Independent Bank Corp (Massachusetts)
NASDAQ:INDB
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Independent Bank Corp (Massachusetts)
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Good morning. And welcome to the Independent Bank Corp. First Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]
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 these identified in our annual report on Form 10-K and our earnings press release.
Independent Bank Corp. cautions you against unduly relying upon any forward-looking statements and disclaims any intent to update publicly any forward-looking statements, whether in response to new information, future events or otherwise.
Please note that during this call, we will also 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 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. Also please note that the event is being recorded.
I would now like to turn the conference over to Chris Oddleifson, President and CEO. Please go ahead.
Thank you, Andrea, and good morning, everyone, and thank you for joining us today. I am accompanied today by both Rob Cozzone and Mark Ruggiero, our newly appointed Chief Operating Officer and Chief Financial Officer, respectively.
We began the year with another record quarterly financial performance, excluding M&A related charges, operating net income reached $36.7 million or $1.30 per share, which was a striking 30% above the prior year’s record results.
Rob and Mark will walk you through the quarter in greater detail shortly, but suffice it to say, our results were once again led by strong fundamentals, including loan and deposit growth, a higher margin, stubborn credit quality, contained expenses and healthy returns.
Tangible book value per share continues to grow nicely reaching 14% above its level of a year ago. The major development, of course, has been the closing of our Blue Hills Bancorp acquisition earlier this month. This transforms us to an $11 billion plus asset company and more importantly, extends and strengthens our presence in a highly desirable Greater Boston and Nantucket markets.
Blue Hills’ CEO, Bill Parent and I, along with many others has spent considerable time together and pre-planned to make this merger a success. We welcome Bill’s addition to our Board, along with Dave Powers and Scott Smith, who will help bring continuity to our combined organization. We are confident in the upcoming integration, given our successful track record in assimilating other acquired banks over the years.
While this merger meaningfully increases the size of our bank, our goal is not to become the biggest local bank, but rather to continue to a high -- continue to be a high performing bank in the eyes of our customers, colleagues, communities and, of course, shareholders. Beyond earnings accretion, another important benefit to this acquisition is in -- is that it enables us to build scale and more profitably absorb incremental costs, especially regulatory related.
In conjunction with the closing, we also announced organizational move designed to lead our organization into the future. Chief among them was the elevation of Rob Cozzone to the position of Chief Operating Officer to capitalize on the strong leadership skills and command of our businesses. As many of you can attest, Rob is also an excellent communicator of our story to the investment community and internally is a highly respected leader.
Mark Ruggiero, who has served us well as Controller, has been promoted to Chief Financial Officer. He has big shoes to fill, but we are confident in his abilities.
Another key move was to appoint Ed Seksay, our very capable General Counsel into the important Chief Risk Officer position. There were various other related promotions and expansion responsibilities as well, including the promotion of David Reglin to Deputy Chief Risk Officer and Maureen Gaffney to Controller.
We have a robust, succession program at Rockland Trust and I believe it is noteworthy, that we were able to develop and promote talent from within as these examples illustrate. There are many other promotions from within at all levels of the bank on an ongoing basis. This really resonates with motivates my colleagues who brings so much passion to their jobs.
In addition, we welcome a number of talented Blue Hills’ colleagues with strong skill sets into key positions within our company, including Bob Driscoll who leads our combined residential mortgage business and Neil Marttila who leads our Nantucket market.
While the Blue Hills integration is our top near-term priority, we certainly aren’t still -- standing still. We continue to move forward and made progress on a number of other important initiatives. As examples, we have unveiled our online account opening platform, expanded the use of video tellers and continually upgrade our mobile banking capabilities.
As well our expansion of the western market by the recent Milford National acquisition, along with our opening of a Commercial Banking and Wealth Management office is going well and encouraging new business generation.
Our newer branches in downtown Boston and Newton are also off to a great start. And lastly, our investment management business continues to make excellent inroads into our expanded customer base and just reached the $4 billion mark in assets under management and administration.
While the two strengths of our company is being able to execute the day-to-day, integrate acquired entities and grow organically, all the same time without missing a beat on the earnings front and our success hasn’t gone unnoticed, as we continue to receive recognition from reputable third parties. Rockland Trust was recently named as the Best Bank in New England by Global Finance, based on a range of criteria that included financial performance, customer relationships, new business generation and product innovation.
In addition, Forbes was ranked as number one in Massachusetts and ninth overall among all banks nationwide in a recent survey of tens of thousands of banking customers. Over the years, we have received numerous accolades and recognitions of excellence in customer service, our work environment and community outreach.
It is difficult to ignore the negative market sentiment that persists nationally, despite a 3.8% national unemployment rate and a low-to-mid 2% GDP growth. Trade discussions and weak global economies continue to create uncertainty driving concern over future growth.
Amid this, the Massachusetts Academy remained strong and is operating near full capacity. Steady job creation has continued in 2019 and at 3% the state unemployment rate is still near all time lows. State wage and salary income growth was also strong in the fourth quarter, increasing 7.2% on an annualized basis versus 4.3% for the U.S.
So as you look ahead, we are excited about the potential to grow and perform. The combined strength of our now larger company gives us added confidence in our ability to succeed in a highly competitive industry.
We believe strongly in the importance of corporate culture is essential to ours what we like to call our cycle and engagement. So we can do a virtuous cycle in which my engaged relationship oriented colleagues provide exemplary service to our customers, who in turn reward us with more business, which then drives strong financial performance and ability to invest in future growth. All of which ultimately benefit shareholders with growth in book value, higher valuations and increased dividends.
Speaking of which, we were pleased that our Board recently approved a 16% increase in our dividend, which was on top of last year’s 19% increase and other healthy ones in the years before. We would like to thank our many long-term shareholders for all their support and encouragement and welcome former Blue Hills shareholders as well. Rob?
Thank you, Chris. Good morning. I definitely echo Chris’ comments about welcoming Blue Hills’ colleagues who bring added competencies to our organization. And before I begin to discuss earnings for the quarter, I will provide some additional color on the acquisition front.
As Chris mentioned, the legal closing of Blue Hills occurred on April 1st and all went as expected. There is still some heavy lifting remaining for the systems conversion, but that preparation is well underway. Upon closing, we added $2.5 billion in assets, including $2.1 billion in loans, $215 million in securities and $1.9 billion in deposits. As you will notice, the total acquired balance sheet is less than the $2.8 billion reported by Blue Hills on 12/31/18.
The difference is a result of some planned deleveraging that took place shortly before the close, including the sale of approximately $115 million in securities and $250 million in residential loans. This deleveraging will have a modest negative impact on the acquired earnings base, but will enhance profitability, capital and our overall balance sheet funding profile, while also mitigating margin compression. During the remainder of the second quarter, we anticipate some further deleveraging, which may include loan participations and planned loan runoff, as well as some additional security sales.
With the significant decline in market rates since the September announcement of the Blue Hills transaction, final loan fair value marks and associated accretion income will be much less than originally intended -- anticipated, whereas term deposit interest marks will be much higher.
In addition, core deposit intangible and associated amortization will be lower than originally anticipated. At the end of the day, the Blue Hills transaction is expected to be slightly more accretive to tangible book value per share and slightly less accretive to earnings per share than originally planned, but nothing very material.
In the midst of our preparation for the Blue Hills closing, we continue to keep a close eye on the integration of Milford National Bank, which closed last November. That integration has gone quite well. Our customer retention rates are better than anticipated, our new colleagues are quickly getting acclimated and the remainder of our planned cost savings was realized with the closing of our Milford National Main Street branch on March 1st. The Milford acquisition is helping to provide some continuity to a gradual expansion into Worcester.
Let me now begin to provide some commentary on the quarterly results before handing it over to Mark. Net income of $35.2 million and diluted earnings per share of $1.25 in the first quarter of 2019 reflect increases of 18% and 17%, respectively, from the prior quarter’s GAAP results.
Excluding merger and acquisition expenses and the related tax impact, net income and earnings per share increased 30% plus versus the same period last year to $36.7 million and $1.30, respectively.
Strong earnings results continue to drive improved profitability ratios and growth in tangible book value per share. Our operating return on average assets was almost 1.7% and with a $0.29 boost from other comprehensive income, tangible book value per share increased another $1.07 during the quarter to $29.64.
Loan growth in the first quarter was 4% on an annualized basis and similar to the prior quarter was buoyed by strong growth within C&I driven primarily by corporate banking and asset-based lending production.
Commercial real estate on the other hand, remained flat during the quarter as competitive pricing and structure continued to be challenging. Total consumer real estate was also flat as ongoing growth in the residential category was offset by a decline in home equity.
As is usually the case due to seasonality, first quarter deposit growth was tempered. However, also impacting growth in demand deposits was a $39 million reduction in the more volatile 1031 tax free exchange category, as well as some customer driven transfers to higher yielding money market accounts. As a result, demand deposits were down almost 5% for the quarter, offset by a 6.9% increase in money market balances.
In line with previous guidance, the cost of deposits was up 5 basis points for the quarter to 39 basis points. As expectations for future rate increases in 2019 have essentially come to a halt, deposit betas may prove to have peaked for the cycle.
Despite the increased deposit costs, continued healthy loan betas, liquidity deployment and a full quarter of the December rate increase drove the net interest margin for the quarter up to 4.14%, an increase of 9 basis points from the prior quarter.
Management has also proactively responded to the flattening of the yield curve with another $100 million of loan hedges protecting against downward rate movements, bringing the total hedge position against lower rates to $600 million as of March 31, 2019.
The company’s borrowing profile in the first quarter reflected various funding transactions in anticipation of the April 1 Blue Hills merger. In particular, the company secured $125 million credit facility late in the quarter, comprised of a $50 million line of credit and a $75 million three-year commitment. The majority of the $50 million line is anticipated to be repaid during the second quarter.
In addition, in conduction -- in conjunction with the planned pay off of $35 million of subordinated debt that will lose its Tier 2 regulatory capital treatment later this year, the company took advantage of strong market conditions and issued $50 million of subordinated debt at a fixed interest rate of 4.75%.
I will now hand it over to Mark.
Thank you, Rob. As CFO, I look to continue to open the -- continue the open dialog with the investment community that we place great importance on. The total non-interest income decrease of approximately $2 million reflect the typical seasonal decline when compared to the fourth quarter, but is up approximately $1.7 million or 8.4% from the first quarter of 2018 and even when excluding the gain on equity securities of $900,000 in the first quarter of 2019, the increase over the prior year is a healthy 3.8%.
And as Chris mentioned in his previous comments, the Investment Management Group total assets under administration is now rounding to the $4 billion mark, as the company continues to generate strong business through its enhanced presence in Boston, Cape Cod and Martha’s Vineyard. In addition, a reminder that the Blue Hills merger will generate increases across most non-interest income categories.
Non-interest expense was very well contained in the first quarter of 2019 and despite increased costs associated with payroll taxes, medical insurance and snow removal expense, total non-interest expense was down over $1 million or 1.9% from the prior quarter, when excluding merger and acquisition costs.
The continued successful workout of problem loans, including the restructuring of a large commercial loan relationship at the end of 2018, has driven significant reductions in loan workout costs and consulting expense in the first quarter of 2019 compared to the prior quarter. [Audio Gap] expenses for the quarter were primarily related to the pending Blue Hills merger with the remaining M&A costs expected to be incurred in Q2.
After-tax M&A charges should approximate $20 million in the second quarter and non-anticipated cost savings are expected to be realized by the end of the second quarter. Asset quality metrics remained strong. Net charge-offs for the quarter remained at only 1 basis point of loans on an annualized basis and non-performing loans dropped nearly 5% in the quarter.
The aforementioned restructure of a large commercial relationship also drove the significant decrease in delinquency levels during the quarter. The provision level of $1 million for the quarter was needed primarily for organic loan growth.
And now for an update on the company’s current expected credit loss or CECL preparation. Although, the standard is certainly getting a lot of attention from standard setters, regulatory agencies, the SEC and government officials, the company is on track with its project plan for an effective January 1, 2020 implementation.
In particular, the company has successfully validated its loan level historical loss and recovery data needed for an initial CECL run and is in the process of developing its model assumptions and forecasts scenarios needed to translate to a life-of-loan loss estimate. We anticipate providing guidance over the estimated impact later in the year.
I will now provide an update for growth expectations for key balance sheet and P&L categories. Rob has already given you some insights on the financial impact of the Blue Hills acquisition, and I will add a little more color here as well. But given the many moving parts, the guidance this time around will be on an organic basis. We will be in a better position next quarter to discuss these categories on a combined basis.
The legacy loan portfolio is still expected to grow at a mid single-digit pace on an annualized basis with near-term runoffs in the Blue Hills acquired portfolio expected, in particular with -- within C&I and residential. Legacy deposits are expected to grow in the mid single-digit range on an annualized basis with some natural attrition of the Blue Hills acquired CD portfolio expected.
As noted, there are a lot of moving pieces that will impact net interest margin going forward as compared to Q1 results. When the dust settles, on a combined basis and with some additional delevering, we expect to be in the mid-to-high 3.9% with no further rate increases.
Almost all legacy non-interest income categories should experience an increase in the second quarter and are expected to increase in total for the year at a low-to-mid single-digit rate and we continue to anticipate non-interest expense to also grow at a low-to-mid single-digit rate for the full year prior to factoring in the increased expense load of the Blue Hills acquisition. As we have been saying, although no credit concerns are noted for the near-term, eventual deterioration is likely inevitable. And lastly, the tax rate for the year is expected to be around 25%.
In summary, we look forward to continue progress in our new endeavors as a $10 billion plus bank.
That concludes my comments. Chris?
Thank you, Mark. Thank you, Rob. All right. Andrea, let’s open up the line for some questions.
[Operator Instructions] And the first question will come from Mark Fitzgibbon of Sandler O’Neill & Partners. Please go ahead.
Hey, guys. Good morning and first let me say congrats to Rob and Mark.
Thank you, Mark.
Thank you, Mark.
I wonder if I could start out by asking about sort of the competitive environment with respect to deposits. We hear anecdotally some of the bigger regional banks in your market have gotten particularly aggressive with deposit pricing. I just -- you guys are forecasting sort of, I think, low-to-mid single-digit deposit growth this year and I am just curious will that be a function of the new locations you get Blue Hills, some new deposit strategies and promotions or something else?
Yes, in terms of the competition, Mark, it’s actually subsided partially as expectations for future rate increases have increased. Some of the competitors that we saw out there aggressively with some CD rates and money market rates have pulled back. We have seen a couple of new entrants, some of which we view as less competitive overall.
We obviously have chase moving into the market with some physical locations there, go-to-market strategy has been a heavy upfront cash offer for a combined checking and savings product. So that is concerning most of the other competition as rate driven competition. So we are keeping a close eye on that. Right now with just a couple of locations from chase that’s not having an impact on us.
However, we do expect that the growth rate that we saw in higher price to money market. Although not at that pace we will likely continue we see some growth and transition of funds into some higher rate funds and expect our core cost of deposits to continue to go up.
We don’t expect to have accelerated growth as a result of the Blue Hills acquisition just because we anticipate attrition amongst their higher cost deposit categories. They had some promotional CD offers and promotional money market offers that we -- they were using to grow deposits, which we will withdraw. So those balances we actually anticipate will attrite, so that will reduce our overall growth rate when you combine the two franchises.
Okay.
Right. I’d say the competitive environment has eased up a little bit especially from a rate perspective.
Okay. And then could you share with us the size of your commercial pipeline and maybe what the average rate on that looks like?
Sure, Mark. For the approved pipeline at the end of the first quarter was approximately $106 million and in terms of rate it’s pretty consistent with what our experience has been on new commitments booked in the last couple of quarters, which are certainly healthy rates in the mid 5%s or so.
Okay. And then, lastly, as the Bank gets larger, are you beginning to sort of think about expanding the geography in which you would consider future acquisitions in and how small of a deal would be considered too small today?
Mark, Chris here. The -- you are really familiar with our history. I mean we are very opportunistic and situational. Part of the calculus is that if ideally, we have -- sort of have our ideal list and ideal size, but the market doesn’t give you what you want. So if something comes along that’s small, let’s say, $250 million for example.
I mean we take a look at it and if it’s in a market that we want to be in, if it’s adjacent or within our markets, I don’t think that would be too small. If there weren’t other things to other priorities, right? I mean if there were other priorities that we thought had more leverage we would focus on that, so we are highly situational.
In terms of the market size, I mean, what we historically have said, that we really like the market, Worcester East and just sort of do arc North -- Northeast and Southeast of the Atlantic Ocean. So going through Southern New Hampshire, going through Providence Rhode Island and that’s sort of our focus area.
Should there be some opportunities they are a little bit outside that. We probably can -- we again would consider it, if we didn’t have sort of like more attractive opportunities that were within that band. So, I guess, we are in a position that we will take -- we will be thoughtful and take a look at opportunities.
Ideally, we would like to build a $15 billion to $20 billion bank East of Worcester. We think that focused geographical concentration comes with a lot of positives in terms of managing and focusing the bank.
Thank you.
Thanks, Mark.
Our next question comes from Laurie Hunsicker of Compass Point. Please go ahead.
Hi. Thanks. Good morning.
Hi, Laurie.
Just wondered on the margin, the net interest income line, can you tell us how much of that was accretion income, how much of the $82.52?
Sure. For this quarter, it was relatively lower. It was only about $200,000.
Wow! Okay. So...
That’s not total -- that’s not total purchase accounting and become the less the accretable yield. Total purchase accounting was about $800,000.
That was $800,000. Okay. So up a little bit from last quarter. Okay. So if I am looking at your core margin excluding the accretable yield, you went from 4.02% to 4.10%?
That sound all right. Yeah.
Okay. Okay. Okay. And then I just wanted to make sure I heard you right, obviously, assuming a recent deleveraging and then continued runoff on the Blue Hills balance sheet, we would expect your margin to be in the 3.90%-ish range, did I hear that correctly?
Yeah. Sure. When you factor in the delevering that has already occurred and some planned delevering strategies that are still underway, when that is all said and done, the mid 3.90% is where we anticipate that margin.
Okay. And then, obviously, so accretion right now is around 4 basis points on margin going to be much higher with Blue Hills, do you have a dollar number or a basis point number on margin that accretion income is going to look like going forward as we are looking there?
Actually accretion income was going to be a lot less than we originally anticipated Laurie with Blue Hills.
Sure.
So with that five-year treasury is down 72 basis points between announcement and close. So the loan mark we expect, not finalized yet, but we expect the loan mark to be fairly minimum. The interest and liquidity mark, credit mark will still be very close to what we anticipated.
The biggest mark is now on term deposits. So that mark will accrete through the margin obviously as an offset to interest expense and we expect that to be in the range of $3 million annually in the first year, but that quickly the CDs kind of tend to be within two-year maturities, so that goes away pretty quickly.
Okay. All right. So just if we sort of added back together for thinking about accretion income impact, I mean, maybe you go from 4 basis points to 6 basis points or so…
Yeah. That’s probably pretty close. Yeah.
Okay. Okay. Great. Thanks. And then just on the balance sheet, obviously, you just closed it. So you don’t first claim to your point on market move. Your intangibles as of March 31st were $270 million. Do you have what intangibles would be had you closed Blue Hills March 31st, do you have a number?
Well, we are still finalizing the purchase accounting marks. But we expect it to be approximately $250 million in additional goodwill and another, call it, $20 million to $30 million in intangibles, but those are round numbers yet to be finalized.
Got it. Okay. So putting all that together, plus it looks like you have got another $18 million or so of one-time charges, pro forma tangible book is sitting just shy of $30, $29.999 something?
Yeah. I think...
Yeah.
…little bit north of that, but you are not far, because we...
Okay.
… ended the first quarter at $29.64 or so.
$29.64, right.
A little bit of a lift on top of that, yeah.
Okay. So it’s substantially more accretive to your earlier comments than expected.
Exactly.
Okay. Okay. And then…
All yet to be finalized, Laurie.
I mean, yeah, sure, no, absolutely. And then can you just help us quantify just a little bit more as we are trying to quantify our models on what the balance sheet restructuring runoff could look like as you further delever. Just if you were to put just $1 total on the loans and securities, how should we be thinking about that?
Yes. Primarily will occur within securities and you can think of, to the tune of round numbers again, Laurie. So $100 million to $150 million in additional securities deleverage. And then we anticipate the portfolio, the legacy Blue Hills portfolio to amortize a fair amount.
I am a little uncomfortable giving you a number on that at the moment. We don’t have any additional loan sales planned. But we will look to participate out a handful of commercial credits.
Okay. Okay. Great. And then last question, you mentioned that the amortization expense will be lower. Do you have a number there? How should we be thinking about that?
For which number, for the...
The amortization expense, yeah, and the non-interest expense line, how we should be thinking about that number?
Sure. So, again, the preliminary mark on the CDI is coming in at about 2%. So if you do the quick math, it’s expected to be around the $20 million range. I mean, we typically amortize our CDIs using the -- a sum of the year’s digit amortization methodology, which equates to about 18% in the first year.
Great. Okay. Super. And I just wanted to go back to Mark’s earlier question on M&A and obviously, Chris, you quantified you would like to be $15 billion to $20 billion that’s consistent and certainly of what you have said historically, you now have two deals closed, is it safe to assume you are potentially out booking right now?
How this business works. I mean, you are always aware and banks are sold, not bought and it’s always sort of -- it’s sort of funny and when you take a look in the rearview mirror, we are fairly predictable, one every year and a half on average.
But if we take a look at the front windshield and you really have no -- very little idea what’s coming down the road, and sort of what the moods of various management teams or Boards are going to be.
So all I can say is, I would anticipate the secular trend of banking consolidation to continue nationally and continue locally. And I hope we will be at the table when the Boards raise their hand and say, we would like to sell.
Okay. Great. Thank you so much and Rob and Mark congratulations. Thanks.
Thank you, Laurie.
Thanks.
Our next question comes from Matthew Breese of Piper Jaffray. Please go ahead.
Good morning, everybody.
Good morning, Matt.
I just really wanted to focus on the NIM and the hedges. Maybe to start, you noted that you had $600 million in hedges now in place. Could you just talk about what the instruments are that you are using, what are the instruments you are using? And then, if we were to use a little bit of a dynamic interest rate outlook, right. So if fed cuts or if they don’t cut, what would the NIM do post 2Q and how much protection do the hedges afford to you?
Sure. So in terms of the nature of the hedges, Matt, there are -- we have done loan pool hedges where we are looking to hedge the effective interest rate on an entire loan pool that are variable in nature.
So they are actually a combination of received fixed hedges, as well as callers, both of them obviously give us protection against the downside. And as you can imagine, given the market dynamics over the last few quarters where we put these hedges on, some of them were done in environments where they were significantly in the money at the time of the hedge whereas those more recently a little bit closer to where the floor is.
So those are essentially the nature of the hedges and because of where the market was earlier in the process, even if rates do come down here in the near-term, we will still be able to get market interest on those hedges and even if rates go up on the callers that we have we will benefit from the upward rate environment as well. So the callers really added us a lot of flexibility to accommodate for some potential short-term movements either up or down.
Okay. And if let’s just go through a scenario where the fed does cut by the end of the year with the hedges in place by 3Q, 4Q, what kind of NIM -- what’s the behavior of the NIM like and what would that look like without the hedges?
Well, I’d say, it still would be negative. We are still asset sensitive. As I think we have said in the past about 42% to 45% of our loan portfolio is tied to LIBOR unadjusted for the hedges. So if you add -- so that’s call it $3 billion of loans that are tied to LIBOR, $600 million of that has been protected with a hedge to the downside. So the remainder is still tied to LIBOR and we will adjust them with the movements in LIBOR.
And we can only offset that on the deposit side with minimal rate adjustments on the deposit side, which will take some time to effect and because our deposit costs are so low, obviously, we have some margin compression as rates go down. So our plan, Matt, is to continue to layer in protection for lower rates. But if we get a rate shift downward tomorrow it would have a negative impact on the margin certainly.
Sure. Okay. Okay. And then maybe just touching on CECL, I guess, as I think about the current reserve in its totality. It’s sums to maybe eight years, nine years, 10 years of historical charge-offs, and then plus the number of deals you do. I’d just have to imagine you are in a pretty good place in regards to CECL. Is there a possibility that we see reserve actually come in for CECL or is it more likely than not to go higher?
It’s a very interesting question and certainly it’s too soon to tell at this point specifically. But to your point, we have a healthy reserve on the books. We actually have a longer look back period in terms of historical losses that factor into our balance as it sits on the books today.
But as we move towards CECL, a lot of it is going to be data dependent and how much of a loan level look back period we can implement into the model and right now we feel very good about the last nine or 10 years of historical loss and recovery data that we have access to build into the model.
So that level of loss will really drive the framework for what the CECL number will be and then, obviously, the wildcards and the areas will be economic forecasting and foreseeable future assumptions over how much of macroeconomic factors will impact that historical loss rate.
So, in summary, we don’t have a number nailed down yet, but your instinct seem to pan out in that the CECL model may not be as big of a number as was originally intended and thought about in the industry.
Okay. The commentary isn’t it ironic that we are probably closer to a downturn than we have ever been and some fairly sizable institutions are talking about reducing their reserves as a result of a rule that was intended to strengthen the industry, it’s very odd.
Intuitively to move from an incurred loss to an expected loss, doesn’t sound like you should be relieving reserves right? But the nuance of it is really that the data that is able to be driven in both models. So we are in good progress with what we have built out, and like I mentioned in my comments, we certainly plan to have some more finite numbers as we get closer to the end of the year.
Okay. And just maybe a follow-up there, we don’t want to get into specifics, but just from a high level you mentioned that’s going to be more data dependent. So if you were to breakdown the qualitative versus quantitative percentage that drive the allowance today, what is that roughly and where is it going to, and does that more data dependent model, is that going to make for a more volatile provision in the out years?
Yeah. Well, certainly, the incurred loss model, we think about very bifurcated like that where you have your historical loss factors that drive the quantitative number and then a qualitative analysis that really looks at things like management trends and economic factors that drive the qualitative aspect of it.
And as you mentioned, if you look at our history, we have had very little history of charge-offs, net charge-offs in the book over the last 10 years. So, as you can imagine, most of the allowance or a healthy portion of our allowance is attributable to qualitative factors.
And the CECL model, that bifurcation of the two kind of gets a bit more blended. There’s certainly historical lost data that is using to drive the model and the buildout of the model, but it’s really our regression analysis against those specific data points to come up with probability of default loss given default assumptions.
But then you need to get multiplied by economic forecast and other variables. So the translation of quantitative and qualitative, and the adding of the two, gets a bit more grey in the CECL model, if that helps kind of frame how we are thinking of it.
Yeah. That’s the way I was thinking about it too. I was just curious if once applied if you think that more data dependent model is going to result in a more volatile provision?
Yeah. Certainly the...
And therefore reserve.
Yeah. The concern is at what point in the cycle, do the assumptions over the economic factors in the foreseeable future of losses, is it really going to be a pro-cyclical model where anticipation of the economic downturn will spike reserves leading into that scenario and then the loss factors that may get generated in a downturn environment make that worse.
So it certainly concerns that it would lead to a bit more volatility as you move through major economic cycles. But I think, again, it’s all going to come back to kind of how those estimates and assumptions get layered in and it’s still bit too soon to tell as we are building out the model.
Understood. Well, I appreciate the help. Thank you.
Yeah. Thank you.
Thanks, Matt.
[Operator Instructions] And our next question comes from Collyn Gilbert of KBW. Please go ahead.
Thanks. Good morning, everyone.
Good morning, Collyn.
Hi.
If we could just start by digging into the loan book a little bit, so you guys had another great quarter of C&I growth. If you could just talk a little bit about what’s driving that and kind of your outlook from there, maybe some of the pricing that you are getting there, I know Mark you had given the pipeline yield on a blended basis. But then part two of this question is, also getting a little bit more color as to what you are seeing on the CRE side, growth had sort of subsided a bit there and just kind of how the pipeline within each of those segments is looking?
Sure. I will add in and then Rob and Chris might want to add some more color. But, I think, as we noted in the comments, a lot of the growth in the C&I is really getting buoyed by our corporate bank initiative and the asset based lending portfolio as well. And those have really been the key drivers of our growth over the last few quarters. And so we have made a couple of key hires in the last year and both of those portfolios and it’s really starting to benefit in terms of growth in production.
In addition to that, we have talked about our movement into the Worcester market, opening the Worcester commercial lending office here recently and we think that’s going to pay off very well in terms of complementing the Milford acquisition and continue to kind of penetrate that Worcester market.
So and what comes in those portfolios, we do see a little bit more volatility, some larger deals in -- from a quarter-over-quarter perspective that can sometimes result in just one or two deals really attributing to a good portion of the growth. But, certainly, those are the portfolios where we are really seeing most of the growth in.
And as you mentioned on the commercial real estate front it continues to be a challenge. We continue to stay very disciplined in terms of our pricing in our term structuring. The competition continues to stay strong there and we are being very selective about the deals that we want to participate in.
And I think you kind of see that trade-off in our asset quality metrics as well. I mean, if you look at kind of the slow growth without sacrificing credit, that’s been a good strategy for us. So because of that, because of our discipline that the pricing remained strong in that portfolio, we are not chasing rate and really just looking at deals that we feel very comfortable with.
Okay. On that point Mark, is there -- just as you look at kind of the overall complexion of the CRE book, are you seeing any big lumpiness in terms of credits that are due to mature or reset and do you see any big variances among the pricing of some of those resets, just trying to get a sense of what the maturation and pricing schedule looks like within that book?
Yeah. Nothing specific Collyn that we see in the horizon in terms of large deals that have abnormal pricing or that we anticipate will create much volatility in terms of the loan yields.
Okay. Okay. That’s helpful. And then just shifting back to Blue Hills, given some of the movement that they did ahead of the close, do you guys happen to have maybe what their margin was either for the month of March or what it was for the quarter?
For the quarter, they were 3.04%.
Okay.
Given their internal reporting that we…
Yeah.
That we obviously have access to, that was a non-public number.
And all of the delevering we described Collyn happened at the end of the quarter. The actual loans they had closed on the Friday before quarter end. So that benefit was not included in that 3.04% margin and then most of the security sales happened during March as well, actually all of them I think happened in March.
Okay. Okay. And then -- and you all commented just -- you had indicated that you are anticipating some of Blue Hills’ most rate sensitive deposits will -- you are not going to keep that same promotional pricing. Do you have a dollar amount roughly of what that slug of their deposits that you would maybe characterize as the promotional rate deposits?
Well, now it’s kind of hard as they went on. They had a couple of different promotional offerings over the years between money markets and CDs, and as those promotional rates have retired, some of them haven’t been extended.
The largest component is within a kind of medium-term CD that they had priced at 2.96% and I think that slug is a little less than $100 million. But that will take time to runoff over time, over the next 24 months or so.
Okay. Okay. Okay. That’s helpful. And then if we just look at your NIM more broadly and I know you gave great color via Matt’s question on kind of the hedges and how you are structured there. But if we assume that the Fed does not cut rates and we stay in this relative environment for whatever timeframe. But like -- if we just think about sort of the trajectory of the NIM as we move into 2020, is there an upward bias? Is there a meaningfully downward bias? I mean, is the goal to minimize compression or is the goal to hold it flat, just trying to get a sense and that’s kind of why I was asking about the sort of the maturation detail maybe of what we might be seeing on the CRE side of the book, just where you see the NIM trending a little bit more broadly?
Yeah. So on an organic basis Collyn and excluding Blue Hills, we would have expected deposit costs to continue to go up without much relief on the asset side. But to go up at a slower pace than what we certainly saw this quarter. So we saw a 5 basis point increase in cost of deposits this quarter.
That was the highest quarterly increase we have seen and now that the sentiment is the feds are not going to move any further and my comments earlier regarding competition backing away, we wouldn’t expect to see deposit costs increase at that rate on an organic basis going forward, maybe 2 basis points to 3 basis points for the next couple of quarters and then nothing after that.
So, with that, we would see flat to slight compression in the organic margin. However, layering on the Blue Hills balance sheet, even post delevering as Mark said, we expect that to bring the margin to the mid-to-high 3.90% versus the current quarter at 4.14%.
We also think on a combined basis that deposit costs after Q2 could start to decline as those higher cost deposits runoff and so that margin at the mid-to-high 3.90% we should be able to maintain that.
Okay. Okay. That’s very helpful. And then my last question is for you Chris. Thank you for giving us sort of the color on the M&A strategy in an ideal world, as you had indicated kind of staying East and growing to $15 billion to $20 billion bank whatever the case might be. Within that geographic preference, do you have -- how would you prioritize doing another thrift acquisition or like taking kind of more of thrift like balance sheet versus a fixer upper type of structure, I mean in recognizing of course, right, it’s the willingness of the sellers. But in your ideal world, you kind of gave us some color as you prioritize geographic expansion, but how would you prioritize sort of business model appetite for the next slug of deals?
Collyn, I think, a high-performing bank and high-performing bank combine, create a high performing bank. I think the worry we would have or the fixer upper, I mean, we are very sort of guardians of our currency.
And to think about an acquisition and if we were to sort of dilute sort of what we have become, a high performing commercial bank with too much of dilution of our balance sheet, I think, they wouldn’t be appreciated by you as much. I think that would then put us in a difficult position in terms of future acquisitions.
So we prefer to be sort of, one of the metrics we think about in any acquisition is how well our currency behave and so I think that’s probably the metric to think about it in terms of fixer upper or we would like this kind of balance sheet and not that that had be highly situational. But you would imagine that a bank that looks more like us would have an easier time maintaining our currency than a bank that’s way down on the thrift side.
Okay. Okay. That’s very helpful. I will leave it there. Thanks guys.
Great.
Thanks, Collyn.
Yeah. Thanks.
This concludes our question-and-answer session. I would like to turn the conference back over to Chris Oddleifson for any closing remarks.
Thank you, Andrea. And thank you everybody for joining us today and we look forward to talking with you again in three months time. Bye.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.