Independent Bank Corp.

Good day and welcome to the INDB first quarter 2023 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Before proceeding, please note that during this call, we will be making forward-looking statements. Actual results may differ materially from these statements due to a number of factors, including those described in our earnings release and other SEC filings. We undertake no obligation to publicly update any such statements. In addition, some of our discussion today may include references to certain non-GAAP financial measures Information about these non-GAAP measures, including reconciliation to GAAP measures, may be found in our earnings release and other SEC filings. These SEC filings can be accessed via the investor relations section of our website. Finally, please note this event is being recorded. I would now like to turn the conference over to Jeff Tangle, CEO. Please go ahead.

Thank you and good morning and thanks for joining us today. I'm thrilled to be hosting my first earnings call as CEO of Independent Bank Corp. I'm joined by CFO and Head of Consumer Lending, Mark Ruggiero. First, I'd like to give a shout out to my predecessor, Chris Odleson, who expertly guided Rockland Trust for the past 20 years and laid a strong foundation on which to build upon. So I've been at the helm for all of two and a half months now, and at least the first month was relatively calm. Since then, the challenges in the banking industry has taken center stage. So let me get to that topic right up front, given the intense interest regarding its impact on individual banks. Mark will take you through the details, but let me just say all in all, we're faring quite well. Total deposits were down 3.8% in the quarter in line with prevailing peer trends. We do feel some of this continues an outflow experienced in prior quarters. as depositors draw down on excess liquidity and or seek higher interest rates. That's not to say we've been immune from the volatile environment, but things have been manageable. At the very outset, we armed our frontline customer-facing colleagues with coaching and support to respond to questions and calm customer concerns. We also reconfirmed our access to multiple sources of liquidity that we've tapped into and can easily further avail ourselves should the need arise. But more than anything, it's been our history of focusing on core relationships that has provided considerable stability to our deposit base. In fact, household retention has remained at historic highs and new checking account activity continues to be strong. Also, some of our deposit outflow migrated over to our investment management group as we successfully manage our relationships across business lines. For many of you that already know us well, all of this should come as no surprise. That stability, coupled with our history of conservative risk management, a balanced business model, granular and diverse customer base, and a culture where each relationship matters, leaves us well-positioned to navigate whatever challenges the external environment throws at us. Notwithstanding all of that, we are by no means complacent as this interest rate cycle is still playing out amidst much uncertainty. We remain ever vigilant to the ongoing developments with elevated levels of communication and contingency plans in place. As our company has proven at the onset of prior banking challenges, we've pivoted quickly to prioritize safety and soundness considerations despite near-term earnings impacts. We remain steadfast in our resolve to weather the current uncertain environment and come out the other side stronger than ever. Zooming out, I'd like to share a few observations of the company from my initial few months. I was impressed by the Rockland Trust franchise from afar. I'm even more impressed being on the inside. The phrase that comes to mind is that in many ways, Rockland Trust is punching above our weight class. I've spent a considerable amount of my time thus far listening and learning, reassuring our employees that I have zero interest in changing the strategic direction or business model of the company. Chris and the team built a truly special company over the past 20 years. Why would I change that? I guess it would fall under the old adage, if it's not broke, don't fix it. My job is to preserve and build upon the unique culture that makes Rockland Trust so special. We will continue down the path of disciplined growth that we've become accustomed to. In closing, I just wanted to add that in the past few months, I've had the opportunity to meet and speak to a number of folks in the investment community, including our larger shareholders. Over the years, I've always found these dialogues healthy and insightful. These recent conversations have just reinforced my conviction that we're pursuing the right strategy and operating from a position of strength. I would now like to turn the call over to Mark.

Thanks, Jeff. I will now take us through the earnings presentation deck that was included in our 8 filing and is available on our website in today's investor portal. Slide four of the deck summarizes our first quarter results and key drivers. As noted, 2023 first quarter gap net income was $61.2 million and diluted EPS was $1.36, reflecting 20.5% and 19.5% decreases respectively from prior quarter results, largely due to higher funding costs on deposits and borrowings. These results produced a 1.30 return on assets, an 8.63% return on average common equity, and a 13.30% return on tangible common equity. Also noted on this slide, we highlight some of the primary drivers behind the first quarter results, many of which we will touch upon through the rest of the deck, in addition to further insight on key risk management updates that we recognize are of importance in this challenging environment. But before moving on, I'll highlight quickly the last two bullets noting we completed the full $120 million stock buyback during the quarter, and despite this activity, strong earnings and other comprehensive income resulted in a modest increase in tangible book value from $41.12 to $41.31. Addressing those key risk areas, we will focus first on deposit activity, which is obviously top of mind for many of you. Slide five includes our typical deposit charts, reflecting changes in balances for the quarter, as well as additional details over quarterly cost of deposits. And I will highlight deposit betas in a couple of minutes on a future slide. As noted, total deposits declined $607 million, or 3.8%, when compared to the last quarter. We attribute the runoff to a combination of factors, including seasonality, FDIC insurance protection, though to a loss of degree, an extremely competitive rate environment, which on a positive note included another $78 million that moved to our wealth management team. And lastly, as Jeff alluded to, general usage of excess liquidity due to inflationary and other factors. And we believe it is important to expand upon this last factor. Focusing on the excess liquidity impact, we continue to monitor activity very closely and note that the vast majority of deposit outflows is attributable to existing accounts of existing households. In other words, in many cases, customers redeploying their money. The level of deposit outflows attributable to lost households remains very low and it's consistent with historical levels of attrition. And further highlighting our longstanding history of focusing on core relationship accounts, a highly important metric for us in Q1 is the positive 0.5% growth in households, which led to record quote unquote new to bank deposit levels attributable to new households in the quarter. Continuing to focus on the strength of our deposit base, we move to slide six. but we have also included information over emerging risk data points such as uninsured deposit balances. As noted, our March 2023 estimated uninsured deposits of $4.7 billion represent approximately 30% of total deposits. And though not insured by the FDIC, another $659 million of municipal deposits, or 4.3% of total deposits, are collateralized by the bank, providing additional protection over those amounts. This results in a relatively low 25.8% of deposits being uninsured or uncollateralized. While we take comfort in the proving historical strength of our deposit franchise, we do not take it for granted. We take great pride in our relationship banking model and continue to work with and educate colleagues, customers, and outside centers of influence to ensure any and all concerns are addressed within our suite of product offerings. Turning now to slide seven, we provide some additional information regarding the company's overall liquidity position, which as Jeff stated, is a major priority for us. In summary, we manage liquidity risk by effective measuring and monitoring of both on and off balance sheet liquidity. And though various metrics are used across the industry to monitor on balance sheet liquidity, We highlight the key drivers of the changes in our on-balance sheet cash held primarily at the Federal Reserve and its correlated impact on the borrowings. As noted here, the increase in interest-earning cash to approximately $323 million reflects a proactive decision to bolster on-balance sheet liquidity through increased borrowings as a direct response to the emerging industry risks observed in the quarter. This action, along with the previously mentioned share repurchase activity and decline in overall deposit balances, resulted in approximately $880 million of borrowings with the Federal Home Loan Bank of Boston as of March 31st. Total borrowings of $992 million represent a low 6.1% of total funding liabilities. And from an interest rate management perspective, we entered into $300 million of hedges fixing the interest rate on $300 million of borrowings at a weighted average rate of 3.68% over an average term of three and a half years. Regarding our off-balance sheet borrowing capacity, you can see here that we have borrowing availability through various channels, including primarily the Federal Home Loan Bank of Boston, the Federal Reserve, and unpledged securities that could serve as additional collateral. I will also emphasize that in direct response to the emerging industry risk, we significantly increased our asset pledging and borrowing capacity at the Federal Reserve during the quarter and continue to assess additional strategies on an ongoing basis. We are keenly focused on the tracking and monitoring of deposits and liquidity to ensure there is a comprehensive analysis of balance sheet trends and the potential impact on our liquidity and interest rate risk management. The borrowing capacity at March 31st, 2023 represents approximately 132% of our estimated uninsured deposit exposure and 153% when also excluding collateralized deposits. Continuing the focus on interest rate and capital risk management, we have included some additional information on slide eight, summarizing key information related to our securities portfolio. The reported combined AFS and HTM security portfolios as of March 31, 2023 totaled $3.1 billion. The $19.3 million decrease from the prior quarter reflects principal paydowns of $43.6 million, offset by unrealized gains of $22.2 million in the available for sale securities portfolio for the quarter. The quarter end unrealized loss position on the AFS portfolio is $146 million, or 9.3% of the portfolio. Not included in the reported balances is another $158 million of unrealized losses on the held to maturity portfolio, or 9.4% of those balances. The average life of the entire portfolio is 4.5 years, with details of expected principal payments over the next four years included on this slide. With the AFS unrealized losses already included in our reported tangible capital ratios, We highlight our strong capital position by noting our tangible capital ratio remains strong at 9.4%, even when factoring in the held to maturity portfolio losses net of tax. While there is no denying that earnings growth will be challenged in this environment, as I stated earlier, we are confident that our patient and balanced approach to managing our balance sheet over the last three years has positioned us well. to adapt to the emerging risks and continue on our path of long-term growth. The remaining slides will provide detail on all the other components of the quarter's results, the highlights of which I will summarize quickly now. Referring to slides 9 and 10, our loan activity remains solid with total loan balances relatively flat for the quarter, reflecting a cautiously opportunistic posture to providing credit in this environment. Our long-standing focus on relationship banking continues to provide solid loan opportunities that meet our discipline pricing and credit philosophy. Appreciating the level of investor interest over commercial real estate exposure, I will reiterate that commercial real estate lending has been a long-standing core competency of this bank, with credit underwriting discipline and monitoring of the portfolio that has proven to mitigate credit loss over previous cycles. Recognizing there are unique dynamics in today's environment, and in particular relative to office-related classes, we provide additional information over the composition of that portfolio. While I won't go through all the details on slide 11, the data highlights a balanced and diverse portfolio with very strong current credit metrics, a portfolio which we continue to feel is very well managed. Staying on the topic of asset quality, we move now to slide 12. Further deterioration of the outlook over the large non-performing CNI syndicated credit that we mentioned last quarter brought the provision for the quarter to $7.25 million. We have now allocated a specific reserve to cover 100% of the $23.2 million outstanding balance of this loan. Separate from this individual credit, total non-performing assets, delinquencies, and overall asset quality remain strong and consistent with the prior quarter. Turning to slide 13 and the net interest margin, due primarily to the deposit runoff pressure noted earlier, the increase in wholesale borrowings and cost of deposits resulted in a six basis point reduction in the reported net interest margin to 3.79% for the quarter. When excluding non-core items, the core net interest margin decreased four basis points for the quarter. We also provide a snapshot of the cumulative beta impact on both the loan and deposit portfolios. And at 27% and 12%, respectively, we highlight these results are right in line with the assumptions used in building out our balance sheet and longer-term asset-sensitive profile. Noted on slide 14, Fee income results were in line with expectations, with a bright spot continuing to be our wealth management offering. Though the timing of inflows and lower average fee ratios on new money impacted quarter-over-quarter revenue, total assets under administration of $6.1 billion at March 31st reflect an increase of $352 million, or 6% from the prior quarter, fueled by net new money inflows and market appreciation. Similarly, on slide 15, the expense increase of 4% was also in line with expectations, reflecting seasonal increases in payroll taxes, increased FDIC insurance expense, and approximately $2 million of one-time costs associated with CEO transition. Lastly, as summarized on slide 16, as a result of the emerging environment and significant uncertainty over macroeconomic factors, we provide a limited set of guidance focused primarily on general trends over near-term expectations. With reduced total approved pipelines compared to the prior quarter, we now expect flat overall loan balances for the second quarter. With the March spot rate cost of deposits at 67 basis points, deposit pricing and overall market competitiveness remains high. We anticipate a continued shift into higher rate deposit products and overall deposit balance pressure will persist. Similar to Q1, we expect outstanding borrowing changes will primarily be a direct result of loan and deposit changes. We anticipate the culmination of these items will likely result in some level of further net interest margin contraction. With the large non-performing C&I credit now fully reserved, We anticipate provision for loan loss to decline from the Q1 levels, barring no significant changes to the overall credit environment. And lastly, regarding non-interest items, we anticipate flat to low single-digit increase in non-interest income, despite recent changes to overdraft fees, and relatively flat expenses as compared to Q1 totals. That concludes my comments, and we will now open it up to questions.

We will now begin the question and answer session. To ask a question, you may press star then one on a touch tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Mark Fitzgibbon with Piper Sandler.

Please go ahead. Hey, guys. Good morning and happy Friday.

Hey, Mark. Happy Friday, Mark.

Mark, I saw your guidance for flat loan balances for the year. Would you also expect balance sheet footings to be flattish for the year as well?

Yes. In terms of help me out there, Mark, when you mean just total assets? Yep. Yeah, I mean, we talked a little bit. It isn't a big number, but we do have a level of cash on balance sheet today based on some proactive borrowings. That's a number that we'll continue to monitor as the environment plays out. But I think all in all, that won't have too big of an impact on total footing. So I'd say period end March serves as a good proxy for total assets over the course of the year.

Okay. And then secondly, would you expect the NIM compression in the second quarter to look sort of similar to what we saw in the first quarter? Or is it a little less because you don't have the sort of the extra liquidity to take on the way you did in the first quarter?

Yeah, it's a tough question, Mark. And to be honest, I'm sure you can appreciate it really is going to depend on the overall balance of deposits as that has a direct impact on kind of our level of borrowings. So just to give you some perspective, Our March spot margin was 3.7%, or 3.70%, and that included only a portion of the cash that we had borrowed during the first quarter. So when you reflect that we could keep the $300 million of cash on the balance sheet, although that has no impact on absolute levels of net interest income, that will also create a bit of a drag on the margin to the tune of about four or five basis points. So I think you're starting at a point of 370. There'll be a little bit of a drag from the cash we're holding on the balance sheet. And I do think you'll see the cost of deposits continue to go up from those March levels. I really can't predict exactly where that end point will be, but I think it's reasonable to suggest we'll continue to tick down from that March level.

Okay. And obviously, you guys bought a lot of stock during the first quarter at an average price, I think, of 74%. Is it logical then that you're going to be even more aggressive at 58?

Yeah, I think we're probably going to hit the pause button on any stock buybacks at the moment and just kind of assess the situation as we move through the second quarter. It's always something that's kind of a tool in our toolbox, but at the moment we'd like a bit more clarity and certainty about what the future rate environment looks like.

Okay, great. And then, Jeff, now that you've sort of been in the driver's seat for a little bit here, as you look at the various loan books and business lines that Independent has, are there any sort of areas where you think there's an opportunity to shrink or sell pieces of the business?

Not really. I think most of the loan portfolios and the lines of business we're in, I think we feel pretty good about and don't really – there's not any hot spots that we feel like are, you know, we're taking too much risk or that the performance isn't what we'd like. I would, if anything, you know, I think I'd like to sort of double down on a number of, you know, our middle market CNI business, for example, is one that I hope we can continue to make progress on. But I haven't seen anything that gave me pause that suggested we would exit any of the businesses.

Great. And then lastly, do you think M&A is possible in this environment? And if so, what would be sort of at the top of your wish list? Thank you.

That's a good question. I'd like to believe that M&A is possible in this environment. It might take a bit longer to get through the regulatory process would be my guess. But that's something that I guess whether it's us or somebody else is just going to have to test and see see what that process looks like today. And as I'm sure you can appreciate, and I think our M&A strategy is going to look very similar to what it was during Chris's tenure here. It would be filling in existing markets where we're already doing business with or in adjacent markets that would really begin to round out our franchise.

No, just to add, Mark, the obvious is the purchase accounting noise that would be created in this environment. You really have to get comfortable that you can look through that and look at the real economics of any deal. But I think you certainly have to be appreciative of the accounting marks in this environment and understanding where there may be As expected, initial capital dilution and likely higher earn back as a result of accounting, I always, you know, we're big proponents of having that, you know, internal rate of return governor to really kind of weed through that noise and make sure a deal makes sense.

Thank you.

You're welcome.

Our next question comes from Steve Moss with Raymond James. Please go ahead. Good morning.

Good morning.

Maybe just starting with deposits here, deposit costs, just curious, you know, what are you guys seeing for interest-bearing deposit pricing and kind of, you know, how are you thinking about those costs migrating higher? If you could quantify how much those costs could head higher in the upcoming quarter or two.

Yeah, as I alluded to, You know, earlier, Steve, it's a tough one to pick a number for sure. But I think from just a practical perspective, a lot of what we're seeing is, you know, for customers that are looking for rate on the consumer side and to some degree on some of our small business side, our CD offering has really resonated. We have a 4.25%. a five month CD, you know, we've incented higher rates on the short end of the curve, obviously in this environment, and that's been working really well in terms of retaining balances. Um, we also have some promotional money in our money market, uh, loyalty accounts, and we do a lot of kind of what I would call exception pricing because of, of the great job we've done in building a deposit franchise, where we really have that relationship with the customer. we often have the ability to have the conversation with the customer looking for rate or looking for a type of product. And as such, we're able to deploy a strategy where it's much more kind of exception basis versus having to reprice broader pockets of the deposit base. So that has worked well. But as you would imagine, a lot of that pricing is up in the 4% in this environment. And again, you know, the story we've been talking about is, you know, often when a customer has a competitive rate that they're seeing in our market, if we can get to within 25 or 50 basis points of that competitive rate, you know, our relationship will usually retain that deposit. And we don't take that for granted. It's not to say, you know, we can only play a defensive game here. So we're obviously being proactive in looking at where it makes sense to continue to price up deposits. But for those that are rate sensitive, a money market or a CDE offering right now in the fours is likely doing the job. So that's been the dynamic, Steve, that's created the increase that you've seen. And as I referenced, our March cost of deposits was up to 67 basis points. So you figure that's seven or eight basis points kind of over the course of that month. I think in the very near term, that's probably a likely projection heading into Q2. We'll see kind of where we are at the end of the quarter.

Okay. And maybe just on the non-interest bearing side with kind of the ongoing remixing, kind of how much do you ultimately think could remix here over the next couple of quarters? I realize that's tough, but when you look at customer liquidity, how much do you think could be excess? Do you have any kind of sensitivities are quantifying that.

Yeah, again, it's a tough one, you know, because typically the first quarter, I don't want to dismiss, we usually have some seasonality here in the first quarter. Right now, you're seeing a lot of outflow related to tax payments. So it's tough to really parse out what's normal course of business versus what may be something else. But I think it's just it's just reasonable to suggest that. I would think it'll start to level off towards the end of the quarter from the pace we've experienced in the first quarter, but I really don't, not comfortable sort of predicting a number at this point. Okay.

And then maybe just in terms of, you know, on the office disclosures here, wondering if you guys could provide any color on the underlying loan to values, debt service coverage, and maybe even how much may be maturing in the next 12 months?

Yeah, the loan-to-values is a – I don't know what the number is. I think it's pretty low. I think it's in the 50 or 60 percent, but the problem with that calculation is a lot of those loan-to-value calculations are based on older appraisals, and so because of that, it's not really a good measure. because they're not all sort of mark to market, if you will. The debt service coverage, I think, is maybe a better indication of the health of the portfolio. And the debt service coverage in our office book is north of 1.5. So we feel pretty good about that. And we have roughly about $400 million of the office portfolio that is going to reprice in the next couple of years, which we think is a pretty manageable number. And I think the whole office, the story around office is going to play out relatively slowly. I think it's not going to be a tsunami. Just because the lease maturities are staggered, the loan maturities are staggered, companies are still determining how much space they actually want upon lease maturities. So that's still a bit of an unknown. So there's a number of of factors that are all variable and is all going to occur over, you know, two, three, four years. So because of all that, we feel pretty good about our office portfolio.

Okay, great. And maybe just one last one for me in terms of loan pricing. You know, you guys mentioned pipelines have declined. Just kind of curious what you're seeing in the market for loan rates these days.

Yeah, I would say in the middle market where we're playing, it's still fairly aggressive. But I would also tell you historically, we've been very disciplined in our pricing. And so our spreads haven't changed all that much because they haven't needed to because we continue to be very disciplined in that regard. So, again, feel pretty good about the you know, the overall yield on our loan book and don't think that, you know, they're going to widen out dramatically, nor are they going to come in. I'm talking about the spread, the credit spread.

Right. In terms of just in terms of some numbers there, in terms of what funded in the first quarter on the commercial side, a lot of it was around 6%, low sixes. A lot of the commitments that were booked in the first quarter that will drive fundings going forward, that has certainly gone up into the 7% range or even higher in some cases. So we are seeing a nice lift in terms of the absolute level of interest rates as the portfolio churns. It's just, you know, I think what you're hearing, similar to other institutions, the level of attrition has certainly slowed down. So, you know, it's really less closings needed to – to get to flat and or modest growth. So although the impact may not be as big, we are seeing a nice lift in terms of overall interest rates on the commercial side. On the consumer side, it continues to go up. I'd say most of our resi production has been in the high five range, you know, looking to get 6%. But, you know, that's an area we'll continue to monitor closely going forward.

Okay, great. Thank you very much for all the color. Appreciate it.

Thank you. Our next question comes from Chris O'Connell with KBW. Please go ahead.

Hey, morning, Jeff, Mark. So I want to just keep going on the loan side of the business. I think everybody's kind of seeing a slower loan growth environment here, but hoping you could provide color as to some of the drivers. I mean, is it you know, your pricing at the top of the market here? Is it that you're being tighter on credit standards? Or is it more so that there's, you know, less demand out there in your markets?

I think of all of those three, it's probably the latter. Again, I think historically, we've been very disciplined on both credit and pricing. So those two factors haven't really changed all that much, in my opinion. Um, but I think there is less demand out there. I think companies are being a bit more cautious. Um, and, uh, and as we've seen, they've been using their, their funds to pay down, uh, pay down line.

Yeah. And then as far as, you know, what you guys are putting on, uh, in, in find attractive at this point in the cycle, uh, I mean, is there any particular, you know, industries or market segments, uh, either within CRE or C&I that, uh,

uh that you like the most here and you know outside of office are you guys seeing any other stress uh you know in other uh specific segments i can chime in and jeff feel free to add on but i'd say generally no we're not seeing pockets of stress but we're obviously being very selective here chris right in terms of which asset classes the types of sponsors you know again i I highlight we're a relationship bank, and we've done business in the commercial space with bars and sponsors over a number of projects. We know them very well, and that's probably where we'll continue to see opportunity that we're comfortable with. So it's been still primarily driven by, you know, one to four family kind of construction, apartment, condo developments. You know, there's some level of industrial or mixed use, again, that with the right credit box fits our profile and we're comfortable with. But I'd say if it's a sponsor or a borrower that we don't have that relationship with, there's a little bit of a higher hurdle to clear, I would suggest.

Yeah, and the increase in rates has also served to tamp down some of the activity in the commercial real estate market because deals just don't pencil out anymore given the higher cost of funds for the real estate developer. So I think that's had an effect that has just been limiting some of the activity we've seen.

Got it. And I appreciate the comments around the overall balance sheet as well as the loan guide. For the, I think it's just shy of like $200 million or so remaining, of the securities portfolio that's maturing in the back half of this year. You guys plan to reinvest that in securities or pay down borrowings or limit higher cost deposits? What's the best use of this cash flow?

Yeah, that'll certainly be redirected to paying down borrowings, assuming those are still outstanding. We're operating now with a higher securities portfolio than we have in the past. We certainly acknowledge and recognize that. So we are certainly in a very good position to just allow for that securities portfolio to a trite and redeploy that against borrowings in the near term. So we have no desire to be reinvesting back in the securities book at this point.

Okay, got it. and uh you mentioned that i think in the prepared comments there was it two million dollars uh for the kind of one-time compensation uh line uh with the uh those all in um comp and some level of legal uh related to transition okay so do you think expenses can trend down in the second quarter at all and then or ramping back up or or is your kind of you know, natural growth in the business that's offsetting some of that $2 million to keep it flat on a go-forward basis.

Yeah, you know, I guided the flat. You know, that's a reflection of, you know, there are some projects that we will stay committed to. I think we need to continue to invest in the future of this bank. You know, there's a number of customer-related initiatives and some back-office efficiency initiatives that we have on tap for the year. Certainly, the customer experience is top of mind that we don't want to continue to improve. We're looking at deposit account opening technology. We're looking at technology on the back end that over time we believe will draw efficiencies. Right now, there's a level of one-time spend associated with that embedded in some of the flat guidance there. There's obviously variable compensation arrangements that will provide us some flexibility to keep costs in check in the near term, but I think the combination of tightening the belt a bit in areas where we should be, but making sure we continue to invest in technology and our future growth serves us the path to suggest we keep expenses relatively flat. But if the pressure retains, Chris, and if we continue to see earnings pressure, I think expenses is fair game to be looking at where there may be opportunity to do more there.

Got it. And I guess following up there, what types of opportunities would you guys be looking at? Would it be kind of reduce, you know, footprints or head counts, or would it be taking a closer look at kind of like vendor contracts or things, you know, of that nature?

Yeah, I'd say all of the above. I mean, I don't think from a footprint standpoint there's anything right now where I'd say we have immediate opportunity to suggest cutting costs is the right answer. But I think it's, you know, it's getting into the details of, to your point, it's vendors and and other expenses associated, maybe a level of consulting experience that we've had in the past, you know, where there may not be kind of the immediate return, you know, those that have a little bit of a longer end tail there, you know, we may have an opportunity to make some changes. And then, you know, certainly on, as I mentioned, on the facility side, you know, we have meaningful kind of rent expense. As I mentioned, I don't think there's there's an opportunity there. You know, anything that's coming up for renewal, we're taking hard looks at. Maybe there's a consolidation opportunity or two, but I wouldn't say anything too widespread.

Got it. And, you know, given the, you know, timing, it seems like on the wealth AUM as well as you know, maybe some more fee schedules on some of the new, you know, AUM put on. What's a good starting point kind of as a baseline for wealth management next quarter on the fee side?

In terms of total revenue? Or the asset number?

Revenue.

Yeah, so I wanted to remind, so our fourth quarter, number was elevated. If you recall, we had a large one time benefit, we had we had moved some money over to a different platform, which generated kind of a one time commission of about six or $700,000. So the fourth quarter number was certainly elevated for that reason. And then in the first quarter, I think you saw kind of more of a normalization as well as you know, the reality of some of the new money being in kind of municipal related products, certainly some of it being the deposit customers looking for rate. Those are going into a laddered treasury security portfolio, and that has a lower fee ratio associated with it. So I think you're seeing a little bit of that driving kind of the revenues staying flat, I guess, more or less, despite having some of the increase in the AUA. So I think your first quarter numbers is probably a pretty good baseline to be thinking as a starting point. We typically get a second quarter bump from our tax prep fee business, so we should see that hit in the second quarter. But I think you'll probably see it land somewhere between kind of Q1 and Q4 numbers would be my guess.

Great. And then as far as the C&I credit that is now fully reserved for here from a couple of quarters ago, can you just walk us through, I guess, what change in the past quarter that made you guys take the full reserve? And is there any opportunity for that to come back in over time? Or do you think that, you know, it's kind of just going to continue in the wrong direction?

Yeah, you know, at the time we closed the books at year end, you know, this is, as I mentioned, this is a larger syndicated deal. There's a number of consultants now involved associated with the company filing bankruptcy. You know, all the work right now is trying to understand the validity of receivables. And I'd say the The newer information that we gleaned in the first quarter is that there's risks some of those receivables may not materialize into true proceeds. So the realization of those receivables that serve as collateral based on the data at year end suggested a small portion of that would still be realized. I think what we're hearing and learning now is that the vast majority of those receivables may not materialize into proceeds that would make its way back to the lenders. So at this point, we just feel like there's not much of a path there to getting much return in terms of proceeds upon liquidation, and we think it's appropriate to take the full reserve. I think the level of insight and clarity onto how this will all play out, we may not actually know for a couple more quarters. So in terms of when the charge-off comes, we typically, under the regulatory guidance, would need to see a little bit more clarity as to what the end result of the liquidation process will be. But I think the full reserve at this point we feel is appropriate.

Got it. And then, you know, last one for me. I mean, you know, obviously, you know, the rate that the borrowing hedge locked in, you know, seems very attractive, you know, for that term. I mean, the securities book, as you mentioned, is a little bit bigger than normal. Is there any other balance sheet actions or is there anything that you guys can do or are looking at on the securities portfolio as far as restructuring or things of that nature to help out the margin that you're looking at?

Yeah, I mean, certainly we're certainly aware and we know other institutions have have taken that strategy of liquidating some of the securities portfolio. Personally, I was not a huge fan of that. I think the numbers on the paper, we all kind of know the impact of that. You take the loss now and you improve the earnings going forward. I do think, though, as the steepness of the inversion curve continues to play out, this this becomes a bit more attractive. So I wouldn't rule it completely off at this point or suggest it's completely off the table, but that's a lever we could pull. Or maybe the more realistic answer there, Chris, is there's some smaller pools of the securities that maybe don't have as big of a loss embedded in them that we could do some cleanup trades and accelerate the reduction of the securities book. So I think that's an area where there's opportunity, but one that I wouldn't suggest we're committing to saying we need to be at a point where we accelerate the liquidation, but I think it's something we'll continue to monitor. And then secondarily, certainly we've grown our residential portfolio, and a lot of that volume has been retained on balance sheet as well. That's an area in the past we've done some loan sales out of. Again, I think with the rates we put that production on in a true kind of marginal cost of type funding spread environment, I think that's appropriate return on our investment. But in terms of maybe shrinking the balance sheet a little bit and right-sizing kind of a leverage, that's another area where we could maybe look for opportunities to sell off a portion of that book. and pay down borrowings as well. So those are probably the two asset classes I'd look to. Again, I'm not convinced that's needed at this point, but we'll continue to monitor that.

Yep, I think that makes sense. I mean, any sense as to how much of the securities portfolio is yielding sub 150 or one and a quarter?

Yeah, there's a decent portion of the balance that is probably in that sub-150 range you talked about. I don't have the exact numbers here in front of me, but, you know, that's the tradeoff, though, right? I mean, that's where you have some pretty large embedded losses. So they'd be – you'd have to be – you know, much really confident that that's the right decision to make, which I haven't been there yet.

Got it. Appreciate the time. Thanks for taking my questions.

Thank you. Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Jeff Tingle for any closing remarks.

I'd just like to say thanks for your continued interest in Independent Bank Corp, and I will talk to everybody next quarter.