Good morning and welcome to the Independent Bank Corp. Second Quarter 2019 Earnings Conference Call. Today all participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions [Operator Instructions].

Before proceeding, let me mention that this call may contain forward-looking statements with respect to the financial condition, results of operations and business of Independent Bank Corp. Actual results may be different.

Factors that may cause actual results to differ include these 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. Please note that today’s event is being recorded.

At this time, I would now like to turn the conference over to Chris Oddleifson, President and CEO. Please proceed..

Thank you, and good morning, everyone, and thank you for joining us today. I am accompanied today by Rob Cozzone, our Chief Operating Officer and Mark Ruggiero, our Chief Financial Officer.

We continued our earnings momentum with yet another record quarterly financial performance excluding M&A related charges, operation net income rose to $48.8 million or $1.42 per share significantly up above prior quarter and prior year’s result. On year-to-date basis operating EPS is up 28% over the prior year.

Our core fundamentals remain strong with organic loan and a core deposit generation, solid fee income, continued growth and assets under management, benign credit trends, improved operating efficiency and healthy returns most notably tangible book value per share grew 8% in the last quarter alone and now it’s just about 20% above its level a year ago.

The major milestone in the second quarter of course was to bring a Blue Hills into the fold as of April 1st, which bolted us to a bank with over $11 billion in assets.

Rob will take you through some of the integration details and progress points while Mark will cover the impact and key financial categories but suffice it to say we’re very happy with how things have gone thus far. The talented Blue Hills colleagues who joined our ranks have settled in nicely and are already contributing to our overall success.

Our three new board members who came over from Blue Hills have been very helpful and providing continuity and achieving a smoother simulation. A very noteworthy is that during the quarter when we were focused on a successful integration of Blue Hills, our organic growth engines were running very well.

During the second quarter, we had record new investment management volume. Our assets under management now stand just a tad below $4.25 billion. We had record commercial loan origination, record residential loan origination, and record new core consumer account sales.

All this tells me our brand recognition, our scanning as a tough place to work among all employers and our reputation is having the highest customer satisfaction in Massachusetts continues to serve as well and building our business.

Our footprint continues to extend in contiguous fashion by both de novo expansion and opportunistic acquisitions, providing us a real opportunity to capitalize on the strength of the Rockland Trust brand. We now reached westward to Worcester northern suburbs of Boston southward to Cape Cod and the islands and throughout Greater Boston.

These markets encompass the strongest economic activity in New England along with the most attractive demographics. But, as I've said before, size alone are becoming the biggest local bank is not our ultimate goal.

Rather, we seek to sustain our tracker as a high performing company and the preferred financial institutions to customers in all our markets.

In order to do so, we must continue to balance and need to remain nimble and maintain intimate relationships while possessing some significant sufficient size and scale to continue investing in critical areas especially technology.

We devote considerable resources to the Blue Hills integration efforts and our deep talent pool allows us to move forward another key initiatives. Foremost among them is the significant strides we continue to make in a digital space.

Our implementation of online account opening technology that allows our customer to open accounts in five minutes or less is proven quite successful. The positive accounts open online increased 18% over some of the period last year.

We've introduced new services such as video tellers, card swap and Apple Watch access to enhance the customer experience.

We've also begun to use robotics for such things as processing address change request with a goal to free up our colleagues from handling routine or repetitive tasks, and we continue to strengthen our cybersecurity capabilities protect against that growing risk.

The stakes to remain competitive in the digital space are unrelenting and we intend to keep pace, intelligent, cost effective fashion by prioritizing efforts and areas that improve the customer experience. We've also enhanced to broaden the scope of our enterprise risk management program in tandem with becoming a much larger institution.

This included forming a board of risk committee, revising the membership and other board committees, refining risk appetite and thresholds, expanding dashboard reporting key metrics, strengthening our internal list department and obtaining independent third party reviews. These are just a few of the things are working on.

Needles to say, we're not sitting still and we're optimistic about the future despite the clouds of trade disputes, weak global economies and the Fed appearing to signal that the economy is about the weekend, unless they cut rates.

All this contributes to uncertainty, but the local economic conditions here Massachusetts remain favorable with state unemployment of only 3% at the end of May and real GDP growth of 4.6% on an annual basis at the end of Q1.

So looking ahead as now bigger bank, we believe we are creating the foundation needed for a sustainable future and at the same time preserves are all important culture at Rockland Trust when it sets us on a path of constant improvement and superior performance.

The expression where each relationship matters is well known to all my colleagues and that expression is a living, breathing call-to-action that recognizes our need to work hard to gain our customers trust and add business. It is a seemingly simply idea but as is a complex to put in the action and deliver on a continual basis.

My Rockland colleagues have taken this to heart and exhibit the passion and dedication to continue to exceed expectations, which has led to recognition of our service actions be reputable third parties. We remained disciplined and have an unwavering focus on our competitive advantages.

We continue to take nothing for granted and expect a competitive challenge that external uncertainly will persist and we feel confident in our ability to sustain our track record of growth and performance. That's it for me Rob..

Thank you, Chris. Good morning. I'll provide some additional color on the Blue Hills front before I turn it over to Mark. Following the closing of the acquisition on April 1st, we converted all systems and facilities over the weekend of June 7th.

I can't say enough of all the combined efforts of conversion teams on both the Rockland and Blue Hills sides. Despite the stress associated with learning all new system and transitioning approximately 30,000 households, our new Rockland colleagues continue to serve their customers with care, further solidifying already strong relationships.

As part of the combination, we closed three overlapping branches in West Roxbury, Norwood and Westwood and uniquely, we decided to maintain the Nantucket Bank brand on the island of Nantucket, a brand that dates back to the mid-1800s.

Even with 10 successful acquisitions under our belt, I never ceased to be amazed by the talented colleagues we have working on our integrations and I can't thank them enough. At the Blue Hills acquisition, we added $2.1 billion of loans, 1.9 billion of deposits, a $197 million of securities and a $125 million of borrowings.

As previously discussed, some balance sheet delevering had been performed prior to the closing with more anticipated afterwards. Since closing, we have sold $47 million of securities and have identified an additional $86 million of residential loans to be sold in the third quarter, loans which have been reclassified to help for sale.

In addition, we've allow for accelerated loan run off for segments of the Blue Hills portfolio that don't line up well with ours. While we do not anticipate further loan or security sales, we will continue to allow certain loan portfolios to run down.

On the business side, on-boarded Blue Hills' commercial loan offices began producing out of the gate and our desire to leverage the Blue Hills mortgage operation has already proven them fruitful with record closings during the second quarter. Notably, we have exceeded our initial financial expectations for the transaction.

Tangible book value accretion was north of 2.5%. We have extracted more than 50% in cost saves as of 630. Mortgage banking income was well ahead of expectations for the second quarter and partially due to accelerated purchase accounting, net interest margin dilution was much less than anticipated.

We know that there is more work to be done to fully assimilate former Blue Hills Bank colleagues and customers, but we are confident that we are often the right footprint.

Mark?.

Thank you, Rob. I will now cover the second quarter results in more detail.

GAAP net income of $30.6 million and diluted earnings per share $0.89 in the second quarter of 2019, reflect decreases of the 13% and 29% respectively from the prior quarter’s results, driven primarily by $24.7 million of pretax, merger and acquisition expenses associated with the Blue Hills acquisition.

Excluding these merger and acquisition expenses and their related tax impact, net income and diluted EPS were $48.8 million and $1.42 respectively, new records for the Company and generating increases of 33% and 9% respectively when compared to Q1. This strong earnings performance resulted in a sustained 1.69% operating return on average assets.

In addition, tangible book value per share increased a remarkable $2.36 in the quarter, a direct result of the acquisition impact strong operating earnings and a $0.41 lift attributable to other comprehensive income. And return on average tangible common equity on an operating basis remained strong at 18.1% for the quarter.

Organic loan activity inclusive of the delevering actions taken was essentially flat for the quarter across all categories.

Within the commercial portfolio, strong construction loan growth was offset by decreases in both the commercial real estate and C&I categories; however, as Rob alluded to in his comments, a certain level of loan run-off on the Blue Hills acquired commercial loans was anticipated and offset strong growth in volumes in the second quarter.

On the consumer side, the majority of mortgage production continues to be sold in the secondary market, our overall demand for home equity loan remains a challenge across the industry both leading to flat organic movement for the quarter.

Prospectively, the expanded footprint continues to provide a significant flow of potential opportunity to our lenders and is evidenced an approved commercial pipeline at June 30th of approximately $170 million.

On the deposit side, although run-offs and the acquired core deposits were slightly elevated during the quarter, the Company experienced a strong rebound in demand deposits with 4.6% or 18.5% annualized organic growth in the category for the second quarter.

And within the time deposit category, new broker deposits were obtained to replace the liquidity needed from increased levels of maturing CDs included in the Blue Hills deposit base.

As a result of the movement and balances noted, despite the absorption of the higher cost in deposit base of Blue Hills, we were able to mitigate the negative impact on our funding cost. The overall cost to deposits for the second quarter was still a relatively low 49 basis points reflecting only a 10 basis points increase from the prior quarter.

The Company’s borrowings profile when the second quarter reflected a number of moving pieces including an approximately $250 million increase in federal home loan bank borrowings, a majority of which consist of overnight borrowings.

In addition, the Company fully paid off the $50 million line of credit that was secured in the first quarter for funding the Blue Hills acquisition and redeeming approximately $10.3 million of higher cost callable trust preferred debt.

Amidst a lot of moving pieces for the quarter, the net interest margin of 4.09% for the second quarter came in higher than expected and was boosted by approximately $4.3 million of loan accretion on acquired balances.

Although accretion income to be difficult to predict due to potential volatility associated with pay off activity, a more normalized level of accretion income would affect the margin right around 4%, which reflects a decrease from the prior quarter due to the full quarter absorption of Blue Hills’ lower margin balancing.

And as an update over implications associated with the growing expectations of potential Federal Reserve rate cuts, the Company has entered into an additional $150 million of hedges during the quarter, protecting against downward rate movements, bringing the total has position against lower rates to $750 million as of June 30 2019.

As a reminder, layering on additional protection against reduced rates remains challenging, as market pricing has already factored in the significant rate cuts expected throughout 2019.

Currently, we would expect the 25 basis points Fed cut near the end of July, to result in a decrease in an interest income of approximately $70,000 to $800,000 in the third quarter, and a decrease over approximately $1.4 million to $1.6 million in the fourth quarter. Shifting gears to non-interest items.

The non-interest income of $28.6 million for the quarter reflects an increase of approximately $7.1 million or 33% when compared to the first quarter as every major category experienced an increase from the prior quarter. Some key highlights to know include the following.

Enhanced post acquisition mortgage production capabilities and increasing refinance waves due to the current interest rate environment and natural seasonality have resulted in an over 300% increase in mortgage banking income from a quarter, an increase in assets under administration to $4.2 billion combined with seasonal tax preparation fees have driven strong Investment Management results for the quarter.

The increased customer accounts and core health households resulting from the acquisition have generated higher levels of deposits, interchange and ATM fee income, and lastly, other non-interest income includes approximately $750,000 of income associated with the sale of a small business credit card portfolio as well as increased income from equity method investments in FHLB dividend income.

Total non-interest expensive of $93 million for the quarter represents a $36.7 million or 65% increase on the prior quarter, included in this number is $24.7 millions of merger related expenses, the majority of which includes severance and contract termination costs.

When excluding merger related expenses non-interest expense increased approximately $13 million from the prior quarter, with the major drivers being salaries and benefits increase of $5.7 million, including the new combined higher workforce space, increased incentive expense as well as some transitionary cost through the acquisition for conversion date of June 7th.

Occupancy and equipment expense increased $1.3 million, reflecting primarily the enhanced branch network from the Blue Hills acquisition. A net loss of approximately $1.5 million was realized on the $47 million deleveraged security sale previously mentioned by Rob, which is included in other non-interest expense.

Other drivers of that category increase in the product quarter include increased amortization of intangible assets, acquired in the acquisition, increase consulting expenses, directors fees tied to immediately vested rewards customarily grants and in the second quarter, and provision for unfunded commitments.

Despite the increases and absolute dollars noted, the successful achievement of expected cost days and the Blue Hills acquisition that Rob covered has led to a further reduction in the operating efficiency ratios to 50.7% for the quarter. Asset quality metrics remained strong.

Net charge-offs for the quarter remained at only 1 basis point of loans on an annualized basis and the uptick in non-performing assets are primarily attributable to approximately $5.2 million of combined non-performing loans and other real estate loan balances obtained in the Blue Hills acquisition.

The provision level of $1 million for the quarter was needed primarily to accommodate growth in non-acquired loan balances.

For quick update on the Company's current expected credit loss or CECL preparation, the Company is finalizing its initial forecast assumptions and economic scenarios to layer into the model on top of the loan level historical loss factors.

This step will lead to more refined process of generating parallel runs to the current loss model, which will then need the outputs needed to fine tune assumptions over the second half of the year. I'll now provide a update on guidance for the rest of the year.

Given the significant change in the overall composition of the Company as a result of the Blue Hills acquisition, our guidance will be primarily focused on the second half of the year.

With a continued focus on company's liquidity along with pricing competition and additional expected run offs on certain acquired portfolios, overall loan growth is anticipated to be flat to low single-digit growth for the rest of the year. Deposits are expected to grow in the low single-digit range for the rest of the year.

Assuming no changes to rates from the fed, the net interest margin is anticipated to be in high 3.9% range as previously guided assuming normalized loan accretion levels. However, a reminder, the impact of loan payoff activity can provide for upside potential in any given quarter.

Non-interest income in the third quarter is expected to remain relatively consistent with Q2 results as demand of mortgage banking is anticipated to remain strong until early fall, combined with decreases from nonrecurring items realized in the second quarter being offset by an anticipated gains on the pending deleveraged residential sales.

With no anticipated non-recurring gains and mortgage demand expected to wane in the fourth quarter, non-interest income is anticipated to decrease at a mid single-digit percentage in Q4, when compared to Q2 and Q3 estimates.

With no further transitionary costs and full Blue Hills Bancorp save expectations to be realized in Q3, quarterly non-interest expenses is expected to decrease at a low to mid single-digit percentage, compared to operating Q2 results, and as we have been saying, although no credit concerns are noted for the near-term, eventual deterioration is likely inevitable.

Lastly, the tax rate for the rest of the year is expected to remain around 25%. That concludes my comments.

Chris?.

Thank you very much. We are ready for questions..

We will now being the question-and-answer session. [Operator Instructions] Today's first question comes from David Bishop of DA Davidson. Please proceed..

A question for you, in terms of you saw the uptick in deposit costs, I think that was sort of telegraph some of the pressures, some of the wholesale side Blue Hills, but what are you seeing in terms of the market place? And what are your estimate in terms of the maybe that’s the pace of growth and funding cost on the deposit side in the second half? Or you think there was plateaued just given some of the remix and strong demand you had on the non-interest bearing? Side just curious how you’re thinking about the deposit process as we head into the back half of the year?.

Sure, Dan, I think you hit upon certainly a concept that where we’re looking at closely and that’s essentially the mix of deposits as you can look at. The second quarter results we had very strong growth in demand deposits at 4.6%. Although, we would love to see that growth continue into the third quarter that maybe a bit outsized.

So, certainly, the mix of deposits could put a little bit of strain on the cost of deposits. On the positive side, we are seeing pricing pressures subside. The competition certainly on the CD pricing is starting to come in and I think the industry expectations over potential rate cuts is certainly starting to resonate amongst our competitors.

So, with all being said, I think where we feel pretty comfortable that we should be able to remain deposit cost in check, but I would expect maybe a basis point or two increase into the third quarter probably solely primarily due to the mix of deposits..

Have you all started the lowing a third, I guess, some of your legacy rates on terms of savings and any CDs across the board?.

We have not, David. We have lagged as you probably recognized on the way up. We’re certainly positioning ourselves to reduce rates should we actually get a cut from the fed and use that as they impetus to do so. But as of now, we have not reduced any of our rates on deposits..

And then sounds like a pretty strong quarter on the origination fronts, I'm just curious it sounds like, clearly there were some run-off in some of the legacy, Blue Hills sectors, maybe talk about sort of the pace of the volume of commercial and residential originations.

And I’d be curious just to hear what was our planned attrition on the legacy Bull Hills size versus maybe what was sort of legacy organic run-off that may have caught by surprise, that math sound like pretty strong organic loan growth?.

Yes and we add very, very strong commercial closings in the quarter and in the pipeline numbers that I referenced in my prepared comments suggest that we have really strong momentum going into the third quarter.

So in terms of opportunities, we continue to have very good success in our corporate banking initiative which is sort of the upper middle market customer base.

As you know, we’ve opened a commercial lending office Worcester and we’re really starting to see some opportunities especially in the C&I and ABL portfolios there, and we think there’s market disruption in that space that we can take advantage of.

So, we feel that in terms of new originations going into the third quarter we should continue to see very strong originations. And to your point offsetting that, there is some level of, of acquired portfolio from Blue Hills that we do anticipate will continue to attrite.

In particular, there was some leverage lending loans that, once they become due, we would likely not renew or look to continue on. So, there is still an element of that portfolio still expected to run through.

And then other deals that did pay off in the second quarter is a combination of essentially non-relationship commercial real estate loans where the pricing just didn't really fit, what we think makes sense, or C&I relationships that again just didn't really fit into our typical profile. So nothing unusual, as we said that that run off was expected.

But I think it will still be a combination of that run off offsetting, which should be another strong closing quarter going forward..

And then on the residential side, David, as I stated in my comments, we had a record closing volumes about $240 million in the quarter, combination of combining the sales force of Blue Hills with Rockland, we now have about 40 originators in total and we expect that and obviously the rate decrease driving some refinance volume.

But we expect that to increase to the tune of 22% to 25% in the third quarter, given the pipeline that we had at the end of June. So, obviously that will subside as we head into fourth quarter, but all we expect the third quarter to be quite strong in the residential front..

Got it, that's good color. And then, I guess, Chris from a holistic basis, you guys are over the $10 billion mark, closing in on a $12 billion. Obviously, your relationship banking model is pretty strong ROA.

Do you look at it from a massive size here, we worry about getting away from the relationship driven models and more transactional basis as you get bigger and have to do sort of bigger credits.

Is that sort of holistic concern as you move forward in terms of just growing bigger?.

Yes, I think you have to be very, very focused and diligent to mitigate the natural tendency to for when you get bigger to sort of think about the numbers instead of the people. I think that's exactly sort of what happens to sort of very large organizations as people who are really making the business work day-to-day, don't feel valued and respected.

And we are absolutely focused in on that. And we are -- we have -- they have staff culture that is set naturally mitigates to that tendency. And certainly in our acquisition strategy, we spend a lot of time on the people side.

The numbers and the technical stuff that that yields to a lot of hard work, the people stuff you really have to focus on and be thoughtful on how to really include everybody in the ongoing entity. So that is that definitely is a risk that we understand exists.

And our continued high performance depends on our ability to really maintain that relationship orientation. And I have a lot of confidence that we have a lot of runway to go before I have to start thinking about my colleagues as serial of employee numbers rather than people..

Our next question comes from Laurie Hunsicker of Compass Point. Please proceed..

I just wondered on your other, other expense, that $18.2 million, I know that it included 1.5 million loss in sales securities.

You mentioned that there was some other higher consulting fees, can you tell us what else non-core was in that figure??.

Sure, Laurie. So, in terms of non-core items, I wouldn't say there's this significant items that that would not recur into the third quarter. Certainly some of the consulting expense was a bit outsized, but a lot of that was delays of some of the initiatives that we had intended through the first quarter.

And with a lot of the strategic priorities we have crossing $10 billion, preparing for CECL and a number of other factors, the consulting expense sort of run rate has certainly ticked up a bit in 2019 and is expected to have sort of stayed there.

There is director fees in the second quarter associated with the equity awards that all expense in the quarter that will not recur, that's a $0.5 million. So, I think when you look at the loss on the sale security and the Directors fees, the $2 million there within that category that we can surely say would not occur again in the third quarter.

So, I'd those are two biggest components within that category..

And then just so that I heard you right, the outsize consulting fees will continue to run elevated just simply as you've crossed 10?.

Correct. And in terms of there won't be elevated in terms of what we anticipated. I think it was just from Q1 to Q2, there was a timing difference there that suggested a bigger increase..

Okay. Perfect. That makes sense.

And then also can you just give a little bit more color specifically on the accretion income dollar wise that you're looking at sort of back half of this year and also into next year, as we think about the net interest income line?.

Sure. As my comments suggested, it obviously can be a bit volatile depending on an individual loan payoffs, but I'd say a good on target in terms of a normalized run rate would be half of what we saw in the second quarter.

So I mentioned they're alluded to $4.3 million of total loan accretion and half of that is a good gauge of what the normal run rate would be..

And then Chris, last question for you, oh, go ahead, I'm sorry..

I was just going to say, Lauri, that. That would peg the margin to be right in line with the 4% high threes that we've been talking about..

Okay, right.

So, I guess, yes, if we're looking at that back end, the accretion income which was 16 basis point of NIM will jump down to 10, 9, 8 that's how we think as we go forward?.

Exactly..

And then Chris, you've got one of the strongest currencies in New England. Can you just update us now that you have closed Blue Hills, what is your M&A appetite at this point when you looking for even what's your avoiding any color you could give would be helpful? Thanks..

No, it wouldn't be a complete call without this question from Laurie. So, thank you. Our sort of orientation continues to a strong set of regional franchise. We've seen examples of banks who get a little bit too far field and that would have called sort of like gangly franchise and that's really difficult to manage.

We think our strength is really our tight geographical focus and this is our tenth acquisition since I have been here and they all have been sort of within a very continuous to our franchise and as worked out very well.

If I were to paint a perfect picture, I mean, we'd have a bank in the $15 billion to $25 billion range that's from west includes Worcester and then arcs to the Atlantic ocean, both north and south. That is where there is real sort of concentration of economic activity is.

I mean, if there is a franchise that is sort of a little bit out of that that comes available, we certainly would have a conversation and we love to be in conversations. You know better than I that the banks are sold not bought and any board that wants to have conversation, I'd love to engage and see whether there is something is make sense.

We are disciplined as whole things, so we don’t do strategic acquisitions. We do acquisitions that make sense from strategic point of view but also are fiscally super responsible..

[Operator Instructions] Our next question comes from Matthew Breese of Piper Jaffray. Please proceed..

Just want to round up the NIM discussion, make sure I have kind of everything right. So all else equal no fed cuts, just given your comments that the top line NIM could be in the highest 3.90 range.

Does imply that all else equal to core NIM at this point is going to face compression of couple basis points in quarter? Is that accurate?.

Yes I think certainly the implications are beyond the deposit side, so as I alluded to earlier to the extent we are a little remixing of the deposit, I think that could put a little bit of pressure there and would attribute to the overall potential NIM compression. So, 1 to 2 basis points is a pretty good estimate..

And if you layer an effect cut I think your comments suggest that perhaps pro fed cut is in the quarterly basis its maybe 3 basis points of additional pressure on the core NIM?.

For a full quarter, it’d be more like about 5 bps. So, I mentioned a 1.5 million..

I understood okay..

The third quarter would be about 3 basis points it’s going to be essentially half rate through the quarter..

Got it, okay. And then just the thinking about the hedges you have in place, the $750 million at this point.

What is the protection it provides? If that wasn’t there for instance, what would be the full quarter impact from a fed cut?.

Sure, so of that $750 million portfolio, right now, approximately $560 million of that portfolio is -what we call in the money are already providing protection. So, any rate cut from where we are today that $550 million would protect approximately $1.5 million of that.

So, on a quarterly basis, that's essentially 375, $400,000 in terms of interest income protection. The additional $200 million is that we’re not speaking to as you can expect because of the market conditions, pricing had already factored in at least a couple of rate cuts.

So, those hedges rates provide protection, but not until we get two or maybe even three cuts in as either the fixed rate or the floor that we have on those hedges is in the 170 to 190 range..

And then just thinking about the franchise holistically with Blue Hills certainly some more seasonal island presences, can you just give us an update on how that seasonality will impact on a go-forward basis? The quarter you expect to be really strong, the categories you expect to be different.

And how we should be factoring that into the model?.

Yes in terms of the deposit side equation, the deposit balances actually don’t fluctuate as much as you might expect, Matt, not to an extent that you would see an impact on the Company's overall deposit book. On the lending side, certainly our ability to produce loans on the islands does slow in the late fall and winter months.

That would be somewhat noticeable within our mortgage production now. And then also, on the commercial side, again, it's a small piece of our entire commercial production at the moment. So we're not noticeably in fact that, you you're talking single digit percentage decreases in production as a result of that seasonality..

And just the final one, for me, going back to the accretable yield. If we cut it in half for next quarter, we get to $2.1 million.

At what point do we get to something sub of $1 million in quarterly accretable yields? I know it's tough to model but, just trying to gauge the ramp down cadence on that over the next 18 months?.

So I guess the nuances part of this is this, essentially a large credit assumption included in that fair value mark. And, essentially, the accounting rules because of how you bifurcated the loan books, that entire mark is getting created, and just based upon sort of normal pay down activity.

So full payoffs of loans would create volatility, but you can think about the 1% credit mark on that Blue Hills' book or $24 million, that in theory should be a consistent a credible number over the duration of that portfolio.

So you shouldn't expect to see sort of a significant dip in any quarter after a period of time that should resolve sort of a level interest earning accretion, but the nuance of loan chaos in any quarter would create the volatility..

The next question comes from Collyn Gilbert of KBW. Please proceed..

Thanks, good morning, guys. I apologize. I just got kicked off for a second when Matt was asking his question. So I hope I'm not repeating what he already asked. But I'm just curious on the runoff of the BHBK portfolio.

Can you just remind us again of where the balances are and what you intend to run off?.

So, it's a combination of a few portfolios in particular. On the commercial side, it's primarily isolated to C&I and commercial real estate. There was a significant construction portfolio that came over in the acquisition and we're seeing good standings associated with that.

And that category will naturally either pay off or move into a permanent accretive own over time, but the bulk of what we've been seeing is seeing for payoff activities, to date has been in the C&I increase portfolio.

And I think we'll continue to see that going into the third quarter as some of the highly leveraged C&I book is still expected to attrite. And then given the residential portfolio, been much higher than what we have had, this is natural run off of that portfolio anticipated as well.

So that, in the second quarter, there was around$40 million of run off on the resi book. Some of that was due to full payoffs..

So the 2.1 million we acquired Collyn, we're down to about $2 billion..

Okay.

So another what I was going to ask you is the balances of what, I mean, is the anticipation of one-off that pull to $2.2 billion?.

No, of course, not..

No, yes..

The small fraction I'd call it a couple hundred million within that book that doesn't line up with the categories of commercial lending that we're comfortable with. And so, we let those trades over time.

So, now little less than $100 million for the second quarter, looking at from we have similar mile as we head into the third quarter and then to start to slow thereafter..

That's helpful. And then, just in terms of the dynamic between the originations and any paid on that you're seeing.

What's the rate on difference that you are seeing on some of those loans to kind of paying down? And then, versus what the origination rates are?.

There hasn't been I'd say a sizable differential between them. As you know, part of the trade off of our are somewhat modest organic growth is that we continue to stay very disciplined over pricing. Certainly, in the market we're continuing to see spreads coming in but those are the deal that we don't actively go after.

So, we're continuing to see volume and getting deals with spreads in sort of our price range. On the on fixed rate side, certainly pricing has come in a bit and that anticipated obviously was what's expected from the Fed. But in terms of the delta between the runoffs and new originations, we don't see much of a significant impact as a result of that..

And the new volume is pretty close to our current book yields, now to Colin, so it feels to us like the loan yield is stabilizing, if you strip the volatility with purchase accounting..

Okay. Okay. That's helpful. And then just lastly on mortgage banking, you guys offer great color there and that's seems to be obviously coming in very strong.

How beyond that you're anticipating in kind of third and fourth quarters? Just longer-term kind of broad way, how do you see that business contributing to you guys in 2020 and beyond and then just given the infrastructure that you sites, you got 40 kind of originator on staff now.

How should we think about that business contribution in a little bit longer-term?.

Yes. You know, historically, we struggled with mortgage business Collyn, to some extent the emphasized it and favored the offering as a supplement to our banking relationships.

The majority of our volume purely by necessity was coming from our existing customer base and making the connection between our LOs and our branch personnel and commercial lenders and alike, but that was largely because we were not successful in recruiting LOs those that had relationships with local CLIs.

Blue Hills on the other hand has had lots of success recruiting those individuals, and so they're able to bring new the bank customers via the mortgage channel, giving us the ability to cross-sell, hopefully cross sell bank services to those mortgage customers.

And then the other piece of equation is the ability to leverage the infrastructure and have an infrastructure that delivers a very good customer experience. In the past with a team of 20 LOs, it’s difficult to support an internal mortgage operation.

Now with 40 good producing LOs we can efficiently support an internal mortgage operation but especially an internal mortgage operation that delivers a great customer experience because Blue Hills made the right investments in customer phasing as well as LO phasing technology.

So we don’t anticipate that it will be a significant contributor to the bottom line on a run rate basis. It will be a good contributor and will be able to enhance our offerings to both customers and prospects. But certainly, this quarter and next quarter any indication, we’re feeling very good about what we have done on the mortgage side..

I think we should probably get that our aspirations to mortgage business are consistent with our branch..

That's right..

And we don't have aspiration to go super regional or national..

That’s exactly right. No aspirations for that at all..

The next question comes from David Bishop of D.A. Davidson. Please proceed..

Yes good morning guys. Just one quick follow-up. Chris, you've mentioned the health of the regional economy there and I think there’s discussion about the loan pricing.

That being said, any loan segments maybe especially on the CRE side where you guys are pulling backs, but I am just seeing pricing and structure that’s getting too frothy where you're just putting the brakes on and then stepping aside?.

I can answer that David. You’re seeing the decline in the CRE portfolio over the last several quarters flat to down in the CRE book and that is purely due to a competition that we’re seeing on the CRE front.

We’re seeing both credit terms as well as pricing continue to come in and we continue to see anecdotal evidence of spreads being narrower than the prior quarter. So, we expect the modest decline in the CRE book to continue.

Where we have been seeing opportunities is obviously on the construction side and some of the smaller deals and the expertise we have in the construction space have allowed us to capital on those. And with those transactions, we’re able to get healthy pricing as well as very good credit terms and loan terms overall.

I would also say just finally we are bumping up against internal limits on hospitality side. So, we’re only allowing really new production to existing customers there well that portfolio runs down to free up some headroom..

How the exact portfolio?.

You had to ask me that David. I don’t think I have it on my fingertips. 350 issues what I remember, but I could be wrong..

I can follow up offline. Thanks for the colors guys..

Okay thank you..

This concludes the question-and-answer session. I would now like to turn the conference back over to Chris Oddleifson for any closing remarks..

Thank you everybody for all your good questions. We appreciate your interest. We’ll talk to you again in three months and be careful this weekend with this heat wave, stay cool. Good bye..

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect..