Earnings Call Transcript
Independent Bank Corp (INDB)
Earnings Call Transcript - INDB Q1 2021
Operator, Operator
Welcome to the Earnings Call for Independent Bank Corp. Before proceeding, let me mention that this call may contain forward-looking statements with respect to the financial condition, results of operations and business of Independent Bank Corp. Actual results may be different. Factors that may cause actual results to differ include those identified in our annual report on Form 10-K and our earnings press release. Independent Bank Corp. cautions you against unduly relying upon any forward-looking statements and disclaims any intent to update publicly any forward-looking statements, whether in response to new information, future events or otherwise. Please note that during this call, we will also discuss certain non-GAAP financial measures as we review Independent Bank Corp.’s performance. These non-GAAP financial measures should not be considered replacements for and should be read together with GAAP results. Please refer to the Investor Relations section of our website to obtain a copy of our earnings press release, which contains reconciliations of these non-GAAP measures to the most directly comparable GAAP measures and additional information regarding our non-GAAP measures. Also, please note that this event is being recorded. I would now like to turn the conference over to Chris Oddleifson, President and CEO. Please go ahead.
Chris Oddleifson, President and CEO
Thank you. Good morning, everyone, and thank you for joining us on this very exciting day and the latest chapter in the growth trajectory of the Rockland Trust franchise. Joining me on the call this morning are Mark Ruggiero, our Chief Financial Officer; Rob Cozzone, our Chief Operating Officer; and Gerry Nadeau, the President of Rockland Trust and our Chief Commercial Banking Officer. We are delighted to announce the acquisition of Meridian Bancorp and its flagship, East Boston Savings Bank, a strong, well-run community bank with $6.5 billion in assets. Mark and I will be covering the presentation slide deck that accompanied last night’s announcement. But first, Mark will briefly cover our first quarter results, which continue to reflect our track record of solid performances. Following both segments, we will open it up to Q&A. Mark?
Mark Ruggiero, CFO
Thank you, Chris. First quarter GAAP net income of $41.7 million and diluted earnings per share of $1.26 represent a 20% increase from prior quarter results, driven primarily by higher PPP fee recognition and a negative provision, with a reminder that the prior quarter contained $5.2 million of one-time pre-tax costs. The first quarter results produced a 1.26% return on assets and a 9.87% return on average common equity, with both metrics continuing to be impacted by the significant excess liquidity position. In addition, tangible book value per share rose another $0.37 to $35.96 as of March 31, 2021. The major drivers of the first quarter results as compared to the linked quarter are as follows: total loan balances decreased 1.6%, as high attrition volume continued to outpace strong new originations during the quarter. We remain very optimistic about new deal flow and opportunities, as total closed commitments across all loan products, excluding PPP, were approximately $690 million for the quarter and the approved commercial loan pipeline as of March 31, 2021, stands at $30.8 million. Total deposits increased an incredible 5.4% or 22% annualized, fueled primarily by consumer and government stimulus and PPP funding, as well as continued success in attracting new core customers amidst current market disruption. In fact, core deposits grew nearly $700 million, with demand deposits leading the charge with almost 40% annualized growth, while time deposits continued to decline. As for the PPP program, there are approximately $500 million of outstandings and $7.9 million of deferred fees remaining to be recognized related to the original 2020 round. As for the new 2021 round, we currently have over $400 million in the application pipeline and have closed and funded over $360 million through today, inclusive of that $400 million. We anticipate this level of activity to generate approximately $16 million in fees to be amortized to interest income over the five-year repayment schedule or accelerated into income upon full forgiveness. The combination of increased deposits and restrained loan growth has led to even further increases in liquidity. To partially mitigate this, we significantly increased our pace of securities purchases during the quarter, resulting in a $269 million increase in total securities balances. And as a more modest deployment of liquidity, we also made an additional $40 million BOLI investment during the quarter. Net interest income of $95.6 million grew by 4.5% compared to the prior quarter. Consistent with prior quarters, our earnings release includes a roadmap of the non-recurring margin components to help identify core margin trends. The first quarter reported margin of 3.25% increased 15 basis points in the prior quarter and benefited from the recognition of approximately $9.5 million of fees accelerated by the full forgiveness of PPP loans. Excluding those fees and other items, as noted in Appendix B, the core margin remained relatively stable, with core loan yields contracting modestly, while the runoff of time deposits and other pricing changes further reduced the cost of deposits to 10 basis points for the quarter. Also noteworthy regarding the core margin, we entered into another $100 million of macro level one month LIBOR fixed rate hedges, two separate $50 million positions, taking advantage of the recent steepness in the yield curve. Based on current one month LIBOR rates, the transactions result in a pickup of approximately 110 basis points in yield on the $100 million. The negative $2.5 million in provision is reflective of a few key components worth highlighting. Number one, net charge-offs for the quarter were $3.3 million, in line with expectations and deemed to be included in the prior reserve build. Outstanding loan balances decreased during the quarter, asset quality metrics continued to remain strong across the board, and overall, macroeconomic data included in the CECL model continues to improve. Total loan deferrals of $221 million at March 31, 2021, are up slightly from the prior quarter as expected, as they include a portion of accommodation industry modifications that were in the process of being renewed when we last reported. Total deferral balances equate to a low 2.4% of the total portfolio, with 74% of the balance concentrated in the accommodation industry. Non-performing loans decreased $7.6 million or 11.5%, with the recent positive development of an additional $8.4 million of that quarter end balance being paid off in full further reducing the nonperforming totals heading into Q2. Non-interest income decreased $2.2 million or 8.1%, as strong wealth management results and solid mortgage banking income were offset by reductions in swap income, equity securities income, and other smaller items. As a side note regarding wealth management, we crossed a great milestone of $5 billion in assets under administration ending the quarter at $5.2 billion. Excluding one-time costs in the prior quarter, non-interest expense increased a modest 1.7%. Lastly, the tax rate of 22.3% for the first quarter benefited from $1.4 million of discrete benefits associated with low-income housing tax credit investments and equity compensation. I will now shift to providing near-term guidance, excluding any impact of the pending merger. We anticipate net loan growth to remain challenged in the near future as attrition continues to mitigate strong closing activity. 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 is expected to compress modestly as asset re-pricing will slightly outpace our ability to further reduce funding costs at this point. Provision for loan loss will continue to reflect a combination of charge-off activity, net loan growth, and general economic assumptions. As such, a relatively stable economic environment should continue to provide a framework for very modest provision levels on the heels of the significant reserve build in 2020. Regarding fee income, we expect continued strong results from wealth management and we reaffirm our prior quarter guidance that mortgage gain on sale margins are expected to normalize down from the current levels, while swap fee income will continue to be challenged as straight to the balance sheet fixed rate alternatives continue to provide a compelling offer. As for non-interest expense, we anticipate flat to modest increases from Q1 levels. And lastly, our tax rate is expected to approximate 25% for the rest of the year. With that, I will turn it back over to Chris.
Chris Oddleifson, President and CEO
Thanks. Okay. So now let’s turn our attention to the slide deck covering our acquisition of Meridian Bancorp and its East Boston Savings Bank subsidiary. So let’s start on slide three. This summarizes really compelling and cogent strategic and economic benefits. We are bringing together our two profitable and well-performing banks with strong customer franchises, and it is consistent with our strategic view that acquisitions and expansion should focus on contiguous or overlapping geographies with attractive markets. In this case, it materially augments our presence in the highly coveted Boston MSA where we are making good strides in our own recent past. The combination of the two banks improves our market deposit share position, and equally, maybe more importantly this time is East Boston Savings has a very strong commercial banking orientation, which fits quite nicely with our own proven strength in this area. In fact, our combined commercial loan portfolio over $11 billion ranks number one in the Boston MSA amongst all banks headquartered in Massachusetts. The economics of this deal are quite attractive, driven by inherent cost savings, lowering funding costs, and redeploying excess liquidity. We expect this acquisition to result in healthy earnings accretion, top-tier return on assets, and importantly, solid positive tangible book value per share, which is an important benchmark for us. Mark will be covering this a little bit more in detail. And as a soon-to-be $20 billion bank, another important aspect will, of course, be the added scale. This transaction provides us with a greater ability to keep pace with critical investments in technology, especially in the digital space, as well as this will be helpful in supporting the enterprise risk management infrastructure expected of a bank with greater than $10 billion in assets here. We are really thrilled that East Boston will also bring an infusion of experienced leadership and talent to our ranks, which will help us really hit the ground running and expand customer relationships in Greater Boston. Moving to slide four. For those of you who are not familiar with Meridian and East Boston Savings, slide four provides a snapshot of their operations. They are a well-established community bank with roots dating back to 1848. As you can see here from various measures displayed, this is a healthy, profitable and efficient bank, with a highly complementary balance sheet to ours. With over $5 billion of loans and deposits, East Boston Savings is a well-rounded and thriving banking franchise with, as I said, longstanding expertise in commercial lending. They have earned a niche in the global marketplace and we feel there is considerable value in their commercial origination model. Their long-term CEO, Dick Gavegnano, has done a terrific job in growing the bank over many years. He and his management team have built a formidable competitor among community banks in this region. Dick was born and raised in East Boston, and has retained deep roots and a visible presence in the area, with strong connections to local businesses, non-profits, and individuals. Fortunately, he’s agreed to stay engaged with the business in a consulting role for well over the next few years. I am really looking forward to working with him. Both companies share a focus on strong colleague engagement and customer focus. Both of us are committed to our local community involvement and charitable giving. I think that all this bodes well for a healthy cultural integration. Moving to slide five, you can see that the end market nature of this acquisition with their 43 branches tightly concentrated in the City of Boston and nearby towns. You also see the lift to deposit share in the Boston MSA generated by this combination and Massachusetts as a whole. The demographics of this market are superb, as shown by the median household income comparisons shown on slide five. This presents a great opportunity for our wealth management group, which has done well in making inroads in previously acquired markets. Also, this is certainly the deepest commercial banking market and is home to some of the fastest growing industries such as biotech, healthcare, education, and financial services. And as we all emerge out of the pandemic-induced slowdown, we are optimistic about the recovery and prospects for the vibrant Boston economy. By combining our two sizable commercial banking franchises, we will bring more talent, lending capacity, and deeper product sets to our combined customer base. Regarding the branch network, there is some overlap between our two companies, which allows for some level of consolidation and that also vividly portrays the breadth of our footprint from Greater Boston all the way to Cape Cod and the Islands and out to Worcester. More recently, we have been expanding in the attractive Worcester market with encouraging progress and great customer reception to date. So, I will let Mark cover the next few pages, who will go into a little more detail. Mark?
Mark Ruggiero, CFO
Thanks, Chris. As we slide over to page six, as Chris indicated, management is very excited about this combination and its underlying potential. As you can see on the pricing summary, the deal reflects a total transaction value of $1.15 billion. This is an all-stock transaction with a fixed exchange rate of 0.275, and the pricing equates to 150 times tangible book value and 10.3 times estimated 2022 EPS with fully phased-in cost savings. We use our stock judiciously when considering acquisitions and demand they meet the high bar that we and our shareholders require, and we are confident that this deal checks all boxes. We anticipate a closing date in Q4 of this year subject to the customary approvals. And as Chris noted, Dick will have continued involvement in business and community engagement over the next few years, along with an infusion of key talent coming over from East Boston Savings. And our commitment to community involvement and charitable giving will be equally emphasized in this market. Moving to slide seven, you can see the deal reflects very attractive pricing and economic benefits. In conjunction with the most widely followed pricing and accretion measures, we compare very favorably to similarly sized transactions over the past two years. This adds to our confidence that this is a well-priced and well-structured transaction, and consistent with our approach to many prior acquisitions. As Chris said, we are very attentive to the impact on tangible book value when considering potential acquisitions and are pleased by the material accretive impact expected in this transaction. Slide eight provides further information regarding the strong profitability and return performance measures arising out of this acquisition. As the previous slide noted, you can see the deal reflects a tangible book value per share accretion of 7.9% upon closing, earnings accretion well above 20% with fully phased-in cost savings, a pro forma ROA of 1.2%-plus, pro forma efficiency ratio below 50%, and an IRR of approximately 16%. We also like to highlight the fact that our pro forma capital and loan loss reserves are expected to remain in a solid position and be able to support future growth or other strategic capital actions. Regarding the latter, though not specifically included in the model results, we do believe that the potential to repurchase a portion of the shares issued in this transaction is quite feasible and would make the pro forma profitability metrics even more compelling. And with the projected asset size of $20 billion and a much bigger market cap, we are positioned to enjoy the benefits of increased scale and operating leverage that Chris touched on earlier. Slide nine provides a nice visual of the benefit of this deal. We often talk about where and how potential transactions reflect the one plus one equals three concept. And as you can see here, the expected pro forma return and efficiency measures, with fully phased-in cost savings, represent a healthy improvement over our own projected standalone performance in 2022 and over most of Boston’s as well. Each of us already generated solid individual returns and operated efficiently, and we anticipate this just takes us to another level of excellence. Slide 10 provides further insight on total balance sheet expectations for the next couple of years. I do want to be clear that we do not think of this as a pure deleverage of the balance sheet as we discussed and announced in the Blue Hills transaction a couple of years ago. But we do think it is important to provide transparency into some clear moving pieces embedded in the modeling results. Though not set in stone from a timing perspective, this is essentially an anticipated two-year active management plan, focused on reducing excess liquidity, exiting less profitable deposit relationships, paying off higher-cost borrowings, and reducing certain loan concentrations. More specifically, our assumptions include the following: an immediate pay down of East Boston’s FHLB borrowings currently representing approximately $560 million, and consistent with prior acquisitions and our ability to migrate the deposit portfolios, we anticipate a reduction of $1.3 billion in excess liquidity over the two-year period, which would reflect the outflow of very low-yielding cash positions and higher-cost deposits. This will also allow us to take advantage of Rockland Trust’s much lower funding base in support of a much larger commercial loan portfolio. And we have also assumed that the current environment will lead to a focused strategy in the short term to be selective over commercial real estate opportunities in an effort to ensure we remain diversified across industry and property types and consistent with our historical strategies and risk concentrations. As evidenced by East Boston Savings and our own Q1 results, this strategy is one of cautious optimism. And with a shared focus over quality asset classes and pricing, we anticipate this will result in a continued reduction of the commercial real estate book for the next year or two before assuming growth does resume. In summary, the net result will be higher quality earnings and an improved risk profile. The assumptions presented here go hand-in-hand with the other transaction assumptions laid out in the beginning of the appendix. The key ones there include use of analyst consensus estimates for both banks, cost savings of 45% of Meridian’s expense base, with 80% realized in 2022, core deposit intangible of a 0.25% or approximately $10 million, a 2.15% gross loan mark with a 40% PCD assumption, pre-tax merger costs of $64 million, and revenue synergies identified but not included. Reflecting on this last comment, slide 11 summarizes that the real upside in this transaction lies in the clear prospects to capitalize on the tangible synergies that exist across all our business. The potential on the commercial side as we combine our two very strong franchises is compelling. Both banks have a long history of focusing on relationship lending. This is a business model that we know and execute on very well. Our commercial lenders are already active and quite familiar with the Boston market, and working hand in hand with their experienced East Boston counterparts in their many customer relationships. There’s a real opportunity to deliver our deeper product sets into that customer base, especially in the North Shore locales. This would include asset-based lending, dealer finance, cash management, and treasury services. Plus, given our bigger size, we could entertain larger individual hold levels within our risk tolerance limits. On the retail banking side, we have a significant mortgage platform that can be readily leveraged with East Boston’s large consumer base. Our origination volumes have risen dramatically over the past year or so and we can accommodate more business on our beefed-up platform. Similarly, we have had great success with direct marketing of our home equity offering over the years, and this would be a natural fit with the acquired customer base. Our steady investments in mobile banking and expanded online capability will work well here as well. And of course, the opportunities for our wealth management business are terrific, especially given the excellent market demographics that Chris described. Our unit has grown steadily over the years, exceeding $5 billion in assets under administration this quarter, as I mentioned. It offers a full array of equity and fixed-income products and has a number of experienced investment professionals. There are very few success stories of an investment management business operating within a bank, but ours has proven to be an exception. One of the primary reasons is that a large percentage of new business comes from our branches and commercial lenders. Given East Boston’s strong connections to the centers of influence in their market, the prospects for new business generation are very good. And to round out before I turn it back to Chris, slide 12 simply reflects the extensive due diligence process that was embedded in the deal. All aspects of the business model were thoroughly reviewed, with credit due diligence being a main focus. As you can see here, approximately 75% of the commercial real estate portfolio was reviewed, including 100% coverage of higher risk portfolios, as well as a deep dive into Downtown Boston real estate exposure. Throughout the COVID pandemic, we have been transparent with the investor community around our concern over Downtown Boston and London exposure. And that added focus was embedded in the due diligence approach, which resulted in what we believe is an appropriate deal value in the credit market. The management teams had healthy and collaborative dialogue throughout the entire process, and it was clear from the beginning this was a shared vision of the power of these combined franchises moving forward. This vision encompasses the concepts of sustainability and creation of long-term shareholder value, and it’s been behind the company’s acquisition strategy for over a decade.
Chris Oddleifson, President and CEO
Thanks. Thanks, Mark. So along these lines, the last slide 13 is a composite of all the in-market acquisitions we made over the past 10 years plus. The common denominator across these acquisitions is strategic fit, reasonable pricing, and being financially accretive. In all cases, we have achieved and often exceeded the original expectations. As shown here, our success is borne out at a notable level of shareholder returns and earnings growth rates we have achieved over these various periods. We are especially pleased with how well our tangible book value per share has steadily risen despite these multiple acquisitions. We pride ourselves on our demonstrated track record of seamless and timely integrations and fully expect the same experience in assimilating East Boston Savings. And we are encouraged by our relative stock valuation, and we believe it reflects the success of our past acquisitions and excellent long-term operating performance. We have always characterized ourselves as an opportunistic and a very disciplined acquirer. By augmenting our long-term organic growth performance with periodic selective acquisitions, we strongly believe that we are building considerable franchise value. So that concludes our comments, and we are happy to take questions now.
Operator, Operator
Thank you. Our first question comes from Mark Fitzgibbon with Piper Sandler. Please go ahead.
Mark Fitzgibbon, Analyst
Hey, guys. Good morning, and congratulations.
Chris Oddleifson, President and CEO
Great. Thanks.
Mark Ruggiero, CFO
Thank you, Mark.
Mark Fitzgibbon, Analyst
First, I had a couple of questions related to the deal. There have been several acquisitions recently in rapid succession in New England, and I guess, I have got kind of three questions around that. First, do you think it will continue in your estimation? Second, could you do another deal while the EBSB deal is in process? And third, do you think these deals are a function of the merger map lining up well finally or is it genuine fear on the part of the sellers that they need to build scale to compete?
Chris Oddleifson, President and CEO
Yeah. All great questions. First of all, I want to make the profound sort of prognostication that, yes, mergers and acquisitions will continue as they have since 1985 from 18,500 banks to what do we have about 5,000 now. You look at the Boston marketplace, I mean, it used to be way more opportunity because there were way more stock-based banks. There are still some and I have no idea if anybody is sort of thinking about this, but it’s pretty predictable that these things happen over some time. So, I’d say, I set a prognostication and probably definitely well. Let’s see, I can’t read my writing here. What was the second part of the question?
Mark Fitzgibbon, Analyst
The second question is could you do another deal while the…
Chris Oddleifson, President and CEO
Oh! Yeah. Could we do another deal? If another bank approached us and expressed interest in selling and liked our currency, I would definitely be open to a discussion. However, I would prefer to persuade them to hold off for a bit rather than rush into something. But I wouldn't say no; I would definitely want to talk. I think there's a common theme that as you approach $10 billion, the technology, regulatory issues, and complexity of the banking business increase significantly. The amount of complexity has exceeded our expectations since surpassing $10 billion. We have had to hire more people in enterprise risk management than we initially planned for, and we are on track to address that. Approaching $10 billion is challenging, especially considering the thousands of fintechs out there, which is intimidating. This definitely impacts sellers, but that would be my perspective.
Mark Ruggiero, CFO
I think you are right, Chris. And I would just add, coming off the year we had in 2020, certainly, there was a lot of uncertainty and I think you saw a lot of that reflected in bank valuations. And I think a lot of banks were obviously waiting to get a clearer picture. I think the investor community was trying to get a clearer picture as to what that all meant. And I think there’s just a general consensus now around a clearer picture and a better understanding of valuation at this point. And I think that lends itself to both buyers and sellers getting a level of comfort over these types of deals.
Mark Fitzgibbon, Analyst
Okay. And then, Mark, I think, you had mentioned that you have commercial loan commitments of $308 million. I was curious what the mix of these loans looks like and maybe if you had some sense of what the pipeline yield is?
Mark Ruggiero, CFO
Yeah. You know what? A lot of it is pretty consistent with the industries and asset classes we have been talking about over the last couple of quarters, Mark. Certainly, apartment lending, multifamily, and construction continues to lead the charge, especially in our suburbs and some of the markets that we are in here on the South Shore. We continue to see to a lesser degree some mixed-use industrial and other office space that we are getting comfortable. But it continues to be very well diversified across a number of industries. From a pricing perspective, there is some optimism in the market. We did see a little bit of an uptick in spreads and absolute yields, though, relatively speaking to a number of years ago, we are still talking on the commercial side anywhere in that mid-3 to upper-3 range depending on the product and individual circumstances. But that’s a recent development here that I think is certainly a positive in terms of our comfort level that we should be able to hold the margin pretty tight on our loan yields. You are welcome.
Operator, Operator
Our next question comes from Dave Bishop with Seaport Global Securities. Please go ahead.
David Bishop, Analyst
Yeah. Good morning, gentlemen, and congratulations as well on the quarter and the deal.
Mark Ruggiero, CFO
Thank you, Dave.
David Bishop, Analyst
Quick question just circling back on the slide in terms of the balance sheet restructuring, the reduction in the commercial real estate balances is estimated at $700 million over two years. Chris, I am just curious, just picking your brain, is that more related to concentration concerns from a regulatory perspective, growth constraints, or maybe inherent risk perception of that asset class, just from a holistic basis or as it relates specifically to the more lease exposure, just curious, maybe some of the thoughts behind that winnowing of that portfolio?
Chris Oddleifson, President and CEO
Mark, you can take that.
Mark Ruggiero, CFO
Sure. I’d say that it’s really a mix of everything you mentioned. The primary factor here is our anticipation that this reflects the current environment. Both parties have shared a common vision of being cautious with new originations in this market. When looking at our first quarter results, we both reduced our commercial loan footings to some extent. We believe this cautious approach is prudent, even as we move toward the post-merger phase. It reflects a careful stance on new lending, and as we face the level of attrition we have experienced, this will continue to challenge our outstandings. Additionally, we are mindful of the commercial real estate concentration following the deal. We feel more comfortable maintaining our approach with the understanding that natural attrition will help balance some of that concentration. We have managed similar levels after past acquisitions and are okay with an over 300% commercial real estate concentration. However, we recognize it will exceed levels we've seen in recent years, and we expect that the natural outflow in this environment will assist in adjusting that concentration. We have been open about our understanding of Boston real estate, and there remains uncertainty regarding the implications for office space post-COVID. We are optimistic about the Boston economy, believing it has some insulation from trends in other metropolitan areas like New York. Nevertheless, we want to remain realistic about expectations. Thus, we will take a cautious approach over the next 18 to 24 months to gain further clarity on what that means for Boston office space, which leads us to adopt a more conservative stance on growth expectations. This combination of factors has led us to the $700 million estimate, but this is not an immediate exit strategy we've identified.
David Bishop, Analyst
Okay.
Mark Ruggiero, CFO
There may be specific loans that as we as we get to know the book a little better, maybe there’s a participation or an exit strategy on a one-off here and there. But this is not a pooled loan sale like we did on the Blue Hills acquisition.
David Bishop, Analyst
Okay. And does Meridian have much exposure in the downtown office market, the commercial real estate market or is it pretty de minimis?
Mark Ruggiero, CFO
There is certainly some exposure in Boston, particularly in East Boston and South Boston. However, it's not as significant as one might expect. The company has good diversification in several suburbs and neighboring cities. Specifically, focusing on those three zip codes, about 20% of exposure is linked to downtown Boston properties. In our due diligence, we found that the businesses here have strong customers and sponsors, which aligns well with our relationship lending approach. We were also pleased to note the level of diversification into other nearby cities.
David Bishop, Analyst
Got it. And then more housekeeping, Mark, for you, the timing of the flop restructuring, the payoff, is that something where you intend to do in pre-merger, or is that going to be simultaneous with the completion of the deal?
Mark Ruggiero, CFO
It would likely be simultaneous with the deal. So just from a modeling standpoint, the mark is embedded, the $24 million write-up of that borrowing position, and then we anticipate paying that off immediately. So the $24 million capital hit is embedded in sort of the one-time fair value mark in the model.
David Bishop, Analyst
Got it. And Mark, I think you gave some color in terms of the PPP fees left to amortize. I wasn’t sure, I think that the first round is like $7.9 million fees…
Mark Ruggiero, CFO
That’s right.
David Bishop, Analyst
You funded $16 million. Was the $16 million of fees just specific to the second round or is that total round one and two with that?
Mark Ruggiero, CFO
That pertains specifically to the second round and is based on our expectations. The PPP program is still active, and we still see some new applications coming in. The estimated fees for the new round are projected to be around $16 million, plus an additional $7 million, totaling $23 million that we expect to recognize. Of that, about $8 million will likely be recognized through the rest of 2021, with the remainder depending on the timing of forgiveness for this new round, but it will most likely be in 2022 for the $16 million.
David Bishop, Analyst
Got it. And then just one final question post-merger, as you look at your interest rate sensitivity, any sort of early estimates what that does in terms of maybe the one-year interest rate gap or your nearing asset sensitivity?
Mark Ruggiero, CFO
We discuss how our balance sheet complements itself, and East Boston has successfully reduced their deposit and funding costs over recent quarters. However, they still have a slight liability-sensitive position. When we pair that with our asset sensitivity, it creates a more balanced profile for the future. This adjustment will slightly improve our positioning and offer better protection against downturns. It may limit some upside potential, but not significantly. Overall, their liability sensitivity combined with our position gives us a better balance compared to where we've been.
David Bishop, Analyst
Got it. Appreciate the color, Mark.
Mark Ruggiero, CFO
No problem.
Operator, Operator
Our next question comes from Kelly Motta with KBW. Please go ahead.
Kelly Motta, Analyst
Good morning. At the risk of sounding redundant, congrats once again on the deal.
Chris Oddleifson, President and CEO
Thank you, Kelly.
Mark Ruggiero, CFO
Thanks.
Kelly Motta, Analyst
So, one of my questions, you mentioned that East Boston, like yourself, is a relationship-based lender. How do you identify the relationship managers who you want to stay on and do you have agreements in place to retain them post-merger and your confidence of achieving that?
Chris Oddleifson, President and CEO
I think it was customers or college lenders. Oh, lenders. Oh, yes. So...
Kelly Motta, Analyst
Lenders. Yeah.
Chris Oddleifson, President and CEO
I apologize for the muffled response. This was a key consideration before the announcement, and two senior leaders will remain to lead this region. We are very eager to retain those teams, and the process will start on Monday, which is very important. John Carroll, our COO, has done an excellent job building the CRE portfolio. He has extensive experience in banking and is an insightful, relationship-oriented leader. He already feels like a colleague, and he is truly exceptional. He is definitely on board with us, and we have made arrangements. Frank Romano, another senior commercial lender focused on C&I, will also stay with us. Additionally, Ed Merritt, another senior banker, will remain as well. Dick Gavegnano, the main architect and leader behind this growth, will continue as a consultant for three years. Even though there are many acquisitions, I have had fruitful conversations with Dick, and we are very much aligned. He has deep roots in East Boston and will be a valuable asset and partner. Kelly, you raised a crucial point regarding our success, and I believe we have started off very well.
Kelly Motta, Analyst
Great. That’s good to hear. Maybe circling back to just the CRE concentration question, do you have an estimate pro forma of where that stands post-close, as well as where you would ideally like to be comfortable getting down to?
Mark Ruggiero, CFO
We do, Kelly. So, slide 18 of the deck that was provided.
Kelly Motta, Analyst
Oh!
Mark Ruggiero, CFO
And I apologize I know I have got a couple reach outs to me during this presentation. This deck is included in an 8-K filing that we issued last night and it may not have been accompanied with this earnings call information, but it is publicly available in the 8-K filing. But to just…
Kelly Motta, Analyst
Oh! I got it. I just…
Mark Ruggiero, CFO
No. I just got it out there.
Kelly Motta, Analyst
Thank you.
Mark Ruggiero, CFO
Slide 18 shows that after the close, we will be around 260%. However, as we previously mentioned, we anticipate a potential short-term reduction post-merger and with this restructure. We believe we will fall into the $325 million to $330 million range, which are levels we would definitely be comfortable with.
Kelly Motta, Analyst
Perfect. Thanks. And maybe just one last one on loan growth for this year, obviously, there’s been a lot of pressure from attrition. Do you expect this to slow at ex-PPP and sort of at least stabilize a bit or do you expect continued runoff in the low mark?
Mark Ruggiero, CFO
Yeah. It’s a very interesting question and one that we have been trying to predict and hope we see some level of reductions in terms of the attrition. But I do think another piece of it you mentioned, Kelly, PPP, I think that’s a very important note to hear that just the level of PPP funding in the market and in our industry really has given an infusion of liquidity to a lot of our borrowers and you can certainly see that reflected in line utilization rates. That was another driver of our reductions in outstandings this quarter as we are just not seeing the level of draws on a lot of the C&I loans and other loans. So, I think, the combination of that excess liquidity and then just a continuation of the low rate environment triggering opportunities for owners and borrowers to look at an exit strategy, sell a piece of property and, unfortunately, payoff the borrowing. So I talked about the pipeline being very strong as we head into the second quarter. So we are very optimistic on deal flow and closing expectations. In fact, now as we come out of, hopefully, as the environment continues to stabilize and we see even just a little bit of relief on the payoff in attrition and maybe the PPP funding doesn’t put as much pressure on line utilization, I think there’s a path there to start to see loan growth. The timing of that is up in the air a bit, but we are hoping that’s a second half 2021 formula.
Kelly Motta, Analyst
Thank you. If I could just one last one. The timing of within 4Q 2021 close within the quarter, what are you modeling?
Mark Ruggiero, CFO
Yeah. We modeled end of the quarter, Kelly, just to keep things cleaner. As you know, it all depends on regulatory approvals and a number of other matters that are somewhat out of our hands. But we just modeled it as an end of quarter close just to keep things cleaner.
Kelly Motta, Analyst
Okay. Thank you so much.
Mark Ruggiero, CFO
You are welcome.
Operator, Operator
Our next question comes from Laurie Hunsicker with Compass Point. Please go ahead.
Laurie Hunsicker, Analyst
Yeah. Hi. Good morning.
Chris Oddleifson, President and CEO
Good morning.
Laurie Hunsicker, Analyst
And I just want to echo what everyone else has said, Dick and Chris, and your teams, congratulations. Very, very exciting.
Chris Oddleifson, President and CEO
Thanks.
Laurie Hunsicker, Analyst
I’m wondering, Mark, if we could go back to your day two CECL, I didn’t see it clearly in there. I backed into it at $40 million. I didn’t know if you had a better number?
Mark Ruggiero, CFO
In terms of the impact of the non-PCD going through the provisioning?
Laurie Hunsicker, Analyst
Right. The day two…
Mark Ruggiero, CFO
It would be about $68 million. The 2.15% all-in credit mark we referenced corresponds to approximately $115 million, with 40% PCD being around $45 million and the 60% non-PCD being close to $68 million to $70 million pre-tax. After tax, it's in the range of $45 million to $50 million.
Laurie Hunsicker, Analyst
$45 million…
Mark Ruggiero, CFO
Yeah. Yeah. $48 million. Yes. $48 million.
Laurie Hunsicker, Analyst
$45 million. Got it.
Mark Ruggiero, CFO
Yeah. After-tax.
Laurie Hunsicker, Analyst
Got it. Okay. Perfect. Okay. And then second question for you, as we look to next year 2022 when you are merged with EBSB, how should we be thinking about tax rate?
Mark Ruggiero, CFO
It should be pretty consistent. They have some tax-exempt lending similar to what we do, but considering their tax rate and the combination of the pro forma pre-tax numbers, I would expect us to remain in the 24% to 25% range, assuming we don’t see corporate tax reform, which would change the situation significantly.
Laurie Hunsicker, Analyst
Got it. Okay. And then can you help us think about the margin outlook for next year if we were to strip out the accretion income, factor in the balance sheet initiatives that you are doing with respect to EBSB and taking out anything in terms of PPP noise? How should we be thinking about that?
Mark Ruggiero, CFO
You mentioned many moving parts. Joking aside, this is how we are considering modeling the pro forma margin. I believe you outlined it similarly to my thinking. If we start with our first quarter results, there was definitely some benefit from PPP in our numbers. When we include the fair value markings, it tells a solid story, as the interest in the liquidity mark offsets the credit mark. Essentially, we're seeing a wash in the accretion related to these numbers, with some noise from the non-PCD accretion. Overall, this results in minimal impact on the pro forma figure. As we account for the PPP balances being removed from the books, it will certainly reduce the margin from what we reported in the first quarter. I estimate that the pro forma combined entity, before any restructuring, is around 3%. This figure excludes all the benefits from PPP that have been converted to cash, providing an outlook with those assumptions. In terms of the balance sheet restructure we have modeled, we are effectively reducing $2 billion in assets, predominantly commercial real estate loans at 4% and cash at 10 basis points. We have assumed repayment of the FHLB borrowings, and have factored in a mix of deposits with a weighted average cost of about 30 basis points. This $2 billion will come off with a net yield of only 50 basis points. While this does lead to a decrease in absolute net interest income, it enhances the quality of earnings and should push the margin back up to approximately 3.2% to 3.25% after restructuring.
Laurie Hunsicker, Analyst
Great. Very helpful. Thank you. Thank you for that detail. And… Just jumping over to your hotel book and I appreciate all the details you give. But can you just talk a little bit directionally? We saw the jump up in deferrals? You went linked quarter from $114 million to $163 million in your $402 million book. Can you just talk a little bit about that and kind of an outlook in terms of how you are seeing things?
Mark Ruggiero, CFO
Sure. I will take a quick stab and certainly, Gerry is on the line as well and if there’s another element here, feel free to add on, Gerry. The increase is really just a reflection of what we talked about when we reported last quarter, where there was about $70 million that we thought could potentially come back on. We were literally in the process of renegotiating a revised modification at that time. So we were not surprised and understood why our reported numbers showed an increase. This was mainly due to the timing of a population that we knew was somewhat in flux. It reflects our hotel and accommodation customers understanding, in most cases, the seasonality around their business and working with them to provide relief to get through 2021, especially considering the winter and spring. There’s essentially very little cash flow right now. When we talk to many of our borrowers, there is a lot of optimism heading into spring, summer, and fall, with significant consumer pent-up demand that many operators are hopeful about. We expect them to have a good year in 2021, which typically provides them the cash flow to service some of their debt going into fall. Our strategy has been to offer a balanced relief package allowing them to continue making interest payments, which was a critical part of all our modifications moving forward. All borrowers are making those interest payments, which gives them additional relief to navigate their seasonality, and we plan to revisit this with many of those customers in early 2022.
Laurie Hunsicker, Analyst
Okay. That’s helpful. Great. Thanks. And then, Chris, I guess, last question for you. As we look at this now combined franchise, you are going to have tremendous earning power. Can you share with us how you and the Board are thinking in terms of a dividend outlook? Thanks.
Chris Oddleifson, President and CEO
Yeah. I will let Mark how do we want to answer that now?
Mark Ruggiero, CFO
Yeah. There’s no secret. We will have very healthy capital levels post-acquisition. I think we talked a little about this last quarter when we did our recent dividend increase. The constraint here is on from a dividend really just relative payout ratio as we all experienced in the low-rate environment some level of compressed earnings. So, absolute levels of capital. We are continuing to be very, very strong post-merger and I think there’s a number of capital levers that we could pull depending on the situation, and as we learn more over the next nine months, whether that’s in the form of a share repurchase, whether it’s in the form of dividend strategy, or just other opportunities to deploy capital. So, all those are on the table. They are all items we will be actively discussing. But there’s no secret. There will be very healthy capital levels and plenty of opportunities to return that value back to our shareholders.
Laurie Hunsicker, Analyst
Okay. Great. And just one more question, can you just share with us again what your target payout ratio is on dividend?
Mark Ruggiero, CFO
Yeah. We typically like to be in the high 30% to 40% range. We are very comfortable at a higher payout ratio in this environment. We are very confident and comfortable when we stress test our capital under a number of scenarios. There’s ample capital to support any risk event. So we have made conscious decisions and like I said, are comfortable with the payout ratio where we are today. But over the long-term, we would prefer to be more in that high 30% to 40% range.
Laurie Hunsicker, Analyst
Perfect. Thank you for taking my questions.
Mark Ruggiero, CFO
You are welcome.
Operator, Operator
Our next question is a follow-up from David Bishop with Seaport Global Securities. Please go ahead.
David Bishop, Analyst
Yeah. Thank you. Hey. A quick question, I think you mentioned the preamble in terms of the expense savings being 45%. Branch consolidation targets, I know, historically, you have all obviously put a lot of emphasis on the branch network; a lot of the business comes from there. Just curious maybe how much that plays a role in terms of the efficiency targets and maybe where else you can garner some savings in terms of hitting that 45% target?
Chris Oddleifson, President and CEO
Yeah. I can answer that, Dave. With every transaction, as you know, you followed us for a long time. We take a careful look at the combined branch network and do a thorough analysis, and we will do the same here. We haven’t made any final decisions at this point. But we recognize that the cost savings assumptions include some level of consolidation. So more on that to come.
David Bishop, Analyst
Got it. From a broad perspective, the merger brings your pro forma assets to nearly $20 billion. Historically, you have been quite specific regarding commercial loan sizes, thanks to your presence in the community. As you grow beyond the $20 billion mark, does this encourage you to consider larger average loan sizes and the types of relationships necessary to drive growth moving forward? I'm interested in how you maintain balance with the longstanding culture at Rockland Trust.
Chris Oddleifson, President and CEO
Gerry Nadeau, our Chief Commercial Banking Officer and President of the Bank, is on the line too. Gerry, do you want to address that?
Gerry Nadeau, Chief Commercial Banking Officer
Thank you. We are not going to change our approach. Our strategy remains consistent. Currently, 80% of our loan volume comes from relationships under $2 million, while 20% comes from those above that amount. Based on our projections, we believe we can maintain our historical organic growth rates by adhering to this plan. We may consider slightly increasing the size of individual loans above $2 million, but there will not be a wholesale change in our strategy at this time.
David Bishop, Analyst
Got it. Thanks for the color.