking officer that'll.
They'll be available to answer your questions posed to Mark on my comments, it's always we extend our hopes for continued wellbeing to all of you and your families.
We ended the year with another solid performance with fourth quarter net income coming in at $34.6 million or $1.05 per share Mark will take you through the details shortly but I'd like to focus on Mike how much on a full year just completed.
And what a year. It was this pandemics stressed every corner of our economy and society, creating enormous demand supply and financial shocks to our system's banks in particular had to quickly pivot and adapt to this crisis was presented incredible challenges and certainly learning experiences.
We've responded to the challenge to serve our customers and types of needs, while continuing to move our franchise forward.
Financially, we before we performed well on 2020, when considering all of the economic headwinds highlights include.
Operating earnings of $121 $7 million or $3.66 per share robust core deposit growth of 30%, which further reduced our very low funding cost well on loan growth was tempered by elevated levels of Paydowns and refinancings long closings remains strong on.
Origination volumes across the combined commercial and consumer sectors reached nearly $3 billion. This excludes P. P. P. Some 11% above prior year levels.
And that's from management levels grew 9% to nearly $5 billion, driven by net new money and market appreciation.
We had significant growth on our residential mortgage activities and revenues, we extended about $800 million on loans distressed companies under the Sba's PPP program.
Business households grew by 5% and consumer households grew by one five per cent. We earned net outstanding CRA rating, we had tight expense management and maintaining our operating efficiency.
Patients get below 60%.
Operating on return on assets of 1%, we completed the repurchase of one 5 million shares and a tangible book value per share was up another four per cent for the year.
Credit was and remains a major focal point for us and while much uncertainty remains we feel that our long held underwriting discipline at workout skills continue to serve us well on.
Mark will be walking through the ins and outs from all the recent credit quality trends and metrics of interest.
Beyond the numbers and dealing with the pandemic related challenges we continue to advance our franchise in 2020. Some examples we introduced new products, such as credit card and our Premier deposit products, we opened up new branches and made key hires in a target market Worcester specifically.
We fully implemented our commercial business underwriting and Decisioning on originations process for our relationships total of less than $2 million. We converted the vast majority of our training to a virtual platform we had a depth.
We had a depth to our risk management programs.
And of course, there are numerous lessons and takeaways from our experience over the last year foremost. Among these is that there is significant increase in the use of digital products.
And accessed by customers of all ages, a trend that is here to stay for sure.
We're committed to keep pace with these developments by continuing to.
Intelligently invest in technology. So we continue to build the strong relationships, we have with customers in ways they choose to interact.
Likewise, there clear implications for bank branch networks as the trend is towards more impersonal consultation for complex matters.
With regular transactions moving online.
For Us branch optimization until more of a refocusing of activities and configurations.
Certainly adapting to this but like many other banks, we are not planning numerous bank branch closings as they do.
Remain a major source of new account openings business referrals for us.
Looking ahead, well continue to focus on Covid related matters near term priorities include of course fulfilling demand for the car.
Car Roundup P. P P and that's off to a great start.
Continuing to extend our presence in the attractive western market selected additional branch openings maximizing our use of sales the sales for platform throughout the bank, we're gonna be expanding our dealer floor planning efforts.
We are definitely it'll be continuing deepening our enterprise risk management program.
And assessing set on what is our workspace needs look like post pandemic.
Without question, our industry will continue to face numerous challenges for the foreseeable future, but not the least which are the continued margin pressure from this low rate environment on certain credit conditions.
And of course, as I mentioned, keeping pace with technological change.
We intend to meet these challenges by never wavering from our long standing strategy of focus and discipline.
Customer remains at the center of all our planning and we're determined to continue to meet their product and service needs. We consistently rank high on comparative service excellence and customer loyalty, scoring and reputable third party surveys on.
Rockland Trust our brand continues to resonate across the entire footprint. We also recently received top ratings in several performance and strategy categories and a national study by Bank Director magazine. So this.
This all reassures us that we're on the right track.
We believe the continued success in their future require a healthy mix of scale nimbleness flexibility efficiency and of course, most importantly talent development and we're working hard on all these fronts.
Our Rockland Trust colleagues remain at the forefront of all the success I simply cannot say enough how well my colleague stepped up this past year to meet the many challenges as they unfolded and they did so with enthusiasm and energy.
They were truly the essential workers, who persevered and continue to support our customers without missing a beat for.
For them the clear shared objective of building and enhancing relationships provided the foundation to overcome issues and seize opportunities now.
We believe that a great place to bank is preceded by a great place to work, we invest in our colleagues by a wide range of coaching and development programs. We have a strong track record of promoting from within and spent considerable time of succession planning.
All of these efforts.
Do resonate internally as evidenced by our being named to the Boston Globe Top places to work.
Les for the 12th consecutive year and we are the only bank in our category.
Lastly, we are very excited to announce the addition of worn fields C. E O Pyramid Hotel group and James Morten C. All of the lion's share of Boston to our board of directors. Each of them is a proven leader on their industry and bring a great deal of business acumen to the boardroom and I'm looking for it to where.
With them I also wish to acknowledge all of us to David.
David powers for his service to the board as he has reached the age of her age.
Age requirement for retirement, and we I'd like to especially thank him for his really helpful. Insights during our assimilation of Blue Hills bank into our company and with that I'll turn it over to Mark.
Thank you, Chris I will now cover the fourth quarter results in more detail.
GAAP net income of 34.6 million and diluted EPS of $1 five in the fourth quarter of 2020 reflect decreases of <unk>, 7% and 0.9% respectively from the prior quarter's results.
Fourth quarter results were negatively impacted by a number of decisions that led to approximately $5 2 million of one time costs incurred during the quarter, including a $4 2 million associated with two branch closure decisions and $1 million related to our loss on sale of non core small business fund investments acquired in the <unk>.
2019 Blue Hills merger.
Although negatively impacted current quarter earnings. These strategic decisions were made primarily to improve future profitability.
To provide further context into the core business drivers on the fourth quarter results I would highlight the following factors all of which I will shortly provide further additional color into.
As Chris highlighted in his comments, we experienced another quarter of solid core business volumes, including strong closing activity in both the loan and deposit franchises. In addition, the combination of our hedging positions on pricing and funding cost management led to consistent core margin results.
Effective work out of certain nonperforming assets and no significant change to assumptions of credit risk led to significantly decreased N P. As minimal charge offs in zero provision expense for the quarter also the level of loan deferrals, notably declined as well.
Fee income results were in line with expectations and expenses increased due primarily to the large one time items noted above combined with select incremental costs associated with multiple street strategic initiatives.
The combination of this activity drove a return on assets and return on tangible common equity of 1.0 for an 11.77% respectively for the fourth quarter.
In addition, the tangible book value per share of $35.59. At December 31, 2020 reflects another solid 42 cent increase in the current quarter.
I will now provide further insight into each of the summary points just discussed.
Total loans decreased $12 3 million or 0.5 per cent on an annualized basis continue on the narrative that we had been discussing for much of the year with ongoing commercial loan growth and robust closing activity throughout the total portfolio being offset by pay offs and nutrition.
Focusing first on the commercial side, we continue to find pockets of opportunity. Despite the challenging environment with notable increases in the quarter in both C&I and commercial real estate balances.
C&I growth of seven 9% on an annualized basis was diversified across multiple industries.
Commercial real estate opportunities remained strong despite a cautious approach towards downtown Boston exposure.
And as alluded to in prior calls our commitment to the communities. We serve through these very challenging times has continued to foster strong inroads to the small business segment as evidenced by the 17.6% annualized growth in that portfolio during the quarter.
Offsetting all of these growth categories payoffs and completion of projects led to a $19 4 million or 13.5% annualized decline in the construction portfolio.
On the consumer side, we also continue to see significant closing volumes, however, elevated attrition across both mortgage and home equity continue to mitigate net growth despite.
Increasing the percentage of mortgage closings retained in the portfolio from 17% in the third quarter to 27% in the fourth quarter. The persistent low rate environment has continued to create a significant headwind in terms of increasing your outstanding balances or dynamics that holds true across the home equity portfolio as well.
In fact total fourth quarter home equity closings up $110 million, representing 20% increase over third quarter volumes. Another example of the strong flow of activity in the quarter.
In addition to the solid closing activity noted across all loans segment. The credit environment has remained fairly consistent in the fourth quarter.
On a proactive and dissent disciplined approach to managing problem credits has proven to be very effective over the last three months.
Both net charge offs and overall nonperforming assets have decreased from the prior quarter levels. The.
The decrease in nonperforming loans reflects effective work out on two of the three large relationships that were moved into non accrual status during the third quarter with one of those resolutions, including full payment of approximately $900000 of interest income that had previously been deferred.
Also referenced in appendix F for our earnings release total loans subject to future deferrals have decreased meaningfully to $174 million or one 8% of total loans as of December 31, 2020, compared to six 2% in the previous quarter.
In addition related to recent deferral maturities, we approximate there was an additional $70 million or so of approved deferrals that are pending final acceptance that are not included in these numbers.
Despite the likelihood of these subsequent deferrals the deferral picture has certainly improved heading into 'twenty 'twenty one.
And as we have been discussing over the entire pandemic. The remaining deferral exposure continues to be concentrated in the accommodation industry as expected.
Leveraging our close relationships with these companies we have assessed the impact of their business operations and in some cases, where seasonal operations are expected to impact cash flow assumptions a portion of the current deferrals have been extended for longer periods of time to align with those business expectations with over 100.
For the balance is deferred into 2022 on a longer. However, it was an important and positive development in all of those longer term deferral instances. The Barbara has agreed to make interest payments prospectively.
To close the loop on deferrals, the minimal amount of deferral exposure at the end of the fourth quarter pertaining to the consumer portfolios reflects a portion of previous deferral agreements that have matured and are pending resolution.
As we can as we continue to work with those customers. We anticipate some modest amount will result in a prospective debt restructuring agreement in the first quarter of 'twenty 'twenty one.
Given the improvement in asset quality metrics, just noted along with fairly consistent economic forecast assumptions when compared to the prior quarter application of our current reserve methodology resulted in a zero provision for loan losses in the fourth quarter.
This results in a fairly modest reduction in the allowance for loan loss as a percent of loans from one point to 3% at September 30th two the current fourth quarter level of one point to 1%.
As we have been doing in prior quarter calls I will give another quick update on our P. P. P program, which is certainly top of mind with the opening of another round. This week.
Relating specifically to the $812 million of P. P. P loans that we originated during 2020.
Mind, you, we recorded approximately 26 million of net deferred fees to be recognized as those loans are forgiven or paid off.
Of the 26 million expected to be earned through this first wave.
$9 1 million has been amortized into income on a year to date basis with 3.6 million recognized in the fourth quarter.
These numbers reflect the fact that minimal loan forgiveness has occurred through the end of the year, which still 792 million of outstanding P. P. P balances as of December 31, 2020.
We ask you please refer to appendix C for more detail on the loan balance and income recognition associated with the P. P. P loans on a quarterly basis.
Regarding the new round of the P. P. P program announced in December stimulus Bill we have started to take applications. This week and are in full swing with strong demand. We will certainly provide updates on that activity as this round progresses.
It's been no secret that our stimulus that the stimulus programs and customer behavior have fostered excess liquidity positions across the industry and deposit growth in the fourth quarter continued to reflect that story.
With increases in existing consumer balances being the primary source of deposit growth total deposits increased 142 million in the fourth quarter. It for.
5.2% annualized rate and.
And similar to prior quarters the mix in deposits continue to reflect a favorable shift as higher cost time deposits continue to run off while growth in core deposit categories remained strong.
With core deposits now, reaching 90% of total deposits along with further reductions to standard rates.
Total cost of deposits decreased another six basis points from the prior quarter down to 14 basis points for the fourth quarter.
There's no question that our long term value proposition of attracting new core household and its related deposit growth have proven very successful and served us well.
Yet it does provide challenges in the short term regarding liquidity deployment and relative profitability metrics.
While we did deploy some of our excess cash position to pay down on federal home loan bank borrowings and increased securities balances during the fourth quarter high liquidity levels remain.
With the yield curve that significantly limits, the attractiveness of medium and long term investing the excess cash position is constrained return on assets and net interest margin results.
Regarding the latter metric as noted in appendix C. In our earnings release, the reported fourth quarter margin of 3.1 O per cent reflects a three basis point decrease from the third quarter margin.
When excluding P. P P loans excess liquidity purchase accounting accretion and other one time items the core margin for the quarter increased six basis points in the quarter to 3.39% driven primarily by the aforementioned $900000 in interest benefit from the effect of work out of the previous nonperforming.
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And as guided in prior quarters core asset yields continued to compress as cash flow reinvest into this lower rate environment, while reductions in funding costs had been able to mitigate the overall net core margin impact.
Turning to noninterest items, we will highlight a few key items to note for the fourth quarter rigor.
Regarding noninterest income.
Some moving pieces related to increased overdraft fees and decreased ATM fees total deposit service charges and ATM fees remained fairly consistent quarter over quarter.
Regarding wealth management, new money inflows continued to exceed outflow activity with the majority of the fourth quarter increase attributable to strong market performance and as Chris mentioned total assets under administration under administration increase from third quarter levels are for point 5 billion. Two for point 9 billion as of December 31, 20 <unk>.
'twenty.
As noted earlier mortgage banking closings continued at a significant level throughout the fourth quarter.
With an increase in the production moving to portfolio plus a narrowing of spreads on sales volume as expected total mortgage banking income decreased $2 3 million from the record high set last quarter.
On a similar note as we continue to find appropriate balance over managing our interest rate sensitivity position loan level derivative income also decreased from the significantly elevated levels experienced in previous quarters.
Lastly, the increase in other noninterest income is comprised of a number of various items, including unrealized gains and year on realized investment income on equity securities tax credit purchase discounts and strong activity from our tax section 10, 31 exchange business.
Regarding noninterest expense.
Total increase was primarily attributable to the two large one time items alluded to earlier that I will cover first.
The lease impairment of $4 $2 million reflects accelerated lease termination costs and the write off of leasehold improvements related to two branch closure decisions made in the fourth quarter.
As we discussed last quarter, we continue to view our branch strategy as being a key component of the overall franchise value, but we'll look for opportunities to consolidate where appropriate to drive further efficiency.
The $1 million loss on sale of investments reflects a loss incurred on the sale of six small business investment company funds that were obtained in the Blue Hills acquisition.
Non core investment type that certainly posed additional credit risk in this current environment.
When excluding these two items the remaining $1.9 million of increase in noninterest expenses, primarily comprised of increased incentive compensation consulting fees software and software costs as we continued to invest in infrastructure and digital capabilities.
This balance of controlled cost management, while committing to fund long term strategic priorities. There's a formula that will continue to define and drive expense management over the near term.
Lastly, the tax rate of 23 three per cent for the fourth quarter was in line with expectations.
As we look out into 'twenty 'twenty, one the landscape remains profoundly uncertain the.
The industry will continue to face the headwinds of pressured asset yields high excess liquidity and an economy that will continue to be significantly impacted by the deployment of the national Health crisis, sorry, the development of the National Health crisis.
While many variables are expected to impact 'twenty 'twenty one results over the course of the year, we want to provide some key expectations over core business activity to serve as guidance over the near term.
Excluding D. P. P activity with an improved commercial loan pipeline of 186 million as of December 31, 2020, and it continue risk based approach over opportunities, we anticipate modest net growth in total commercial balances.
While closing activity is expected to remain strong heading into 'twenty 'twenty. One the expected persistence of Paydown activity will continue to challenge any meaningful growth in the consumer portfolios.
Regarding the net interest margin excess liquidity and timing on P. P. P fee recognition will continue to create some level of volatility in the reported margin.
Excluding those factors the core margin will continue to be impacted by expected asset yield compression similar to the impact experienced in the last two quarters.
Assets continue to re price and it into an anticipated low rate environment. However, we believe there is still some level of further reductions in the in the deposit base that should continue to mitigate the asset yield compression in the near term, resulting in a modest net core margin compression.
With the credit environment posing the largest risk regarding uncertainty on fourth quarter results reflect our bigger picture posture of credit reserve methodology heading into 'twenty 'twenty one.
In other words, assuming no material changes to the overall macroeconomic forecast the 'twenty 'twenty build of the allowance for loan losses should lead to provision for loan losses being more closely correlated to charge off activity with some element of loan loss reserve reductions if the environment stabilizes.
Addressing the primary drivers of fee income, we expect mortgage demand to remain strong with gain on sale margins expected to normalize down from 'twenty 'twenty levels and swap fee income will ultimately revert back to more historical levels.
Turning away a continued stabilization of the economy should reflect positive increases to deposit fees that were negatively impacted for much of 2020 and continued growth in investment management results are expected.
And as previously noted our commitment to expanding our Worcester presence building out an enhanced risk space infrastructure and investing in our digital customer experience initiatives, while continuing to challenge efficiency and costs across the entire organization is expected to result in total expense levels fairly consistent with.
Core expenses noted in the fourth quarter, excluding the large one time items previously noted.
Lastly, our tax rate is expected to approximate 24 per cent.
This concludes my comments and we'll now open it up to questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Youre using a speakerphone please pick up your handset before pressing the Keith is that anytime you question has been addressed and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
The first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.
Hey, guys. Good morning morning watermark.
Chris I'm curious you touched on a little bit of your plans with respect to the branch network and I saw that you had closed a few locations. This this this quarter, but given what we've seen from some other banks in your market with fairly large branch closure announcements I'm curious how you're thinking about your roughly 100 branch you know France.
<unk>, you know could that number come down dramatically in the years ahead as customers migrate to more digital approaches to interacting with you all.
Yeah Mark on.
Give me a minute on this topic, then I'd really like to turn it over to Rob Who's really.
Leaving that effort I think if I were to say if you look out, let's say 20 or 30 years, clearly theres going to be at.
On a shift over time, but it's not gonna be I'm on our opinion rapid I mean, there are a lot of customers, who we earn their relationships to these brands through branches, where we have an extraordinary set of referrals from up to other business units from the branches and we view them as very very critical Robbins he'll explain.
We have a very comprehensive.
Comprehensive and focused set of evaluation of branch performance and and and and that's why you see over time, we have made a number of branch closures or consolidations, but we think on the in the short to medium term that branches are going to remain very key to.
To or success, Rob what would you add to that.
Yeah.
Well you covered a lot there Chris but certainly your your your direct question Mark about significant decreases in our branch network over the next several years are we're just not forecasting that has an appropriate strategy for us although our level of account.
<unk> coming from digital sources, our new online account opening system, which allows consumers to open up an account and a mere four minutes is always wonderful technology and we continue to educate our customers on our prospects about that alternative and we've doubled.
Our volume of accounts opening through that channel. However, it is still less than 10 per cent of our total account openings.
And the numbers of accounts that we're opening and our branches has accelerated.
Fourth quarter and you've heard me say this start in prior quarters.
But we had record openings of deposit accounts checking accounts, primarily in savings accounts in the fourth quarter versus any other fourth quarter and then as Chris referenced the volume of referral activity still coming from our branches is significant.
And at the moment, we don't have a clear line of sight as to how that referral activity can.
Shift to digital alternative.
Those referrals are coming from in depth conversations.
Between our bankers and the customer and referring them to our other our relationship managers on the wealth management area in the mortgage area. There's still we're saving lots and lots of home equity application for the vast vast majority of them coming through the branch network as they explore needs.
Without customers.
Having said that as you noted we did just close two locations one of which I would certainly say was accelerated by the pandemic and that's because there was a former.
Headquarters of one of the bank that we acquired in addition to the branch there was lots of office space attached to that location and the combination of the cost from that office space, which was under utilized on we're projecting would be continued to be under utilized just made sense to accelerate that decision.
I don't see a cigar.
Significant acceleration amongst the rest of our network, but we will continue to look for opportunities to pair back branches and when we do close a branch like many many other.
Banks, we see very high retention rates as long as there's another location relatively nearby twice.
Well I suspect they'll continue to be in the single digits sort of numbers opportunities to consolidate locations, but keep in mind our expansion into westar.
<unk> is a physical expansion, we believe that to be successful in a new geography.
We'd need branch locations with.
With highly trained local staff, who know their communities and the two branches that we opened in the city of Worcester.
During.
2020 in the midst of a pandemic are doing exceptionally well.
And we hope to open at least two more in the greater Washington area in 2020.
2021, sorry.
Alright, 'twenty 'twenty one thank you Chris.
Super Helpful. And then Mark I'm curious on I apologize, but did you give any guidance.
Guidance on expenses for 'twenty and 'twenty one.
Yeah, basically mark that you know the guidance as you know we we look at really the last couple of quarters is really be in a strong baseline for expectations into 'twenty 'twenty. One are the fourth quarter caveat also being I'll, obviously be on excluding the large one time items, we took in the quarter, but you know we've we've made some incremental.
Investments, we've talked about some expense increases in things like software and technology to continue to build out that digital customer experience. We've mentioned some areas around our risk infrastructure build out so there's been some really key hires in terms of talent.
And personnel in those areas. So that's creating a little bit of an increase in the run rate from those perspectives, but offsetting that we are being very very thoughtful and really holding the line on other discretionary spends and we think that the combination of that approach should keep expenses relatively flat with sort of on.
At run rate, we've been showing over the last couple of quarters.
Okay, and then lastly, if if you're not able to find acquisitions and capital continue to be a capital sort of continues to pile up I guess I'm curious would you contemplate a special dividend or maybe bumping up the quarterly dividend rate.
Yeah, certainly you know capital our capital management is top of mind and you know I think you mentioned a couple of alternatives that we continue to keep.
Keep in our in the tool belt and continued to assessed certainly you know we experienced a successful buyback program in earlier 2020, it's certainly approach that we would be comfortable deploying with these levels of capital. Despite some of the uncertainty in the environment.
Sir you know with the with the positive increase we've had in the stock price from an economic perspective. It just does not make sense at this point.
So you know I would say from a from a ranking perspective that would certainly be the most logical deployment of capital if the economics made sense.
From a from a dividend management perspective.
We typically do take a look at our dividend rate.
You know in the first quarter of each calendar year.
Again, where you're hitting the nail on the head. There's there's certainly an overall comfort level of absolute levels of capital.
I'm from an ongoing dividend perspective, we obviously continue to be very cognizant of payout ratios and want to make sure. We're thinking about that both managing you know against the short term environment and understanding you know dividend rate given our current profitability levels and wanted to make sure that's a sustainable rate.
It'll certainly be the mindset as we think about any any changes in 'twenty and 'twenty. One in terms of a special dividend I'm you know, it's a it's a strategy that we.
Quite honestly haven't haven't deployed in the past but.
You know, we we understand there's probably pros and cons in terms of of what that truly does accomplish but you know again I think nothing is completely off the table, but you know we'll look we'll be looking at all those alternatives.
As we round out sort of the 2021 capital plan.
Thank you.
The next question comes from Christopher <unk> with D. A Davidson. Please go ahead.
Hey, good morning, everyone.
Good morning on.
So I'd like to just dig in a little bit to your loan growth and and and I guess, starting with P. P E relative.
Relative to the 2020 activity.
How large do you expect the participation to be in this newer.
Iteration of the program.
Yeah, that's a great question, Keith and Chris and one that's yeah very very relevant in this week. So just as a reminder, we did.
A little over 6000 P. P. P loans are in the first round well.
Yes, you could think of it as sort of two different waves in 'twenty 'twenty, but we did do a little over 6000. This new program. When you look at some of the rules and requirements around for a straw second draw loans, our experience through that first round towards the end of that program.
On the demand has certainly come down to a very low level. So we think most borrowers that really we're in need enable to get a P. P. P round did in fact get one during during 2020, so we anticipate and believe the majority of our demand here in this new.
Wave will be second draw requests in other words existing P. P. P borrowers coming back looking for a second draw.
So you know heading into this round we.
Just on our gut feeling was that we were anticipating probably somewhere between 50 and 75% of that.
Oh that first round population to likely qualify and come back and you know I'll say in the first few days you know the first 24 to 48 hours certainly felt like we were going to be on that on that pace, but it has it has come down in the last day or two and you know it's so early in the <unk>.
Graham, where we're not sure if we need to read into that quite as much yet or not but you know what it is.
But where we sit here today. It suggests we may not reach those types of levels, but it's still very early to tell but we already have well over 1000 applications in the queue today.
But you know when we get to that three or 4000 range, it's still a bit early to know for sure.
Great. Thank you and then and then I guess are you know looking at traditional commercial industrial.
Assuming you do get to that three or 4000 level do you anticipate that having a kind of a negative impact on on the demand for more traditional commercial and industrial products.
We we don't I'll share my thoughts on in the Gerry Nadeau I'll ask <unk> to share his thoughts as well, but again leveraging.
Our experienced through the first round it it really was sort of mutually exclusive and we certainly had some overlap in certain industries that.
You know that we're able to get a P. P P loan and and we you know we saw our industries continue to have demand from from normal lending.
Needs. So yeah, we did not experience one or the other really having an impact over.
Oh for demand they were quite honestly mutually exclusive.
And we think there continues to be really good pockets of opportunity.
Both from a C&I and commercial real estate perspective, you know to give a few examples we've we've continued to see.
Apartment and construction.
Construction projects really outside of the Boston proper market neighborhoods continuing to be.
On.
On a program for US and you know we have some some nice sort of verticals and our asset based lending.
And CNI portfolios that we've been seeing some good opportunity in.
Industrial me on what we call sort of flex space warehousing.
The building developments that are actually structured so that they can be more flexible for any type of tenant use I'm. We're seeing some uptick there, especially you know borrowers that may be looking for lab space.
And there's been opportunities from our perspective, there as well. So you know all of that I think are typically borrowing relationships that.
To be honest may or may not qualify for P. P. P. But we havent seen it constrained demand I don't know if Jerry you have other.
Thoughts along that front.
Perhaps the only thing to add to that is the only category I think it's still to be determined would be for contract is if you remember back in the spring of 2020, our Massachusetts shut down a lot of construction for an extended period.
So many contract is we'll be able to evidence the 25% quarterly revenue decline.
Even though they may have had a good year otherwise so with that in mind. There is a possibility and looking at the list of those that are probably there are some contract isn't there. They do meet their requirements. So if they do in fact end up getting the PPP loans it could potentially pay down on lines of credit. So maybe I don't know that it necessarily will negate.
New loan demand as much as perhaps we decreased utilization rates on lines of credit and some industry.
Got it thanks, and then I guess, just lastly, I'm looking at deposit and specifically time deposits.
Is there more room to move on both a balanced level for time deposits or or a car.
Perspective for for time deposits to move down.
There is and <unk> and.
In both fronts I mean, certainly our new.
Time deposit offerings are at.
Rates that are significantly lower than what the weighted average cost of that deposit product is on the books.
And you know we talk a lot about really a lot of our success on account generation over the last couple of quarters has continued to be primarily focused on core deposit generation. So we.
You've seen in the last couple of quarters, just the run off and the time deposit portfolio.
There is another good portion of that of that product level set to mature over the next six months and in fact, just even over the next three months the weighted average of what we'll run off as well over 1% from that product. So just the natural.
Maturity schedule of those of that.
Those deposits will continue to give us benefit on the cost of deposit front and then any new C. D pricing is coming on the books out on much lower rate. So that certainly has been a big driver behind our ability to continue to get deposit cost down.
Got it thank you.
Welcome.
The next question comes from Laurie Hunsicker with Compass point. Please go ahead.
Hi, Thanks, Good morning, good morning Laurie.
I guess mark.
This is a question for you just going to credit and I know two of your three credit card.
Here this quarter, just wondering on which ones they were in a hotel or a restaurant.
Or the entertainment.
Your first two large [laughter], but at the hotel pay it off and in the restaurant relationship paid off as well.
So just a reminder, the hotel was was the relationship that we took a charge off in the third quarter down to at the time and expected payoff level on that did pay offs.
As we planned.
In the restaurant relationship you know we had a as you we mentioned sort of the the interest benefit associated with that that was it.
A very positive workout solution.
And then I think I hope, you're right and so the and the hotel with $20 million on the restaurant line on the $20 million exactly on the hotel, we had charged down to a I believe a little over 18 and the all in restaurant relationship was a little over 20, I think it was more like $22 million.
Okay Cool and then just looking at the charge offs this quarter.
Like one nine with with C&I with any of that.
Those two loans.
No just the the C&I is primarily drill.
Driven by one charge offs on an acquired loan from from the Blue Hills acquisition.
We had and so and then some other just much smaller charge offs. So one of one loan equates to about 1.8 $1.9 million of that Q4 activity, but they are completely separate from those.
Those are those are the three that we put on non performed so that that was actually a new nonperformer in the quarter.
So that offsets the reduction of those two work out loans that we that we were just talking about.
Got it okay, and so and then to your point on provision obviously loan growth is going to be nominal I think that's true across the board.
I mean 80 485 per cent of your charge offs non were related to that's my mouth because the.
As we think about your loan loss provision it could be very very light.
Parents, and obviously there are a lot of question marks around call. It right I mean could it be light from the standpoint of thinking about what things look like in 2019 or how do you see that yeah. No I think I think that's a fair way to look at it and you know I'm sure you're monitoring as much as we are in and we don't.
Necessarily.
You don't always need to compare ourselves to what we're seeing in industry trends, but I think you're seeing the obvious of.
What was the.
On the seesaw methodology really driving significant loan loss reserves in and quite honestly you know what probably should have happened in the concept of what <unk> is meant to do is.
Buildup that reserve win when you think that future risk is there.
I think what we've experienced in the fourth quarter and our approach to what you saw in terms of the zero provision in level.
Where we're at a point, where we are comfortable that barring any really made any major changes to the.
The macroeconomic environment you know, we think we have a good handle on.
What we've already provided for future credit risk. So we really should be in a position to.
We continue to think about you know either reducing reserves or or you know matching charge off activity.
With with provision, but I you know I think we showed it in the fourth quarter and its a concept that we would be comfortable heading into 'twenty 'twenty, one with that we don't necessarily need to continue to replenish the reserve at this level if we're.
So in theory taken losses on on reserves that we've already credit bid for a reserve for.
Got it Okay. That's helpful and then I guess.
Jumping over to deferrals here.
So your your overall deferral down nicely commercial deferrals not sitting on 2.4%. It looks like every single category improved except for one that's either small business services at 151 billion net.
For the deferral rate now at 24 million or 16% from last quarter can you talk a little bit about that book end.
How you're seeing that back.
I'm, sorry, which category, where you're referencing so it's the other business services book.
And you have the highlighted categories of hotel food retail.
Parts of Iraq, and then there's other services back of 151 million, although it looks like it is the only category that debt bond angry or I can certainly I can follow up if you off line, if that's easier I'm just wondering.
If there was anything to be concerned about the other services, except for public administration for up.
It's a nonprofit.
Well, let debt actually.
Services that type of thing right, Yeah, and I think you know this is a.
An interesting dynamic of of you know I wanted to continue to provide some.
Transparency into industries, and I think although we've continued to continue you know continue to highlight that industry and give some color to it I would point to you know.
The level of deferrals that we've experienced to date and there is a very low correlation of you know active deferrals.
To that industry. So you know I think we feel a lot better about that category.
And as you can obviously see a lot of the current deferrals continue to be primarily associated with the accommodation hotels restaurants et cetera.
So we're not seeing you know really a lot of stress in that category.
We continue to to provide insight to it and obviously continue to monitor but it isn't a category that you know, we're feeling I'm overly concerned about.
Okay, great. Okay, just a couple of more questions on.
On the on the other other non interest income line that that for 8 million out of that $27 5 million of total non interest income.
What what were the one time nonrecurring yearend item for the Batesville at all.
Well the the securities the day the equity Securities portfolio is one that you.
I wouldn't necessarily categorize as being non recurring it's just very volatile right. It's the market, our unrealized gain or loss on that securities book.
So that she just bear with me I'll get you the exact number that increased quarter over quarter by about 300000.
We typically have yearend realized gains or capital gain distributions on that book as well and that was about 150000.
So all in you know half half a million on the equity securities portfolio, some of which though certainly could be occurring to the extent as continued appreciation on on the valuation.
Right. Okay, and then on expenses, just just going back and I. Appreciate your color around thinking about non interest expenses flat I just wanted to know on a core basis, obviously, where we're stripping out the loss on the sale.
On the equity investment that for point to and then.
I'm, sorry, the least impairment for point to and then the BHP cash lawful kind of equity investment on a million on better.
It looks like there were.
Are there other non recurring expenses as well on so I'm just trying to understand the doubts on when you talk about the core expenses.
Are you talking about a base of 68 and a half million or are you talking about you know looking at abaddon.
Here on your point you had some color on the press release that there was you know a million seven or so linked quarter increase but I just don't know how much of that.
That's sort of miscellaneous non recurring or we stripping that out in the core bank is closer to 68.
Eight more loans.
Any color you can help us think about in terms of how you're approaching Corp.
Sure Yeah, you know it.
Oh, I thought I heard.
You know it certainly in the fourth quarter you.
Some of that increase was salary and employee benefit incentive compensation commissions and I think.
You recognize that in and it sounds like you're also looking for some more insight in that other non interest number. So a couple of items. We spoke about them I would say were accelerated in the fourth quarter. So it it represents.
Some elevated level of expenses and that had to do with some consulting arrangements.
Our agreements, we've and we've incurred in the fourth quarter.
A couple of examples associate with quite honestly the P. P. P program. So we obviously continue to work through.
Even though all of the closings on the first round of complete there's still a lot of work to be done on the forgiveness side. So we've had to bring in some additional help them on that process. So there's does expense there that would will be there for the completion of the P. P. P program, but then that would be able to drop off.
We've had some increased expenses on continuing to build out our risk framework. So I think there's a bit of elevated expense in that front, but at the same time. We also made some key hires.
To really continue to improve the infrastructure around that.
You know as we grow as we continue to look to grow we think it is very very important to continue to invest in the infrastructure of this company and we're really trying to find the balance of making sure we do that and making sure we invest in strategic priorities without sacrificing.
The long term value, but recognizing it may continue.
<unk> continued to create a little bit of incremental increase on the expense side.
So we've done some consulting work with folks.
We're we're continuing to build out an infrastructure that has some ramp up in cost associated with it I think a portion of that will go away over time, but we also put some more employee and in salary expense in place you know on the second half of the year. So from a run rate perspective, you know you were.
We'll see some some incremental expense on the salaries, so that will kind of wash a little bit so I'm kind of giving you a few examples of where I think you'll see some movement.
Heading into 'twenty 'twenty, one, but you know to pinpoint and that fairly narrow our range I think you were alluding to.
You know I I think youre in that range as appropriate, but there will continue to be a little bit of volatility in any given quarter has to bear on that range we land.
Okay, great. Thanks, that's helpful and and I guess, Chris one more question for you can you just give us very high level. Your your thoughts on M&A, you're sitting here with very strong soccer and see it it seem to have tangible book.
How you how you see the world right now on that thanks.
Yeah at a high level I would say that that the secular trend will continue in all the bank consolidations in M&A.
On a nationally and overtime locally.
The number of bank sensitive had managed a great deal here in Massachusetts. So it's much more random rather than sort of predictable and I would say out of a big picture point I think the interest rate environment and celebrates its I would imagine that debt.
Adds a little bit of instead of performance that is thinking to a number of bank. So so we will see now well well well, let you know.
Thank you.
The next question comes from Dave Bishop with Seaport Global. Please go ahead.
Yeah.
Good morning, gentlemen.
Good morning on how are you.
Good good.
Question.
It sounded like the retention of mortgage production on the residential side jumped about 10% for the fourth quarter, just curious how youre thinking about that heading into 2021, if you think that the debt.
Overall retention rate should continue to remain elevated relative to our 2020.
Yeah, I think yeah, you know, it's an area quite honestly David do it. We we think is appropriate to look to be a bit more aggressive in putting the production on two portfolio.
Well, we certainly are showing you know the challenges we've had in growing that book on balance sheet.
And in this environment with the refi activity.
To create a big deal of outflow you know we.
We want to be very cognizant of continuing to protect that balance sheet for the long term so.
So I think you know in terms of putting more production onto your balance sheet.
It is still Ah.
Our products and a crew.
That we are comfortable with and especially going through our underwriting and our production channel.
So you know I think we will continue to look to be a bit more aggressive to put some of that production on balance sheet I will say you know as we.
At least experience in the last couple of weeks with the 10 year Treasury starting to show some life and tick up a bit you know that's all predicated on what we see in sort of the overall.
Play out of the economic environment, and certainly what will happen with mortgage rates. So if we start to get a little bit of lift on the long end of the curve.
If we don't see that mortgage pricing react as quickly.
You know, what we wouldn't be as comfortable continuing to put you know that lower debt lower price at that type of duration.
But from a big picture perspective, all things being equal I think the levels. We did in the fourth quarter would certainly create a good baseline to think about what we'd be comfortable going forward with into 'twenty and 'twenty one.
Okay got it.
And then popping back to credit.
Thanks again for the added disclosures in the back there.
Relating the.
On deferrals and some of the areas Youre looking at maybe going maybe a layer below that.
I guess, we're still waiting what's happening from a substandard and special mention perspective, but maybe even from a watch list trends or do you think you've got the near the areas identified here for fairly well ring fenced I guess, what I'm asking you know or are you seeing any sort of bleed through to other segments or sectors that maybe didn't make these tables, but it could be a sort of a can areas in.
Coal Minder.
You know that there are bearing a little bit more monitoring heading into 2021.
Yeah, I I'd say I think the short answer there is there's no David I mean, I think you know we talk a lot about our.
Our strategy and really the value of knowing our markets and stay in geographically.
Centralized in and it really and the diversification across sort of industries and product levels and really managing our size loan exposure.
It gives us a lot of comfort that we know our borrowers well, we know where the risk lies and I think we really do have a good handle in the material that we've provided to really identify where we think there continues to be risk I mean, we can't sugarcoat. The fact that there's still.
On a lot of uncertainty in our geography here in Massachusetts, you know, there's still a lot of businesses that.
You know have limitations on on being able to stay open occupancy rate.
<unk> cetera. So we are very cautious to suggest that you know what we're what passed all of the the.
The major concern but.
At the same time, we think we have a very good understanding of where that risk lives and we think we've captured out appropriately and in our reserving and our provision in but you know we're not seeing any other day.
Delinquency metrics are really no significant changes in our on our classified levels that that gives us additional concern outside of what we have reserved for.
Okay got it got it and then one final question I'm not sure if I misheard merge you on the sort of the opening remarks here. It sounds like you know you see some opportunities within the commercial real estate.
Sub segments out there just curious where you see the opportunities and did I hear you right that Houston, you're starting fees getting more constructive on Boston Boston, New York, you are still staying relatively cautious in terms of that kind of that market.
No still staying cautious, but maybe I'll have maybe Jerry just provide a bit more color on.
On the commercial real estate market.
Yeah what.
But I think we've been seeing opportunity in suburban apartments, you know the.
Demand for housing actually seems to be increasing every day, there's a story on the newspapers about the lack of availability of homes to purchase which has been driving increases in apartments. I think that there are people that are whether its permanent or not I don't know, but that are electing to live in more suburban locations are in apartments were on.
So seeing some opportunities with mixed use.
As well as a flex and our warehouse industrial I think it's a little too early to determine how strong the demand will be for lab and our lab light space in Massachusetts, I think it will be strong and.
I think that's just a general sort of re establishment of bringing back a lot of capacity to the United States from overseas. So I think that does bode well for the.
Massachusetts in general in the near future, but it's a little early to completely be confident on where so I think at this point you know where were seeing the most opportunity where we're comfortable as Bourbon Hobbit.
House industrial flex space in mixed use.
Is the.
So the ongoing I know a lot of universities here in the mid Atlantic are still virtual is that sort of having any sort of impact in terms of the commercial real estate market with what's going on with the University and colleges for students arent art back in sort of student housing or just curious number.
Number one I don't think you have much exposure there, but just curious is that on any sort of macro impact on the mark.
Right and that's really in Boston proper Boston when you, sometimes see Boston reported by banks and includes a lot of the suburban towns right around it when you look into the city itself.
The apartment buildings that are surrounding the colleges have more vacancy than they did previously.
Just to give you a data point in September which is typically the peak of the occupancy in Boston because of students. There were 13000 empty apartments in Boston versus what normally might have been three or four so big increase.
That has since improved there's been a lot of kids debt.
Who don't Wanna be mommy, and daddy's basement, even though they're going to school virtually they still want to be living in an apartment independently or with friends. So it's actually sort of improving with the occupancy in the city and they might be going to school virtually but there is still on our part but its just part of growing as part of a toric So I do not.
That's changed them, but we are being cautious certainly on new credit in Boston until we really better understand where where do we land on the other side of this pandemic.
Okay.
Got it appreciate the color.
Youre welcome.
Yeah.
The next question comes from Chris O'connell with K B W. Please go ahead.
Good morning, gentlemen, just a couple of cleanup questions first off.
How do you guys or how are you guys expecting the P. P. P forgiveness kind of schedule over the course of 2021.
Yes, certainly we think that should start to accelerate now in the first quarter, you know theres been a lot of.
Waiting around for that simplified for them if you've been following the program so borrowers less than a 150000, they announce there'd be a much simplified process for them was not actually released until just this week. So we think that should be a catalyst to really seeing some level of acceleration.
Yeah, I would say certainly in the first half of the year for six months I would imagine we should be able to make our way through through most of that forgiveness process.
Great and then finally, just on the excess liquidity I mean, it sounds like you know.
Overall loan growth is going to kind of shake out fairly modest.
For 2021, unless things change.
Change here.
You guys have been on between $900 million and 1 billion kind of excess cash on the balance sheet right now.
At what point do you think to start putting that into securities. Even if the yields aren't that attractive just to get a little bit of a better yield than the cash yeah. No. It's it's a it's a great question and it's one we talk about.
Yeah on a weekly basis and I'd say the positive development. There is we're getting to see a little bit more comfort as I mentioned with the 10 year ticking up.
And that gave us some comfort with the levels, we did in the fourth quarter. So the first quarter on a while we put any really meaningful net growth on the securities book.
We've been more aggressive early on here in the first quarter as well. So it's certainly the most obvious lever to pull and one that we will be.
More aggressive in heading into 'twenty 'twenty. One so you know I think on the margins. We can continue to put more of that money into the securities book.
You know there are some other smaller type on the fringe investments, we we obviously need to be looking at you know things like a bully investment low income housing tax credit investments that we're very familiar with and you know we think there's some opportunity there.
We've done as much as we could on the funding side and paying off balances, but we have a little bit of.
Of debt, there that could be running off as well in 'twenty and 'twenty one.
And so you know I think I think there's opportunities there you know there isn't any one match.
Magic bullet I think that is going to make a huge dent in that position, but we do believe there's opportunities to make some level of improvement for sure.
Got it appreciate it that's all I had thank you.
Well thanks, Chris.
This concludes our question and answer session I would like to turn the conference back over to Chris on the Sun for any closing remarks.
Well. Thank you very much everybody. Appreciate all your good questions. We look forward to talking to you in three months and up between now and then say stay safe.
Bye.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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