Independent Bank Corp.

Good day and welcome to the Independent Bank Corp. Second Quarter 2024 Earnings Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's remarks, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Before proceeding, please note that during today's call today, 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 of 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 that this event is being recorded. I would now like to turn the conference over to Jeff Tangle, CEO. Please go ahead, sir.

Thanks, Cole, and good morning, and thanks for joining us today. I'm accompanied this morning by CFO and Head of Consumer Lending, Mark Ruggiero. Our second quarter performance continues to demonstrate the resilience of our franchise in a difficult environment and is a testament to our long-term proven operating model as a customer-focused community bank. Mark will take you through the details in a few minutes after I share some thoughts. While the current higher for longer interest rate sentiment clearly creates a challenging environment not only for Rockland Trust but for the entire industry, We continue to definitely manage this uncertain environment as we have through countless other macro challenges over the years. We remain focused on a number of key strategic priorities, all centered around protecting short-term earnings while positioning the bank for earnings growth when the overall environment improves. One of those priorities is actively managing our commercial real estate portfolio with particular emphasis on our office portfolio while working to create a more diversified loan portfolio. We are pleased to see a reduction in our CRE concentration at the end of the second quarter. We'll continue to drive this percentage down through normal amortization and the exit of transactional business. By exiting transactional business, we will free up capacity to continue to support our legacy commercial real estate relationships. We will also look to remix the balance sheet towards more CNI. While a competitive market to be sure, our robust pipeline is a testament to our strength in this space. Our relationship managers continue to get top scores in the Greenwich surveys, and we continue to actively recruit new talent in the greater Boston market. Many of these new hires come from larger banks, but are attracted to our culture and our operating philosophy. Another priority is prudently growing deposits, which has been a historical strength of ours. Mark will provide additional color in a few minutes, but in the second quarter, we grew deposits, grew the number of households we served, and maintained our net interest margin. We also grew our assets under administration to a record $6.9 billion in the second quarter. Our wealth management business continues to be a key value driver for our customers and the company as a whole. It works seamlessly with retail and commercial to deliver a differentiated experience that resonates with our clients. And underscoring all of this is our historical discipline credit underwriting and portfolio management. Rockland Trust's solid loan underwriting has consistently resulted in low loan losses through various economic cycles, and we think this environment will be no different. The risk profile is further bolstered by our strong capital position. As we focus on these priorities, we continue to actively assess M&A opportunities. While M&A activity remains somewhat muted, we will be disciplined and poised to take advantage of opportunities that fit our historical acquisition strategy and pricing parameters when conditions improve. It's been a proven value driver in the past, and we expect it to be one in the future. We've said the past couple of quarters that we didn't expect this year to be easy, and it hasn't been, but we are pleased with the trends and results noted through the first half of the year. We will continue to focus on those actions we have control over and look to capitalize on our historical strengths. There's no magic to our value proposition. We do community banking, really well and believe our current market position presents a high level of opportunity. We remain focused on that long-term value creation. To summarize, we have everything in place to deliver the results the market has been accustomed to over the years, including a talented and deep management team, ample capital, highly attractive markets, good expense management, disciplined credit underwriting, strong brand recognition, operating scale, a deep consumer and commercial customer base, and an energized and engaged workforce. In short, I believe we are well positioned to not only navigate through the current challenging environment, but to take market share and continue to be the acquirer of choice in the Northeast. And on that note, I'll turn it over to Mark.

Thanks, Jeff. I will now take us through the earnings presentation deck that was included in our 8K filing and is available on our website in today's investor portal. Starting on slide three of the deck, 2024 second quarter GAAP net income was $51.3 million and diluted earnings per share was $1.21, resulting in a 1.07% return on assets, a 7.10% return on average common equity, and a 10.83% return on average tangible common equity. In addition, we highlight the 85 cent increase in tangible book value per share. As Jeff alluded to, the second quarter results are a reflection of the solid core banking franchise that has generated strong financial results on a consistent basis over the last two decades. Expanding a bit on some of these core drivers, we will turn to slide four, noting the strength and stability of the company's deposit base. We have consistently highlighted our core household growth over the last couple of years, and you can see that focus play out in the second quarter results, with period end balances up $366 million or 9.8% on an annualized basis, while average deposits were up $270 million or 7.4% on an annualized basis. All customer segment balances increased in the quarter, with municipal deposits being the principal driver. And while demand for rate continues to drive overall time deposit increases in the consumer segment, second quarter period end balances still reflect a very healthy overall composition, with total non-interest-bearing demand deposits comprising 28.7% of total deposits. The value of this deposit franchise is not only reflected by the strong percentage of non-interest bearing DDA, but the 100 plus year focus on core operating accounts has resulted in another large portion of deposits in less rate sensitive, smaller balance savings and interest bearing checking accounts. This total deposit composition resulted in the still relatively low overall cost of deposits of 1.65% for the quarter. up 17 basis points versus Q1. However, the deposit growth and corresponding reduction of wholesale borrowings resulted in an overall funding cost increase of only eight basis points, a key driver of the margin stabilization noted in the quarter. Moving to slide five, total loans increased $70.3 million, or 2% annualized, to $14.4 billion as of quarter end. Again, reflecting the company's strategic intent that Jeff just mentioned, total C&I balances increased approximately $22.7 million, or 5.8% on an annualized basis, while combined CRE and construction balances were essentially flat. New commercial activity was diversified across a number of industries and property types, with a net reduction in non-owner-occupied commercial real estate. An approved commercial pipeline of $269 million at June 30th represents a 10% increase versus the prior quarter and should bode well for disciplined new origination activity heading into the third quarter. In addition, the small business portfolio continues to steadily rise, and the consumer portfolios are also reflected low single-digit percentage growth in line with overall expectations, reflecting solid new origination activity in both residential and home equities. Shifting gears to asset quality, slide six provides details over a number of key asset quality metrics. To highlight a couple, total non-performing loans remained relatively consistent at $57.5 million, or 0.4% of total loans, with a notable decrease in new to non-performing activity versus the prior couple of quarters. Included on this slide, we have added some additional detail on the five largest non-performing loans. It should be noted that the current expected loss exposure on these loans has already been accounted for in either charge loss or specific reserves already reflected in the allowance. The allowance for loan loss ratio of 1.05% reflects a two basis point increase from the prior quarter. Jumping to slide eight, we highlight the key components of our non-owner occupied office portfolio, which remains in good stead as we work through the challenging environment. First, we had no new non-performing loans in this category. Regarding past due exposures, we continue to work with borrowers, and in some cases other banks were applicable, to find appropriate resolutions. Updated information in the quarter drove modest increases in the reserve allocations of these credits, as I just noted on slide six. Regarding second quarter maturities, we had approximately 36 million of loans in this segment mature during the quarter. with all loans either paid off, renewed, or extended with no negative risk migration. And lastly, in terms of the office loans set to mature over the next few quarters, we remain diligent in assessing all options to determine the best resolutions on a case-by-case basis. Moving to the multifamily portfolio and the information noted on slide 9, we continue to see pristine asset quality metrics with no non-performing assets in this portfolio. Switching gears to slide 10, we highlight the net interest margin stabilizing in the second quarter as expected, with the reported margin of 3.25% reflecting a two-basis point increase versus the prior quarter. The near-term factors of loan asset repricing, securities cash flow deployment, and hedge maturities combined for overall asset yield increases in the quarter that offset the increase in funding costs which, as I previously mentioned, saw a lower increase versus the prior quarter. Moving to slide 11, non-interest income rose nicely, driven by strong deposit-related fee income, mortgage banking, and wealth management, the latter of which saw increases in the second quarter from tax preparation fees, increased insurance commissions, as well as the increase in overall assets under administration to the record $6.9 billion as of June 30th. Total expenses were relatively flat when compared to the prior quarter, with modest increases and decreases versus the prior quarter across various components. The second quarter expense levels also benefited from an $800,000 adjustment associated with the valuation of the company's split dollar life insurance liabilities. And lastly, the tax rate of 22.7% was slightly lower than the prior quarter, which was impacted by equity award vesting activity in that quarter. In closing out my comments, I'll turn to slide 14 to provide a brief update on our forward-looking guidance, which we want to reiterate continues to reflect the level of uncertainty over near-term credit conditions. In terms of loan and deposit growth, we reiterate our full-year 2024 guidance of low single-digit percentage increases with expectations for flat to low single-digit percentage growth in the near term. Regarding the net interest margin, assuming either no Fed reserve cuts or a September 25 basis point cut, we anticipate the margin for the third quarter to be in the 325 to 330 range. As it relates to asset quality, we anticipate modest charge-off activity in the second half of the year that has already been accounted for by the specific reserve allocations, as I previously noted. with provision expense being driven by any other emerging credit trends that are not already captured in the reserve. Regarding non-interest income, we reaffirm a low single-digit percentage increase for full year 2024 versus 2023 with relatively flat third quarter totals versus Q2 levels. And for non-interest expense, we reaffirm low single-digit percentage increases for full year 2024 versus 2023 as well as for third quarter versus second quarter numbers. Lastly, the tax rate for the remainder of the year is expected to be around 23%. And that concludes my comments. We'll now open it up for questions.

And we will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. And at this time, we'll pause momentarily for the first question. And our first question today will come from Mark Fitzgibbon with Piper Sandler. Please go ahead.

Hey, guys. Good morning and happy Friday.

Hi, Mark. Hi, Mark.

I'm just curious. Any impact this morning from the whole CrowdStrike saga?

Yes, but not significant and feels like it's kind of getting – closer to normal as we speak. It really primarily impacted our desktops. So the wire system, online banking, all that stuff was working just fine. And actually, our call volumes in our call center were normal. So it's really mostly been desktops. As you can imagine, a lot of those were in the branches. And so we're working to get all those back up and online. But it hasn't been I know it's had a lot of headline news, but it hasn't, thus far anyways, it hasn't been a big challenge for us. Okay, great.

And then I wonder if you could share with us what percentage of your CDs are repricing, say, between now and the end of the year or over the next 12 months or whatever you might have?

Yeah, over the next 12 months, the vast majority, for sure, Mark. We have some information on slide 10 of the DECC. About $1.3 billion will actually mature in the third quarter, and then another $900 million or so in the fourth quarter. So there's $2.2 or so of it just in the next couple of quarters. So, you know, as you can imagine, you know, we've purposely tried to keep as much of that CD book relatively short to be able to take advantage of potential rate cuts.

Okay. And then on page eight of the slide deck, you guys sort of give some detail on office loans that are going to mature. And it looks like in the back half of this year, you've got like $44 million of criticized office loans that are set to mature. I assume you've been having lots of conversations with those borrowers. Any comfort or any comments around what's likely to happen with those credits?

Sure. Yeah, we are having plenty of conversations. It certainly is manageable. Each one of those criticized and classified numbers over the next three quarters is essentially one loan for each of those key components. So the $14 million criticized to mature in the third quarter is one relationship. That was actually a loan that had matured earlier in the year that we did a short-term extension on. We're working with that borrower now to get some additional collateral. And we expect that we'll get renewed and matured without any issues. So we'd expect that $14 million to resolve without any issues. The $30 million of criticized maturing in the fourth quarter is also one loan. That's a larger participation that we have in a much bigger relationship. I think we've talked about this last quarter. It's really our biggest downtown Boston exposure. Occupancy there is about 85%. We think that's a credit that probably will have either a short-term extension or the bank group will look to extend further.

It actually has a one-year extension built into the loan documents, and so we're just negotiating right now with the agent bank and all the participants with the borrower on how we want to deal with that coming up here.

That's one we'll probably mark. I think that's one we would look to exit if we have the opportunity to do so. That's essentially a transactional loan that is the type of loan that we're trying to reduce very proactively over the next quarter or two. And then lastly, the classified first quarter 2025 maturity is also one relationship. That's still being worked through to understand possible resolutions there. It's sort of a multi- building facility here in the Boston suburbs, but one where the equity investors had been supporting up until the second quarter. But there's expectations that that support will wane here in the second half and that there will be cash flow issues coming up in the second half. So we're proactively working with the borrower now, but it's a bit premature to articulate whether that one will resolve.

Okay. Great. And last question, I wonder if you could just update us on sort of the Worcester expansion, how that's going, and maybe in terms of loans and deposits, and share with us if you have plans for expansion into any other new markets. Thank you.

Yeah, we've been pretty pleased with Worcester so far. We've had terrific leadership in that market, somebody who's been in that market a long time that we were able to attract. He had actually been part of another bank that had been sold. And instead of staying with the bank that bought this Worcester Bank, he came to work for us. He's been a difference maker for us in bringing all of our different lines of business together in that market, you know, commercial, retail, wealth, so that we show up like a bank. So while it's a big market for the amount of branch coverage we have and the amount of loans we have, so we feel like because it was a bit of a de novo, we have a lot of room to grow there as we introduce our unique community bank operating model to that market. Mark, I don't know if you have any specifics off the top of your head.

Yeah, I mean, I think the success we've had there, certainly from a deposit standpoint, has ramped up over the last few quarters. We've really been much more proactive and aggressive in and advertising and promoting in that market, and we've seen actually really good deposit growth there. From a retail branch presence, that's an area where we think some level of expansion and potential de novo makes sense. If you look at our map, we've done a nice job filling in branches in Worcester proper and a couple surrounding towns, but there is still a little bit of a gap to the rest of our eastern footprint. So I think we'll continue to prioritize looking for opportunities to fill in you know, that small gap in the footprint. And then I think to your other question, you know, other markets that we feel, you know, this opportunity would continue to be, you know, the East Boston, north of the city markets that, you know, we're also starting to see, you know, really good momentum and make some progress in. But, you know, we think there's more opportunity there. So, you know, we're continuing to stay aggressive in that market. And then, you know, I think ultimately continuing to fill in, you know, the North Shore, north of the city, Merrimack Valley area, we think, is where there's a lot of opportunity.

That's also where, if you recall, we hired somebody at the end of last year to really manage that North Shore, North Boston market for us, and he's from the North Shore, so he's got really deep knowledge of that market. He's been helpful in sort of guiding us beyond maybe what the numbers would say and some analytical model about where we should have a branch. He's brought some real on the ground, you know, street savvy to, you know, where he thinks we could use additional support in the branch network. So, while we don't have anything, you know, planned right now or, you know, to announce, it's something that we continue to evaluate.

Thank you. You're welcome. And our next question will come from Laurie Hunsicker with Seaport Research Partners. Please go ahead.

Hi, Jeff and Mark. Good morning. Maybe just staying on markets. How do you think about New Hampshire? How do you think about Maine? And Jeff, maybe can you comment if there is a whole bank deal, you know, what's the sweet spot and what's the max you go? What's the minimum you go in terms of size? How do you think about that right now?

Yeah, I would say never say never, right? But we'd prefer to stay you know, primarily, you know, in contiguous markets to where we're currently operating. So, you know, if we're on the North Shore, you know, anything kind of north and west of that in greater Boston would be great. You know, maybe east of Worcester, you know, filling in, kind of bridging Worcester to Boston. And as you know, we go down to the, you know, as far as the Cape and the South Shore and the South Coast. And while we don't have any physical branches in Providence, we do have a home production office there. So that's a market that's also close by. So none of those markets, you know, from an M&A standpoint, you know, we think would be natural for us to, you know, to be in. If you were to say, you know, would we necessarily want, you know, a bank presence in northern Maine or northern New Hampshire, you know, that doesn't have any connectivity to the rest of our franchise, I would say probably not. Again, never say never, but... You know, those don't seem like they're markets that are, you know, sort of contiguous with where we operate. And with respect to size, you know, I think there's a balance, right? I mean, if we had our, you know, our operations folks here, they'd tell you it takes just as much work to do a, you know, a $1 billion deal as a $10 billion deal. So let's do the $10 billion deal. But there's also balance by, you know, what's the integration risk? You know, how does it change the complexity of our balance sheet and the culture of our company, et cetera? So I would think we're going to be pretty measured in terms of size of things that we would find attractive. As we go forward, measured meaning, you know, something, you know, probably less than 50% of our balance sheet, you know, or our size would be, I guess, a good place to start, and then we just go from there.

Okay. And then what's too small? Is a billion too small? Is 2 billion too small? How do you think about that?

I would think less than a billion would be too small unless there was something highly, highly unusual about it. And then, you know, so moving up from there, you know, 2 billion is getting, you know, kind of, you know, closer. And if we had a deal that was $2 billion that we thought made sense financially and met our return hurdles and, was contiguous to where we do business and would add value to the franchise, I suppose we would consider that.

Okay. And then what's that on the asset management side? How do you think about acquisition there?

Well, we'd love to do acquisitions there. We talk about this all the time. It's been really difficult, though, because we've looked at a lot, and there's so much private capital and private equity in that market that And all these RIAs are getting rolled up by private equity and the prices that they're paying just, I mean, they just blow us out of the water. And so that's part of that equation. The other part is there's times when we've spoken to RIAs and they want to be bought and then just continue on the way they always have. And we're like, oh, no, no, no, you're going to be part of Rockland Trust. And that doesn't always resonate with some of the RIAs. So sometimes that knocks us out of contention. So we've really, we've been looking a lot and our, you know, our wealth, our head of wealth is constantly kind of trolling the market and, you know, talking to people, but it's been difficult for the reasons I just stated.

Gotcha. Gotcha. Okay. And certainly your capital position is super strong right now. Didn't look like there were buybacks in the quarter. Can you speak a little bit to how you think about that?

Yeah, we have not announced a buyback plan after completing the plan that was previously announced late last year, and we finished up earlier in the year. So it's part of the constant conversation. You know, I think certainly overall capital levels continue to be very, very strong. So I think, you know, having that conversation makes a lot of sense. But, you know, we were comfortable hitting the pause button there. And, you know, we understand the importance of preserving capital in environments where there's uncertainty. So I think it's just going to be a continuous conversation internally as to whether we put another plan in place. But right now, you know, we're comfortable with excess levels of capital because we do believe it gives us some flexibility for future endeavors.

Gotcha. Gotcha. Okay. And then, And then, Mark, your loan-to-deposit ratio is now sitting at 100%. Where do you ideally want that to be? How should we be thinking about that?

Well, just to clarify, Laurie, we're actually down to 93% at period end. So we haven't approached 100. We've been around 93, 95 over the last quarter or two. So, you know, that's top of mind, you know, every conversation we have. deposit growth continues to be the focus around here. We're a bank that historically are comfortable operating in the low 90s. I'd say that's sort of the target over time that we want to get to. We've made some really good progress here in the second quarter to get back closer to those levels. So that's the continued march to ideally get back down into the low 90s.

Gotcha. Gotcha. Okay. Sorry. It looks like I had a typo here in my model. Okay. No problem. And then just just Just circling back to office on slide eight, a couple of things. Can you help us think about if you have it, you know, what is the occupancy of that $14.4 million that you said it looks like it's going to renew? And then the $10.3 million, I assume that's one credit. I'm just looking for 3Q24. Can you give us, you know, any details about what the... occupancy or vacancy rate either way is is looking for those and then same question for 2q24 that that 20 million um i'm at 30 million and then and then again that that mixed use that 54.7 million dollar relationship do you have any vacancy on that yeah i so maybe i'll start you know all pass rating credits over the next three quarters i would expect we would see very little

negative migration. I don't know how many loans make up the 10 million or the 20 and the 19 in the out quarters. But in general, you know, the experience we've seen over the last three quarters with, you know, pass rating credits coming up for maturity, we've been able to renew, extend, or get some level of payoff. And I'd expect that to be the case with all those credits. I just don't have how many loans make up the 10 million. The $14 million criticized maturing in the third quarter, I don't have the occupancy level in front of me. But as I indicated, I think, in Mark's question, that's one that we feel really good about in terms of expecting that to renew without any issues. So I think occupancy there is pretty good. The $30 million is, like I said, there's good occupancy there. It's a much larger facility. that is likely to get an extension here in the fourth quarter. But as I think, as we indicated, that's that is one that, you know, if we have the opportunity to exit, we'll, we're going to pursue that. The $55 million that's coming to that occupancy is down to about 45 or 50%. So there is, you know, cash flow concern expectations coming up in the second half here.

Got it. Okay, and then just one more question around this. These three buckets, the $25 million in 3Q, $50 million in 4Q, and $75 million in 1Q, how much of that is Class B or C?

Do I have that? I don't know if I have that breakdown on the future maturities.

I mean, the $30 million in Q4, that's Class A. The $50 million in Q125 is class BC, probably.

Yeah. The other smaller loans I don't have in front of me, Laurie.

Okay. Okay, great. And then, Mark, one just last quick question here. Tax rate for 2024, how should we be thinking about that? Is it also going to stay at that 23% level or does that come up?

For the rest of 2024?

I'm sorry, for the rest of, sorry, 2025. My apologies. You gave 2025, but we look forward. What should that be looking like?

Yeah, I think around 23% is a good proxy for now.

Okay, perfect. Thanks for taking my questions.

You're welcome.

And our next question will come from Steve Moss with Raymond James. Please go ahead.

Hi, good morning.

Hi, Steve.

Jeff, maybe just starting on the margin here, you know, with, with the, uh, the good to see the pivot here in terms of the margin, just as we think about it going forward here, is it more a function of your funding costs continue to moderate lower, um, as, as, as bigger drivers assets continue to reprice or, you know, I see your cash flows here for the second half for the remainder of the year, but just kind of curious if it's funding versus asset repricing.

Yeah, this is Mark. Steve, I'll take that one. It's actually going to be both. So we're seeing, you know, in terms of just what's coming up for either repricing or maturity on the loan book, that's been giving us on average probably six or seven basis point lift on the margin each quarter, just in terms of what's rolling off at lower rates and being replaced with better pricing. So Just natural runoff of the portfolio being replaced with higher earning assets gives us six to seven basis points lift. We talked about hedge maturities in the past. We had put on a number of macro level hedges on the loan book that had fixed one month so far at much lower rates. We entered into those years ago. As those start to mature, In essence, those loans revert back to floating rate loans, and you're getting the lift associated with that. So just by allowing those hedges to mature, we had $100 million mature in the second quarter. There's nothing maturing in the third quarter, but then another $100 in the fourth as well, $100 million. So that dynamic has been giving us about a two basis point lift on loan yields on a quarterly basis. And then lastly, by allowing the securities book to roll off at much lower yields, that cash flow is getting redeployed either into loan growth or paying off borrowings. And that's given us another two basis point list, give or take on a quarter. So your overall earning assets between the repricing of the loans, the hedges, and the securities, that's about a 10 basis point increase, which is pretty much what you saw in the second quarter. I'd expect that to continue. What you also saw in the second quarter is the ability of the deposit growth to allow us to pay down those much higher cost overnight borrowings. So even though the cost of deposits was up 17 basis points, the overall mix of funding improved significantly such that overall funding cost is only up eight basis points. And I think that dynamic should continue into the second half. We should be able to stabilize deposits and or grow them. And I think you're getting to the point now where the high-priced CDs and other rate-sensitive deposits are not having as big of an impact on the cost of deposits. So overall, funding costs should continue to stay, I would say, in that high single-digit increase mode. So the net-net of all that should result in some modest NIM expansion.

that's all that's helpful. And then just in terms of Fed cuts here, if we get a couple of rate cuts here later this year and into next year, kind of curious, you know, how you guys are feeling about the margin in that kind of environment.

Yeah. I think we've, we've talked a lot over the last couple of quarters with the investor community. I feel really good about, you know, our balance sheet, I'd say being in a much more neutral position to absorb either rate cuts or a longer for hire scenario. So, you know, We are now sitting with about 25% to 30% of the book that reprices off the short end of the curve. Some of that is mitigated by the hedges that we still have in place. But I think we have the ability to offset that on the deposit side, especially with keeping the CDs as short as we did and being able to move on some of the exception pricing. I'm not in the camp that I would predict within the first two months of a Fed cut that you'll see the margin improve. I think it will take a little bit of time on the deposit side, but I think in a three to six month window, if the Fed cuts, we should be able to get enough on the funding side to offset where we'll see some yield pressure on the floating rate loans. So a long way of saying, I think we have levers that you know, we'll be able to take advantage of Fed cuts in the short term. And then I just think, you know, a flattening or a normal slope curve only means better margin going forward in the long run.

Right. No, I hear you there. Okay. Appreciate that. And then in terms of the, I know we talked a lot about the, the criticized in office, but just in terms of the non-performers that you have, I know the largest one being a CNI, and then there's two offers underneath just an update on, you know, before you stand on resolution of those credits?

Yeah. Yeah, the CNI, you know, that relationship is in a bankruptcy situation. So, you know, we're really just working through hopefully what would be, you know, collateral sales to allow for repayment. So based on the appraisal we got recently, you know, we felt it was appropriate to increase that reserve slightly here in the third quarter. So, sorry, in the second quarter. So we now have, you know, slightly under $6 million of reserve, which we believe is appropriate given our understanding of the value of the collateral. So, you know, I don't think there's an immediate resolution there, but we feel, you know, we have the loss well contained. I'd say similar on the larger office non-performing, the $11 million, well, it's on the books now for a little over $7 million. That's one that we took a charge off on back in the fourth quarter based on expectations of a note sale. That note sale unfortunately had fallen through earlier in the year, but there's expectations now of another potential note sale or similar resolution. And again, we feel the charge off we took should give us protection for where we think that will ultimately resolve. So as I kind of noted in my prepared script there that We believe we have the loss contained in those non-performing assets. There might be a little bit of noise as they ultimately come through the resolution, but I think for the most part, we feel that that loss exposure is behind us.

Okay, great. I appreciate all the color. Thank you very much, guys.

You're welcome.

And once again, if you would like to ask a question, please press star then 1. Our next question will come from Chris with KBW. Please go ahead.

Good morning. Good morning.

I just wanted to follow up on the CD discussion. And I don't know if I didn't hear this, but what's the current offering rate on new CDs?

Yeah, we have a promotional rate at 5% for the most part still, Chris. We'll assess that throughout the third quarter, certainly, as market expectations for a cut become a bit more clear. But right now, we still have a 5% offering out there.

Got it. And have you guys reduced offering pricing on any deposit products here to date?

We typically don't want to talk too much about uh, deposit pricing. Um, but for the most part, I'd say we can, we have biweekly conversations where we're constantly looking at deposit pricing. We look at the market, our competition. Um, so we, we adjust, you know, when we feel appropriate, um, and we'll continue to do so through the, through the second half.

Got it. And, um, You know, on the M&A discussion, I saw that, you know, the CRE concentration ratio is down this quarter to 306%. Is there, you know, you guys have pretty robust capital levels in general, but how much does the CRE concentration ratio kind of come into your forward strategic planning? Is there you know, a target level or range that you want to operate at, you know, over the medium or long term? And does that, you know, will that factor into any potential, you know, M&A, you know, discussions going forward as, you know, whether, you know, an acquisition, you know, if it would increase it to a certain level, would that kind of deter you away from pursuing it?

Yeah, I'll start. And then, Mark, if you want to feel free, but I'd say to answer the first part of your question, we'd really like that ratio to be below 300%. I mean, that's one of the regulatory benchmarks, and we'd like to be below that. We've been in this exact position in years past where because of an acquisition took our ratio well in excess of 300%, so we're working that down, and I don't know that we have a target per se, like is it 275%, is it 250%, The way I think about it is I want it below 300%, or I think it should be, and then I want enough room underneath that so that we can continue to support our good strategic commercial real estate relationships. We're not walking away from them. We're not walking away from the business. We're trying to reduce some of the transactional business that we've acquired over the years and give us flexibility to to go back to being what we're really good at, which is providing service to clients in our footprint, whether they're commercial real estate or otherwise. With respect to acquisitions, it's kind of deal-specific, I guess. Given our size and what I had said earlier about the ideal size of a potential target, I don't think that commercial real estate concentration at a target would would in and of itself be limiting. But, again, it's all going to depend on, you know, how much continued progress we make in getting our ratio down and then what the target ratios commercial real estate would be and then where does that land. But I don't see it to be overly problematic, you know, as I sit here today.

And I would just emphasize, I think, you know, we're a team that isn't new to thinking about, you know, some level of balance sheet restructure in conjunction with the deal, you know, and getting comfortable with, you know, executing on a plan that, you know, we can see there's a pro forma result of a balance sheet that makes sense. So if there's, you know, a strategy involved with a deal where there's some level of balance sheet restructure, I think we're comfortable looking at that and making sure, you know, it's all incorporated in the modeling and still meets the returns we'd be looking for.

Great, really helpful. And, you know, thinking about kind of the mix and the level of, you know, net growth, medium term, you know, you mentioned trying to exit, you know, transactional, you know, CRE that's on the balance sheet, you know, over time and, you know, focus on the core relationships. Even just the general number, any sense on, you know, what the dollar amount is of, you know, the transactional CRE? you know, on the books right now that you'd like to kind of move on over time?

Yeah, I don't know that we have a specific, like, bucket of transactional, you know, quote, unquote, commercial real estate. I would say it's definitely skewed towards some of the legacy East Boston Savings Bank relationships. But as we think about reducing in exiting some of those transactions. Some of them are quite obvious, right? I mean, we're a small participant in a really big deal and, you know, really don't even have an active dialogue with the client. Some could be, you know, we did one loan or East Boston Savings did one loan for this client and that's all they've done, but maybe they really didn't ask for any other business. So we're open to the idea that some of these transactions, you know, quote, unquote, can actually be relationships, but, you know, You know, we have to have the conversation with the borrower first. And so all our bankers know that. I mean, we've been talking about this for the better part of six months with our commercial real estate teams. And so they know the play that we're running. And, you know, again, it's not like I can say it's $300 million, it's $500 million. It kind of goes back to our tagline where, you know, each relationship matters. We're evaluating each one.

I think to Jeff's point, I would say it's mostly concentrated in some of the acquired portfolios. I'd say a lot of the legacy. Rockland Originations, there's very little in way of what we would consider transactional. And it's certainly not the majority of the acquired portfolios either. I think it's a segment of those. And in particular, you're seeing some of that manifest itself in some of the office portfolios. relationships that we've been talking about. Those are the types that we're referring to where if we can be proactively looking to move away from those or exit some of those relationships, I think that's going to be part of the playbook going forward.

Great. And then just circling back to the 1Q25 office maturity, that's classified with the 45 to 50% occupancy. You know, any thoughts around just, you know, what, you know, is there a specific reserve already set to that credit? If not, any thoughts around, you know, how that gets resolved, you know, between now and, you know, the maturity date? given that 45 to 50% occupancy, it seems like extending the credit or the maturity doesn't really solve the issue probably.

Yeah, just a couple of things maybe on that. One is we don't have a specific reserve against it at the moment. We're in the middle of getting an updated appraisal, which I think will give us some insight into whether or not we feel one is appropriate. And like a lot of the credits that we're working through, we're going down multiple paths here. We're trying to work with the borrower and see if there's a solution there. We're also exploring the idea of selling the loan if we feel like we can't come to terms with the borrower on what the future looks like. Again, each one of these is different. This one is no different than that in that we have a couple of different things that we're trying to push at. But I think the important message here in my mind is we're being very proactive. We're not sitting here waiting for the first quarter to come by and then say, oh, what are we doing about this? This has a lot of eyes on it at the moment.

And to be clear, there's no reserve on it because – It has been performing to date, but we know because of that proactive communication, there's likely impaired cash flows coming into the second half of the year. So we're exploring those options as we speak.

Great. And have you guys tested the waters at all, even if nothing actually went through and was executed on? in terms of, you know, marketing any office, you know, loan sales at all over the past, you know, six to 12 months? And if so, you know, kind of, you know, what were the discussions, I guess, around, you know, pricing or bids?

Yeah, so we have, you know, we probably maybe six or nine months ago kind of dipped our toe in the water to see what, you know, what we thought um, you know, might be a market clearing price for a portfolio of loans. We actually didn't like what we got back. Um, and you know, so on we go and, um, and we're doing the same thing again now, um, just for good hygiene, you know, what, what, you know, what does the market look like? And, and is there a, you know, are there specific loans or pools of loans that we think would, um, help us reduce that, that free concentration, maybe take a little bit of the credit risk off the table. and incur, you know, some level of loss, but we're not going to do something stupid or take outsized losses, you know, if we don't see them.

And, you know, as you guys are going through the process again, I mean, you know, not the pricing levels, obviously, you know, wouldn't want to disclose, but the level, how big is the level of interest?

I think that depends on the pricing levels, to be honest. I mean, that's what I've heard from these guys. And as you know, there is a lot of capital in that market. But I think it's also, you know, the way I've had it described to me is there's a pool of investors that are really looking for more kind of performing, you know, sort of, you know, near par type office loans. And then there's a whole other part of that market that's, you know, looking for a much higher return. And as a result, they're looking for, you know, kind of more of the scratch and dent type loans where they can get a bigger discount and try and, you know, get a better return. And so all of that factors into the mix here when we think about, you know, what the different levers are we have to reduce our portfolio.

Great. Appreciate all the color.

Thanks. You bet.

And this will conclude our question and answer session. I'd like to turn the conference back over to Jeff for any closing remarks.

Thanks, Cole, and appreciate everybody's interest in Independent Bank Corp. Have a great weekend.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.