Q2 2019 Earnings Call
Good morning, and welcome to the independent Bank Corp. second quarter 2019 earnings conference call today, all participants will be in listen only mode should you need assistance. During the conference. Please signal a conference specialist by pressing the star key followed by zero.
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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 may include those identified in our annual report on Form 10-K and on our earnings press release.
Independent Bank Corp. cautions you against unduly relying upon any forward looking statements and disclaims any intent to pub 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 G.A.P. financial measures as we review Independent Bank Corp performance. These non G.A.P. financial measures should not be considered replacements for and should be read together with G.A.P. 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 G.A.P. measures to the most directly comparable G.A.P. measure.
And additional information regarding our non at G.A.P. measures.
Please note that today's event is being recorded.
At this time I would like to turn the conference over to Chris Oddleifson, President and CEO . Please proceed.
Good morning, and good morning, everyone and thank you for joining us today.
Hi, <unk>.
I am accompanied today by Rob because zone, our Chief operating officer, Mark Brugger, our Chief Financial Officer.
We continued our earnings momentum with yet another record quarterly financial performance, excluding M&A related charges operating net income rose to $48.8 million or $1.42 cents per share.
Significantly above both prior quarter and prior years results.
On a year to date basis operating EPS is up 28% over the prior year.
Our core fundamentals remain strong with organic loan and core deposit generation solid fee income continued growth in 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 sits just about 20% above its level of a year ago.
The major milestone in the second quarter of course was the bringing of Blue hills into the fold as of April Onest.
Which vaulted 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 on key financial categories.
But suffice it to say we are very happy with how things have gone thus far.
The talented Blue Hills colleagues, who joined our ranks have settled in nicely and already contributing to our overall success.
Our three new board members, who came over from a little hills have been very helpful in providing continuity and achieving a smooth assimilation.
Very noteworthy is that during a quarter when we're focused on a successful integration of Blue Hills.
Our organic growth engines are running very well.
During the second quarter, we had record new investment management volumes are our assets under management now stand just ish.
A tad below four in a quarter.
Billion dollars.
Oh, we had record commercial loan originations record residential loan originations and a record new core consumer account sales.
All this tells me our brand recognition our standing as a top place to work among all employers and our reputation is having the highest customer satisfaction in Massachusetts.
Continues to serve us well in building our business.
Our footprint continues to extend and contend that contiguous fashion by both the novo expansion and opportunistic acquisitions, providing us a real opportunity to capitalize on the strength of the Rockland Trust brand.
We now reach westford.
To to Worcester to the northern suburbs of Boston awkward to Cape Cod in 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 a biggest local bank is not our ultimate goal or other we seek to sustain our tracker as a high performing company.
And the preferred financial institution customers in all our markets.
In order to do so we must continue to balance and need to remain nimble maintain intimate relationships, while possessing 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 palpable allows us to move forward on other key initiatives a foremost among them are the significant strides we continue to make in the digital space.
Our implementation of online account opening technology that allows a customer to open an account in five minutes or less is proving quite successful.
As Todd said accounts opened online increased 18% over a similar period last year.
We've introduced new services, such as video Tellers card swap an 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 repetitive tasks.
And we continue to strengthen our cyber security capabilities to protect against that growing risk.
The stakes to remain competitive in the digital space, our unrelenting and we intend to keep pace and intelligent cost effective fashion by our proprietary prioritizing efforts in areas that improves the customer experience.
We've also has to broaden the scope of our enterprise risk management program in tandem with becoming a much larger institution.
This included forming a four to risk committee revising the membership and other board committees refining risk appetites and thresholds expanding dashboard reporting key metrics strengthened our internal risk department and obtaining independent third party reviews.
These are just a few other things are working on the head of state we are not standing still and were optimistic about the future. Despite the clouds or trade disputes weak global economies and the fed appearing to signal that the economy is about the weekend I unless they cut rates. All this contributes to uncertainty, but the local economic conditions here in 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 our all important culture Rockland trust on that sets us on a path of constant improvement and superior performance.
Expression, where each relationship matters is a well known to all my colleagues.
Expression is a living breathing call to action that recognizes our need to work hard to gain our customers Trust and added business. It's a seemingly simple idea, but as a complex to put into action and deliver on a continual basis.
Hi, Rocklin 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 by the reputable third parties.
We remain disciplined and have an unwavering focus on our competitive advantages. We continue to take nothing for granted and expect a competitive challenge and external uncertainty will persist.
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 turning it over to Mark.
Following the closing of the acquisition on April Onest.
We converted all systems and facilities over the weekend of June 7th.
I can't say enough about the combined efforts of urgent teams on both the Rockland and Blue Hills sides.
Despite the stress associated with learning all new systems and transitioning approximately 30000 households are 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 and west Roxbury Norbord 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 18 hundreds.
Even with 10 successful acquisitions under our belt.
I never cease to be amazed by the talented colleagues, we have working on our integrations and I can't thank them enough.
The Blue Hills acquisition, we added $2.1 billion of loans $1.9 billion of deposits $197 million of securities and $125 million borrowings.
As previously discussed some balance sheet Delevering had been performed prior to the closing with more anticipated afterwards.
Since closing, we've 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 held for sale.
In addition, we've allowed 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 Onboarded Blue Hills commercial loan offers as began producing out of the gate.
And our desire to leverage the Blue Hills mortgage operation has already proven 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 in 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 off on the right foot.
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 of 89 cents in the second quarter of 2019 reflect decreases of 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 one dollar and 42 cents, 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 a remarkable $2.36 in the quarter.
A direct result of the acquisition impact strong operating earnings and a 41 cents 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 MCN AD 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 closing volumes in the second quarter.
On the consumer side. The majority of mortgage production continues to be sold in the secondary market overall demand for home equity loans 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 and as evidenced by an approved commercial pipeline at June thirtyth of approximately $170 million.
On the deposit side, although runoff in the acquired core deposits was 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 replaces the liquidity needed from increased levels of maturing Cds included in the Blue Hills deposit base.
As a result of the movement in balances noted despite the absorption of the higher costing deposit base of Blue Hills, we were able to mitigate the negative impact on our funding cost. The overall cost of deposits for the second quarter was still a relatively low 49 basis points, reflecting only a 10 basis point increase from the prior quarter.
The company's borrowings profile in the second quarter reflected a number of moving pieces, including an approximate 250 million increase in federal home loan bank borrowings the 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 redeemed approximately $10.3 million of higher cost callable trust preferred debt.
I missed a lot of moving pieces for the quarter. The net interest margin of 4.09% for the second quarter came in higher than than expected and was boosted by approximately $4.3 million of loan accretion on acquired balances.
Although accretion income can be difficult to predict due to the potential volatility associated with payoff activity a more normalized level of accretion income would have pegged the margin right around 4%.
Which reflects a decrease from the prior quarter due to the full quarter absorption of Blue Hills is lower margin balance sheet.
And as an update over implications associated with the growing expectations or 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 hedge position against lower rates to 750 million as of June Thirtyth 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 a 25 basis point fed cut near the end of July to result in a decrease in noninterest income of approximately seven to $800000 in the third quarter and a decrease of approximately 1.4 to 1.6 million in the fourth quarter.
Shifting gears to non interest items, the noninterest 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.
Every major category experienced an increase from the prior quarter.
Some key highlights to note include the following.
Enhance post acquisition mortgage production capabilities, and increasing refinance wave due to the current interest rate environment and natural seasonality have resulted in an over 300% increase in mortgage banking income for the 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 in core core households, resulting from the acquisition have generated higher levels of deposit interchange and ATM fee income.
And lastly, other noninterest income includes approximately $750000 of income associated with the sale of a small business credit card portfolio as well as increased income from equity method investments and FHLB dividend income.
Total non interest expense of $93 million for the quarter represents a $36.7 million.
$36.7 million or 65% increase from the prior quarter.
Included in this number is 24.7 million 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.
The major driver is being of salaries and benefits increased 5.7 million, including the new combined higher workforce space increased incentive expense as well as some transitionary costs through the acquisition core conversion date of June seven.
Occupancy and equipment expense increased 1.3 million, reflecting primarily the enhanced brand that's branch network from the Blue Hills acquisition.
Our net loss of approximately $1.5 million was realized on the $47 million de Levered security sale previously mentioned by Rob which is included in other non interest expense.
Other drivers of that category increased from the prior quarter include increased amortization of intangible assets acquired in the acquisition increased consulting expenses directors fees tied to immediately vested awards customarily granted in the second quarter.
And provision for unfunded commitments.
Despite the increases in absolute dollars noted the successful achievement of expected cost saves from the Blue Hills acquisition that Rob covered has led to a further reduction in the operating efficiency ratio to 50.7% for the quarter.
Asset quality metrics remained strong net charge offs for the quarter remained at only one basis point of loans on an annualized basis and the uptick in nonperforming assets are primarily attributable to approximately 5.2 million of combined nonperforming loans and other real estate owned balances obtained in the Blue Hills acquisition.
The provision level of $1 million for the quarter was needed primarily to accommodate growth and non acquired loan balances.
For a quick update on the company's current expected credit loss or Cecil 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 a more refined process of generating parallel runs to the current loss model, which will then lead to outputs needed to fine tune assumptions over the second half of the year.
I will now provide an 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 liquidity, along with pricing competition in additional expected run off 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 the high 3.9% range as previously guided assuming normalized loan accretion levels. However, as a reminder, the impact of loan payoff activity can provide for upside potential in any given quarter.
Noninterest income in the third quarter is expected to remain relatively consistent with Q2 results as demand over mortgage banking is anticipated to remain strong into early fall.
Combined with decreases from nonrecurring items realized in the second quarter being offset by anticipated gain on the pending de leverage residential sale.
With no anticipated unarmored nonrecurring gain in mortgage demand expected to wane in the fourth quarter noninterest income is anticipated to decrease at a mid single digit percentage in Q4, when compared to Q3 Q2 and Q3 estimates.
With no further transitionary costs in full Blue Hills bank cost save expectations to be realized in Q3.
Quarterly noninterest expense 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 and noted for the near term eventual deterioration is likely the inevitable.
Lastly, the tax rate for the rest of the year is expected to remain around 25% that concludes my comments Chris.
Right. Thank you very much.
We are ready for questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then too.
At this time, we will pause momentarily to assemble our roster.
Thanks.
Today's first question comes from David Bishop of D.A. Davidson. Please proceed.
Hey, good morning, gentlemen, how are you.
Good morning.
Well I hope you are too.
Good good hey.
Question for you in terms of.
You saw the uptick in deposit cost I think that was sort of telegraphed with some of the pressure or some of the wholesale side of Blue Hills, but.
What are you seeing in terms of the marketplace and what are your estimates in terms of the.
Maybe the pace of growth in funding costs on the deposit side in the second half or you think maybe those that those can plateau just given some of the the remix and strong demand you've had on the noninterest bearing side, just just curious how you're thinking about the deposit costs as we head into the back half of the year.
Sure David I think you hit upon certainly a concept that where we're looking at closely and thats 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 that growth continue into the third quarter that may be a bit outsized. So certainly that the mix of deposits could put a little bit of strain on the cost of deposits.
On 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 that being said I think where we feel pretty comfortable that we should be able to remain deposit costs 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.
Got it and have you have you all started the lowering our third I guess some of your your legacy rates on terms of savings.
Any cds across the board.
We have not David.
Yeah, we have lagged as.
You probably recognize on the way up we certainly positioning ourselves to reduce rates should we actually get a cut from the fed and use that as the impetus to do so.
But as of now we have not reduced any of our rates on deposits.
Got it and then sounds like a pretty strong quarter on the origination slots.
I'm just curious it sounds like you know clearly there was some some runoff in some of the legacy.
We'll do hill sectors, maybe talk about.
Sort of the.
The pace of the volume of commercial and residential originations and I'd be curious just to hear what sort of planned attrition on the legacy Blue Hill side versus maybe what was sort of a.
Sort of legacy organic run off that that May have caught you by surprise with that math, it sounds like pretty strong organic loan growth.
Yes, and we had very very strong commercial closings in the quarter and the pipeline numbers that I referenced in my prepared comments suggest 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 up or upper middle market customer base.
As you know, we've we've opened a commercial lending office and Worcester, and we're really starting to see some opportunities, especially in the Cnine SBL portfolio is there and we think there's some market disruption in that space that we can take advantage of.
So so we feel that are in terms of new originations going into the third quarter, we should continue to see.
Very strong originations and then to your point offsetting that.
There is some level of of the acquired portfolio from Blue Hills that we do anticipate we'll 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's still an element of that portfolio still expected to run through.
And then other deals that did that did pay off in the second quarter as a combination of.
Essentially non relationship commercial real estate loans.
Where the pricing just didn't really fit what we think made sense or.
C N I relationships that again, just just didn't really fit into our typical profile. So.
Nothing unusual as we said that that runoff was expected.
But I think it will still be a combination of.
That run off offsetting what should be another strong closing quarter going forward.
And then on the residential side David.
As I stated in my comments, we had record closing volumes.
About $240 million in the quarter combination of combining the sales force of Blue Hills with Rocklin, 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 20% 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 the fourth quarter, but 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 grow over the $10 billion Mark closing in on a $12 billion.
Obviously your relationship banking model.
As produced strong ROI do you.
Do you look at it from a.
Not that size Uri worry about getting away from the relationship driven models more transactional basis as you get bigger and have the do sort of bigger credits is that sort of a holistic concern as you move forward in terms of budget is growing bigger.
Yes, I think you have to be.
Very very focused and diligent to mitigate the natural tendency to four when you get bigger to sort of think about the numbers instead of the people I think thats exactly.
Sort of what happens to sort of very large organizations is people who are rapidly 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 a.
They have a culture that is that is that naturally mitigates that tend to have that tendency and certainly in our 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 b b thoughtful on how.
To really include everybody in the in the ongoing entity. So that is that definitely is a risk that we understand exist and we are.
Our our our our continued high performance depends on our ability to.
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.
Got it great. Thank you for the color guys.
Thanks, Dave.
Our next question comes from Laurie Hunsicker of Compass point. Please proceed.
Yes, hi, good morning.
Good morning.
I am just wondering on your other other expense that 18.2 million I know that it included a million five loss on sale of securities.
You mentioned that there was some other higher consulting fees can you tell us what else noncore was in that figure.
Sure Larry So in terms of non core items I wouldn't say there's.
The significant items that that would not recur into the third quarter certainly some of the consulting expense.
It 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 with the lot of the strategic priorities, we have crossing 10 billion preparing for Cecil.
In a number of other factors the consulting expense sort of run rate has certainly ticked up a bit and in 2019 and is expected to sort of stay 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 half million dollars. So I think when you look at the the loss on the sale of Securities and the directors fees. This was $2 million there within that category that we can we can assuredly say would not.
Occur again in the third quarter.
So I'd say those are your biggest components within that okay. And then just so that I heard you right. The outsize consultant fees will continue to run at elevated just simply as you Cross 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 that you're looking at for the back half of this year and also into next year.
As we think about the net interest income line.
Sure you know as my comments suggested it obviously can be a bit volatile depending on any individual loan payoff, but I'd say a good target in terms of a normalized run rate would be half of what we saw in the second quarter. So I mentioned or alluded to $4.3 million of total loan accretion I think half of that is it is a good gauge of what what a normal run rate would be.
Okay. That's helpful. Great and then Chris last question for you Oh go ahead I'm sorry.
I was just going to say larger that would peg the margin to be right in line with the 4% high threes that we've been talking about.
Right. So I guess, yeah right if were looking at that then.
The accretion income, which was 16 basis points on your math Nam a little jump down to 10 nine eight that type of thing as me coming back.
Great, Okay, Cool and then Chris.
You've got one of the strongest currencies in new England can you just update US now that you've closed Blue Hills, what is your M&A appetite at this point what are you looking for.
Given what you're avoiding any color you're picking up would be helpful. Thanks.
No it wouldn't be a complete call without this question from you already said, Matt. Thank you.
The.
Our sort of orientation continues to be a strong set of regional franchise idle we've seen examples of banks, who get a little bit too far field.
And I would I call kind of a gangly franchise and its really difficult to manage we think our strength is.
Really our tight geographical focus and this is our 10th acquisition.
Since I've been here and they've all been sort of within a very contiguous to our franchise and has worked out very well.
No. The if I were to paint a picture perfect picture I mean, we'd have a up.
A bank.
In the 15 to 2020 $5 billion range. That's from West includes Westar and that harks to the Atlantic Ocean, both north and South.
That is where there's real concentration of economic activity is.
If there is a franchise instead of a little bit out of that becomes available. We certainly would have a conversation.
We love, we love to be in conversations and Matt at this.
You know better than I did banks are sold not bought.
And any any board that wants to have a conversation that I'd love to engage in and see whether something is ours is a make sense.
We are.
Discipline or disciplines as whole thing so.
We don't do strategic acquisitions, we do acquisitions that may make sense from.
From that makes sense from a strategic point of view, but also our.
Fiscally Super responsible.
Great. Thank you Chris.
Thanks.
As a reminder, if you do have a question during today's conference. Please press Star then one on your Touchtone phone.
Our next question comes from Matthew Breese of Piper Jaffray. Please proceed.
Hey, good morning.
On it.
Good morning to round out the NIM discussion make sure I have everything right. So all else equal no fed cuts.
Just given your comments that the the topline NIM can be in the high three kind of 90 range.
Does that imply that all else equal the core NIM at this point is going to face compression of a couple of basis points a quarter is that accurate.
Yeah, I think certainly the.
The implications would be on the deposit side, so as I alluded to earlier to the extent, we have a little re mixing up of the deposit.
I think that could put a little bit of pressure, there and would attribute to the overall potential NIM compression. So a one to two basis points as is a pretty good estimate.
And if you layer in a fed cut I think your comments suggest that perhaps per fed cut based on a quarterly basis its.
Maybe three basis points of additional pressure on the core NIM.
I'm on for a full quarter it'd be more like about five five bips.
So.
I mentioned a million and a half.
Oh understood. Okay. Okay. So the third quarter would be about three basis points are going to be essentially halfway through the quarter.
Got it okay.
Okay, and then just 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 right.
Of that $750 million portfolio.
Oh, right now approximately $550 million of that.
Portfolio is what we what we call in the money.
We're already providing protection.
So any rate cut from where we are today that $550 million would protect approximately one and a half million dollars up that.
So on a quarterly basis, you know that that's essentially.
375 $400000.
In terms of of interest income protection.
The additional $200 million 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 those hedges provide protection, but not until we get to or maybe even three cuts and as either the fixed rate or the floor that we have on those hedges in the 170 to 190 range.
Understood Okay.
Okay, and then I'm just thinking about the 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 things on a go forward basis. The quarters do you expect to be really strong the categories you expect to be different.
And how we should be factoring that into the model.
Yeah and in terms of the the deposit side of the equation that the deposit balances actually don't fluctuate as much as you might expect Matt.
The.
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 impacted you your you're talking single digit kind of percentage.
The increases in production as a result of that seasonality.
Okay.
Alright.
And just a 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 a million dollars in quarterly Accretable yield I know, it's tough to model, but you know.
Just trying to gauge the ramp down cadence on that over the next 18 months. The I guess the nuance you part of of this is essentially a large.
Credit assumptions included in that fair value Mark and.
Essentially the accounting rules because of how you you bifurcate the loan books.
That entire Mark is getting accreted 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 that in theory should be a consistent accretable number over the duration of that portfolio.
So.
You shouldn't expect to see sort of a.
A significant dip in any quarter. After a period of time that that should result in sort of a level interest, earning accretion, but the the nuance of loan pay offs in any quarter would create the volatility.
Understood. Okay. All right. That's all I had thanks for taking my questions.
Thank you Matt.
The next question comes from Collyn Gilbert of KBW. Please proceed.
Thanks, Good morning, guys.
I apologize I just got kicked off for a quick second one that was asking his question too I hope I'm not repeating what he already asked but.
Just curious on the on the run off of the BHP Cape portfolio can you just remind us again of where the balances are what you intend to run off.
Yes, so it's a combination of a few portfolios in particular on the commercial side, it's primarily isolated to see and I and commercial real estate.
There was a significant construction portfolio that came over in the acquisition and we're seeing good.
Outstandings associated with that and that that category will naturally either.
Payoff will move into a permanent Cree loan over time, but but the bulk of what we've been saying at CN for pay off activity to date has been in the Cnine increased portfolio and I think we'll continue to see that going into the third quarter as some of the.
The the highly leveraged Cnine book is still expected to attrite.
And then.
Given the residential portfolio in much much higher than what we have had this is natural runoff of that portfolio anticipated as well.
So that that in the in the second quarter, there is around $40 million of runoff on the resi book.
Some of that was due to full payoffs, though.
So of the 2.1 billion, we acquired call and were down to about 2 billion.
Okay.
Sorry, and that was what I was going to ask it just is the balances of what I mean is the anticipation to run off that fell to 2.2 billion.
Oh, no no of course, not no no yes.
I'll say this a small fraction it was a call it a couple hundred million.
Within that book that you know.
Doesn't line up with.
But the categories of commercial lending that we're comfortable with and so we'll let those attrite over time.
So how about little less than $100 million.
For the second quarter looking at probably a similar amount as we head into the third quarter and then should start to slow thereafter.
Got it okay. Okay. That's helpful and then just in terms of.
The dynamic between the originations and pay down debt, you're seeing what's the rate differential that you're seeing on some of these loans the credit that are paying down.
And then versus what the origination rate Todd.
Yeah, but there hasn't been.
I'd say, a sizeable 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 come in but those are the deals that are we don't actively go after so were continuing to.
To see volume and getting deals with with spreads and in sort of our price range I'm on the on the fixed rate side certainly.
Pricing has come in a bit and that's anticipated obviously with what's expected from from the fed.
But in terms of the delta between the run off in new originations.
We don't we don't see much of a have a significant impact as a result of that.
And the new volume yields are pretty close to our current book yields.
Now call and so it feels to us like the loan yield is stabilizing.
If you strip out the volatility with purchase accounting.
Okay. Okay. That's helpful. And then just lastly on mortgage banking you guys arent great color there.
Yes that seems to be obviously coming in really strong hi beyond what you have in it what you anticipate seeing in front of the third and fourth quarter just longer term kind of broadly how do you see that business.
Contributing to you guys.
In 2020 and beyond any just given the infrastructure that you cited you know you've got 40.
Kind of originators on staff now how should we think about that business contribution a little bit longer term.
Yeah.
You know historically, we struggled with the mortgage business Collyn.
And had to some extent deemphasized that and favored.
The offering as a supplement to our banking relationships the majority our volume.
Purely by necessity was coming from our existing customer base and making that connection between our LOE was in our branch personnel and commercial lenders and the like.
But that was largely because we were not successful in recruiting at Lowe's that had relationships with local Seo lies blue hills on the other hand has had lots of success recruiting those individuals.
And so they are able to bring the bank at new customers via the mortgage channel.
Giving us the ability to cross sell you know hopefully cross sell bank services.
To those mortgage customers.
And then the other piece of the equation is the ability to leverage the infrastructure and have.
An infrastructure that delivers a very good customer experience.
In the past, where the team of 20 yellows, it's difficult to support.
And internal mortgage operation.
Now with 40, good producing outflows, we can efficiently support.
And internal mortgage operation, but especially in in terms of total mortgage operation that delivers a great customer experience because blue wheels made the right investments in customer facing as well as a low facing technology.
So we don't anticipate that you know.
It will be a significant contributed to the bottom line.
On a run rate basis, it will be a good contributor.
And we'll be able to enhance our offerings to both customers and prospects.
But certainly you know if fees this quarter next quarter any indication, we're feeling very good about.
What we've done in the mortgage side.
I think we should probably add that our aspirations in the mortgage business or.
Consistent with our our branch footprint, that's right size I mean, we don't have aspirations to super regional or national.
That's exactly right, yes, no aspirations for that at all.
Okay.
Okay. That's great. That's all I had thanks guys.
Thanks, Collin thanks.
The next question comes from David Bishop of D.A. Davidson. Please proceed.
Yeah. Good morning, guys, just one quick follow up.
You know, Chris you mentioned the of the health of the regional economy, there and I think there was discussion about the loan pricing.
That being said any loan segments.
Maybe especially on the theory cyber you guys are pulling back from just being a pricing and structure, just getting too frothy, where you've got the brakes on.
Stepping aside.
I can add to that David.
Yes, you've seen the decline.
And the C.I. re portfolio over the last several quarters flat to down in the CRT book.
And that is purely due to.
The competition that we're seeing on the CRB front.
We're seeing.
Both.
Credit.
Terms.
As well as pricing continue to come in.
And we.
We continue to see anecdotal evidence of spreads being narrower than the prior quarter. So we expect a modest declines in CRT book to continue.
Where we have been seeing opportunities.
Is obviously on the construction side on on some of the smaller deals and the expertise we have in the construction space has allowed us to capitalize on those.
And.
With those transactions were 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 the hospitality side.
So, we're only allowing really new production to existing customers there while that portfolio runs down to to free up some headroom.
How big is that before.
You had to ask me that I don't think I have it at my fingertips, three 350 issues, what I remember, but I could be wrong.
Got it I can follow up offline.
Thanks.
Okay. Thank you.
This concludes the question and answer session.
I would now like to turn the conference back over to Chris on leasing 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 the sequel stay cool.
Good bye.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.