Independent Bank Corp (Massachusetts)
NASDAQ:INDB
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Independent Bank Corp (Massachusetts)
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Good morning and welcome to the Fourth Quarter 2020 Earnings Call. All participants will be in a listen-only mode. [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 Corporation. 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 Corporation 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 Corporation'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. Please note that this event is being recorded.
I would now like to turn the conference over to Chris Oddleifson, President and CEO. Please go ahead.
Good morning and Happy New Year to everyone. Thank you for joining us today.
With me, as usual, is Mark Ruggiero, our Chief Financial Officer. We will again be joined by Rob Cozzone, our Chief Operating Officer; and Gerry Nadeau, President of Rockland Trust and our Chief Commercial Banking Officer. They'll be available to answer your questions, post Mark and my comments.
As always we extend our hopes for continued well-being to all of you and your families. We ended the year with another solid performance with fourth quarter net income coming in at $34.6 million or $1.05 per share. Mark will take you through the detail shortly, but I'd like to focus my comments in the full year just completed.
And what a year was this pandemic stressed every corner of our economy and society creating enormous demand, supply and financial shocks to our systems, banks and particularly, had to quickly pivot and adapt to this crisis was presented incredible challenges and certainly learning experiences.
We've responded to challenge to serve our customers in times of need while continuing to move our franchise forward. Financially, we performed well in 2020 when considering all the economic headwinds. Highlights include operating earnings of $121.7 million or $3.66 per share. Robust core deposit growth of 30%, which further reduced our very low funding cost.
While loan growth was tempered by elevated levels of pay downs and re-financings, loan closings remained strong. Origination volumes across the combined commercial and consumer sectors reached nearly $3 billion. This excludes PPP, some 11% above prior year levels. Investment management levels grew 9% to nearly $5 billion, driven by net new money and market appreciation.
We had significant growth in our residential mortgage activities and revenues. We extended about $800 million in loans to stress companies under the SBA's PPP program. Business households grew by 5% and consumer households grew by 1.5%.
We earned an outstanding CRA rating. We had tight expense management, maintaining our operating efficiency below 60%. Operating return on assets of 1%, we completed the repurchase of 1.5 million shares and a tangible book value per share was up another 4% for the year.
Credit was and remains a major focal point for us and what much uncertainty remains, we feel that our long-held underwriting discipline and workout skills continue to serve us well. Mark will be walking you through the ins and outs of other recent credit quality trends and metrics of interest.
Beyond the numbers and dealing with the pandemic-related challenge, as we continue to advance our franchise in 2020. Some examples, we introduced new products such as credit card in our premier deposit products. We opened up new branches and made key hires in a target market, Worcester specifically.
We fully implemented our commercial business underwriting and decisioning originations process for relationships totaling less than $2 million. We converted a vast majority of our training to our virtual platform. We had a depth to our risk management programs, and of course, there are numerous lessons and takeaways from our experience over the last year.
Foremost among these is that there is significant increase in the use of digital products and accessed by customers of all ages, a trend that is here to stay for sure, and we are committed to keep pace with these developments by continuing to intelligently invest in technology. So we continue to build the strong relationships we have with customers in ways they choose to interact.
Likewise, there are clear implications for bank branch networks, as the trend is towards more in-persons consultation for complex matters with regular transactions moving online. Thus branch optimization will entail more of a refocusing of activities and configurations. We are certainly adapting to this. But like many other banks, we are not planning numerous branch closings as they do remain a major source of new account openings and business referrals for us.
Looking ahead, while continuing to focus on COVID-related matters, near-term priorities include, of course, fulfilling demand for the current round of PPP. And that's off to a great start. Continuing to extend our presence in the attractive Worcester market, selected additional branch openings, maximizing our use of sales, the sales force platform throughout the bank.
We're going to be expanding our dealer floor planning efforts. We definitely will be continuing deepening our enterprise risk management program and assessing sort of what is our workspace needs look like post pandemic.
Without question, our industry will continue to face numerous challenges for the foreseeable future, not the least, which are the continued margin pressure from this low rate environment, uncertain credit conditions and of course, as I mentioned keeping pace with technological change.
We intend to meet these challenges by never wavering from our long-standing strategy of focus and discipline. The customer remains at the center of all our planning and we are determined to continue to meet their product and service needs. We consistently rank high on comparative service excellence and customer loyalty scoring and reputable third-party surveys.
In Rockland Trust, our brand continues to resonate across the entire footprint. We also recently received top ratings in several performance and strategy categories in a national study by Bank Director magazine. So this all reassures us that we're on the right track.
We believe the continued success in the future will require a healthy mix of scale, nimbleness, flexibility, efficiency, and of course, most importantly, talent development and we're working hard on all these fronts. Our Rockland Trust colleagues remain at the forefront of all this success. I simply cannot say enough of at how well my colleagues stepped up this past year to meet the many challenges as they unfolded.
And then did so with enthusiasm and energy. They were truly the essential workers who persevered to continue to support our customers without missing a beat. For them, the clear shared objective of building and enhancing relationships provided the foundation to overcome issues and seize opportunities.
Then we believe that a great place to bank is preceded by a great place to work. We invest in our colleagues by a wide range of coaching and development programs. We have a strong track record of promoting from within and spent considerable time at succession planning.
All these efforts do resonate internally as evidenced by our being named to the Boston Globe Top Places to Work list for the 12th consecutive year. And we are the only bank in our category.
Lastly, we are very excited to announce the addition of Warren Fields, CEO of Pyramid Hotel Group and James Morton, CEO of the YMCA of Boston to our Board of Directors. Each of them is a proven leader in their industry and bring a great deal of business acumen into the boardroom and I'm looking forward to working with them.
I also wish to acknowledge all of us to David Powers for his service to the Board, as he has reached the age of our - age requirement for retirement and we are - I like to especially thank him for his really helpful insights during our simulation of Blue Hills Bank into our company.
And with that, I'll turn it over to Mark.
Thank you, Chris.
I will now cover the fourth quarter results in more detail. GAAP net income of $34.6 million and diluted EPS of $1.05 in the fourth quarter of 2020 reflect decreases of 0.7% and 0.9% respectively from the prior quarter's results.
Fourth quarter results were negatively impacted by a number of decisions that led to approximately $5.2 million of one-time costs incurred during the quarter, including a $4.2 million associated with two branch closure decisions and $1 million related to a loss on sale of non-core small business fund investments acquired in the 2019 Blue Hills merger.
Although negatively impacting current quarter earnings, these strategic decisions were made primarily to improve future profitability. To provide further context into the core business drivers of the fourth quarter results, I would highlight the following factors, all of which I will shortly provide further additional color into.
As Chris highlighted in his comments, we experienced another quarter of solid core business volumes, including strong closing activity in both the loan and deposit franchises. In addition, the combination of our hedging positions, loan pricing and funding costs management led to consistent core margin results.
Effective workout of certain non-performing assets and no significant change to assumptions of credit risk led to significantly decreased NPAs, minimal charge-offs in zero provision expense for the quarter. Also, the level of loan deferrals notably declined as well.
Fee income results were in line with expectations and expenses increased due primarily to the large one-time items noted above combined with select incremental costs associated with multiple strategic initiatives. The combination of this activity drove a return on assets and return on tangible common equity of 1.04% and 11.77% respectively for the fourth quarter. In addition, the tangible book value per share of $35.59 at December 31, 2020 reflects another solid $0.42 increase in the current quarter.
I will now provide further insight into each of the summary points just discussed. Total loans decreased $12.3 million or 0.5% on an annualized basis continuing the narrative that we have been discussing for much of the year.
With ongoing commercial loan growth and robust closing activity throughout the total portfolio being offset by pay off and attrition. Focusing first on the commercial side, we continue to find pockets of opportunity, despite the challenging environment with notable increases in the quarter in both C&I and commercial real estate balances.
C&I growth of 7.9% on an annualized basis was diversified across multiple industries. While commercial real estate opportunities remain strong, despite our cautious approach towards Downtown Boston exposure.
And as alluded to in prior calls, our commitment to the communities we serve through these very challenging times has continued to foster strong inroads to the small business segment as evidenced by the 17.6% annualized growth in that portfolio during the quarter.
Offsetting all of these growth categories, payoffs and completion of projects led to a $19.4 million or 13.5% annualized decline in the construction portfolio. On the consumer side, we also continue to see significant closing volumes, however, elevated attrition across both mortgage and home equity continue to mitigate net growth.
Despite increasing the percentage of mortgage closings retained in the portfolio from 17% in the third quarter to 27% in the fourth quarter, the persistent low rate environment has continued to create a significant headwind in terms of increasing outstanding balances, a dynamic that holds true across the home equity portfolio as well. In fact, total fourth quarter home equity closings of $110 million represent 20% increase over third quarter volumes, another example of the strong flow of activity in the quarter.
In addition to the solid closing activity noted across all loan segments, the credit environment has remained fairly consistent in the fourth quarter. Our proactive and disciplined approach to managing problem credits has proven to be very effective over the last three months. Both net charge-off and overall non-performing assets have decreased from the prior quarter levels.
The decrease in non-performing loans reflects effective work out on two of the three large relationships that were moved into non-accrual status during the third quarter, with one of those resolutions including full payment of approximately $900,000 of interest income that had previously been deferred.
Also referenced in Appendix F of our earnings release, total loans subject to future deferral have decreased meaningfully to $174 million or 1.8% of total loans as of December 31, 2020 compared to 6.2% in the previous quarter. In addition, related to recent deferral maturities, we approximate there is an additional $70 million or so of approved deferrals that are pending final acceptance that are not included in these numbers.
Despite the likelihood of these subsequent deferrals, the deferral picture has certainly improved heading into 2021. And as we have been discussing over the entire pandemic, the remaining deferral exposure continues to be concentrated in the accommodation industry as expected.
Leveraging our close relationships with these companies, we have assessed the impact of their business operations and in some cases, where seasonal operations are expected to impact cash flow assumptions, a portion of the current deferrals have been extended for longer periods of time to align with those business expectations with over $100 million of the balances deferred into 2022 or longer.
However, there is an important and positive development and all of those longer-term deferral instances the borrower has agreed to make interest payments prospectively. And to close the loop on deferrals, the minimal amount of deferral exposure at the end of the fourth quarter pertaining to the consumer portfolios reflects a portion of previous deferral agreements that have matured in a pending resolution. As we continue to work with those customers, we anticipate some modest amount will result in a prospective debt restructuring agreement in the first quarter of 2021.
Given the improvement in asset quality metrics just noted along with fairly consistent economic forecast assumptions when compared to the prior quarter, application of our current reserve methodology resulted in a zero provision for loan losses in the fourth quarter.
This result in a fairly modest reduction in the allowance for loan loss as a percent of loans from 1.23% at September 30th to the current fourth quarter level of 1.21%. As we have been doing in prior quarter calls, I will give another quick update on our PPP program, which is certainly top of mind with the opening of another round this week.
Relating specifically to the $812 million of PPP loans that we originated during 2020, a reminder, we recorded approximately $26 million of net deferred fees to be recognized as those loans are forgiven or paid off. Of the $26 million expected to be earned through this first wave, $9.1 million has been amortized into income on a year-to-date basis with $3.6 million recognized in the fourth quarter.
These numbers reflect the fact that minimal loan forgiveness has occurred through the end of the year, which is still $792 million of outstanding PPP balances as of December 31, 2020. And we ask you please refer to Appendix C for more detail on the loan balance and income recognition associated with the PPP loans on a quarterly basis.
Regarding the new round of the PPP program announced in December stimulus bill, we have started to take applications this week and are in full swing with strong demand. We will certainly provide updates on that activity as this round progresses. It's been no secret that our stimulus - that the stimulus programs and customer behavior have fostered excess liquidity positions across the industry and deposit growth in the fourth quarter continue to reflect that story.
With increases in existing consumer balances being the primary source of deposit growth, total deposits increased $142 million in the fourth quarter, a 5.2% annualized rate. And similar to prior quarters, the mix in deposits continue to reflect a favorable shift as higher cost time deposits continue to run off, while growth in core deposit categories remains strong.
With core deposits now reaching 90% of total deposits along with further reductions to standard rates, the total cost of deposits decreased another 6 basis points from the prior quarter, down to 14 basis points for the fourth quarter. It's no question that our long-term value proposition of attracting new core household and it's related deposit growth have proven very successful and served us well. Yet, it does provide challenges in the short term regarding liquidity, deployment and relative profitability metrics.
While we did deploy some of our excess cash position to pay down Federal Home Loan Bank borrowings and increase securities balances during the fourth quarter, high liquidity levels remain. With the yield curve that significantly limits the attractiveness of medium and long-term investing, the excess cash position has constrained return on asset and net interest margin results.
Regarding the latter metric, as noted in Appendix C in our earnings release, the reported fourth quarter margin of 3.10% reflects a 3 basis point decrease from the third quarter margin. When excluding PPP loans, excess liquidity, purchase accounting accretion and other one-time items, the core margin for the quarter increased 6 basis points in the quarter to 3.39% driven primarily by the aforementioned $900,000 and interest benefit from the effect of workout of the previous non-performing relationship.
And as guided in prior quarters, core asset yields continue to compress as cash flow reinvests into this lower rate environment, while reductions in funding costs have been able to mitigate the overall net core margin impact.
Turning to non-interest items. We will highlight a few key items to note for the fourth quarter. Regarding non-interest income, it's a moving pieces related to increased overdraft fees and decreased ATM fees. Total deposit service charges and ATM fees remained fairly consistent quarter-over-quarter.
Regarding wealth management, new money inflow continue to exceed outflow activity with the majority of the fourth quarter increase attributable to strong market performance. And as Chris mentioned, total assets under administration increased from third quarter levels of $4.5 billion to $4.9 billion as of December 31, 2020.
As noted earlier, mortgage banking closings continued at a significant level throughout the fourth quarter with an increase in the production move into portfolio plus a narrowing of spreads on sales volume as expected, total mortgage banking income decreased $2.3 million from the record high set last quarter.
And on a similar note, as we continue to find appropriate balance over managing our interest rate sensitivity position, loan level derivative income also decreased from the significantly elevated levels experienced in previous quarters.
Lastly, the increase in other non-interest income is comprised of a number of various items including unrealized gains in year-end, realized investment income on equity securities, tax credit purchase discounts and strong activity from our tax Section 1031 exchange business.
Regarding non-interest expense, the total increase was primarily attributable to the two large one-time items alluded to earlier that I will cover first. The lease impairment of $4.2 million reflects accelerated lease termination costs and the write-off of leasehold improvements related to two branch closure decisions made in the fourth quarter.
As we discussed last quarter, we continue to view our brand strategy has been a key component of the overall franchise value, but we'll look for opportunities to consolidate where appropriate to drive further efficiency. The $1 million loss on sale of investments reflects a loss incurred on the sale of six small business investment company funds that were obtained in the Blue Hills acquisition, a non-core investment type that certainly posed additional credit risk in this current environment.
When excluding these two items, the remaining $1.9 million of increase in non-interest expense is primarily comprised of increased incentive compensation, consulting fees and software costs as we continue to invest in infrastructure and digital capabilities. This balance of controlled cost management, while committing to fund long-term strategic priorities is the formula that will continue to define and drive expense management over the near term.
Lastly, the tax rate of 23.3% for the fourth quarter was in line with expectations. As we look out into 2021, the landscape remains profoundly uncertain. The industry will continue to face the headwinds of pressured asset yields, high excess liquidity in an economy that will continue to be significantly impacted by the deployment of the national health crisis - sorry, the development of the national health crisis.
While many variables are expected to impact 2021 results over the course of the year, we want to provide some key expectations over core business activity to serve as guidance over the near term.
Excluding PPP activity, with an approved commercial loan pipeline of $186 million as of December 31, 2020 in a continued risk based approach over opportunities, we anticipate modest net growth in total commercial balances. And while closing activity is expected to remain strong heading into 2021, the expected persistence of pay down activity will continue to challenge any meaningful growth in the consumer portfolios.
Regarding the net interest margin, excess liquidity and timing on PPP fee recognition will continue to create some level of volatility in the reported margin. Excluding those factors, the core margin will continue to be impacted by expected asset yield compression, similar to the impact experienced in the last two quarters, as assets continue to reprice into an anticipated low rate environment.
However, we believe there is still some level of further reductions in the deposit base that should continue to mitigate the asset yield compression in the near term, resulting in a modest net core margin compression.
With the credit environment posing the largest risk regarding uncertainty, our fourth quarter results reflect our bigger picture posture of credit reserve methodology heading into 2021. In other words, assuming no material changes to the overall macroeconomic forecast, the 2020 build of the allowance for loan losses should lead to provision for loan losses being more closely correlated to charge-off activity with some element of loan loss reserve reductions if the environment stabilizes.
Addressing the primary drivers of fee income, we expect mortgage demand to remain strong with gain on sale margins expected to normalize down from 2020 levels and swap fee income will ultimately revert back to more historical levels. Alternatively, a continued stabilization of the economy should reflect positive increases to deposit fees that were negatively impacted for much of 2020 and continued growth in investment management results are expected.
And as previously noted, our commitment to expanding our Worcester presence, building out an enhanced risk-based infrastructure and investing in our digital customer experience initiatives, while continuing to challenge efficiency and costs across the entire organization is expected to result in total expense levels, fairly consistent with the core expenses noted in the fourth quarter excluding the large one-time items previously noted. And lastly, our tax rate is expected to approximate 24%.
This concludes my comments and we'll now open it up to questions.
[Operator Instructions] The first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.
Chris, I'm curious, you touched on a little bit of your plans with respect to the branch network and I saw that you had closed a few locations this quarter. But given what we've seen from some other banks in your market with fairly large branch closure announcement. So I'm curious how you're thinking about your roughly 100 branch franchise. Could that number come down dramatically in the years ahead as customers migrate to more of your digital approaches to interacting with you all?
Yes, Mark. I'll give a minute of this topic then I'd really like to turn it over to Rob, who is really leading that effort. I think if I were to - so if you look out, let's say 20 or 30 years, clearly, there is going to be a shift over time. But it's not going to be in our opinion rapid. I mean there are a lot of customers who we - are in their relationships through these - through branches. We have extraordinary set of referrals from up to other business units from the branches and we view them as very, very critical.
Rob, as he'll explain, we have a very comprehensive and focused sort of evaluation of branch performance and that's why you see over time, we have made a number of branch closures or consolidations. But we think in the short to medium term that branches are going to remain very key to our success.
Rob, what would you add to that?
Well, you covered a lot there, Chris, but certainly, your direct question, Mark about significant decreases in our branch network over the next several years. We're just not forecasting that as an appropriate strategy for us. Although our level of account openings coming from digital sources, our new online account opening system, which allows consumers to open up an account in a mere 4 minutes is - was a wonderful technology and we continue to educate our customers and our prospects about that alternative and we've doubled our volume of account opening through that channel.
However, it is still less than 10% of our total account openings and the numbers of accounts that we're opening in our branches have accelerated. Our fourth quarter and you've heard me say this during prior quarters, but we had record openings of deposit accounts, checking accounts, primarily, in savings accounts in the fourth quarter versus any other fourth quarter.
And then as Chris referenced, the volume of referral activity still coming from our branches is significant. And at the moment, we don't have a clear line of sight as to how that referral activity can shift to a digital alternative. Those referrals are coming from in-depth conversations between our bankers and the customer and referring them to our other relationship managers in the wealth management area, and the mortgage area, they're still receiving lots and lots of home equity applications, the vast, vast majority of them coming through the branch network as they explore needs with our customers.
Having said that, as you noted, we did just close two locations, one of which I would certainly say was accelerated by the pandemic. And that's because it was a former headquarters of one of the banks that we acquired. In addition to the branch, there was lots of office space attached to that location and the combination of the cost from that office space, which was underutilized and were projecting would be continued to be underutilized, just made sense to accelerate that decision.
I don't see significant acceleration amongst the rest of our network, but we will continue to look for opportunities to pare back branches. And when we do close a branch like many, many other banks, we see very high retention rates as long as there is another location relatively nearby. So I suspect that we'll continue to be in the single-digit sort of numbers, opportunities to consolidate locations, but keep in mind, our expansion into Worcester is a physical expansion.
We believe that to be successful in a new geography, we need branch locations with highly trained local staff who know the communities in the two branches that we opened in the city of Worcester during 2020 in the midst of a pandemic are doing exceptionally well and we hope to open at least two more in the Greater Worcester area in 2020.
2021.
Sorry. 2021. Thank you, Chris.
Super helpful. And then, Mark, I'm curious on - I apologize for this, but did you give any guidance on expenses for 2021?
Yes. Basically, Mark, that the guidance as we look at really the last couple of quarters is really be in a strong baseline for expectations into 2021. The fourth quarter caveat also being - obviously being excluding the large one-time items we took in the quarter. But we've made some incremental investments, we've talked about some expense increases and things like software and technology to continue to build out that digital customer experience. We've mentioned some areas around our risk infrastructure build out. So there has been some really key hires in terms of talent and personnel in those areas.
So that's creating a little bit of an increase in the run rate from those perspectives but offsetting that we are being very, very thoughtful in really holding the line on other discretionary spends. And we think that the combination of that approach should keep expenses relatively flat with sort of that run rate we've been showing over the last couple of quarters.
And then lastly, if you're not able to find acquisitions and capitals continue to - capital sort of continues to pile up, I guess I'm curious, would you contemplate a special dividend or maybe bumping up the quarterly dividend rate?
Yes. Certainly, capital management is top of mind and I think you mentioned a couple of alternatives that we continue to keep in the tool belt and continue to assess. Certainly, we experienced a successful buyback program in earlier 2020. It's certainly an approach that we would be comfortable deploying with these levels of capital despite some of the uncertainty in the environment.
But, with the positive increase we've had in the stock price from an economic perspective, it just does not make sense at this point. So I would say from a ranking perspective, that would certainly be the most logical deployment of capital if the economics made sense.
From a dividend management perspective, we typically do take a look at our dividend rate in the first quarter of each calendar year. Again, where a hit the nail on the head, there is certainly an overall comfort level of absolute levels of capital from an ongoing dividend perspective. We obviously continue to be very cognizant of payout ratios and want to make sure we're thinking about that both managing against the short-term environment and understanding dividend rates given our current profitability levels and wanted to make sure that's a sustainable rate. So that will certainly be the mindset as we think about any changes in 2021.
In terms of a special dividend, it's a strategy that we quite honestly haven't deployed in the past, but we understand there is probably pros and cons in terms of what that truly does accomplish, but again, I think nothing is completely off the table, but we will be looking at all of those alternatives as we round out sort of the 2021 capital plan.
The next question comes from Christopher Keith with D.A. Davidson. Please go ahead.
So I'd like to just dig in a little bit to your loan growth. And I guess just starting with PPP relative to the 2020 activity, how large do you expect the participation to be in this newer iteration of the program?
Yes, it's a great question, Keith, and a question one that's very, very relevant in this week. So just as a reminder, we did a little over 6,000 PPP loans in the first round. Well, I guess you could think of it as sort of two different waves in 2020, but we did do a little over 6,000. This new program when you look at some of the rules and requirements around first draw, second draw loans, our experience to that first round towards the end of that program, the demand had certainly come down to a very low level.
So we think most borrowers that really were in need enabled to get a PPP round did in fact get one during 2020. So we anticipate and believe the majority of our demand here in this new wave will be second draw request. In other words, existing PPP bar is coming back looking for a second draw.
So heading into this round, we - just our gut feeling was that we were anticipating probably somewhere between 50% and 75% of that first round population to likely qualify and come back. And I'll say in the first few days, the first 24 to 48 hours certainly felt like we were going to be on that pace, but it has come down in the last day or two.
And it's so early in the program where we're not sure if we need to read into that quite as much yet or not but where we sit here today, it suggests we may not reach those types of levels, but it's still very early to tell. But we already have well over 1,000 applications in the queue today, but will we get to that 3,000, 4,000 range? It's still a bit early to know for sure.
And then I guess looking at traditional, commercial and industrial, assuming you do get to that 3,000 or 4,000 level, do you anticipate that having kind of a negative impact on the demand for more traditional, commercial and industrial products?
We don't. I'll share my thoughts and then Gerry Nadeau, I'll ask to share his thoughts as well, but again leveraging our experience through the first round, it really was sort of mutually exclusive. We certainly had some overlap in certain industries that we're able to get a PPP loan.
And we saw our industries continue to have demand from normal lending needs. So we did not experience one or the other really having an impact over demand. They were quite honestly mutually exclusive, and then we think there continues to be really good pockets of opportunity both from a C&I and a commercial real estate perspective.
To give a few examples, we've continued to see apartment in our construction projects really outside of the Boston proper market neighborhoods, continuing to be a strong program for us and we have some nice sort of verticals in our asset-based lending and C&I portfolios that we've been seeing some good opportunity in industrial, what we call sort of flex space, warehousing, the building developments that are actually structured so that they can be more flexible for any type of tenant use.
We're seeing some uptick there especially borrowers that may be looking for a lab space and there has been opportunities from our perspective there as well. So all of that I think a typically borrowing relationships that to be honest, may or may not qualify for PPP, but we haven't seen it constrain demand.
I don't know, if Gerry, you have other thoughts along that front?
Perhaps, the only thing to add to that is the only category I think it's still to be determined would be for contractors. If you remember back in the spring of 2020, Massachusetts shut down a lot of construction for an extended period. So, many contractors will be able to evidence the 25% quarterly revenue decline, even though they may have had a good year otherwise.
So with that in mind, there is a possibility. I'm looking at the list of those that have there are some contractors in there. They do meet the requirements. So if they do in fact end up getting the PPP loan, it could potentially pay-down in lines of credit. So may - I don't know that necessarily will negate new loan demand as much as perhaps we decreased utilization rates on lines of credit in some industries.
And then I guess just lastly, looking at deposits and specifically time deposits, is there more room to move on both a balanced level for time deposits or a calf perspective for time deposits to move down?
There is. In both fronts, I mean, certainly, our new time deposit offerings are at rates that are significantly lower than what the weighted average cost of that deposit product is on the books. And we talk a lot about - really a lot of our success on account generation over the last couple of quarters has continued to be primarily focused on core deposit generation.
So we - you've seen in the last couple of quarters just run-off in the time deposit portfolio. There is another good portion of that product level set to mature over the next six months. And in fact just even over the next three months, the weighted average of what will run-off is well over 1% from that product.
So just a natural maturity schedule of those deposits will continue to give us benefit on the cost of deposit front and then any new CD pricing is coming on the books at a much lower rate. So that certainly has been a big driver behind our ability to continue to get deposit costs down.
The next question comes from Laurie Hunsicker with Compass Point. Please go ahead.
I guess Mark and Gerry, this is a question for you. Just going to credit, I knew two out of your three credits here this quarter, just wondering which ones they were, the hotel, the restaurant or the entertainment?
Yes, first two, Laurie. The hotel paid off and the restaurant relationship paid off as well.
Okay. Great.
So just a reminder, the hotel was the relationship that we took, the charge-off in the third quarter, down too at the time and expected payoff level and that did pay off as we planned. And the restaurant relationship, we had - as you - we mentioned sort of the interest benefit associated with that. That was a very positive workout solution.
That’s the 900. Okay, right. And so the - and the hotel was $20 million and the restaurant loan was $20 million, is that correct?
Yes. The hotel we had charged down to, I believe a little over $18 million in the all-in-restaurant relationship was a little over $20 million. I think it was more like $22 million.
$22 million. Okay, cool. And then just looking at the charge-offs this quarter, looks like $1.9 million was C&I, was any of it those two loans?
No, the C&I is primarily driven by one charge-off on an acquired loan from the Blue Hills acquisition. we had an - and then some other just much smaller charge-offs. So one of - one loan equates to about $1.8 million, $1.9 million of that Q4 activity, but they - it's a completely separate from those. Those are the three that we put on non-performing. So that was actually a new non-performer in the quarter. So that offsets the reduction of those to work out loans that we were just talking about.
Okay and so, and then to your point on provisions obviously loan growth is going to be nominal. I think that's true across the board. I mean 84%, 85% of your charge-offs then were related to this one loan. So as we think about your loan loss provision, it could be very, very light compared and obviously, there are a lot of question marks around COVID but it...
Okay.
I mean, could it be light from the standpoint of thinking about what things looked like in 2019 or how do you see that?
Yes. No, I think that's a fair way to look at it. And I'm sure you're monitoring as much as we are and we don't necessarily always need to compare ourselves to what we're seeing in industry trends, but I think you're seeing the obvious of what was the CECL methodology really driving significant loan loss reserves, and quite honestly, what probably should have happened in the concept of what CECL is meant to do is build up that reserve, when you think that future risk is there.
I think what we've experienced in the fourth quarter, and our approach to what you saw in terms of the zero provisioning level, we're at a point where we are comfortable that barring any really many - major changes to the macroeconomic environment, we think we have a good handle on what we've already provided for future credit risk.
So we really should be in a position to continue to think about either reducing reserves or matching charge-off activity with provisioning but I think we showed it in the fourth quarter and it's a concept that we would be comfortable heading into 2021 with that. We don't necessarily need to continue to replenish the reserve at this level. If we're in dairy taken, losses on reserves that we've already credited for or reserved for.
Got it. Okay, that's helpful. And then I guess just jumping over to deferrals here. So your overall deferral is down nicely, commercial deferral is now sitting in 2.4%. It looks like every single category improved except for one other small business services of $151 million with a deferral right now of $24 million or 16% up from last quarter. Can you talk a little bit about that book and how you're seeing that book?
I'm sorry, Laurie. Which category were you referencing?
So it's the other business services book, then you have the highlighted categories of hotel, food, retail, parks and rec, and then this other services book of $151 million and it looks like it's the only category that don't increase or I can - certainly, I can follow up if you offline if that's easier. I just wondered if there was anything to be concerned about it, the other services, except for public administration, so it's your non-profit, religious, social services that type of thing.
Right. Yeah. And I think this is an interesting dynamic of - I wanted to continue to provide some transparency into industries and I think although we've continued to highlight that industry and give some color to it, I would point to the level of deferrals that we've experienced to date and there is a very low correlation of active deferrals to that industry.
So I think we feel a lot better about that category and as you can obviously see a lot of the current deferrals continue to be primarily associated with the combination hotels, restaurants, et cetera. So we're not seeing really a lot of stress in that category. We continue to provide insight to it and obviously, continue to monitor, but it isn't a category that we're feeling overly concerned about.
Just a couple more questions. On the other, other non-interest income line up, the $4.8 million out of the $27.5 million of total non-interest income, what were the one-time non-recurring year-end items? What did they total?
Well, the securities, the equity securities portfolio is one that we - I wouldn't necessarily categorize as being non-recurring. It's just very volatile, right. It's the market or unrealized gain or loss on that securities book. So that if you just bear with me, I'll get you the exact number that increased quarter-over-quarter by about 300,000. We typically have year-end realized gains or capital gain distributions on that book as well and that was about $150,000. So, all in, $0.5 million on the equity securities portfolio, some of which though certainly could be occurring to the extent is continued appreciation on evaluation.
And then on expenses, just going back, and I appreciate your color around thinking about non-interest expenses flat. I just want to know on a core basis, obviously, we're stripping out the loss on the sale of the equity investment, the $4.2 million. And then - I'm sorry, the least impairment of $4.2 million and then the BHBK loss on sale of equity investment of $1 million. But it looks like there were are other non-recurring expenses as well.
And so I'm just trying to understand the delta. So when you talk about the core expenses, are you talking about a base of $16.5 million? Are you talking about looking at that and saying to your point, you have some color in the press release that there was 1.07 million or so of linked quarter increase. But I just didn't know how much of that sort of miscellaneous non-recurring, or are we stripping that out in the core base, it's closer to $66.8 million, so just any color you can help us think about in terms of how you're approaching core expenses?
Sure. I thought I heard - Certainly, in the fourth quarter, some of that increase was salary and employee benefit, incentive compensation commissions and I think you've recognized that and it sounds like you're also looking for some more insight in that other non-interest number. So a couple of items, we spoke about, I would say were accelerated in the fourth quarter, so it represents some elevated level of expenses and that had to do with some consulting arrangements or agreements we've incurred in the fourth quarter. A couple of examples associate with it's quite honestly the PPP program.
So we obviously continue to work through even though of the closings on the first round of complete but still a lot of work to be done on the forgiveness side. So we've had to bring in some additional help on that process. So this expense there that would - will be there through the completion of the PPP program.
But then that would be able to drop off. We've had some increased expenses on continuing to build out our risk framework. So I think there is a bit of elevated expense in that front. But at the same time, we also made some key hires to really continue to improve the infrastructure around that as we, grow as we continue to look to grow.
We think it is very, very important to continue to invest in the infrastructure of this company, and we're really trying to find the balance of making sure we do that and making sure we invest in strategic priorities without sacrificing the long-term value. But recognizing it may continue to create a little bit of incremental increase on the expense side.
So we've done some consulting work with folks, we're continuing to build out an infrastructure that has some ramp up in cost associated with it. I think a portion of that will go away over time, but we also put some more employee and salary expense in place on the second half of the year. So from a run rate perspective, you will see some incremental expense on the salary.
So that will kind of wash a little bit. So I'm kind of giving you a few examples of where I think you'll see some movement heading into 2021 but to pinpoint in that fairly now a range, I think you were alluding to, I think you are in the - that range is appropriate, but this will continue to be a little bit of volatility in any given quarter as to bear in that range we land.
And I guess, Chris, one last question for you. Can you just give us very high level, your thoughts on M&A, you're sitting here was very strong stock currency at Q2 of tangible book, but how you how you see the world right now on that? Thanks.
Yes. On a high level, I would say that the secular trend will continue and there will be bank consolidations and M&A nationally and over time locally. The number of banks that sort of a managed a great deal here in Massachusetts. So it's much more random rather than sort of predictable and I would say other big picture point, I think the interest rate environment as it's I would imagine that adds a little bit of sort of performance sort of thinking to number of banks, so we'll see. And now, we'll let you know.
The next question comes from Dave Bishop with Seaport Global. Please go ahead.
A quick question, it sounded like the retention of mortgage production on the residential side jumped about 10% in the fourth quarter. Just curious how you're thinking about that heading into 2021 if you think that overall retention rates should continue to remain elevated relative to 2020?
Yes. I think it's an area, quite honestly, David, that we think is appropriate to look to be a bit more aggressive in putting the production onto portfolio. We, certainly, showing the challenges we've had in growing that book on balance sheet and in this environment with the refi activity continuing to create a big deal of outflow, we want to be very cognizant of continuing to protect that balance sheet for the long-term.
So I think in terms of putting more production onto balance sheet, it is still a product and a credit that we are comfortable with and especially going through our underwriting in our production channel. So I think we will continue to look to be a bit more aggressive to put some of that production on balance sheet.
I will say, as we at least experienced in the last couple of weeks with the 10-year treasury starting to show some life and tick up a bit. That's all predicated on what we see in sort of the overall play out of the economic environment and certainly what will happen with mortgage rates.
So if we start to get a little bit of lift on the long into the curve, if we don't see that mortgage pricing react as quickly, we wouldn't be as comfortable continuing to put that lower price at that type of duration, but from a big picture perspective, all things being equal, I think the levels we did in the fourth quarter, which certainly create a good baseline to think about what we'd be comfortable going forward with into 2021.
And then popping back to credit, thanks again for the added disclosures in the back there. Relating the deferrals in some of the areas you're looking at, maybe go in maybe a layer below that. I guess we're still waiting what's happening from a substandard and special mentioned perspective, but maybe even from a watchlist trends or do you think you've got the areas identified here fairly well ring-fenced, I guess what I'm asking, are you seeing any sort of bleed through to other segments or sectors that maybe didn't make these tables, but could be sort of the canaries in the coal mine that are bearing a little bit more monitoring heading into 2021?
Yeah. I'd say, I think the short answer there is no, David, I mean I think we talk a lot about our strategy and really the value of knowing our markets and staying in geographically centralized in it really and the diversification across sort of industries and product levels and really managing our size, loan, exposure. It gives us a lot of comfort that we know our borrowers well, we know where the risk lies and I think we really do have a good handle in the material that we provided to really identify where we think there continues to be risk. I mean we can't sugar coat the fact that there is still a lot of uncertainty in our geography here in Massachusetts. There's still a lot of businesses that have limitations on being able to stay open, occupancy rates, et cetera.
So we are very cautious to suggest that we're past all of the major concern, but at the same time, we think we have a very good understanding of where that risk lies, and we think we've captured out appropriately in our reserving and our provisioning, but we're not seeing any other delinquency metrics or really significant changes in our - on our classified levels that give us additional concern outside of what we've reserved for.
And one final question, I'm not sure if I missed or heard you in here. So the opening remarks here, it sounds like you see some opportunities within the commercial real estate subsegments out there, just curious where you see the opportunities. And did I hear you right that you're starting to see getting more constructive on Boston or you're still staying relatively cautious in terms of that market?
No. Still staying cautious. But maybe I'll have maybe Gerry just provide a bit more color on the commercial real estate market.
Yes. What I think, we've been seeing opportunity in suburban apartments, the demand for housing actually seems to be increasing, every day there's a story in the newspapers about the lack of availability of homes to purchase, which has been driving increases in apartments. I think that there are people that are - whether it's permanent or not, I don't know, but that are electing to live in more suburban locations - in apartments.
We're also seeing some opportunities with mixed-use as well as flex and warehouse industrial. I think it's a little too early to determine how strong the demand will be for lab, light space in Massachusetts. I think it will be strong. I think that just be a general sort of re-establishment of bringing back a lot of capacity to the United States from overseas.
So I think that does bode well for Massachusetts in general in the near future, but it's a little early to completely be confident and aware. So I think at this point, where we're seeing the most opportunity, where we're comfortable is [indiscernible] warehouse industrial, flex space and mixed-use.
Is the sort of the ongoing, I know a lot of universities here in the Mid-Atlantic are still virtual, is that sort of having any sort of impacts in terms of the commercial real estate market with what's going on with the university and colleges that students aren't back in sort of student housing or just curious if - number one, I don't think you have much exposure there, but just curious, if at all any sort of macro impact in the market?
Right. And that's really in Boston proper, Boston - sometimes see, Boston, before it buy banks, it includes a lot of the suburban of towns right around it. When you look into the city itself, certainly the apartment buildings that are surrounding the colleges have more vacancy than they did previously. Just to give you a data point in September, which is typically the peak of the occupancy in Boston because of students.
There were thousand empty apartments in Boston versus what normally might have been three or four, so big increase that has since improved, there's been a lot of kids that - who don't want to be in Mommy and Daddy's basement even though they're going to school virtually, they still want to be living in an apartment independently or with friends. So it's actually sort of improving with the occupancy in the city and they might be going to school virtually, but they're still in that apartment, it's just part of growing, it's part of touring.
So I don't think that's changed. But we are being cautious. Certainly, a new credit in Boston, till we really better understand where do we land in the other side of this pandemic.
The next question comes from Chris O'Connell with KBW. Please go ahead.
Just a couple of questions. First off, how do you guys or how are you guys expecting the PPP forgiveness kind of just schedule for the course of 2021?
Yes, certainly, we think that should start to accelerate now in the first quarter. There has been a lot of waiting around for that simplified form if you've been following the program, so borrowers, less than 150,000, they announced would be a much simplified process, the form was not actually released until just this week.
So we think that should be a catalyst to really seeing some level of acceleration. I would say, certainly in the first half of the year, first six months, I would imagine we should be able to make our way through most of that forgiveness process.
Great. And then finally just on the excess liquidity. I mean it sounds like overall loan growth is going to kind of shakeout fairly modest for 2021 unless things change here. You guys have between $900 million and $1 billion kind of excess cash in the balance sheet right now. I mean at what point do you think to start putting that into securities even if the yields aren't that attractive just to get a little bit of a better yield than the cash?
Yes. No, it's a great question and one, we talk about on a weekly basis. And I'd say the positive development there is we are getting to see a little bit more comfort as I mentioned with the 10-year ticking up and that gave us some comfort with the levels we did in the fourth quarter. So it's the first quarter in a while we put any really meaningful net growth in the securities book and we've been more aggressive early on here in the first quarter as well.
So it's certainly the most obvious lever to pull and one that we will be more aggressive in heading into 2021. So I think on the margins, we can continue to put more of that money into the securities book. There is some other smaller type on the fringe investments we obviously need to be looking at, things like a BOLI investment, low-income housing tax credit investments that we're very familiar with. We think there's some opportunity there.
We've done as much as we could on the funding side and paying off balances, but we have a little bit of debt there that could be running off as well in 2021. And so I think there is opportunities there. There isn't any one magic bullet, I think that is going to make a huge dent in that position, but we do believe there is opportunities to make some level of improvement for sure.
This concludes our question-and-answer session. I would like to turn the conference back over to Chris Oddleifson for any closing remarks.
Great. Well, thank you very much, everybody. Appreciate all your good questions. We look forward to talking to you in three months and between now and then stay safe. Bye.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.