Independent Bank Corp (Massachusetts)
NASDAQ:INDB
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Independent Bank Corp (Massachusetts)
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Good day and welcome to the Independent Bank Corp. Second Quarter 2021 Earnings Conference Call. [Operator Instructions] 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 proxy statement/prospects regarding the merger. You are urged to read the proxy statement/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 prospected 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 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 direct comparable GAAP measures and additional information regarding our non-GAAP measures.
I would now like to turn the conference over to Chris Oddleifson, President and CEO. Please go ahead.
Good morning, everybody. Thank you, Betsy. Thank you everybody for joining us today. With me as usual is Mark Ruggiero, our Chief Financial Officer. We are also joined by Rob Cozzone, our Chief Operating Officer and 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 PPP loans, our commercial portfolio grew at a healthy 4% annualized rate for the quarter that was marked by strong loan closings. In general, our total loan growth remains constrained, we remained encouraged by our robust origination volumes across both the commercial and retail areas. In fact, total loan origination of approximately $1.6 billion for the first half of this year, grew by over 24% from the same period last year.
Deposit generation remains very robust, with core deposits reaching 92% of total deposits. Our marketing efforts and growing brand recognition resulted in record new account openings, along with ongoing growth in the number of households we serve. Investment management continues as a major source of strength with rising fee revenues and assets under administration continuing to reach record levels. Credit quality remains pristine with nonperforming loans 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 cost and selective investments and tangible book value per share continued its upward ascent. So all-in-all, a well-rounded performance.
While we and all our financial institutions are still dealing with the lingering effects of the pandemic along with the unprecedented levels of excess liquidity, we are witnessing some encouraging signs of increased economic activity, though the economic recoveries are fragile by nature, but we remain hopeful of continued progress. We also continue to be active participants in the PPP loan program. Since its inception last year, we originated just about 10,000 loans, totaling nearly $1.2 billion. At the same time, we have been hard at work aiding the 6,000 plus Round 1 borrowers to obtain forgiveness of their loans. This program required a lot of effort, but have 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 serve.
Beyond all that, our top priority of core centers and the integration planning for our recently announced acquisition of Meridian Bancorp and its flagship East Boston Savings Bank, a well-run community bank with approximately $6.5 billion of assets centered in Boston Proper and neighboring towns. Now, we couldn’t be more excited about assimilating this company to ours and we are already making excellent progress in the 3 months since the announcements. Initial focus has been heavily on key people retention, which is proving quite successful, especially in the customer-facing ranks in both the commercial and consumer areas. Gerry and Rob are heavily involved with our East Boston counterparts and mapping out new business opportunities in the acquired customer base, branch consolidation decisioning and planning is very far along. Shareholder approval meetings are scheduled for early next month and all regulatory applications have been filed. I would especially like to thank Meridian’s CEO, Dick Gavegnano, and his senior team for their focused and very capable efforts to ensure a smooth integration of our two companies. Dick’s intimate knowledge of the local marketplace is invaluable and I look forward to continuing to work closely with him in his consultant role with us over the next few years.
We remain confident in achieving our original expectations for cost savings, healthy earnings accretion and tangible book value accretion and we anticipate a fourth quarter closing and conversion. Despite this high priority effort, we are not sitting still and moving our franchise forward our proven integration record across multiple acquisitions over many years, gives us confidence to pursue other growth initiatives at the same time. For example, we are implementing our mobile your banking technology, which allows customers to chat and share documents securely with their own dedicated banker anytime anywhere from their own phone, tablet or computer and we are working to further extend our sales force application within our commercial and investment management businesses, along with a rollout to our retail network that will continue to boost our marketing and new business generation efforts.
We continue to expand in the Greater Worcester market with the recent opening of our Shrewsbury branch. We will have a third Worcester City branch opening next quarter with another plan for a neighboring town early next year. We also continue to attract senior lenders with in-depth knowledge of the local markets. We are very encouraged by our progress in this attractive market and of course continue to build-out our broad-based enterprise and technology risk management functions to accompany our growing size as a company.
Taking a look at the economy, despite our recent shift in sentiment in the equity markets due to increased uncertainty, economic data remains encouraging and it kind of continues to prove its resiliency nationally, since you already know, GDP continues to climb with consumer spending providing a strong tailwind. Retail sales growth exceeded expectations in June and that provides for support for continued growth. Inflation remains in focus, but Chairman Powell has reaffirmed his stance that it will be transitory and the Fed will continue to support the economic recovery. And lastly, labor market conditions, its labor – the labor market continues its steady recovery with 850,000 new jobs in June. More locally, the Massachusetts economy has seen back-to-back quarterly GDP growth ahead of the nation with Q1 2021 GDP growth of 6.9% compared to 6.4% nationally. In addition, while Massachusetts was hit harder by the pandemic, the labor market in Massachusetts continues to recover faster than the nation led by strong growth on leisure and hospitality as well as some other services.
Now, in summary, I would say that there is a lot going on at our company these days. And we believe we are persevering very well through the near-term challenges posed by the current environment. But more importantly, we continue to build on our strengths 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 and third nationally in Forbes ranking to the world’s best bank. Also the Bank Director publication ranked us second overall for long-term performance and total shareholder return.
Opportunistic acquisitions such as Meridian Bancorp certainly contributed to our long-term goals, but organic growth remains a focal point. We like how we are positioned without taking anything for granted in this highly competitive space. We believe the winning formula lies with a relentless focus on our customers and service, a clear understanding of our community advantages, and investing heavily in our Rockland Trust colleagues. Speaking of my colleagues, I want to acknowledge their incredibly tireless efforts to meet our challenges and opportunities, while continuing to provide really top right service to our customers. They have really fully embraced our role as an essential business to provide much needed comfort and support to our customers and local communities in these very stressful times. And I thank each and every one of them for their dedication and enthusiasm.
And with that, I will turn it over to Mark.
Thank you, Chris. Second quarter GAAP net income of $37.6 million and diluted EPS of $1.14 represent a decrease of approximately 10% from prior quarter results, due primarily to reduced PPP fee recognition in mortgage banking income as well as current quarter East Boston Savings Bank merger-related expenses. Excluding merger and acquisition expenses, operating net income and diluted EPS were $38.8 million and $1.17, respectively for the second quarter. On a GAAP basis, the results reflect a 1.08% return on assets and 8.70% return on average common equity, while operating results, excluding M&A, were 1.12% and 8.98% respectively. In addition, tangible book value per share rose another $0.82 to $36.78 as of June 30.
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% for the quarter, caused primarily by a reduction in PPP loan balances of $364 million. Excluding PPP loans, total commercial loans increased $66.2 million or 4.3% on an annualized basis with total closed commitments of $452 million for the quarter, essentially doubling its volume from Q1.
In addition, the approved commercial loan pipeline as of June 30 sits at 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-sale and rental properties, while additional opportunities are diversified across retail, industrial and warehouse classes. In addition to new volume associated with those asset classes, second quarter balance changes also reflect an increased level of construction loans reaching project stabilization and either transferring into the commercial real estate or refinancing out.
We also experienced solid growth in our small business portfolio as the customer goodwill earned from a successful PPP 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% of the production into the balance sheet portfolio for the second quarter as compared to only 23% in the first quarter. Despite the consequent lowering of mortgage banking results within non-interest 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 pay-down and payoff activity, resulting in a 1% decrease in that portfolio.
As Chris noted, our success in the PPP program, a deeper dive into the related financials is as follows. As of June 30, 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 closed that program having secured approximately 3,700 loans totaling approximately $370 million. This volume generated $18.2 million in total fees, with $16.9 million remaining to be amortized into interest income over the 5-year repayment schedule or accelerated into income upon full forgiveness.
Total deposits increased by 3.4% or $393.4 million, reflecting not only additional stimulus money received in April, but as Chris cited, 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 runoff 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 right for doing so. As such, there are no plans to hit the pause button on efforts to attract and retain core customers as evidenced by, as Chris mentioned, our continued Worcester branch expansion and ongoing improvement in our digital experience.
Though general expectations 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 outlook 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 these security purchases with an average expected duration on second quarter and first quarter purchases of 5.4 years and 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% compared to the prior quarter with a reported margin of 2.99%, reflecting a 26 basis points decrease. As I previously noted, the decrease in dollars was primarily driven by a reduction of PPP fees as $7.2 million was recognized in the current quarter versus $9.5 million in the prior quarter, while the decrease in margin is primarily attributable to the elevated levels of cash and securities where average balances rose by over $800 million on a combined basis in the quarter. Though 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 repricing will be a challenge to mitigate going forward.
Regarding asset quality, notable metrics for the quarter include the following: Nonperforming loans decreased $11.4 million or 19.2%, driven primarily by an $8.4 million commercial loan payoff during the quarter. Total delinquencies dropped to 0.11% of the portfolio, net charge-offs for the quarter were only $192,000, representing nearly 1 basis point of loss on an annualized basis. And total loan deferrals were $233.8 million at June 30, which is relatively consistent with the prior quarter as expected. This equates to 2.6% of the total portfolio and continues to be concentrated in the accommodation industry.
As such, the negative $5 million in provision for bad debts is reflective of improving overall economic forecasts, 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 $479,000 or 1.1%, which included strong wealth management results, further 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 investments. Offsetting these increases, the $3 million decrease in mortgage banking reflects gain on sale margin compression combined with the aforementioned strategic decision to hold a larger portion of new originations in the company’s portfolio for excelling 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 in various categories. Lastly, the tax rate of 24.9% for the second quarter is in line with expectations and is up from the prior quarter, which as a reminder, benefited from $1.4 million of discrete benefits associated with loans and housing tax credit investments and equity compensation.
In summary, highlighting various aspects of those 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 PPP impact. While the mortgage retained verses 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 though the deployment of cash into securities will provide some level of incremental interest income, a reduction in net interest income is expected as accelerated PPP fee income for Q3 is anticipated to be approximately $5.5 million lower than Q2 results, with any notable acceleration of the 2021 round not expected to benefit the margin until 2022.
Assuming an anticipated trend of improving general economic factors and no major surprises from overall asset quality, provision for loan loss will continue – will likely to 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 $1.1 million investment gain that is non-recurring and non-interest expense, excluding merger costs, should remain relatively consistent with Q2 results, along with a consistent tax rate for the remainder of the year.
That concludes my comments, and we will now open it up to questions.
[Operator Instructions] The first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.
Good morning everyone. This is Nicholas Cucharale filling in for Mark. Hope you’ve been well.
Hi, Nick. Yes. Thank you.
So I wanted to start with the deferral portfolio. As you alluded to, it looks like nearly three quarters of the remaining modifications were in the accommodation book. Can you give us some color on those loans? Has occupancy rebounded significantly?
Sure. Maybe Gerry, do you mind giving some color there?
Sure. There is really two subsets in that group. And that is those that are sort of destination of vacation stay hotels have actually come back very, very strong. Majority of them are either in vacation hotels, such as New Hampshire and Cape Cat they are experiencing occupancy levels, in some cases, even in excess of 2019. The business stay hotels for the most part flagged suburban to Boston or suburban in Rhode Island, focused on business travelers. They have been slowly improving their occupancy rates and ADR. And anecdotally, we are hearing from them that from what’s been as low, and in some cases, is 10%, now running up closer to 50% on average with many of them reporting nearly 100% on weekends. So it is gradual, steady improvement on those – that subset.
So of those $176 million in accommodation deferrals, do you have a breakout of what percentage is destination versus business?
In that group, about two-third is business. Our total hotel portfolio is split about 50-50, but in that subset, two-third business travel, one-third vacation.
That’s very helpful. Can you share with us where C&I line utilization was the June 30 relative to last quarter and then pre-pandemic levels?
Sure. I’ll have that, Nick. So we look at within C&I, we break out deal with floor plan and then other general C&I lines. I have March 2020 data, which was right at the onset pandemic but reflective of probably more healthier levels. General line of credit utilization was around 46% in dealer floor plan, utilization was about 66% back in 2020. At the end of the second quarter, general C&I line utilization is down to about 34% and dealer floor plan is down to 52%. So certainly, those continue to give some headwinds into extracting outstanding balances on the balance sheet.
That’s great. Thank you for having that handy. And then lastly, just – thank you for quantifying the commercial loan pipeline. It sounds like you’re optimistic for the second half, given your guidance. Can you help us think about where you’re finding opportunities in the competitive lending environment?
Mark, would you like me to answer that?
Sure. And I’ll chime in if needed, Gerry.
As Mark indicated in his comments, we’re seeing it mostly on the residential side, whether it be apartments or single-family or condominiums for sale. I would say I’ve been the most significant driver. And then secondarily, have been clients either expanding their buildings for their own personal use, being their business or expanding buildings for further rental tenants, mostly these are on the industrial mixed use, if you will, side. That’s probably been the primary drivers, I’ll say, on the CRE side.
Thant’s great. Thank you for taking my questions.
Nick, I thought it would be important to note just back on your deferral question. One other aspect of that, as a reminder, we shared this in prior quarters, but recollection, we – a lot of those modifications under the CARES Act, we were able to extend out into 2022. So, many of those accommodation based deferrals will continue to stay on deferral through the remainder of 2021. So those levels of deferral balances that we’ve been reporting would not be expected to run off in any meaningful manner through the rest of the year, and then they’ll sort of layer in based on 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.
Okay.
The next question comes from Dave Bishop with Seaport. Please go ahead.
Yes. Good morning gentlemen.
Good morning, Dave.
Good morning, Dave.
You had mentioned in terms of the outlook for excess liquidity, probably continuing to redeploy to the extent that loan growth opportunities are available into the securities portfolio. And I guess that’s up to probably about 11% of average assets or so. Do you have a sense how large that could get as a percent of assets? Just curious how you’re thinking in terms of building that in light of, Chris, I guess, remarks with the Fed seeming to be staying on the sidelines for some time as the yield curve staying so flat. Just curious what the appetite is to grow that portfolio?
Yes, David, you know as very well. We typically do not have an overly large securities portfolio as a percentage of those assets. And in fact, the percentage 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, it just warrants sort of an expectation the correct decision to at least deploy some of that excess cash and probably build a higher securities portfolio than we typically operate with. I will add, the one challenge here is just giving finding security product that has a reasonable return in a reasonable spread. So during the second quarter, we – leading up to the second quarter into partway of the second quarter, we were primarily investing in agency bullets going a little bit longer out on the curve because we have the assets into the profile to do so. We all know that just the low rate environment, in fact, what we’re seeing in terms of spreads in a lot of those products, it’s becoming more and more of a challenge to be convinced that. Those are the right deployment of the excess cash. So we actually move towards purchasing some treasuries as of late because to be quite honest, it’s just the best bang for our buck at this point. So it’s a constant sort of analysis of where to deploy that liquidity if there is even convincing product out there with a reasonable spread and reasonable return for the risk, but sort of a long way of saying, we will modestly continue, I think, the clip we did in the second quarter of $300 million, $350 million of purchases assuming all things being equal, that’s probably where our comfort level would be.
And did you have the average – weighted average yield on the security purchases this quarter by any chance?
Yes. On the second quarter it was a little over 1%. It’s about 1.1% on those purchases. Obviously, the treasuries that I just mentioned will be lower than that. Those are – we’re looking at sort of the 5, 6-year 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%.
Got it. And then, Chris, I think you noted another strong quarter from the investment management, wealth management group, probably one of the stronger quarters we’ve seen on a year-over-year basis. Just curious how much of that is sort of market rebound related versus new assets and generation of new relationships?
I don’t have that breakdown in front of me. I will say we – our origination is strong. Mark, do you have that specific breakdown?
I do. Yes. We had net inflows of about – well, actually, we did experience a little bit of runoff in the second quarter. So it’s essentially a wash in terms of new money and outflows for the second quarter and most of the appreciation came in market value appreciation. So we did a little over $100 million, $125 million of new money, and that’s down a little bit from the first quarter where we were just shy of $200 million, but still very results and very optimistic opportunities in talking with the wealth management folks. I think they are excited to be able to actually go out and start meeting with clients again. I think there is been a lot of pent-up demand for those customers to have those face-to-face meetings and get with their advisers again. So we’re feeling very good about continuing to find opportunities there in the market has been cooperating as well.
David, I will add that we have grown this business over 10x over the last 15 years. One of the major drivers is our expanding footprint franchise. I mean the 80% of our business comes from our commercial bankers and our retail bankers referrals. And the more commercial lenders and retail branches that we have, the more referrals we get and that’s been the kind of all our other acquisitions. So with the Meridian Bancorp acquisition, we expect that to bode well too for the growth into this business.
Got it. And then just one final question, Mark, you mentioned – I missed the number. But in terms of deferred fees outstanding from the first tranche of PPP loans. Could you go over that again?
Yes. The first tranche is down to about $1.5 million, David, as of June 30.
Got it. And then $18.2 million in the – or I am sorry, $16.9 million?
So, I think that will just be subject to normal amortization through most of 2021, so a 5-year sort of amortization period on the 16.9%. The one caveat there is there will be a time period here in the fourth quarter for the most part where borrowers will hit there at the end of the time period, the 24-week period of utilizing the funds. And then there is a 10-month window essentially where they have sort of a payment deferral and that’s sort of the window when at least to the first round, we experienced – we will start to see some level 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 leverage what we learned through the first round, my best guesstimate would be the majority of that will not happen until 2022. But there is a potential for some accelerated forgiveness later in the year, I just think you will see the majority of it in the next calendar year.
Got it. Thanks.
The next question comes from Laurie Hunsicker with Compass Point. Please go ahead.
Yes. Hi, good morning.
Good morning Laurie.
I wondered if we could go back to deferrals for a minute and your credit trends look great. Just wondered if you could comment a little bit on this other small business services where we just saw the sharp uptick in deferrals. So, I am talking about the line. It looks like it’s real estate and leasing I mean there is small transportation warehouse that your deferral linked quarter from $24 million to $43 million. Just any color you can give us around that or how we should be thinking about that?
Yes. Without the specific borrowers, Laurie, I would say this was a similar issue with the first quarter. There was a time period through 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 a 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 as we have seen over the first couple of quarters. So, I am 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 in flux that could come back on. So, nothing has surprised us there. All of these increases over the first couple of quarters were all part of that group that we were talking to. And in fact, it’s probably out a number now where we anticipated we would be once sort of all the dust settled. So, the one increase this quarter was just another example of a borrower that had not sort of Gerry signed the paperwork and just got around to it in the second quarter.
Got it. Okay. Thanks. And then also, just wondered – and thank you for your clarification on the remaining PPP fees. If you could also help us think about what accretion income is going to look like in 2022 with EBSB. And then also, just any thoughts you can give us around pro forma margin, excluding the PPP? In other words, as we think about what your core margin looks like for 2022, factoring in EBSB, factoring in the restructure. Any comments would be super helpful.
Sure. I will take a stab at. And as you noted in your question, there are a lot of moving pieces in that equation. So, I will try and break it down for you as best I can. But I think as a starting point, looking at our results over the last couple of quarters, I think of it as, let’s take out PPP altogether as sort of the baseline starting point. And I think if you do that, you are looking at our standalone entity at a margin of about $2.80 to $2.85. That’s with what has been a pretty consistent purchase accounting accretion number. We have – you have seen in the last couple of quarters, it’s running about $1.6 million, $1.7 million a quarter. That could tick down a couple of hundred thousand if I had to guess over the next couple of quarters, but I don’t think it will be a meaningful change. Upon the East Boston acquisition, reminder, our initial assumptions that are still subject to, obviously, a lot of moving pieces between now and close. But at the time we announced and what we are reiterating still is that we would have a 60-40 PCD, non-PCD – well, I should say, 60-40 non-PCD, PCD split and that would equate to about a $65 million, $68 million non-PCD mark. So, that would get accreted into income. If we assume that’s 5-year average life, that would equate to about $13 million a year in accretion income. Offsetting that, we anticipate there will be a premium loan interest and liquidity mark essentially in the same amount. So, the amortization of that premium will be about $13 million, $14 million that will wash with the non-PCD benefit. So, the good news is there should be sort of a washing effect in terms of the noise and the margin on that side. And then there will be a sort of a 1 year benefit on the fair value mark of the CDs or the time deposits, and I think that will accrete in about a $5 million benefit. So really, that starting point, core margin $2.80, $2.85 doesn’t change a whole lot when you layer in the impact of the acquisition because a lot of that is sort of netting out to very little noise. But I think you are going to see that getting to about a $2.90, $2.95 margin, we will call it. And then lastly, we talked about sort of the balance sheet restructure and the opportunities to essentially allow for a level of runoff 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 us a level of deposit runoff. So, we pegged that and modeled in essentially a $2 billion reduction in the balance sheet on the asset side – on the asset size that’s comprised of $1.3 billion in cash and $600 million or $700 million in loans. And then on the funding side, it’s $600 million in FHLB borrowings and the rest coming out of deposits. That spread on the $2 billion is only about 50 basis points. So, even though we will lose absolute dollars in net interest income, the quality of earnings improved significantly. So, you are looking at a smaller balance sheet, but we pegged that margin post full restructure of that $2 billion to get back up to about $320 million or so. So, I will pause there. Laurie, you know there is a lot of moving pieces there, but hopefully, that answered your questions.
Yes, that sure does. Thank you for all the details. I really appreciate it. That is great. Hopefully, very fast enough. Chris, just last question for you, obviously, we are going to see EBSB close here, hopefully, by the end of the year. How are you thinking about forward M&A at this point?
Laurie, pretty much the same way. I believe had a long track record of an acquisition sort of coming across the horizon every 1.5 years, 2 years. And it’s been a really great growth strategy for us. And I think we have executed it quite well, and it’s been important to us. And I would hope that once we close and convert and digest that as the passes prologue and another opportunity emerges, we would love to take advantage of it.
Okay. And then just remind us again, I know that we – one of us asked you usually every quarter almost just your target asset size in terms of how small you would go and how large you would go?
Yes. That’s – the banks are sold, not bought, I would love to sort of tell you exactly. I think probably and have to move the needle a little bit. And there have to be if it was too small, it didn’t move the needle right, there has to be other good reason like some capability or buying or so on. I mean you may recall the first acquisition back in 2003 was $175 million. I think that was the size of Falmouth Bancorp. And I think that will be too small. So, moving – I have to move the needle a little. I mean, noticeably. I mean, certainly not as much as East Boston or Meridian Bancorp, that’s pretty extraordinary. That was good metrics, but – so I don’t want to set a number, but it has to be something noticed.
Alright. Thanks for taking my questions.
Thanks Laurie.
[Operator Instructions] The next question is from Kelly Motta with KBW. Please go ahead.
Hi. Thanks for the question. Good morning.
Hi Kelly.
Hey. I think pretty much most of my questions have been asked and answered. I just want to dig in a little bit on expenses. You specifically, your occupancy and equipment line came down a lot with you, the least, that was mostly snow removal and reduced cleaning costs. Just wondering, I think you in the past have talked about potentially reducing some office expenses. Just wondering if you are still working on that as you look to integrate and close Meridian deal and if there is anything else kind of at play to drive that decrease?
Yes. Certainly, in terms of occupancy and equipment post-Meridian, we have talked about sort of our cost save assumptions. And I think that will play out as we have anticipated and where we have 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 the office space we are taking on there. But as a standalone Rockland Trust entity, we think we have been pretty careful about we had to spend money, especially on technology and equipment. We need to continue to invest in our capabilities. We need to continue to invest in our infrastructure. And that requires a constant care and feeding of the environment and that isn’t where we think it makes sense to shortchange the investment. A couple of tangible items I would 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 and the Medford 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 closed those branches and exited those branches in the second quarter. So, there should be some modest benefit in terms of fully exiting those two branches. But in terms of other line items, I think we have extracted probably as much as we can, but we are always looking at that and looking for efficiency gains where it makes sense.
Great. And then earlier in the call, you – Chris, I believe you spoke about getting new lenders and lockup agreements in place. Just wondering how that initiative is going if it’s mostly completed at this point? And if you could just go over whether that’s for Meridian specifically or how you are doing with recruitment from other banks as well? Thank you.
Great. I will let Gerry comment more extensively. I will say that this is one of the stories that will never end. I think, in our business we will be constantly looking for lenders through acquisitions through higher, through internal development, through promotion. But Gerry, you can expand on that.
Sure. Thanks, Chris. Hi, Kelly. Yes, I think in the context, Chris was speaking about earlier, it was about Western. And we are very fortunate to being able to bring over a couple of folks from TD when we opened in Worcester last year. And so that’s been really giving us some nice growth. And we are actually having meetings even as almost as we speak now with some lenders from other banks that are in play at the current time. So, even though we are joining together with East Boston, we are continuing to find opportunities to add incrementally to our team in a couple of different groups. So, I think we have a couple that we are pretty close to right now. So, I think that’s something we always want to be opportunistic about. There is great value to finding relationship managers that have been in the market for a long time and are generally been able to bring relationships over to us.
Great. Thanks Gerry. And maybe one last one, probably for Mark, just to the tax rate, it looks like it bumped up a bit. Just wondering if there is any kind of discrete items there or kind of that’s how to think about the tax rate for the rest of the year? Thanks.
Yes, that level for Q2 of high 24%, 25% is right in line, and we should expect to see that for the rest of the year. The first quarter was the anomaly because of some one-time benefits on low income housing tax credits where we get updated information and have to revalue the tax benefit. And then equity compensation typically creates some noise in the first quarter because of when the awards vest that triggers a one-time impact through the tax rate. So, first quarter is noisy and then the rest of the year should fall out into that high 24% range.
Great. Thank you. That’s all for me.
Thank you, Kelly. Happy weekend.
This concludes our question-and-answer session. I would like to turn the conference back over to Chris Oddleifson for any closing remarks.
Great. Thank you, Betsy, and thank you, everybody, for joining us today. We look forward to talking to you in three months. I will update you on our third quarter. Have a good weekend. Goodbye.
The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.