Q1 2021 Independent Bank Corp (Massachusetts) Earnings Call
Welcome to the earnings call for Independent Bank Corp.
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 in.
Independent Bank Corp, cautions you against other duly 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 discuss certain non-GAAP financial measures as we review Independent Bank Corp.
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.
So please note that this event is being recorded.
I would now like to turn the conference over to Chris Odd leaps and President and CEO. Please go ahead.
Thank you good morning, everyone.
Thank you for joining us in this very exciting day and the latest chapter in the growth trajectory of Washington Trust franchise. Joining me on the call. This morning are Mark Ruggiero, Our Chief Financial Officer, Rob <unk>, Chief operating Officer, and journey Nadeau, President of Rockland Trust, and our Chief commercial banking officer.
So we are delighted to announce the acquisition of Meridian Bank Corp, and its flagship East Boston savings Bank, a strong well run community bank with $6 $5 billion in assets.
Mark and I will be covering the presentation slide deck that accompanied last night's announcement, but first mark will briefly cover our first quarter results, which continued our track record of solid performances. Following both segments will open it up to Q&A.
Mark Thank.
Thank you, Chris first quarter GAAP net income of $41 7 million and diluted earnings per share of $1 26 represents a 20% increase from prior quarter results driven primarily by higher P. P. P fee recognition and negative provision was a reminder, that the prior quarter contained $5 2 million.
There's a one time pre tax costs.
The first quarter results produced a 1.26% return on assets and a 987% return on average common equity with both metrics continuing to be impacted by the significant excess liquidity position.
In addition, tangible book value per share rose another 37 cents to $35 96 as of March 31 2021.
The major drivers of the first quarter results as compared to the linked quarter are as follows.
Total loan balances decreased 1.6% is high attrition volume continued to outpace strong new originations during the quarter.
We remain very optimistic about new deal flow and opportunities as total closed commitments across all loan products. Excluding P. P. P was approximately $690 million for the quarter and the approved commercial loan pipeline as of March 31, 2021 stands at $308 million.
Total deposits increased an incredible 5.4% or 22% annualized fueled primarily by consumer and government stimulus in PPP funding as well as continued success in attracting new core customers and Miss current market disruption.
Core deposits grew nearly 700 million with demand deposits, leading the charge with almost 40% annualized growth while time deposits continued to decline.
And so the P. P. P program, there were approximately $500 million of Outstandings and $7 9 million of deferred fees remaining to be recognized related to the original twenty-twenty round that.
As for the new 2021 round.
Currently have over 400 million in the application pipeline and have closed and funded over 360 million through today inclusive of that 400.
We anticipate this level of activity to generate approximately $16 million in fees to be amortized to interest income over the five year repayment schedule or accelerated into income upon full forgiveness.
The combination of increased deposits and restrained loan growth has led to even further increase liquidity.
To partially mitigate this we significantly increased our pace of securities purchases during the quarter.
Resulting in a $269 million increase in total securities balances.
As a more modest deployment of liquidity. We also made an additional $40 million boley investment done in the quarter.
Net interest income of $95 6 million grew by 4.5 per cent compared to the prior quarter.
Consistent with prior quarters. Our earnings release includes a roadmap of the nonrecurring margin components to help identify core margin trends.
The first quarter reported margin of 3.25 per cent increased 15 basis points from the prior quarter and benefited from the recognition of approximately $9 5 million of fees accelerated by the full forgiveness of PPP loans excluding.
Excluding those fees and other items as noted in appendix B. The core margin remained relatively stable with core loan yields contracted modestly while the runoff of time deposits and other price and changes further reduce the cost of deposits to 10 basis points for the quarter.
Also noteworthy regarding the core margin, we entered into another $100 million of macro level, one month LIBOR fixed rate hedges two separate 50 million positions taken advantage of the recent steepness in the yield curve.
Based on current one month LIBOR rates. The transactions result in a pickup of approximately 110 basis points in yield on the $100 million.
The negative 2.5 moving.
Negative $2 5 million in provision is reflective of a few key components worth highlighting a number one net charge offs for the quarter with $3 3 million in line with expectations and deemed to be included in the prior reserve build.
Outstanding loan balances decreased during the quarter asset quality metrics continued to remain strong across the board and overall macroeconomic data included in the Cecil modeling continues to improve.
Total loan deferrals of 221 million at March 31, 2021 are up slightly from the prior quarter as expected as they include a portion of accommodation industry modifications that were in the process of being renewed when we last reported.
Total deferral balances equate to a low 2.4 per cent of the total portfolio with 74 per cent of the balanced concentrated in the accommodation industry.
Nonperforming loans decreased $7 6 million or 11, 5%.
With the recent positive development of an additional $8 4 million of that quarter end balance being paid off in full further reducing the nonperforming totals heading into Q2.
Noninterest income decreased $2 2 million or eight 1% a strong wealth management results and solid mortgage banking income were offset by reductions in swap income equity securities income and other smaller items.
As a side note regarding wealth management, we crossed a great milestone of 5 billion and assets under administration and an ending the quarter at $5 2 billion.
Excluding one time costs in the prior quarter noninterest expense increased a modest one 7%.
Lastly, the tax rate of 22.3 per cent for the first quarter benefited from 1.4 million of discrete benefits associated with low income housing tax credit investments and equity compensation.
I'll now shift to providing near term guidance, excluding any impact of the pending merger.
We anticipate net loan growth to remain challenged in the near future as attrition continues to mitigate strong closing activity.
Regarding the net 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.
Excluding those factors the core margin is expected to compress modestly as asset repricing will slightly outpace our ability to further reduce funding costs at this point.
Provision for loan loss will continue to reflect a combination of charge off activity net loan growth and general economic assumptions as such a relatively stable economic environment should continue to provide a framework for very modest provision levels on the heels of the significant reserve build in 2020.
Regarding fee income, we expect continued strong results from wealth management, and we reaffirm our prior quarter guidance that mortgage gain on sale margins are expected to normalize down from the current levels. While swap fee income will continue to be challenged as straight to balance sheet fixed rate alternatives continue to.
I had a compelling offer.
As for noninterest expense, we anticipate flat to modest increases from Q1 levels and lastly, our tax rate is expected to approximate 25 per cent for the rest of the year.
With that I'll turn it back over to Chris.
Okay.
Thanks, Okay. So.
Now, let's turn our attention to the slide deck covering their acquisition of Meridian Bancorp and its east Boston savings Bank subsidiary, So let's start on page or slide three.
Summarizes really compelling.
The compelling and cogent strategic and economic benefits.
Bringing together, our two profitable and well performing banks with strong customer franchise and is consistent with our strategic view that acquisitions and expansion should focus on contiguous overlapping geographies.
With attractive markets.
This case it materially augments our presence in the highly coveted Boston MSA.
We're making good strides and are already in the recent past the.
The combination of the two banks improves our market deposit share position.
And equally and maybe more importantly at this time.
Oh, Yes, East Boston Sapiens has a very strong commercial banking orientation was fits quite nicely with their own proven strength in this area.
In fact, our combined commercial loan portfolio over $11 billion you'd rank us number one in the Boston MSA amongst all banks headquartered in Massachusetts.
The economics of this deal are quite attractive driven by inherent cost savings lowering our funding costs and redeploying climate of excess liquidity.
We expect this acquisition to result in healthy earnings accretion top tier return on assets and importantly solid positive.
Tangible book.
Value per share, which is an important benchmark price mark will be covering this.
R&D talent.
It is soon to be $20 billion bank.
Another important aspect of all of course fees yet at scale.
This transaction price test at the greater ability to keep pace with critical investments in technology, especially in the digital space.
Well this will be helpful. In supporting the enterprise risk management infrastructure expected of a bank greater than $10 billion of assets.
Yeah, we're really thrilled that east Boston will also bring an infusion of experienced leadership and talent to our ranks, which will help us really hit the ground running and expanding.
From relationships in greater Boston.
Why don't we moving to page four.
For those of you who are not familiar with meridian in east buses savings slide four provides a nice snapshot.
Operations.
There.
Well established community bank with roots dating back to the $18 48.
And as you can see here from the various measures displayed this is a healthy profitable and efficient.
Bank with a highly complementary balance sheet targets.
With over $5 billion in both loans and deposits see spikes in sales as a well rounded and driving banking franchise.
With as I said long standing expertise in commercial lending.
They have earned a well our niche in the local marketplace and we feel there is considerable value in their commercial origination model.
Our long term CLO debt caveat I always done a terrific job in growing the bank over many years he and his management team have built a formidable competitor among community banks in this region that was born and raised in East Boston has retained deep roots and a visible presence in the area with strong connections with local busy.
As nonprofits and individuals.
Fortunately he has agreed to stay engaged with the business in a consulting role rolled over the next few years and I'm really looking forward to working with them.
Both companies share a focus on strong colleague engagement and customer focus.
All of US are committed to local community involvement in charitable giving I think there's all this bodes well for a healthy cultural integration.
Moving to page or slide five.
You can see that the end market nature of this acquisition are there 43 benches tightly concentrated in the city of Boston and nearby towns. You'll also see the lift in deposit share in the Boston MSA generated by this combination and Massachusetts as a whole the demographics of this market are superb as shown by the.
Median household income comparisons.
On slide five.
This presents a great opportunity for our wealth management group, which has done well and making inroads and previously acquired markets.
Also.
Certainly the deepest commercial banking market in the state and home to some of the fastest growing industries, such as health care education and financial services.
And as we all emerge out of the pandemic induced slowdown we are optimistic about the recovery and prospects from a vibrant Boston economy.
By combining our two sizeable commercial banking franchise.
Our talent lending capacity and deeper product sets to our combined customer base.
Regarding the crashed at work there is some overlap between our two companies, which allow for some level of consolidation.
<unk> also.
It is a portrays the breadth of our footprint from greater price and all the way to the Cape Cod and the islands and outdoor wister.
More recently, we've been expanding in the attractive western markets with encouraging progress and.
Great customer reception to the <unk>.
So I'll, let mark cover the next few pages.
A little more detail Mark.
Thanks, Chris as we slide over to page six as Chris indicated management is very excited about this combination and its underlying potential.
As you can see on the pricing summary, the deal reflects a total transaction value of 1.15 billion. This is an all stock transaction with a fixed exchange rate of 0.2 dollars 75, and the pricing equates to $1 50 times tangible book value and 10.3 times estimated 2022 E. P. S.
With fully phased in cost saves.
We use our stock judiciously, when considering acquisitions and demand they meet the high bar that we and our shareholders require and we are confident that this deal checks all boxes we.
We anticipate a closing date in Q4 of this year subject to the customary approvals.
As <expletive> noted I'm, sorry, as Chris noted stick, we'll have continued involvement in business and community engagement over the next few years, along with an infusion of key talent coming over from East Boston savings.
And our commitment to community involvement and charitable giving will be equally emphasize in this market.
Moving to slide seven you can see the deal reflects very attractive pricing and economic benefits.
In conjunction with the most widely followed price in an accretion measures, we compare very favorably to similarly sized transactions over the past two years.
This adds to our confidence that this is a well priced and well structured transaction and consistent with our approach to many prior acquisitions.
As Chris said, we are very attentive to the impact on tangible book value when considering potential acquisitions and are pleased by the material accretive impact expected in this transaction.
Slide eight provides even further information regarding the strong profitability and return performance measures arising out of this acquisition.
And it's a previously slide noted you can see the deal reflects a tangible book value per share accretion of seven 9% upon closing.
Earnings accretion well above 20% with fully phased in cost saves.
A pro forma our away of one 2% plus.
Pro forma efficiency ratio below 50% and an IRR of approximately 16%.
We also like to highlight the fact that our pro forma capital and loan loss reserves are expected to remain in a solid position and able to support future growth or other strategic capital actions rigor.
Regarding the latter so not specifically included in the model results. We do believe that the potential to repurchase a portion of the shares issued in this transaction is quite feasible and would make the pro forma profitability metrics, even more compelling.
And then what's the projected asset size of $20 billion in a much bigger market cap, we are positioned to enjoy the benefits of increased scale and operating leverage that Chris touched on earlier.
Slide nine provides a nice visual of the benefit of this deal.
We often talk about where and how potential transactions reflect the one plus one equals three concept and as you can see here the expected pro forma return and efficiency measures with fully phased in cost savings represent a healthy improvement over our own projected standalone performance in 2022 and over most.
[noise] of East Boston as well.
Each of us already generated solid individual returns in operating in an efficient manner and we anticipate this just takes us to another level of excellence.
Slide 10 is providing further insight on total balance sheet expectations for the next couple of years.
I do want to be clear that we do not think of this as a pure deleverage of the balance sheet as we discussed in announcing the Blue Hills transaction, a couple of years ago, but we do think it is important to provide transparency into some clear moving pieces embedded in the modeling results.
So not set in stone from timing perspective. This is essentially an anticipated two year active management plan focused on reducing excess liquidity exiting less profitable deposit relationships paying off higher cost borrowings and reducing certain loan concentrations.
More specifically our assumptions include the following an immediate pay down of East Boston F. H L. B borrowings currently representing approximately $560 million.
And consistent with prior acquisitions and our ability to migrate the deposit portfolios we have.
Anticipating a reduction of $1 3 billion in excess liquidity over the two year period, which would reflect the outflow of very low yielding cash positions and higher cost deposits.
This will also allow us to take advantage of Rockland Trust much lower funding base in support of a much larger commercial loan portfolio.
And we have also assumed that the current environment will lead to a focused strategy in the short term to be selective over commercial real estate opportunities in an effort to ensure we remain diversified across industry and property types and consistent with our historical strategies and risk concentrations.
As evidenced in east Boston savings and our own Q1 results. This strategy is one of cautious optimism and with a shared focus over a quality asset classes and pricing. We anticipate this will result in a continued reduction of the of the commercial real estate book for the next year or two before assuming growth does resume.
In summary, the net result will be higher quality earnings and an improved risk profile.
The assumptions presented here go hand in hand, with the other transaction assumptions laid out in the beginning of the appendix.
The key ones. There include use of analyst consensus estimates for both bank cost of savings of 45 per cent of meridian's expense base with 80% realized from 'twenty 'twenty two.
Core deposit intangible of a 0.25% or approximately $10 million each.
2.15% gross loan Mark with 40% P. C D assumption.
Pre tax merger costs of 64 million in revenue synergies identified but not included.
Reflecting on this last comment slide 11 summarizes the real upside in this transaction lies in the clear prospects to capitalize on the tangible synergies that exist across all our business.
The potential on the commercial side as we combine two very strong franchises is compelling.
Both banks have a long history of focusing on relationship lending.
This is a business model that we know and execute on very well our commercial lenders are already active and quite familiar with the Boston market.
And working hand in hand, with their experienced east Boston counterparts, and there are many customer relationships, there's a real opportunity to deliver our deeper product set into that customer base, especially in the north shore locales.
This would include asset based lending dealer finance cash management, and Treasury services, plus given our biggest size, we could entertain larger individual hold levels within our risk tolerance limits.
On the retail banking side, we have a significant mortgage platform that can be readily leveraged with east Boston large consumer base.
Our origination volumes have risen dramatically over the past year or so and we can accommodate more business on a beefed up platform.
We have had great success with direct marketing of our home equity offering over the years and this would be a natural fit with the acquired customer base, our steady investments in mobile banking and expanded online capability will work well here as well.
And of course, the opportunities for our wealth management business, a terrific, especially given the excellent market demographics that Chris described.
Our unit has grown steadily over the years to over 5 billion and assets under administration this quarter as I mentioned.
It offers a full array of equity and fixed income products and as a number of experienced investment professionals.
There are very few success stories of an investment management business operating within a bank, but ours is proven to be an exception.
One of the primary reasons is that a large percentage of new business comes from our branches and commercial lenders.
Given the east Boston strong connection to the centers of influence and their market the prospects for new business generation are very good.
And to round out before I turn it back to Chris Slide 12 simply reflects the extensive due diligence process that was embedded in the deal.
All aspects of the business model with thoroughly reviewed with credit due diligence. Our main focus as you can see here approximately 75 per cent of the commercial real estate portfolio was reviewed including 100% coverage of higher risk portfolios as well as a deep dive into downtown Boston real estate exposure.
Throughout the COVID-19 pandemic, we have been transparent with the investor community around our concern over downtown Boston, London exposure and that added focus was embedded in the due diligence approach resulted in what we believe is an appropriate deal value credit Mark.
The management teams had healthy and collaborative dialogue throughout the entire process and it was clear from the beginning this was a shared vision of the power of these combined franchises moving forward.
This vision incumbencies, the concepts of sustainability and creation of long term shareholder value and its been behind the Companys acquisition strategy for over a decade.
Chris.
Thanks, Thanks, Mark so well.
Along these lines. The last slide 13 is a composite of all of the in market acquisitions. We've made over the past 10 years plus the common denominator across these acquisitions with strategic fit.
Pricing and financially accretive.
In all cases, we have achieve and often exceeded original expectations.
As shown here our success at growing out other notable level of shareholder returns and earnings growth rates. We've achieved over these various periods, we are especially pleased with how well our tangible book value per share has steadily risen. Despite these multiple acquisitions.
We pride ourselves in our demonstrated track record of seamless and timely integration and fully expect the same experiencing it.
Assimilating East Boston savings that.
We're encouraged by our relative stock valuation and believe it reflects the success of our past acquisitions and excellent long term operating performance.
We've always characterize ourselves as an opportunistic.
Very disciplined acquirer.
Augmenting our long term organic growth performance with periodic selective acquisitions.
We strongly believe that we are building considerable franchise value. So.
That concludes.
Our comments and we're happy to take questions now.
Thank you we will now begin the question and answer session.
I ask a question you May press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the heat.
So withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.
Hey, guys good morning, and congratulations.
Thank you Mark.
First I had a couple of questions related to the deal there've been several acquisitions recently in rapid succession in new England, and I guess I've got kind of three questions around that first do you think it will continue in your estimation second you know could you do another deal while the.
Ebs B deal is in process in.
And third do you think these deals are a function of the merger map lining up well finally or is it genuine fear on the part of the sellers that they need to build scale to compete.
Yeah, great questions first of all other didn't make the profile instead of a set of prognostication that yes, mergers and acquisitions will continue.
As they have since 90 85 from 18500 bank as to what do we have about 5000 now.
Look at the Boston marketplace, I mean, you used to used to be way more opportunity because there are way more stock based bank.
There are still some and I have no idea if anybody sort of thinking about this but it's like.
There's always little brand I mean, it's pretty predictable, but these things happen on from Showtime. So I'd say I presented set of Prognosticators are probably definitely well.
Let's see I can't read my writing here.
What was the second part the second question is could you do another deal while the Oh, Yeah can we get an idea.
So I think.
Yeah.
If somebody were to raise their hand and other bank debt.
We're on track and say Hey, listen we are we're interested in selling or we love your currency, we'd love to talk to you I would not tell him I'm, sorry, I'm Dizzy call colleague.
Call me back I would I would go to say well, let's get together and talk about this and now from a practical point of view I would not necessarily convinced them to hold off little bit.
The sequence something but no I wouldn't I would definitely not say no I'd say, let's talk.
And then I think.
Mark I think the.
I think theres a common theme here.
Net.
The technology the regulatory the complexity of.
The banking business.
Grows pretty dramatically as you approach $10 billion.
We.
The amount of complexity has somewhat exceeded our expectations. When we went over 10 billion we've had to hire more.
Our enterprise risk management folks than we had anticipated net we're well on track and getting that squared away, but I think I think as you approach $10 billion.
It is daunting.
C J.
Thousands of fin techs out there, but that's daunting.
I think that sort of I think that continues to influence.
Sellers I mean debt be.
B for share it has the sellers themselves, but that would be my my take on it.
I think you're right Kristen I would just add you know coming off the year. We had in 2020, certainly there was a lot of uncertainty.
Thank you saw a lot of that reflected in bank valuations and I think a lot of banks where.
Obviously waiting to get a clearer picture I think the Investor community was trying to get a clearer picture as to what that all meant and I you know.
I think there's just a general consensus now around a clearer picture and a better understanding.
Of evaluation at this point and I think that lends itself to.
Both buyers and selling value and sellers getting a level of comfort over these types of deals.
Okay, and then Mark I think you had mentioned that you have commercial loan commitments of $308 million.
Just curious what the mix of these loans look like and and maybe if you had some sense of what the pipeline yield is.
Yeah, you know a lot of it is pretty consistent with with the industries and the asset classes, we have been talking about over the last couple of quarters Mark certainly.
Apartment lending multifamily construction continues to sort of lead the charge, especially in our suburbs and in some of the.
The markets that we're in here on the south shore.
We continue to see to a lesser degree some mixed used industrial and and other office space that we're getting comfortable but it is continues to be very well diversified.
Across a number of industries.
From a pricing perspective.
There is some optimism in the market, we did see a little bit of an uptick.
And spreads and an absolute yields, though you know relatively speaking to.
A number of years ago, we're still talking on the commercial side, you know anywhere in that mid three to offer three range depending on <unk>.
Product and individual circumstances, but you know that's a recent development here that I think is certainly a positive in terms of our comfort level that we should be able to hold the margin pretty tight on on our loan yields.
Thank you.
Youre welcome.
Our next question comes from Dave Bishop with Seaport Global Securities. Please go ahead.
Yeah, good morning, gentlemen, and congratulations as well on the quarter and the deal.
Thank you David.
Quick question.
Circling back on the slide in terms of the balance sheet restructuring.
The reduction in the commercial real estate balances the estimated that $700 million over two years. Christopher just curious just picking your brain is that more related to concentration concern from a regulatory perspective growth constraints or maybe inherent risk perception of that asset class.
Adjusted from a holistic basis or as it relates specifically to the Liberty's exposure just curious maybe some of the thoughts behind that.
Windowing of that portfolio.
Mark Mark you can come from.
Sure.
Say, David it's a it's really a little bit of everything you referenced.
Certainly I'd say the biggest component here is to be clear. This is what we anticipate is really primarily a reflection of of the current environment and you know I think the reality that both parties have.
I have shared a very common vision around being cautious with new originations in this market.
You know when you look at both of our first quarter results, we both contracted to a certain degree in our commercial loan footings and I think that's an approach that we think is prudent to anticipate you know even heading into post close of this merger. So I think it's just.
One a continued reflection of just a cautious approach towards new lending.
And if we anticipate the level of attrition that we've experienced that will continue to put a challenge on on Outstandings.
I think second secondly, it's.
You know what we're not blind to the commercial real estate concentration post deal I'm, just gives us more comfort to really be.
Be steadfast in that approach.
To you know understand that natural attrition will help right size some of that concentration. We have operated at these levels after acquisitions in the past, we're comfortable with and over 300% commercial real estate concentration, but we do need to recognize it'll be higher than where we've been the last few years and I think that's natural outflow.
So we anticipate in this environment will just serve as a nice sort of lever to rightsize that concentration.
And you know and then as I mentioned, we have been pretty transparent about understand in Boston real estate.
I think there's still uncertainty around you know what that means to office space as we come out of COVID-19.
As Chris mentioned, we were very optimistic about the Boston economy. We think there is a level of installation from what you may be seeing in other metropolitan areas like New York, but we don't want to be too outside of the reality in terms of expectation. There. So I think just a cautious approach over.
The next 18 to 24 months to get further clarity.
On what that means to Boston office, just lends itself to be a bit more conservative and in growth expectations. So that was really a combination of all those things.
Dave that sort of pegged us at this 700 million dollar number but this isn't a.
Immediate exit strategy that we've identified there may be specific loans that.
As we as we get to know the book a little better maybe theres, a participation or an exit strategy on a one off here and there but this is not a you know a pooled loan sale like like we did a on the Blue Hills acquisition.
And it is Bernie and have much exposure in the downtown office market, the commercial real estate market or is it pretty de minimis.
This certainly exposure there you know in Boston proper, Boston East Boston, South Boston.
You know I I believe it's about yeah, it's not as large as you would think they do have very good diversifications and some of the suburbs.
In neighboring cities around there. So if you look at just those three spin.
Specific zip codes, there's about 20% of exposure in the book to those downtown Boston properties, but you know as we really went through the due diligence process and talked with the lending team.
That the businesses with very good customers very good sponsors and borrowers.
You know this is a relationship.
Lending model that that fits very nicely with how we think about doing business and.
And we were pleased to see some of the level of diversification to some of the other neighboring cities.
Got it.
Then.
More housekeeping Mark for you that the timing of the flub restructuring to pay off that that's something that meridian's doing pre merger or is that going to be simultaneous with the completion of the deal.
It would likely be simultaneous with the deal so just from a modeling standpoint.
The Mark is embedded.
The $24 million write up of that borrowing position and then we anticipate paying that off immediately so that the $24 million capital hit is embedded in sort of the one time fair value Mark in the model.
Got it.
And Mark I think you gave some color in terms of the P. P P fees.
Left to amortize I wasn't sure.
I think the first round was like seven 9 billion fees, that's right and you signed at $16 million was the $60 million of fees just specific to the second round or is that total round one and two that's specific to the second round that that's an anticipation you know there is still the perfect programs still open we still have.
So leave it and at some level of new <unk>.
Implications coming in.
But depending on where we ultimately end up with final closings. That's the level of estimated fees just on the new round. So 16, plus the seven sort of all in $23 million to be recognized.
I'd say $8 million of that most likely through the rest of 2021 and then the remaining you know all dependent on timing of forgiveness on this new round, but most likely 2022 for the for the $16 million.
Got it and then just just one final question you know post merger.
As you look at your interest rate sensitivity any sort of early estimates what that does in terms of maybe the one year interest rate gap or youre nearing to assets.
Asset sensitivity, Yeah, you know, we talked a lot about the complementary nature of this balance sheet and and you know he's.
Boston has done a great job of.
Moving down their deposit cost and other funding cost over the last few quarters, but they still remain slightly liability sensitive liability sensitive and when you. When you combine that with our asset sensitivity position. It really provides a much more balanced profile moving forward. So you know this will right.
Just a bit more and give us a little more protection on the downside it does mitigate a little bit of the upside.
But not meaningful.
I'd say that the slightly liability sensitive and on a combined basis. It gives us a bit more balanced to where we've been.
Got it appreciate the color Mark no.
No problem.
Our next question comes from Kelly Motta with <unk>. Please go ahead.
Good morning at the risk of sounding redundant congrats once again on.
The deal.
Thank you Kelly.
So one.
One of my questions.
You mentioned that E Boston like like yourself as a relationship based lender have you identified the.
Step up.
Relationship managers, who you want to stay on unlike you have.
Got it.
Agreements in place to retain them post merger and your confidence of bad.
And she did not.
I think it was the customers.
Customers are colleagues.
The lenders lenders, yes, sorry, I didn't do any other.
Muscle to hear it so.
This was after a very key consideration when where we also did the pre announcement.
And.
The senior.
Two the senior lenders here.
Are staying on.
And leading the charge in this region.
And we're very very eager to retain those teams and in fact that those those.
That said if the other whole processes starting on Monday, so very important.
He has done a great job here building the CRE portfolio.
A long long history in banking he is a.
Very insightful relationship oriented.
He.
Got it.
He feels like he feels like a colleague already I mean, it's really terrific sales.
He has he is definitely.
With us we've made arrangements Frank Romano is another.
Senior commercial lender, obviously on the C&I and he is staying with us as well.
And.
And there he was hum.
Also a senior banker will be staying with us too in addition to.
Gabby I know as I mentioned.
The main architect and later behind this growth is staying as a on for.
Three years as a consultant.
And.
Sometimes though it that has a lot of acquisitions debt just a little bit.
The debt of a euphemism, but I will say that.
From my conversations with <expletive>.
We are very much from the same page. It he is going to be actively engaged in helping he has deep roots here in east Boston.
He'll be a just a terrific assets and partner.
So this was a true Kelly you hit on a really really key point.
And I think we've started off right out of the gate in really good shape.
Yes.
Great. That's that's good to hear.
Maybe just maybe circling back to just the CRE concentration question do you have from an estimate pro forma where that stands.
Post close as well as where you'd ideally like to be.
So you're comfortable.
Now getting down to.
We do have Kelly, so slide 18 of the deck that was that right.
And I apologize I know I've got a couple.
Reach out to me during this presentation. This deck is included in a in an 8-K filing that we issued last night and it may not have been accompanied with this.
This earnings call from information, but it is publicly available and in the 8-K filing.
Got it.
I just thought of.
So slide 18, Kelly just shows where it will be.
Post close around 360% book.
As we talk about that.
Likely run off in the short term post merger and this restructure.
We do think we will get down into that 325, 330 range and those are levels that you know certainly we'd be comfortable operating at.
Perfect. Thanks, and maybe just one last one on <unk>.
Loan growth for this year.
Obviously, there's been a lot of pressure from attrition do you expect this just flow and.
X P. P P in at and sort of at least stabilize a debt or do you do you expect continued run off in the loan book.
Yeah.
It's a very interest in question and one that.
You know, we've been trying to predict and hope we see some.
Some level of reductions in terms of the attrition, but I do think and other piece of it you mentioned Kelly P. P. P.
I think that's a very important note to here that just the level of PPP funding in the market and in our industry.
Really has given an infusion of liquidity to a lot of our borrowers and you can certainly see that reflected in line utilization rates.
That was another driver of our reductions in outstanding Outstandings. This quarter as we're just not seeing the level of draws on a lot of the C&I loans and other loans. So I think the combination of that excess liquidity and then you know just a continuation of the low rate environment trigger an opportune.
<unk> for for owners and borrowers to look at an exit strategy sell a piece of property in an unfortunately pay off the bar.
So.
I talked about the pipeline being very strong as we head into the second quarter. So we're very optimistic on deal flow and closing expectations.
As we come out of hopefully a is that the environment continues to stabilize and we.
We see even just a little bit of relief on the payoff and attrition and maybe the P. P. P funding doesn't put as much pressure on line utilization I think there's a path there to two to start to see loan growth you know the timing of that is.
This is up in the air a bit but you know we're hoping that's a second half 2021 formula.
Thank you if I could just one last one.
The timing of them within a <unk> 21 closed within the quarter and what are you modeling.
Yeah, we modeled end of end of the quarter Kelly just to keep things cleaner as you know it's all dependent.
Regulatory approvals in a number of other items that are somewhat out of our hands, but we just model that as a.
End of quarter close just to keep things cleaner.
Okay. Thank you so much.
Awesome.
Our next question comes from Laurie Hunsicker with Compass point. Please go ahead.
Yeah, Hi, good morning, and I, just want to Echo what everyone else is bad Jackie Chris and your team congratulations very very exciting.
Wonder if we could go back your day too.
So I didn't see it clearly in the right back into it at $40 million I didn't know if you had a better number.
In terms of the impact of the non P. C D going through the provisioning.
Correct.
Uh huh.
It would actually be about $68 million or so so 60, so that the mark the 2.15% all in credit Mark we referenced equates to about $115 million.
40% T C D would be about $45 million in the 60 per cent non P. C. D. As you know right around that 68 70 million pretax.
After taxes in that $45 million to $50 million range.
Alright.
48.
Yeah after tax.
Perfect. Okay, and then second question.
We look to next year 2022, when you merged with UBS Bank, how should we be thinking about tax rate.
It should be pretty consistent you know they they have some some tax exempt lending similar to what we do.
But you know when you look at their tax rate and the combination of.
The pro forma pre tax numbers I would anticipate we stay right around that 24 25 per cent range.
All things being equal you know, assuming we don't get a corporate tax reform, which is obviously a much different answer.
Got it Okay, and then can you help us think about the margin outlook for next year, if we were to strip out.
Net income factor in the balance sheet initiatives that you're doing with respect to E. B F B and taking out anything in terms of <unk>, how should we be thinking about that.
You hit on a lot of moving pieces there.
Uh huh.
Joking aside and you know, it's it's really sort of how we're thinking about trying to really model out this pro forma margin and I. Thank you.
You sort of cute it up Laurie very similar to how I'm thinking about it in that.
You know if you really start with our respective first quarter results. There was certainly a level of P. P. P benefit in our numbers and if you layer in the fair value marks I think that's a very good story in that it's a very clean in terms of.
The interest and liquidity Mark being offset with the credit Mark So, there's essentially wash happening and the accretion related to those numbers.
And then you do get a little bit of noise on the non P. C D accretion coming in.
But but you know there is essentially a wash going on there and very little impact on the pro forma number.
When you're late when you layer on all of the P. P. P balances coming off the books that would certainly bring down the margin from what we've reported in the first quarter and I would peg that pro forma combined entity before any restructure.
Right around 3%, that's excluding all the benefit of P. P. P. That's been converted to cash.
And that's sort of Oh, an outlook at that point with all those assumptions.
When you think about the balance sheet restructure that we've modeled we're essentially running off $2 billion of assets, primarily commercial real estate loans at 4% and cash at 10 basis points.
And we've modeled an assumption of the S. H L. B borrowings pay off and then a mix of the deposit base within it weighted average cost of call. It 30 basis points. So that $2 billion comes off at a net yield of only 50 basis points. So while it does create a level of decrease.
Absolute net interest income it does improve the quality of earnings and would suggest the margin goes back up to about three and a three point to $3 two 5% post restructuring.
Yeah.
Right.
Very helpful. Thank you. Thank you for that now.
Just jumping jumping over to your hotel book and I. Appreciate all the details you gave but can you just talk a little bit Directionally, we saw the jump up in deferrals.
Linked quarter from 114 million day $163 million in your 402 million, but can you just talk a little bit about that and kind of an outlook in terms debt.
That's how you're seeing things.
Sure I'll take a quick stab and certainly Jerry is on the line as well and then there's another element here feel free to add on Jerry but.
The increase is really just a reflection of we talked when we reported last quarter. There was about $70 million at that point that we thought potentially it could be coming back on we were literally in the process of.
Sort of renegotiating a revised modification at that point. So we were certainly not surprised and understood why.
Our numbers are reported numbers reflect an increase but that was really just the timing of other population. There that we knew was somewhat in flux.
You know this is continues to really just reflect a lot of our hotel customers and accommodation customers understanding in most cases, a lot of the seasonality around their business and working with them to give them the relief to get through 2021 acknowledging the win.
During the spring, there's essentially very little cash flow I think from when we talked to a lot of our borrowers there's a lot of optimism heading into <unk>.
The spring summer and the fall and I think there's a lot of consumer pent up demand that that a lot of our operators are optimistic about so we do expect them to have good 2021 years, and then that typically as we experienced last quarter gives them the cash flow to to help service a portion of it.
Debt going into the fall. So so our strategy here has really been defined a nice balanced sort of relief package that.
They continue to make the interest payments and that was a critical component of all of our modifications going forward.
So all borrowers are making interest payments. This gives them some added relief to get through the seasonality and something that we think we'd be revisit and with a lot of those customers in early 2022.
Yeah.
Okay.
Oh, great. Thanks, and then growth I guess last question for you. If we look at this now combined franchise, you're going to have tremendous.
Tremendous earning power can you share with us how you and the board are thinking.
In terms of the dividend outlook.
Yeah.
Mark on how do we want to answer that now.
Yeah, you know what it is.
No secret will have very healthy capital levels post acquisition.
You know I think we talked a little bit about this last quarter. When we did our recent dividend increase.
The the constraint here is on from a different.
Really just relative payout ratio.
As we all experienced in the low rate environment, some level of compressed, earning so absolute levels of capital. We are continuing to be very very strong pro smart post merger and I think there's a number of capital levers that we could pull depending on the situation in and as we learn more over the next nine months.
You know whether that's in the form of a share repurchase whether it's in the form of dividend strategy or just other opportunities to deploy capital.
So all of those are on the table, they're all items will be actively discussing.
But but there's no secret there'll be very healthy capital levels and plenty of opportunities to return that value back to our shareholders.
Okay, Great and just one last question can you just share with US again, what your what your target payout ratio is non dividend.
Yeah, we typically like to be and in the high 30% to 40% range right.
Very comfortable at a higher pace should payout ratio in this environment.
We're very confident and comfortable when we stress test our capital under a number of scenarios that there's ample capital to support.
Any risk events. So we've we've made conscious decisions and like I said are comfortable with the payout ratio, where we are today, but over the long term, we'd prefer to be more in that high 30% to 40 per cent range.
Perfect. Thank you for taking my questions Youre.
Youre welcome.
Again, if you'd like to ask a question. Please press Star then one our next question is a follow up from David Bishop with Seaport Global Securities. Please go ahead.
Yeah. Thank you.
Quick question I think you had mentioned in the preamble in terms of the expense saves 45 per cent branch.
Validation targets I know you know historically give all of us.
They put a.
A lot of emphasis on the branch network and a lot of the business comes from there just curious maybe how much that plays a role in terms of the efficiency targets and maybe where else you can garner out some savings in terms of hitting that 45 per cent target.
I can answer that day every transaction is.
You know you followed us for a long time, we take a careful look at the combined branch network and do a thorough analysis.
We'll do the same here.
It made any final decisions at this point.
Recognize that the cost savings assumptions include some level of consolidation so more on that to come.
Got it and then maybe just.
From a holistic basis, obviously the merger takes your pro forma close to $20 billion in assets or so you know historically you guys have been very.
So granular in terms of the commercial loan side given your boots.
It's on the ground there in the community just curious as you get bigger and over that $20 billion range does that Oh, let's say of course your in force your hand, but is that sort of actually compel you to look maybe up cap so to speak and an average loan size in the types of relationships you move to the to have to move the needle moving forward. Just curious how you sort of balance that in terms of the historic.
Culture at Rockland Trust.
Jerry Day go our chief commercial banking offices are and president of the bank is on the line to Jerry do you want to address that.
Sure.
Yes, we're gonna do not deviate from what we've done in the past we said.
I think the strategy, we've had where 80% of our loan volume is two relationships below $2 million and 20% above.
Based on what we've modeled we think we can continue to generate what has been our historic growth rates organic growth rates still following that plan that we might you know on the individual loan sizes, we might make them a little bit bigger than the ones that are over $2 million, but not not a complete wholesale change in strategy no.
Got it thank you for the color.
Welcome.
Yeah.
Yeah.
That ends the Q&A before I turn the call back over to the company, let me pause dimension.
With respect to the transaction announced today. Please note that independent will file a form S. Four registration statement.
Statement with the SEC that includes a proxy statement.
Crosscurrents regarding merger you are urged to read the proxy statement.
This and other documents relating to the merger when they become available because they will not contain important information about the merger in addition, independent and meridian and their directors and officers.
Deemed to the participating in a solicitation of proxies in favor of the proposed merger you can find information about the independent and Meridian directors.
And executive officers in the company's proxy statement filed with the S E C.
Information on how to request. This document is available in the <unk>.
Mr presentation, I would now like to turn the conference back over there.
Yeah.
Yes.
Okay.
Thanks, everyone.
What are you talking to you next quarter.
[music].
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.