Independent Bank - Q2 2024

Transcript

Operator (participant)

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 the star then one on your touch-tone phone. To withdraw your question, please press star then two. Before proceeding, please note that during today's call, we will be making forward-looking statements. Actual results may differ materially from these statements due to a number of factors, including those described in our earnings release and other SEC filings. We undertake no obligation to publicly update any such statements. In addition, some of our discussion today may include references to certain Non-GAAP financial measures.

Information about these Non-GAAP measures, including reconciliation to GAAP measures, may be found in our earnings release and other SEC filings. These SEC filings can be accessed via the investor relations section of our website. Finally, please note that this event is being recorded. I would now like to turn the conference over to Jeff Tengel, CEO. Please go ahead, sir.

Jeffrey Tengel (CEO)

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 C&I. 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. In 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.

On that note, I'll turn it over to Mark.

Mark Ruggiero (CFO and Head of Consumer Lending)

Thanks, Jeff. I will now take us through the earnings presentation deck that was included in our 8-K filing and is available on our website in today's investor portal. Starting on slide 3 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 $0.85 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'll turn to slide 4, 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. 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 8 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 % growth in line with overall expectations, reflecting solid new origination activity in both residential and home equity. 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-offs or specific reserves already reflected in the allowance. The allowance for loan loss ratio of 1.05% reflects a 2 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 where 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 6. 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. 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 2 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 and 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 3.25%-3.30% 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 % increase for full year 2024 versus 2023, with relatively flat third quarter totals versus Q2 levels. For non-interest expense, we reaffirm low single-digit % 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%. That concludes my comments. We'll now open it up for questions.

Operator (participant)

We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone 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. At this time, we'll pause momentarily for the first question. Our first question today will come from Mark Fitzgibbon with Piper Sandler. Please go ahead.

Mark Fitzgibbon (managing director and head of FSG Research)

Hey, guys. Good morning and happy Friday.

Jeffrey Tengel (CEO)

Hi, Mark.

Mark Ruggiero (CFO and Head of Consumer Lending)

Hey, Mark.

Mark Fitzgibbon (managing director and head of FSG Research)

I'm just curious, any impact this morning from the whole CrowdStrike saga?

Jeffrey Tengel (CEO)

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.

Mark Fitzgibbon (managing director and head of FSG Research)

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?

Mark Ruggiero (CFO and Head of Consumer Lending)

Yeah, over the next 12 months, the vast majority for sure, Mark. We have some information on slide 10 of the deck 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 billion or so of it just in the next couple of quarters. So as you can imagine, we've purposely tried to keep as much of that CD book relatively short to be able to take advantage of potential rate cuts.

Mark Fitzgibbon (managing director and head of FSG Research)

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?

Mark Ruggiero (CFO and Head of Consumer Lending)

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 will 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.

Jeffrey Tengel (CEO)

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.

Mark Ruggiero (CFO and Head of Consumer Lending)

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.

Mark Fitzgibbon (managing director and head of FSG Research)

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

Jeffrey Tengel (CEO)

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. 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, commercial, retail, wealth, so that we show up like a bank. While it's a big market for the amount of branch coverage we have and the amount of loans we have, 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.

Mark Ruggiero (CFO and Head of Consumer Lending)

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 advertising and promoting in that market. 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 of surrounding towns, but there is still a little bit of a gap to the rest of our eastern footprint. I think we'll continue to prioritize looking for opportunities to fill in that small gap in the footprint.

And then I think to your other question, other markets that we feel there's opportunity would continue to be the East Boston, north of the city markets that we're also starting to see really good momentum and making progress in, but we think there's more opportunity there. So we're continuing to stay aggressive in that market. And then I think ultimately continuing to fill in the North Shore, north of the city, Merrimack Valley area, we think is where there's a lot of opportunity.

Jeffrey Tengel (CEO)

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 street savvy to where he thinks we could use additional support in the branch network. So while we don't have anything planned right now or to announce, it's something tha

t we continue to evaluate.

Mark Fitzgibbon (managing director and head of FSG Research)

Thank you.

Mark Ruggiero (CFO and Head of Consumer Lending)

You're welcome.

Operator (participant)

Our next question will come from Laurie Hunsicker with Seaport Research Partners. Please go ahead.

Laurie Hunsicker (Senior Financials Banks Analyst)

Hi, Jeff and Mark. Good morning.

Jeffrey Tengel (CEO)

I'm sorry.

Laurie Hunsicker (Senior Financials Banks Analyst)

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? 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?

Jeffrey Tengel (CEO)

Yeah, I would say never say never, right? But we'd prefer to stay primarily in contiguous markets to where we're currently operating. So if we're on the North Shore, anything kind of north and west of that in Greater Boston would be great. Maybe east of Worcester, filling in, kind of bridging Worcester to Boston. And as you know, we go down to the 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 loan production office there. So that's a market that's also close by. So none of those markets, from an M&A standpoint, we think would be natural for us to be in.

If you were to say, would we necessarily want a bank presence in northern Maine or northern New Hampshire that doesn't have any connectivity to the rest of our franchise? I would say probably not. Again, never say never, but those don't seem like they're markets that are sort of contiguous with where we operate. And with respect to size, I think there's a balance, right? I mean, if we had our operations folks here, they'd tell you it takes just as much work to do a $1 billion deal as a $10 billion deal. So let's do the $10 billion deal. But there's also balance by what's the integration risk? How does it change the complexity of our balance sheet and the culture of our company, etc.?

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 something probably less than 50% of our balance sheet or our size would be, I guess, a good place to start, and then we'd just go from there.

Laurie Hunsicker (Senior Financials Banks Analyst)

Okay. And then what's too small? Is $1 billion too small? Is $2 billion too small? How do you think about that?

Jeffrey Tengel (CEO)

I would think less than $1 billion would be too small unless there was something highly, highly unusual about it. Then so moving up from there, $2 billion is getting kind of closer. 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.

Laurie Hunsicker (Senior Financials Banks Analyst)

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

Jeffrey Tengel (CEO)

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 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 been looking a lot.

Our head of wealth is constantly kind of trolling the market and talking to people. It's been difficult for the reasons I just stated.

Laurie Hunsicker (Senior Financials Banks Analyst)

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?

Mark Ruggiero (CFO and Head of Consumer Lending)

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. I think certainly overall capital levels continue to be very, very strong. So I think having that conversation makes a lot of sense. But we were comfortable hitting the pause button there, and we understand the importance of preserving capital in environments where there's uncertainty. So I think it's just going to be a continuous just conversation internally as to whether we put another plan in place. But right now, we're comfortable with excess levels of capital because we do believe it gives us some flexibility for future endeavors.

Laurie Hunsicker (Senior Financials Banks Analyst)

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

Mark Ruggiero (CFO and Head of Consumer Lending)

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 that's top of mind. 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.

Laurie Hunsicker (Senior Financials Banks Analyst)

Gotcha. Gotcha. Okay. Sorry. It looks like I had a typo here in my model. Okay.

Mark Ruggiero (CFO and Head of Consumer Lending)

Oh, no problem.

Laurie Hunsicker (Senior Financials Banks Analyst)

And then just circling back to office on slide 8, just a couple of things. Can you help us think about, if you have it, 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 3Q2024. Can you give us any details about what the occupancy or vacancy rate either way is looking for those? And then same question for 2Q2024, that $20 million, or about $30 million. And then again, that mixed use, that $54.7 million relationship, do you have any vacancy on that?

Mark Ruggiero (CFO and Head of Consumer Lending)

Yeah. So maybe I'll start. 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 million and the $19 million in the out quarters. But in general, the experience we've seen over the last three quarters with 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.

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 I think, as we indicated, that is one that if we have the opportunity to exit, we're going to pursue that. The $55 million that's coming due, that occupancy is down to about 45% or 50%. So there is cash flow concern expectations coming up in the second half here.

Laurie Hunsicker (Senior Financials Banks Analyst)

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

Mark Ruggiero (CFO and Head of Consumer Lending)

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

Jeffrey Tengel (CEO)

I mean, the $30 million in Q4, that's Class A. The $50 million in Q1 2025 is Class BC, probably.

Mark Ruggiero (CFO and Head of Consumer Lending)

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

Laurie Hunsicker (Senior Financials Banks Analyst)

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 it come up?

Mark Ruggiero (CFO and Head of Consumer Lending)

For the rest of 2024?

Laurie Hunsicker (Senior Financials Banks Analyst)

I'm sorry. For the rest of, sorry, 2025. My apologies. You gave 2020. For 2025, as we look forward, what should that be looking like? Thanks.

Mark Ruggiero (CFO and Head of Consumer Lending)

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

Laurie Hunsicker (Senior Financials Banks Analyst)

Okay. Perfect. Thanks for taking my questions.

Mark Ruggiero (CFO and Head of Consumer Lending)

You're welcome.

Operator (participant)

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

Steve Moss (Analyst)

Hi, good morning.

Jeffrey Tengel (CEO)

Hi, Steve.

Steve Moss (Analyst)

Jeff, maybe just starting on the margin here. 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 continuing to moderate lower as bigger drivers, assets continue to reprice? Or 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.

Mark Ruggiero (CFO and Head of Consumer Lending)

Yeah. This is Mark. Steve, I'll take that one. It's actually going to be both. So we're seeing, 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 6 basis point or 7 basis points 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 6 basis point-7 basis points lift. We talked about hedge maturities in the past. So we had put on a number of macro-level hedges on the loan book that had fixed one-month SOFR 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 million in the fourth as well, $100 million. So that dynamic has been giving us about a 2-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 2-basis point lift, 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 8 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.

Steve Moss (Analyst)

Okay. 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 how you guys are feeling about the margin in that kind of environment.

Mark Ruggiero (CFO and Head of Consumer Lending)

Yeah. I think we've talked a lot over the last couple of quarters with the investor community. I feel really good about our balance sheet, I'd say, being in a much more neutral position to absorb either rate cuts or a longer-for-higher scenario. So we are now sitting with about 25%-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 3 month-6month 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 we'll be able to take advantage of Fed cuts in the short term. And then I just think a flattening or a normal slope curve only means better margin going forward in the long run.

Steve Moss (Analyst)

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

Mark Ruggiero (CFO and Head of Consumer Lending)

Yeah. Yeah. The C&I, that relationship is in a bankruptcy situation. So we're really just working through, hopefully, what would be collateral sales to allow for repayment. So based on the appraisal we got recently, we felt it was appropriate to increase that reserve slightly here in the third quarter. Sorry, in the second quarter. So we now have slightly under $6 million of reserve, which we believe is appropriate given our understanding of the value of the collateral. So I don't think there's immediate resolution there, but we feel 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. 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 to resolution, but I think for the most part, we feel that loss exposure is behind us.

Steve Moss (Analyst)

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

Jeffrey Tengel (CEO)

You're welcome.

Operator (participant)

Once again, if you would like to ask a question, please press star then one. Our next question will come from Christopher O'Connell with KBW. Please go ahead.

Christopher O'Connell (Vice President and Equity Research Analyst)

Hey, good morning.

Jeffrey Tengel (CEO)

Good morning.

Christopher O'Connell (Vice President and Equity Research Analyst)

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

Mark Ruggiero (CFO and Head of Consumer Lending)

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.

Christopher O'Connell (Vice President and Equity Research Analyst)

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

Mark Ruggiero (CFO and Head of Consumer Lending)

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

Christopher O'Connell (Vice President and Equity Research Analyst)

Got it. And on the M&A discussion, I saw that the CRE concentration ratio was down this quarter to 306%. 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 a target level or range that you want to operate at over the medium or long term? And will that factor into any potential M&A discussions going forward, whether an acquisition, if it would increase it to a certain level, would that kind of deter you away from pursuing it?

Jeffrey Tengel (CEO)

Yeah. I'll start. And then, Mark, if you want to add in, 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. Is it 275? Is it 250? The way I think about it is I want it below 300% or 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 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, in and of itself, be limiting. But again, it's all going to depend on 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 as I sit here today.

Mark Ruggiero (CFO and Head of Consumer Lending)

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

Christopher O'Connell (Vice President and Equity Research Analyst)

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

Jeffrey Tengel (CEO)

Yeah. I don't know that we have a specific bucket of transactional, 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 and 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 really don't even have an active dialogue with the client. Some could be 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, quote-unquote, can actually be relationships, but 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 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 each relationship matters. We're evaluating each one.

Mark Ruggiero (CFO and Head of Consumer Lending)

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 is very little in way of what we would consider transactional. It's certainly not the majority of the acquired portfolios either. I think it's a segment of those. In particular, you're seeing some of that manifest itself in some of the office 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.

Christopher O'Connell (Vice President and Equity Research Analyst)

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

Jeffrey Tengel (CEO)

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. So again, each one of these is different. This one is no different than that. And 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.

Mark Ruggiero (CFO and Head of Consumer Lending)

To make clear, to that.

Jeffrey Tengel (CEO)

end.

Mark Ruggiero (CFO and Head of Consumer Lending)

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.

Christopher O'Connell (Vice President and Equity Research Analyst)

Great. And have you guys tested the waters at all, even if nothing actually went through and was executed on, in terms of marketing any office loan sales at all over the past 6-12 months? And if so, kind of what were the discussions, I guess, around pricing or bids?

Jeffrey Tengel (CEO)

Yeah. So we have. We probably maybe 6 months or 9 months ago kind of dipped our toe in the water to see what we thought might be a market-clearing price for a portfolio of loans. We actually didn't like what we got back. And so on we go. And we're doing the same thing again now just for good hygiene. What does the market look like? And is there are there specific loans or pools of loans that we think would help us reduce that CRE concentration, maybe take a little bit of the credit risk off the table, and incur some level of loss? But we're not going to do something stupid or take outsized losses if we don't see them.

Christopher O'Connell (Vice President and Equity Research Analyst)

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

Jeffrey Tengel (CEO)

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 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 sort of near-par type office loans. And then there's a whole another part of that market that's looking for a much higher return. And as a result, they're looking for kind of more of the scratch-and-dent type loans where they can get a bigger discount and try and get a better return. And so all of that factors into the mix here when we think about what the different levers are we have to reduce our portfolio.

Mark Ruggiero (CFO and Head of Consumer Lending)

Great. Appreciate all the color. Thanks.

Jeffrey Tengel (CEO)

You bet.

Operator (participant)

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

Jeffrey Tengel (CEO)

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

Operator (participant)

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