Q2 2021 Independent Bank Corp (Massachusetts) Earnings Call
Okay.
Good day and welcome to the Independent Bank Corp, second quarter 2021 earnings conference call all participants will be in a listen only mode.
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Please note this event is being recorded.
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.
With respect to the Meridian East Boston savings Bank transaction.
Please note that independent filed a form S..4 registration statement with the SEC that includes the proxy statement across the slashed prospects regarding the merger.
You are urged to read the proxy statement slash prospects and other documents relating to the merger because they contain important information about the merger.
In addition, independent and Meridian and other directors and officers maybe deemed to be participating in the solicitation of proxies in favor of the prospect of merger.
Finally, please note that during this live call. We will also discuss 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 non-GAAP results.
Please refer to the investors 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 direct comparable GAAP measures and additional information regarding our non-GAAP measures.
I would now like to turn the conference over to Chris Oddly Sin President and CEO. Please go ahead.
Good morning, everybody yeah. The thank you Betsy thank everybody for thank you for everybody for joining us today with me as usual is Mark Ruggiero, Our Chief Financial Officer. We're also joined by Rob because 1 of our Chief operating officer of charity.
Gerry Nadeau, President of Rockland Trust, and our Chief commercial banking officer.
Our strong fundamentals were once again on display as evidenced by our solid second quarter performance.
Excluding M&A charges operating net income for the quarter came in at $38.8 million or $1.17 per share.
Mark will be taking you through the quarter shortly but highlights include excluding.
Excluding P. P. P loans, our commercial portfolio grew at a healthy 4% annualized rate for the quarter that was marked by strong loan closings in general while total loan growth remains constrained.
Encouraged by our robust origination volumes across both the commercial and retail areas and for.
The total loan origination of approximately $1.6 billion for the first half of this year grew by over 24 per cent for the same period last year.
Deposit generation remains very robust with core deposits, reaching 92 per cent of total deposits, our marketing efforts and calling brand recognition resulted in record new account openings, along with ongoing growth of the number of households, we serve the.
That's the management continues the has a major source of strength with the rising fee revenues of assets under administration continuing to reach record levels.
Credit quality remains pristine with nonperforming loans are down by over 19% during the quarter, along with minimal levels of charge offs and lower delinquencies.
Expense levels remain well contained given our disciplined management of costs and selective investments.
Ed.
Oh of book value per share of continued its upward of set.
So all in all the well rounded performance, while we add all the other financial institutions are stealing still dealing with the lingering effects of the pandemic all of the unprecedented levels of excess liquidity. We are witnessing some encouraging signs of increased economic activity.
The economic recoveries are fragile by nature, but we remain hopeful of continued progress.
We also continue to be active participants of the P. P. P loan program since its inception last year, we originated just about 10000 loans totaling nearly $1.2 billion the.
At the same time, we've been hard at work at aiding the 6000 plus around 1 borrowers to obtain forgiveness for all of their loans. This for.
Oh crap of required a lot of effort put of provided needed working capital to worthy businesses.
As the program winds down we really take great pride in how we answered the call and the communities we served.
Beyond all of that of top priority of core centers of the integration of planning for our recently announced the acquisition of Meridian Bancorp and its flagship East Boston savings Bank of <unk>.
Well run community bank with approximately $6.5 billion of the assets centered in Boston proper and neighboring towns now.
We couldn't be more excited about our assembly. Thank this company do ours, and we're already making excellent progress in the 3 <unk>.
But since all of the announcements.
She'll focus has been heavily on keep people retention, which is of proving quite successful, especially in the customer facing racks at both the commercial and consumer areas.
Gerry and Rob are heavily involved with or east Boston counterparts, and mapping out new business opportunities in the acquired customer base rate.
<unk> consolidation Decisioning of planning is very far along shareholder approval of meetings are scheduled for early next month at all regulatory applications have been filed.
I would especially like to think of Meridian CEO <expletive> Aviano at the senior team for their focused and very capable average to ensure a smooth integration of our 2 companies.
Fixed intimate knowledge of the local marketplaces, and valuable and I look forward to continuing to work closely with them. It is consulting role with us over the next 2 years.
We remain confident of achieving our original expectations for cost savings healthy earnings accretion of tangible book value of accretion that we anticipate of fourth quarter closing and conversion.
Despite this high priority effort, we're not sitting still of moving our franchise forward our proven integration of tracker across multiple acquisitions over many years gives us confidence to pursue other growth initiatives at the same time for example, we're implementing our mobile your banking technology, which allows.
Customers of chat and share of documents securely with their all dedicated banker of anytime anywhere from their own phone tablet or computer.
We're working to further extend our sales force application within our commercial and investment management businesses, along with the rollout to our retail network that will continue to boost our marketing of new business generation efforts, we continue to expand the the greater western market, where the rest of the opening of our Shrewsbury branch.
All of the third Worcester City branch opening next quarter.
The other plant for a neighboring town early next year.
We also continue to attract senior lenders width and depth of knowledge of the local markets. We're very encouraged by our progress in this attractive market.
And of course, continuing to build out our broad based enterprise in technology risk management functions 2 of our company our growing size of.
As the company.
Taking a look at the economy. Despite a recent shift in sentiment in the equity markets due to increase of uncertainty economic data remains encouraging and the economy continues to prove its resiliency nationally Sip share.
For all.
All of you know our G D P continuous decline with consumer spending providing a strong tailwind.
Retail sales growth exceeded expectations as true that provides for support for continued growth.
Inflation remains in focus Oh, but chairman Powell has reaffirmed as Dan said it will be transferred the transitory.
And the fed will continue to support the economic recovery.
Lastly, the labor market conditions, it's a labor the labor market continues its steady recovery with integrity of 50000, new jobs in June.
Or locally the Massachusetts. The economy has seen back the back quarterly GDP growth the head of the nation with Q1, 'twenty 'twenty 1 of GDP growth of 6.9%.
Compared to $6.4 per cent nationally.
In addition, Oh, well, Massachusetts was hit harder by the pandemic the the labor market.
The truth, it's continues to recover faster than the nation led by strong growth of leisure and hospitality as well sort of some other services.
Now in summary, I'd say that there is a lot going on at our company. These days that we believe we are.
Of course, the very very well for the near term challenges posed by the current environment.
But more importantly, we continue to build on our strength to ensure long term success and sustained financial performance.
We continue to rank high in various surveys by reputable third parties across a wide range of measures. Most recently, we came in first in our home state of the third nationally and for.
Forbes ranking so the world's best Bank also of the bank director of publication of ranked second overall for long term performance of total shareholder return.
Opportunistic acquisitions, such as Murdy of bank are certainly contribute to our long term goals are but organic growth remains a focal point, we like how we're positioned without taking anything for granted in this highly competitive space.
We believe the winning formula of lives with a relentless focus on our customers and the service.
Clear understanding of our competitive advantages.
And investing heavily in our off the trust colleagues.
Speaking of my colleagues I want to acknowledge their incredibly tireless efforts to meet our challenges and opportunities while.
While continuing to provide really top rate service to our customers they have for really a.
Fully embraced our role as an essential business to provide much needed comfort and support to our customers have local communities and he's very stressful times.
Thank each and every 1 of them for their dedication and enthusiasm.
And with that I'll turn it over to Mark.
Thank you Chris.
Second quarter GAAP net income of $37.6 million and diluted EPS of a dollar of 14 represent a decrease of approximately 10% from prior quarter results due primarily to reduced the P. P. P fee recognition in mortgage banking income as well as current quarter East Boston savings Bank.
Our debt related expenses.
Excluding merger and acquisition expenses operating net income and diluted EPS were $38.8 million and of dollars 17, respectively for the second quarter.
On a GAAP basis, the results reflect a 1.08% return on assets and the 8.70% return on average common equity.
The operating results, excluding M&A more 1.12 per cent and 898% respectively and.
In addition, tangible book value per share of rose another 82 cents to $36.78 as of June 30th.
I will now summarize some of the major drivers behind the quarterly results.
Changes in loan levels continue to be skewed by PPP loan activity total loan balances decreased by $308 million or 3.3 per cent for the quarter caused primarily by a reduction in PPP loan balances of $364 million, excluding PPP loans total commercial loans and.
<unk> $66.2 million or for 3% on an annualized basis with total closed commitments of $452 million for the quarter essentially doubling the volume from Q1.
In addition, the approved commercial loan pipeline as of June 30 of sits out of approximately 346 million, which should bode well for healthy closing activity in the second half of the year.
As discussed in prior quarters, the majority of commercial opportunities lie in various residential developments, including both single and multifamily as well as both for Seo and rental properties, while additional opportunities of diversified across retail industrial and warehouse classes.
In addition to new volume associated with those asset classes.
Second quarter of balanced changes also reflect an increased level of construction loans, reaching project stabilization any of the transfer and into the commercial real estate for refinancing no.
We also experienced solid growth in all the.
Small business portfolio as the customer goodwill earned from the successful P. P. P campaign has paved the way for increased volume.
On the consumer loan side, a similar story of strong closing volumes was experienced in both the home equity and residential books with the residential portfolio also benefiting from the retention of approximately 45 per cent of the production into the balance sheet portfolio for the second quarter as compared to only 23 per cent.
In the first quarter.
Despite the consequent lowering of mortgage banking results, where the noninterest income the increase in retained residential loans did help maintain balances quarter over quarter, while adding modestly to net interest income.
And strong closing activity in home equity continues to be offset by accelerated paydown and payoff activity, resulting in a 1% decrease in the portfolio.
As Chris noted our success in the PPP program, a deeper dive into the related financials is as follows.
As of June 30 of 2021, there are approximately $112 million of Outstandings and 1.5 million of deferred fees remaining to be recognized from the original 2020 round the majority of which should be recognized in the second half of the year.
Regarding the new 2021 round, we close of that program, having secured approximately 3700 loans totaling approximately 370 million the.
This volume generated $18.2 million in total fees with $16.9 million remaining to be amortized into interest income over the 5 year of repayment schedule for accelerated into the income upon full forgiveness.
Total deposits increased by $3.4 per cent or $39$3.4 million, reflecting not only additional stimulus money received in April, but as Chris sided very robust new account opening activity.
Core households are up 2.6% over the first half of the year with core deposits now, reflecting 92% of total deposits.
The combination of strong core deposit levels and the run off of higher cost time deposits led to a second quarter overall cost of deposits of only 7 basis points down another 3 basis points from the prior quarter.
While the success of attracting new core accounts does not alleviate the current excess liquidity challenges. We continue to feel strongly about the long term strategic value of attracting new core customers and we believe the current environment remains ripe for doing so.
Such they're of no plans to hit the pause button on efforts to attract and retain our core customers as evidenced by as Chris mentioned, our continued Worcester of branch expansion and ongoing improvement in our digital experience.
The general expectation for an improving economy could lead to some level of increased customer spending in the second half of the year.
The impact of the excess liquidity from both our consumer and business segments on overall deposit and cash levels remains challenging to confidently predict.
The primary outlet for some of the excess liquidity continues to be the securities portfolio with second quarter purchases of $340 million and overall balance increases of 251 million or 17, 6%.
With our overall asset sensitive profile of the balance sheet, we have been more comfortable investing further out on the curve for the security purchases with an average expected duration on second quarter and first quarter purchases of 5 point for years in 6.7 years, respectively.
Shifting gears to the quarterly earnings net interest income of $93.4 million decreased by $2.2 million or 2.3 per cent compared to the prior quarter with the reported margin of 299%, reflecting the 26 basis points decrease.
As I previously noted the decrease in dollars was primarily driven by the reduction of P. P. P fees of $7.2 million was recognized in the current quarter for $9.5 million in the prior quarter. While the decrease in margin is primarily attributable to the elevated levels of cash and securities were average balance.
As rose by over $800 million on a combined basis in the quarter.
The loan yield compression was able to be offset with further deposit rate decreases during the second quarter with absolute funding costs at very low levels further asset yield reductions from asset free asset repricing will be a challenge to mitigate going forward.
Regarding asset quality notable metrics for the quarter include the following non.
Nonperforming loans decreased $11.4 million or 19, 2% driven primarily by an $8.4 million commercial loans pay off during the quarter.
Total delinquencies dropped to the 0.11 per cent of the portfolio.
Net charge offs for the quarter were only 192000, representing nearly 1 basis point of loss on an annualized basis.
Total loan deferrals were $233.8 million at June 30 of which is relatively consistent with the prior quarter as expected. This equates to 2.6 per cent of the total portfolio and continues to be concentrated in the accommodation industry.
As such the negative $5 million and provision for bad debt is reflective of improving overall economic forecast very strong asset quality metrics and modest new overall loan growth in the quarter.
The current level of loan loss reserves equates to a healthy 221% of nonperforming loans.
Non interest income decreased 279001, 0.1%, which included strong wealth management results for other enhanced by seasonal tax preparation fees. Notable increases in deposit account fees interchange and ATM income and $1.1 million of gains from small business equity.
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Offsetting these increases the 3 million dollar decrease in mortgage banking reflects gain on sale margin compression combined with the aforementioned strategic decision to hold the larger portion of new originations in the company's portfolio for selling into the secondary market.
On the expense side total reported expenses increased 5.2% from the prior quarter when excluding the $1.7 million in merger related expenses. The remaining increase of $1.9 million is almost entirely comprised of increased incentive compensation with other offsetting increases and decreases.
As in various categories.
Lastly, the tax rate of 24, 9% for the second quarter is inline with expectations and is up from the prior quarter, which as a reminder, benefited from $1.4 million of discrete benefits associated with loans low income housing tax credit investments and equity compensation.
In summary, highlighting various aspects of the second quarter results as a framework for near term guidance.
The healthy pipelines across all loan products should serve for low single digit annualized commercial loan growth moving forward excluding P. P P impact.
All of the mortgage retained for our sell decision and low home equity utilization rates will continue to challenge net growth in the consumer books.
Any future deposit growth will likely be more muted, which in turn will affect the level of excess cash continuing to be deployed into securities.
And those of the deployment of cash into securities will provide some level of incremental interest income a reduction in net interest income is expected as accelerated P. P. P fee income for Q3 is anticipated to be approximately $5.5 million lower than Q2 results with any notable acceleration of the 2.
'twenty, 1 round not expected to benefit in the margin until 2022.
Assuming an anticipated and anticipated trend of improving general economic factors and no major surprises from the overall asset quality provision for loan losses will continue will likely continue to track at levels below net charge offs, resulting in further reductions in the overall allowance.
And with various moving pieces core non interest income excluding the second quarter of $1.1 million of investment game that is nonrecurring and non interest expense excluding merger costs should remain relatively consistent with Q2 results along with the consistent tax rate for the remainder of the year.
That concludes my comments and we'll now open it up to questions.
We will now begin the question and answer session to ask the question you May Press Star then 1 on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
If at any time of question has been addressed and you would like to withdraw your question. Please press Star then 2.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.
Good morning, everyone. This is Nick would surely filling in for Mark hope he's been well.
Hi, Thanks.
Yes. Thank you.
So I wanted to start with the deferral of portfolio as you alluded to it looks like nearly 3 quarters of the remaining modifications when the of combination book can you give some color on those loans as occupancy rebounded significantly.
Yeah.
Sure maybe Jerry do you mind, giving some color there.
Sure.
It's really up to subsets of that group.
That is those that are sort of destination of vacation stay hotels of actually come back very very strong.
Majority of them are either in the vacation locales, such as the New Hampshire, and Cape Cod, they're experiencing occupancy levels in some cases, even in excess of 2019 the.
The business stay hotels.
For the most part flagged suburban Boston suburban to rote of in Rhode Island focused on business travelers.
They are slowly improving yeah occupancy rates and a D. A.
And you know anecdotally, we are hearing from them that from what what then as low as in some cases as 10 per.
<unk> now running up closer to 50% on average with many of them reported nearly 100% on weekends.
So it is gradual steady improvement on those that subset.
So of those 176 million and an accommodation deferrals do you have a breakout of how of what percentages of the destination versus business.
That group of about 2 thirds of this business.
Yeah.
The total hotel portfolio is split about 50.50, but in that subset to third business travel once or vacation.
That's very helpful can you share with us where C&I line utilization was at June 30th.
Relative to last quarter, and then pre pandemic levels.
Sure I have that here next of you know we look at within the C&I, we breakout deal of floor plan and then other general C&I lines.
The March 2020 data, which was right after the onset of the pandemic, but reflective of probably more of a healthier levels.
General line of credit utilization was around 46 per cent and dealer floor plan utilization was about 66 per cent back in March of 2020 at the end of the second quarter.
General C&I line utilization is down to about 34 per cent and deal of floor plan is down to 52%. So certainly those continue to give.
Some of some headwinds into extract and outstanding balances on the balance sheet.
That's great. Thank you for having that handy and then lastly, just the thank you for quantifying that the commercial loan pipeline. It sounds like you're optimistic for the second half given your guidance could you help us think about where you're finding opportunities and the competitive lending environment.
Yeah.
Mark would you like me to answer that sure and I'll I'll chime in if needed.
As Mark indicated in his comments, we're seeing it mostly on the residential side, whether it be apartments of single family of condominiums for the sale I would say have been the most significant driver and then secondarily have been clients either expanding their buildings for their own personal use.
It is being their business or expanding buildings for for the rental tenants. Most of these are on the industrial mixed use.
Syed.
That's probably been the the primary drivers.
So you're on the credit side.
That's great. Thank you for taking my questions.
Nick I thought it'd be important to know just back on your deferral question..1 other aspect of that debt as a reminder, we share this in prior quarters, but.
The recollection, we the a lot of those modifications under the cares Act, we were able to extend out into 2020 to so many of those accommodation day deferrals will continue to stay on deferral of through the remainder of 2021. So those levels of deferral balances that we've been reporting when we're not.
The expected to run off in any meaningful manner through the rest of the year and then they'll sort of layer in based on yeah.
The different segments and different maturity dates of those deferral programs, but those will be deferrals well into 2022.
That's great. Thank you for clarifying.
Yeah.
Okay.
The next question comes from Dave Bishop with Seaport. Please go ahead.
Yeah, good morning, gentlemen.
1 day to day.
You had mentioned and in terms of the outlook for excess liquidity.
The continuing to redeploy.
To the extent that the that loan growth the opportunities aren't available into the securities portfolio and I guess, that's up to probably about 11% of average.
Assets are so do you have a of a sense of how large that could get as a percent of assets. Just curious how you're how you're thinking in terms of building that in light of the Crystal I guess your Mark your remarks with the the fed the seemingly staying on the sidelines for some time of the yield curve staying so flat just curious what the appetite is to grow that.
Portfolio.
Yeah, David in your you know our story well we typically.
Do you know do not have an overly large securities portfolio as a percentage of those assets and in fact, you know the the percentage we.
We have right now is pretty much where we've historically operated at I think this dynamic in the environment. We're in with the level of excess cash of just warrants sort of an expectation in the interim.
The correct decision to at least deploy some of that excess cash and probably build of highest securities portfolio than we typically operate with.
I will add you know the 1 challenge here was just evening.
Finding you know security product that has a you know a reasonable return in a reasonable spread.
So you know during the second quarter, we you know leading up to the second quarter and into partway into the second quarter. We were primarily investing in an agency bullets go on a little bit longer out on the curve because we have the asset sensitive profile to do so we all know you know the just the low rate environment.
And in fact, what we're seeing in terms of spreads and a lot of those products, it's becoming more and more and more of a challenge to be convinced of that.
Those of the right deployment of the excess cash so we actually moved towards purchasing some treasuries as of late because to be quite honest. It. It's just the best Bang for a buck at this point. So it's a constant sort of analysis of of where to deploy that liquidity, if there's even convince and product out there with.
With the reasonable spread in reasonable return for the risk.
But sort of a long way of saying what will modestly continue I think the clip we did in the second quarter of <unk>.
3 of $350 million of purchases.
You know, assuming all things being equal that that's probably where our comfort level would be.
And did you have the the average weighted average yield of almost security purchases this quarter by any chance.
Yeah on the second quarter it was.
A little over 1 so about 1.1% on those purchases you know obviously the treasuries that I just mentioned will be lower than that you know those are.
You know what we're looking at sort of of the size of 6 year of part of the curve on those purchases you're talking maybe 70 basis points, but all in weighted average for Q2 purchases was $1.1 per cent.
Got it.
And then Chris I think you noted Oh, another strong quarter from the investment management wealth management group.
Probably 1 of the stronger quarters, we've seen on a year over year basis, just curious how much of that is sort of a market rebound related versus new assets and a generation of new relationships.
Yeah, I don't have that breakdown in front of me I will say we are origination is strong.
Mark do you have of that specific breakdown I do yeah, we add.
Net inflows of about well actually we didn't experience a little bit of run off in the second quarter. So it was essentially a wash in terms of new money and outflows for the second quarter and most of the appreciation came in market value of appreciation.
So we did put you know net.
A little over 100 million of 125 million of new money and that's you know.
Down a little bit from the first quarter, where we were just shy of $200 million.
But it's still very resolved and in very optimistic opportunities and in talking with the wealth management folks I think they're excited to be able to.
To actually go out and start meeting with clients again, I think theres been a lot of pent up demand for those customers to have those face to face meetings and get with their advisors again. So you know we're feeling very good about continuing to find opportunities there and you know and the market has been cooperating as well.
David I will add that the.
We have a growing this business Oh over 10 X over the last 15 years 1 of the major driver is our expanding for print franchise is the.
80 per cent of our business comes from our commercial bankers and our retail bankers referrals.
And the more.
The lenders in the retail branches that we have the moral of referrals, we get and that's been the the kind of of all of our out of our acquisition of itself with the with the Meridian Bancorp acquisition, we expect the net debt.
Bode well to for the.
The growth of the this business.
Got it and then just 1 final question Mark you mentioned.
I missed the number but in terms of.
Deferred fees of outstanding from the the first the first tranche of PPP loans could you go over that again, yeah. The the first tranche is down to about 1 and a half million David as of June has already begun.
Got it and then 18 point too in the.
Oh, I'm, sorry of $16.9 point out I know it yeah. So so you know.
I think that will just be subject to normal amortization through most of 2021 sort of 5 year.
1 of the amortization period on the 16.9, you know the 1 caveat there.
Is there will be a time period here and in the fourth quarter for the most part where borrowers will.
Hit there at the end of the time period of 24 week period of of utilizing the funds and then there's a 10 month window.
Essentially where they have sort of of payment deferral and that's sort of the window when at least for the first round, we experienced will start to see some level of of applications coming in for forgiveness. So it's tough to pinpoint exactly when customers will start going through that forgiveness process, but if we you know leverage.
What we learned through the first round my my best Guesstimate would be the majority of that will not happen until 2022, but there is the potential for some accelerated forgiveness later in the year I just think you'll see the majority of it in the next calendar year.
Got it thanks.
Sure.
The next question comes from Laurie Hunsicker with Compass point. Please go ahead.
Yeah, Hi, good morning.
The Army Laurie.
If we could go back the deferrals for a minute and.
And your credit terms of grades, but just wondered if you kept the comment a little bit on the.
The other small business services, where we just saw the sharper.
Sorry about the Czech Index World I'm talking about the lines it looks like its real estate and leasing.
Yeah, I mean, the small transportation and warehouse debt your deferral of Brent linked quarter from 24 to 43 million.
Just any color you think of us the round out of how we should be thinking about that.
Yeah without the specific borrowers Laurie I I'd say this was the similar issue with the first quarter. There was of a time period through.
You know as of when we reported year end 2020 deferral numbers and then as it played out over the first couple of quarters. We were in talks and negotiations with the number of borrowers that were looking to enter into a deferral program.
And just the timing of when some of those negotiations got executed that's what created the increases we've seen over the first couple of quarters. So I'm not sure. If you recall, but when we announced at year end, we talked about somewhere around $70 million of potential deferrals that were still.
Somewhat influx that could come back on so so nothing has.
Surprised us they are all of these increases all of the first couple of quarters were all part of that group that we were talking to them and in fact, it's probably out of number now now where we anticipated we would be 1 sort of all of the dust settled so.
The.
The the 1 increase this quarter was just another example of of a bar of that had not you know sort of the theory sign the paperwork and just got around to it in the second quarter.
Got it okay. Thanks.
And then also just wondering and thank you for your clarification on that and the remaining from B P fees.
You could also help us think about what accretion income is going to look like in 2020 kill them with E. B at the end then also.
Just any thoughts you can give us the around pro forma margin you know exiting the P. P. P. In other words as we think about what your core margin looks like for 2020 to factoring in the E. B at the factoring in the restructuring.
Any comments would be super helpful.
Sure I'll take a stab at it and then as you noted in your question. There are a lot of the moving pieces in that equation, so I'll try and.
Break it down for you as best I can but I think as the starting point.
Looking at our results over the last couple of quarters.
I think of it as you know, let's let's take L. P. P. P. Altogether is sort of the baseline starting point and I think if you do that youre looking at are.
<unk> Standalone entity, you know of at.
Out of margin of about 2.8 to $2.85.
That's with what has been of a pretty consistent purchase accounting accretion number we've seen in the last couple of quarters. It's running about $1.6.1.7 million of quarter, you know that could tick down a couple of hundred thousand you know if I got the guests over the next couple of quarters, but I don't think it'll be a meaningful change.
Upon the East Boston acquisition.
You know the reminder of our our initial assumptions that.
Subject to obviously a lot of moving pieces between now and close but at the time, we announced and what we're reiterating.
Still is that we would have 60.40 P. C D. Non P C D.
Well I should say 60.40 non P. C D. P C D split.
And that would equate to about a 65.68 million dollar non P. C D. Mark so that would get accreted into income if we assume you know that's a 5 year average life, you know that would equate to about $13 million a year and accretion of <unk>.
Tom.
Offsetting that we anticipate there'll be a premium loan interest and liquidity Mark Sn.
Essentially in the same amount so the amortization of the premium will be about $13.14 million that'll wash with the non P. C. D benefit. So the good news is there should be sort of of Washington effect in terms of the noise in the margin on that side and then there'll be a sort of a 1 year of <unk>.
Benefit on the fair value Mark of the of the Cds or the time deposits and I think that will accrete in about a $5 million benefit.
So really that the starting point core margin to 80 to 85 doesn't change a whole lot when you layer in the.
The impact of the acquisition because of lot of that is sort of netting out to the very little noise, but I think youre going to see that get into about of 290.295 margin we'll call. It.
And then lastly, we talked about sort of the balance sheet restructure and the opportunities too.
Essentially allow for a level of run off on the commercial real estate book, and then likely deploying some of that excess cash into paying off their wholesale funding.
And also allowing for a level of deposit run off so we pegged that and model than a essentially a 2 billion dollar reduction in the balance sheet on the asset size. The on the asset side, that's comprised of $1.3 in cash and 6 or $700 million in loans and then on the funding side.
You know 600 million in S. H L b borrowings and the rest of coming out of deposits that spread on the $2 billion is only about 50 basis points. So even though we will lose absolute dollars and net interest income the quality of earnings improved significantly so you're looking at.
Small our balance sheet, but I, we pegged out margin.
Post full restructure of that $2 billion to get back up to about 320 or so.
So I'll pause there la you know there was a lot of moving pieces, there, but hopefully that answered your questions. Yeah. That's fair that's debt. Thank you for all of the details I really appreciate that that is great and the playbook.
Chris's last question for you obviously, we were gonna see UBS bank closed here hopefully by the end of the year and how are you thinking about forward M&A at this point.
The Laurie the pretty much the same way, but we've had a long track record of of.
The acquisition instead of coming of cry of Bob or across the horizon every a year and half of 2 years and it's been a really great growth strategy for us and I, Thank god the as well.
We've executed quite well and its been important to us and the.
I would hope that once we.
Close and convert and digest that.
As of the past the past is prologue it that the other opportunity emerges we would love to take advantage of it.
Okay, and then just just remind us again, they know that we 1 of US that you usually every quarter I missed but just your your target asset size in terms of how small you would go how large of a ago.
Yeah. So you know it that's.
Yeah. Thanks for.
So the boy I'd love to sort of tell you exactly I think probably.
I'd have to move that need a little bit of that they would have to be if it was too small of digital eat all of the right. They would have to be higher because of the reason like the capability of a buying or selling I mean, you may recall, the first acquisition of back to the asset through the hundreds of $75 million I think that was the size of the Palmas Coupe.
I think that'd be too small.
So moving the day that the at the moving the needle a little of that being noticeably I mean.
Certainly not as much as the.
Esports of that's already of Bank Corp that is pretty extraordinary.
As a good metrics, but.
So I don't want a set of number but it has to be something notice.
Great. Thanks for taking my question.
Thanks Laurie.
As a reminder, if you have a question. Please press star then 1 to be enjoyed into the queue. The.
Next question is from Kelly Motta with K B W. Please go ahead.
Hi, Thanks for the question good morning.
Kelly.
Hey at this point most of my questions have been asked and answered them they get kind of.
They get a little bit on expense.
Expenses, you're specifically of the Iraqi occupancy and equipment line I'm came down a lot with you in the release that there's lots of the snow removal and reduce cleaning costs.
Wondering I think you in the parts of the talked about potentially.
Potentially reducing from office expenses I'm, just wondering if the if you're still working.
Working on now that you look to integrate.
And close that deal and if there is anything else kind of play to drive that decrease.
Yes, certainly.
You know in terms of occupancy and equipment. The Postmeridian, we've talked about sort of a cost save assumptions and you know I think that will play out as we've anticipated and where we've made a lot of great progress and are on track to.
We believe achieving those cost saves, but certainly the absolute dollars will increase with the expansion of.
The branch locations and in the office space, we're taken on there, but as a standalone Rockland Trust entity.
The we think we've been pretty careful about where to spend money, especially on.
Technology and equipment, you know, we we need to continue to invest in our capabilities, we need to continue to invest in our infrastructure and in the.
That you know that requires a constant care and feeding of the environment and that isn't where we think of it makes sense to just to short change the the investment.
A couple of tangible items I'd point to and I actually don't have exact numbers in front of me, but just a reminder, we did make the decision to.
Close the seaport in the med for branches last year, and we pulled a lot of that expense forward.
But there was still some level of incremental sort of run rate expense.
And we actually just completely close those branches and exited those branches in the second quarter. So the should be some modest benefit in terms of fully exiting those 2 branches, but in terms of other line items.
Think.
We've extracted probably as much as we can but you know we're always looking at that and looking for efficiency gains where it makes sense.
Great I think the and then on.
Earlier in the call you, Chris I believe you spoke about.
The getting a new lender of the lock up agreements in place just wondering how that the mission is going if it's mostly completed.
Completed at this point and.
If you could.
Just go over whether that's for meridian, specifically or how you're doing with recruitment from the other banks as well. Thank you all right well I'll, let I'll, let Terry kind of more extensively I will say that the.
At the this is of what are the the stories that will never rent I think in our business, where we'll be constantly looking for lenders through acquisition of true.
Higher through the internal development.
Through promotion.
The carry you can expand on that.
Sure Thanks, Chris Hi, Kelly.
Yeah, I think in the context of Christopher thinking about earlier.
It was about west of and we're very fortunate to have been able to bring over a couple of folks from TD. When we opened in wister last year and so that's been really giving us some nice growth and we're actually having meetings.
And it's almost as we speak now with some lenders from other banks debt.
Our in play at the current time, so even though we are joining together with east Boston, we're continuing to.
Find opportunities to add incrementally to our team the couple of different groups.
I think we have a couple of that were pretty close to right. Now. So I think that's something we always wanted to be opportunistic of boat, there's great value to finding a relationship managers that have been in the market for a long time.
And generally been able to bring relationships open to us.
Great. Thanks, Gerry and maybe 1 last 1.
Probably for Mark just the tax rate it looks like it's on top of bed.
Wondering if there's any kind of discrete items there or.
Kind of how to think about the tax rate for the rest of the year.
Yeah.
The level for Q2 of Hy 'twenty for US 25% is right in line and we should expect to see that for the rest of the year of the first quarter was the anomaly because of some.
1 of 1 time benefits on low income housing tax credits, where we get updated information and have to revalue of the tax benefit.
And then equity compensation typically create some noise in the first quarter because of.
When the awards vest that triggers a onetime impact of the tax rate. So first quarter is noisy and then the rest of the year should fallout into that high 24 per cent range.
Great. Thank you that's all for me.
Thank you Kelly.
And this weekend.
This concludes our question and answer session I would like to turn the conference back over to Chris Oddly Sims for any closing remarks.
Great. Thank you Betsy and thank you for everybody for joining US today, we look forward to talking to you in 3 months. The update you on our third quarter of having a good weekend goodbye.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.