Logo of jester cap with thought bubble.

Image source: The Motley Fool.

Independent Bank Corp (Mass)  (NASDAQ:INDB)
Q4 2018 Earnings Conference Call
Jan. 18, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

See all our earnings call transcripts.

Prepared Remarks:

Operator

Good morning and welcome to the Independent Bank Corporation Fourth Quarter 2018 Earnings Conference Call. 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 those identified in our annual report on Form 10-K and our earnings press release. Independent Bank Corp cautions you against unduly relying upon any forward-looking statements and disclaims any intent to update publicly any forward-looking statements, whether in response to new information, future events or otherwise.

Please note that during this call we will also discuss certain non-GAAP financial measures as we review Independent Bank Corp's performance. These non-GAAP financial measures should not be considered replacements for and should not read together with GAAP results. Please refer to the Investor Relations section of our website to obtain a copy of our earnings press release, which contains reconciliations of these non-GAAP measures to the most directly comparable GAAP measures and additional information regarding our non-GAAP measures. Also please note that this event is being recorded.

I would now like to turn the conference over to Chris Oddleifson, Chief Executive Officer. Please go ahead.

Christopher Oddleifson -- Chief Executive Officer

Thank you, Andrea, and Happy New Year, everyone, and thank you for joining us this morning. With me, as always, is Rob Cozzone, our Chief Financial Officer and Head of Consumer and Business Banking.

We ended 2018 on a high note with strong financial performance. Including M&A-related charges, operating net income grew to $35.9 million or $1.29 per share, nicely above both prior quarter and prior year's results. Once again strong fundamentals led the way. Rob will cover the quarter in greater detail shortly, I'd like to focus my comments today on the full year just completed. We produced record earnings for the sixth consecutive year in 2018.

Highlights included operating EPS growth of 40%; 13% growth in total revenues; a 31 basis point improvement in net interest margin, fueled by our advantageous balance sheet positioning; mid-single digits organic loan growth; ongoing robust core deposit generation, including 10% organic growth in demand deposits; disciplined expense management that drove our efficiency ratio down to the mid-50s percentages; continued stellar credit quality with lower non-performing asset levels versus a year ago; and a full year loss rate of a mere 2 basis points; rising returns with an operating ROI and ROE reaching 1.6% and 13.1% respectively by the fourth quarter and a steadily rising tangible book value per share that grew another 12% last year, inclusive of the additional goodwill we absorbed. So, all in all, 2018 was a very good year.

Beyond the numbers, the Rockland Trust franchise continued to progress in many ways. The highlight of course is reaching agreement to acquire Blue Hills Bank, a $2.7 billion community bank, which will significantly expand our presence in the Greater Boston market, along with providing a commanding position on Nantucket Island. This is a profitable, well-run company. Conversion planning efforts are moving along smoothly and the transaction is expected to be earnings accretive and close in the first half of this year.

We also recently closed on the Milford National Bank acquisition, which gives us more presence in contiguous Worcester County and further extends our footprint within the state. This dovetails nicely with the commercial banking and wealth management office we just opened in Worcester, which is headed up by a very experienced local market leader.

Our investment management business continues to build and grow and is weaning much success in providing wealth management services to our acquired customer franchises. We just crossed the $500 million mark in assets under management in the Cape Cod market, and we see great opportunities arising out of our sizable presence in the neighboring islands of Martha's Vineyard and prospectively, Nantucket.

We also just opened a new branch in the Boston financial district that we're excited about, given how many of our customers work in the area. It is a modern design and comes equipped with video teller services. And a real highlight of opening day was that our first two customers were members of families that's honored Rockland Trust 112 years ago.

We also continue to track and recruit senior experienced professionals into our businesses, including commercial banking and investment management, who are steadily gaining traction in new business generation. And we continue to make investments in new products, technology, customer convenience, security, and so on to keep pace with the rapidly changing customer preferences and market dynamics.

Heading into the new year, our top priority is the synced integration of Blue Hills Bank. Given our track record in this area, we're quite confident as to its success and eagerly look forward to bringing our two companies together. Beyond that, we have other key initiatives, such as online account opening, which is imminent, expansions of private banking services, ongoing modernization of our branch network and increased utilization of sales force, so another busy year is expected.

The recent volatility in the equity market is worth noting. Trade discussions in a prolonged government shutdown have led to increased uncertainty, driving volatility concerned over future growth. It's unclear how all this will play out over the next year, but the underlying economic fundamentals continue to be strong. The general consensus that GDP will be in the mid-2s for Q4, inflation is right around the Fed's target of 2%, and national unemployment is still hovering around historic lows at 3.9%. Locally, the Massachusetts economy is even stronger. Through the third quarter, the economy (ph) has been growing at rates north of 3%. State unemployment levels are at 3.4%. And at Boston area, unemployment is an incredible low 2.4%. Much of this is driven by the consumer and business spending, which -- as the most recent measure -- was up over 7% from the previous year.

Despite all our progress over these many years, we're well aware that none of this comes easy and the bar keeps getting raised, given the many challenges facing our industry. Competition for loans remains intense, deposit costs are rising, new entrants, such as the FinTechs are encroaching, the pace of technology change is relentless, and the macro environment is a bit uncertain.

What we never lose sight of is the customer and how we best earn his or her trust. That is how we approach everything we do. We feel we're up to the task and we're quite confident (ph) to sustaining our success. Discipline and focus continue to form the pillars of our strategy. We'll have to capitalize on our competitive advantages and growing brand awareness and resist allocating our scarce resources to peripheral endeavors. We intend to remain flexible, nimble and opportunistic to seize on opportunities as they are presented.

So once again, I wish to salute all my Rockland Trust colleagues and their commitment and enthusiasm and tireless energy they bring to Rockland Trust each and every day. They are by far our most valuable resource and is a source of great pride that Rockland Trust was named Number one again among the large financial services firms in the latest Best Places to Work survey by the Boston Globe.

And lastly, I'd like to acknowledge two of our retiring directors, John Spurr and Carl Ribeiro, who both reached the mandatory retirement age for directors during the fourth quarter of 2018. I greatly thank them for all their stewardship and guidance they provided to the Company and to me for many years. I wish them very well.

That concludes my comments. Rob?

Robert D. Cozzone -- Chief Financial Officer and Head of Consumer and Business Banking

Thank you, Chris, and good morning. Before I review fourth quarter and full year earnings in more detail, some quick additional notes on the acquisition front. As Chris remarks, the integration of Milford National Bank and Trust is complete, and thanks to our exceptional colleagues, the systems and customer conversion was virtually seamless. The work to further deepen and expand former Milford relationships has begun in earnest. The acquisition added $293 million in loans, $278 million in deposits, both at fair value, as well as $161 million in assets under administration. Cost reductions related to the Milford transaction are substantially complete with the final reductions occurring with the closure of our legacy Milford branch on March 31.

Blue Hill's Bank integration plans are well under way and expectations for financial outcomes and customer inroads remain intact. This week the Blue Hills Bancorp shareholders approved the merger. Independent shareholder voting will occur next week. We've received a very warm welcome from both employees and customers and are excited to join forces with an extremely capable team. The Blue Hills transaction is expected to close sometime in the second quarter.

Now, turning to earnings. Inclusive of merger and acquisition charges of $8 million in the quarter, net income and diluted earnings per share were $29.9 million and $1.07, respectively, for the final quarter of 2018. For the year, net income and diluted earnings per share increased 39% and 38% respectively to $121.6 million and $4.40. Full year operating net income and operating earnings per share, which are adjusted for merger charges and other non-core items, increased 42% and 40%, respectively, while fourth quarter operating net income and earnings per share increased an impressive 47% and 45%, respectively, over the prior year.

Not surprisingly all of these earnings measures were records for the Company. Solid earnings results continue to drive growth in tangible book value per share, which increased another 3.7% in the quarter to $28.57 at December 31, despite having absorbed the Milford acquisition. Profitability ratios for the fourth quarter were sustained at very healthy levels with an operating return on average assets of 1.66%, and an operating return on tangible common equity north of 18%.

Organic loan growth accelerated in the fourth quarter with total loans up slightly more than 5% annualized. Within the commercial portfolio, C&I continues to lead the charge, as our recent hires of experienced lenders within corporate banking and floor plan are beginning to pay dividends. Traditional C&I activity was also quite strong during the quarter. As stated on prior calls, pricing and terms for commercial real estate lending remain challenging.

Despite higher mortgage rates, the demand for home purchase financing continues to derive solid growth in the residential real estate category, which was up 3.2% organically during the quarter. For the full year, total loans grew 4% organically, in line with earlier expectations. Organic deposit growth was strong at 2.48% or 10% annualized. However, growth in savings and interest checking balances benefited from the transition of customary purchase accounts during the quarter, as that product offering was eliminated. Customer repurchase balances, which are reflected in the borrowing section of the balance sheet, were $141.2 million as of September 30. Solid organic demand deposit growth continued in the quarter, up 6% annualized and was very strong for the full year, up almost 10%.

Long term and continuous emphasis on establishing core deposit relationship was again reflected in our cost of deposits for the quarter, which was up only 4 basis points, including the impact of the Milford acquisition. A low deposit beta and healthy loan betas contributed to 11 basis points of net interest margin expansion in the fourth quarter, as the favorable behavior of LIBOR leading up to the December Fed increase bullied (ph) loan yields.

The impact of purchase accounting on net interest income was consistent quarter-over-quarter at approximately $650,000. However, higher interest recoveries did benefit the margin by approximately 1 basis point. With the full benefit of the December Fed increase, net interest margin should expand again in the first quarter of 2019. With the exception of mortgage banking income, which was negatively impacted by seasonal declines in volume, all core fee income categories experienced growth during the quarter. Other non-interest income, which was up 40%, benefited from a $1.1 million gain on the sale of a previously closed branch.

We continually look for opportunities to enhance our network of branches and ATMs. During 2018, we consolidated two branches and opened two, including our first in downtown Boston just last month.

Non-interest expense, excluding M&A charges, increased more than anticipated during the quarter. The most significant drivers of the outsized increase lie within the other non-interest expense category, which was up 18.3%, and includes a $1.1 million loss on equity securities and higher loan workout costs associated with the restructuring of a non-performing loan.

The favorable non-performing loan restructuring as part of bankruptcy reorganization resulted in a $26 million increase to troubled debt restructures during the quarter. This does not represent an increase in problem assets, as this credit was first placed on non-accrual at the end of 2016 and remains there. Asset quality metrics improved again with only $142,000 of net charge-offs or 1 basis point of loans annualized. As such, provision for loan losses of $1.2 million was primarily needed to support loan growth.

Let me now turn to guidance for 2019. I will first provide you with our outlook excluding the impact of the Blue Hills Bancorp acquisition and will then remind you of our financial expectations for that transaction. Loan and deposit growth, barring significant competitive changes, should be in line with recent experience of mid-single digit growth and generally consistent with economic growth. Assuming no further rate increases, the full year net interest margin should be 10 basis points to 15 basis points higher than 2018, with deposit costs increasing another 3 basis points to 5 basis points in the first quarter. Both non-interest income and non-interest expense are expected to increase at a low to mid-single digit rate when excluding non-core items. Although we expect the credit picture for us to remain very benign in the short-term, eventual deterioration is likely inevitable. And with anticipated growth in pre-tax income and the expiration of some New Market Tax Credits, the tax rate should increase to approximately 25% in 2019.

As a reminder, earnings growth in the first quarter of every year is tempered by the increase in payroll-related costs and a seasonal slowdown in customer-related activity. As for the Blue Hills acquisition, should it close early in the second quarter, we expect 2019 earnings accretion of approximately 4%; net interest margin contraction, beginning in Q2, of approximately 20 basis points, barring a likely deleveraging of the balance sheet and modest accretion to tangible book value per share. We look forward to continued progress here on many fronts.

That concludes my comments. Chris?

Christopher Oddleifson -- Chief Executive Officer

Great. Thank you, Rob. And Andrea, we're ready for some questions.

Questions and Answers:

Operator

We will now begin the question-and-answer session. (Operator Instructions) And our first question comes from Laurie Hunsicker of Compass Point. Please go ahead.

Laurie Hunsicker -- Compass Point -- Analyst

I just wondered if we could start with the non-interest expense line. I mean, that included the $1.1 million loss in equity securities, but it was still running about $1.5 million higher than where it's been in the last couple of quarters. Is that the new run rate or is there anything else non-recurring in that figure?

Robert D. Cozzone -- Chief Financial Officer and Head of Consumer and Business Banking

No. There's a couple other things in there, Laurie. I mentioned in my comments the increase in loan workout cost that was about $400,000, maybe a little north of $400,000. All of that associated with the restructuring of that $26 million non-performing credit that I described, and that is all very positive developments as that company came out of bankruptcy or was reorganized under bankruptcy. So, money well spent there. In addition, we had increased our incentive accruals by about $0.5 million associated with our strong performance, and a couple of other kind of nuancing items, but many of which are unique in nature or one-time in nature.

Laurie Hunsicker -- Compass Point -- Analyst

Got it. Okay. And then the tax rate, I just want to make sure that I heard you correctly, 25%, which is a higher guide than previously, which I believe was 23%. Is there something different there?

Robert D. Cozzone -- Chief Financial Officer and Head of Consumer and Business Banking

No. I haven't guided to 2019 tax rate.

Laurie Hunsicker -- Compass Point -- Analyst

Got it. Okay. And then just so I'm clear, typically your first quarter tax run rate is below where you are for the duration. Is that still the case?

Robert D. Cozzone -- Chief Financial Officer and Head of Consumer and Business Banking

Well. It all comes down to what happens with equity compensation.

Laurie Hunsicker -- Compass Point -- Analyst

Equity comp?

Robert D. Cozzone -- Chief Financial Officer and Head of Consumer and Business Banking

What executives do there, so you have some discrete items that have historically hit in the first quarter that are pretty difficult to predict, but when stock performance is good, you tend to see that benefit.

Laurie Hunsicker -- Compass Point -- Analyst

Got it. Okay. And then just talking about margin with Blue Hills rolled in, and I know roughly, I mean my calculation I think it was a 23 basis point drag onto margin with that rolled in, absent a restructure. I just want to make sure I heard you correctly, you said margin would be down 20 basis points absent a restructure?

Robert D. Cozzone -- Chief Financial Officer and Head of Consumer and Business Banking

That's correct.

Laurie Hunsicker -- Compass Point -- Analyst

Okay. And does that include accretion income?

Robert D. Cozzone -- Chief Financial Officer and Head of Consumer and Business Banking

That would include accretion income, but that's beginning -- that's not full year, it's a beginning in the second quarter.

Laurie Hunsicker -- Compass Point -- Analyst

Correct. And so, if I'm thinking about accretion income, and it's been running about 3 basis points on your margin, is 10 basis points or so a good number, or how should we be thinking about that?

Robert D. Cozzone -- Chief Financial Officer and Head of Consumer and Business Banking

The guidance I've given is $5 million to $6 million annually associated with the Blue Hills transaction.

Laurie Hunsicker -- Compass Point -- Analyst

Okay. Great. That's helpful. Okay. And then if you can just update us in terms of how much in one-time charges are remaining. I've realized, MNB, you're almost done I think on one-time charges, and Blue Hills obviously took a substantial bite. But how much in after-tax charges still remain, if we just look at those two combined?

Robert D. Cozzone -- Chief Financial Officer and Head of Consumer and Business Banking

Well. Milford is complete.

Laurie Hunsicker -- Compass Point -- Analyst

So, no more one-time charges there?

Robert D. Cozzone -- Chief Financial Officer and Head of Consumer and Business Banking

No more one-time charges associated. If there is, it's very modest. In terms of Blue Hills, we've only taken about $2 million of the Blue Hills charges so far. So, versus our estimate of $36 million pre-tax, we've only taken $2 million.

Laurie Hunsicker -- Compass Point -- Analyst

Okay. So, on an after-tax basis we're still at, whatever, $20 million -- $20 million or so -- $20 million -- $21 million to go.

Robert D. Cozzone -- Chief Financial Officer and Head of Consumer and Business Banking

Yes. That's about right. Yes.

Laurie Hunsicker -- Compass Point -- Analyst

Okay. Great. And then Chris, last question to you. Can you just talk to us generally. Obviously, we've seen your stock price come down. We've seen all bank stock prices come down in the last four months. But you still have one of the best stock currencies out there. Can you just talk generally in this current environment, how you're approaching M&A here, and just what you're seeing generally?

Christopher Oddleifson -- Chief Executive Officer

Yes. Laurie, I probably sound like kind of a broken record, but things haven't changed as much, so it's very opportunistic. I think -- and it was -- so few publicly traded banks that are left in our marketplace, it's really, really hard to sort of predict any sort of, like, number. So the -- I just think that they we'll be at the table. And so when a board is interested in selling, we'll be at the table, we'll be -- we'll definitely go as a desirable acquirer, because of our currency and our track record, and we talk about what we're going to do and then we do what we'd say we're going to do, and we're very straightforward. And I will also add that in the last 15 years we've done -- what? 10 acquisitions -- 10 bank acquisitions. That's one every year and a half, and sometimes they come in quick succession and sometimes they are a couple of years. But it seems like there is a steady -- I know past results are no prediction of the future, but I'd like to say that there will be other opportunities that present themselves over the next number of years, and we'll be able to take advantage of that. That's about is all I can say right now.

Laurie Hunsicker -- Compass Point -- Analyst

Great. That's helpful. Thank you very much.

Robert D. Cozzone -- Chief Financial Officer and Head of Consumer and Business Banking

Thanks, Laurie

Operator

Our next question comes from Brody Preston of Piper Jaffray. Please go ahead.

Brody Preston -- Piper Jaffray -- Analyst

Good morning, Chris. Good morning, Rob. How are you?

Robert D. Cozzone -- Chief Financial Officer and Head of Consumer and Business Banking

Yes. Doing great. Thanks.

Brody Preston -- Piper Jaffray -- Analyst

Yes. I just wanted to go back and maybe touch on the margin trajectory a little bit. Understand that maybe ex Blue Hills, you said 10 basis points to 15 basis points up, and then BHBK adds a 20 basis point drag, ex a balance sheet remix. I guess I want to touch on the balance sheet remix. What are some of the variables you're considering when you think about the balance sheet remix and the potential upside to the margin?

Robert D. Cozzone -- Chief Financial Officer and Head of Consumer and Business Banking

Yes. I'm sure you're familiar with the funding side of the balance sheet at Blue Hills, which is a pretty typical of converted thrifts, but atypical of how we've positioned our balance sheet over time. So, given the high amount of brokered CDs, as well as home loan bank advances and some of the lower yielding securities, as well as residential arms that are also lower yielding, we think there's an opportunity for a meaningful delever, and I'll provide much more color on next quarter's call as to what we think we can get accomplished there, and maybe even have already completed some of it with help from the folks at Blue Hills. So, that is to say that there are likely several hundred million of assets and liabilities that can be eliminated with a fairly modest impact on net interest income.

Brody Preston -- Piper Jaffray -- Analyst

Okay. All right. And then, I guess, maybe if I could touch on, I guess, more near-term margin trends. I guess in the third quarter of this last year, we had -- LIBOR sort of flattened off, because it had run up a little bit ahead of itself in the second quarter. And I guess maybe so far, I know it's early in the first quarter, but it's been relatively flat. So this -- if this trend in LIBOR sort of continues, would you expect to have more modest NIM expansion in the first quarter relative to what you experienced in the fourth quarter?

Robert D. Cozzone -- Chief Financial Officer and Head of Consumer and Business Banking

Absolutely. (Multiple speakers) there is no longer an expectation of a March increase with LIBOR at 2.51%, 2.52-ish, if it happens to stay there, then the average increase in LIBOR over the quarter will be much less than the average increase we experienced in the fourth quarter. So, certainly, less expansion than what we have just experienced.

Brody Preston -- Piper Jaffray -- Analyst

Okay. And so, I guess that the NIM guide on a stand-alone basis of 10 basis points to 15 basis points, what are you assuming there for rate hikes, if any?

Robert D. Cozzone -- Chief Financial Officer and Head of Consumer and Business Banking

No further rate hikes. And just to remind you, the 10 basis points to 15 basis points is year-over-year expansion, excluding Blue Hills. So, full year 2019 versus to full year 2018 without additional increases and without the impact of Blue Hills.

Brody Preston -- Piper Jaffray -- Analyst

Okay. Great. And then I guess, I wanted to -- I guess maybe go back to the non-interest expense line item a little bit. Touching on the equity security losses, I understand that they're probably hard to predict. But I guess I wanted to get to the nature of that line item. I know there was an accounting change earlier in the year that sort of shifted the losses and the gains to the P&L. Is -- I guess are those losses or gains, is that more tied to the broader movements in the equity market?

Robert D. Cozzone -- Chief Financial Officer and Head of Consumer and Business Banking

Yes. Those are tied to movements in the equity market and those are equity securities used to fund our SERP liability. However, we have made a decision, unfortunately, a little bit too late to put those investments in slightly more conservative and less volatile investment. So we should see less volatility as we move forward into 2019.

Brody Preston -- Piper Jaffray -- Analyst

Okay. Great. And I guess maybe going to the deposit front. I think last quarter you said that you expected maybe a 4 basis point to 6 basis point increase in the cost of deposits. This quarter, and the guide for 1Q is 3 basis points to 5 basis points, which I know is around the same ballpark, but it's slightly less. And just from sort of what we've seen in the market, we've seen some -- I guess maybe some higher cost specials come out of the market. Is that consistent with what you're seeing or is deposit competition as stiff as it's ever been?

Robert D. Cozzone -- Chief Financial Officer and Head of Consumer and Business Banking

I'd say, on an anecdotal basis, I've seen some modest pullback, Brody. I think there are still plenty of options out there for consumers and businesses as well to take advantage of. Maybe a couple of banks have pulled back, now that the probability of additional increases is more muted. But the part of the reduction in my guidance for Q1 is related to our experience. As you said, I guided to 4 basis points to 6 basis points last quarter, and we came in at 4 basis points, because we continue to have a very healthy behavior among our deposit base, including greater growth in the demand deposit category, which allows us to reduce the higher cost categories or not grow them as quickly. And so, I'm confident that we can continue to do that.

Brody Preston -- Piper Jaffray -- Analyst

All right. Great. And I guess I just have a few sort of higher level questions left. I want to know if you could provide us with any updates on CECL, and if you have an idea right now as to whether or not directionally your reserve is going to need to go up or down, and what are some of the factors driving that, because from a quantitative perspective your losses have been extremely low?

Robert D. Cozzone -- Chief Financial Officer and Head of Consumer and Business Banking

I would say, directionally, our expectation is that it will need to go up. I'm not prepared to provide you any more quantitative guidance than that. In terms of our preparedness, we are moving along rapidly and expect to begin to run a parallel CECL model in February. Our -- all of our model inputs have been collected and loaded into software that we're using. So, we're feeling very good about our progress there, and in the coming quarters, I'll be able to provide you with some more quantitative guidance.

Brody Preston -- Piper Jaffray -- Analyst

Okay. Great. And then, you guys do have significant -- I guess, there's a significant amount of wealth down in the Nantucket, Martha's Vineyard area, which is relatively close to the Cape and just in reviewing the map, there are some opportunity zones that have been designated down in that area. And so, I wanted to know if you've had any discussions with some of your wealthier clients on maybe making opportunities on investments, or if you see any type of opportunity to capitalize on that?

Robert D. Cozzone -- Chief Financial Officer and Head of Consumer and Business Banking

Well. I'm not aware of any of those discussions. It's not something that we've pursued, Brody.

Brody Preston -- Piper Jaffray -- Analyst

Okay. Great. And then last one from me. Credit is sort of in top of mind for the industry for the last quarter or so, and your credit obviously remains pristine, but wanted to get your thoughts, Rob and Chris, on what's sort of the one thing on this front that keeps you up at night?

Christopher Oddleifson -- Chief Executive Officer

Well, as far as we can see, it looks like a benign environment. The thing that worries me is that I know the business cycle has not been repealed. I know I believe (inaudible), and I believe there'll be a deterioration sometime in the future, but we're not seeing anything yet. I should point out also, we typically see, on the one hand, environment deteriorates and our smaller business banking loans begin to have some weakness. That looks like a strong portfolio too. So it -- all indicators -- I mean, if you just were sort of looking at the data, I'll say we're in great shape. And so, when you lift your head up and you sort of look around the world and you think about the 10-year expansion, you begin to get a little nervous. So we're not seeing anything.

Brody Preston -- Piper Jaffray -- Analyst

Great. Thank you very much, guys. Appreciate it.

Robert D. Cozzone -- Chief Financial Officer and Head of Consumer and Business Banking

Yes. Thanks, Brody.

Operator

(Operator Instructions) Our next question comes from Collyn Gilbert of KBW. Please go ahead.

Collyn Gilbert -- KBW -- Analyst

Thanks. Good morning, guys. Rob, so just starting on your -- the NIM comment, the 10 basis point to 15 basis point of expansion year-over-year, exclusive of Blue Hills and no rate hikes. Is the expectation for that type of expansion, is that coming from a remixing of the assets that you're intending to perhaps have happened, or is it just kind of natural repricing, given the maturation schedule of what you're seeing in the book?

Robert D. Cozzone -- Chief Financial Officer and Head of Consumer and Business Banking

I just want to be clear, Collyn, that guidance is relative to full year 2018.

Collyn Gilbert -- KBW -- Analyst

Yes.

Robert D. Cozzone -- Chief Financial Officer and Head of Consumer and Business Banking

Okay. So full year 2018 is 3.91%. 10 basis points to 15 basis points puts us at 4.01% to 4.06% for full year, excluding Blue Hills. We just finished the quarter right around the high end of that range. We can expect further expansion in Q1, but should we get no additional increases in Fed funds/LIBOR prime, then we would expect the margin to experience some pressure due to increased funding costs in the remaining quarters of the year. So that's how I get to that 10 basis points to 15 basis points of core expansion.

Collyn Gilbert -- KBW -- Analyst

Okay. All right. That's helpful. And then just on the Boston initiative, maybe if you could just give us an update on how -- I know you just open that office, but how that's trending and sort of how you're thinking about your efforts there, if you think that there will be a need, or what would cause a need to perhaps open another branch there, but just talk a little bit about your -- the downtown effort and how that's going.

Christopher Oddleifson -- Chief Executive Officer

I'll start and Rob can add to it. Our primary driver to opening a branch down there really is to serve our existing customers who commute into the city, and service our existing commercial clients down there. I want to remind you that we've been doing business in Boston on the commercial side for over 20 years, and wealth management for a number of years, and we just -- we opened a commercial banking and wealth management office around the corner from our new branch about five years ago. So this branch is really sort of filling into support all those efforts. We also, in the financial district see some incremental business opportunities that we can leverage, and the conversations are going well, we've opened up a number of accounts, we are meeting our expectations. In terms of thinking about whether we would expand to sort of a full network in downtown Boston, I think that's probably relatively unlikely. That is a -- the most competitive market we're ever in, we think there's a lot of opportunity outside the Boston market that may be a more cost effective to get at. And so, thinking about how we service our existing customers will probably drive most of our decisions. Rob?

Robert D. Cozzone -- Chief Financial Officer and Head of Consumer and Business Banking

Yes. I would just add that, as part of the Blue Hills transaction, we will also have the seaport location. So we'll have essentially two, I'll characterize as downtown Boston locations in the very active areas of Boston. And we think for -- certainly for the medium-term that's sufficient. I'd also remind you that our approach to going into Boston was a very economic approach. Our branch is only 1,400 square feet. We have reduced staff, because we've added two video teller machines in that branch, so that customers can be served by a centralized video teller team that sits in our call center. So we thought that was the right approach given the strategic considerations that we were working with.

Collyn Gilbert -- KBW -- Analyst

Okay. That's very helpful. And then just shifting over to fees, can you just remind me again what percent of your wealth revenues are tied to the equity markets -- the value of the equity markets?

Robert D. Cozzone -- Chief Financial Officer and Head of Consumer and Business Banking

Equity versus fixed income?

Collyn Gilbert -- KBW -- Analyst

Yes.

Robert D. Cozzone -- Chief Financial Officer and Head of Consumer and Business Banking

Let's see. So, I think about 25% of our AUM is our core equity portfolio we manage ourselves. 25% is bonds, and the remaining 50% are mutual funds.

Christopher Oddleifson -- Chief Executive Officer

Primarily equities. So, it's probably somewhere between 60% to 70% of our assets under management are some form of equity investment.

Collyn Gilbert -- KBW -- Analyst

Okay. All right. That's helpful.

Christopher Oddleifson -- Chief Executive Officer

And then we have transactional fees, Collyn. So not all of our revenue that you see on the investment management line is associated purely with managing assets, the majority of it is, but we also have insurance revenues and annuity revenues that are more transactional in nature and not impacted by fluctuations in the market.

Collyn Gilbert -- KBW -- Analyst

Okay. That's helpful. And then just in terms of mortgage, maybe Rob, if you could just kind of give us your outlook there. I know you've been -- you guys have done a great job in building out the jumbo business, portfolio growth was better this quarter because of that, but just how you're thinking about -- and I'm thinking more on the mortgage sale side, mortgage banking side going forward?

Robert D. Cozzone -- Chief Financial Officer and Head of Consumer and Business Banking

Yes. Well, certainly, going forward, as we combine with Blue Hills, we will be selling a higher percentage of our production. Blue Hills has meaningful mortgage originations. In fact, they originate more than we do on an annual basis, and the bulk of that is sold into the secondary market. So I would expect on a combined basis that we'll continue to see kind of mid-to-high-single digit growth in our residential portfolio in 2019, but much higher percentage of our combined production will be sold into the secondary market.

Collyn Gilbert -- KBW -- Analyst

Okay. That's helpful. Okay. That's all I had. Thanks, guys.

Operator

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

Christopher Oddleifson -- Chief Executive Officer

Thanks, Andrea, and thank you everybody for joining us, and we look forward to talking with you in April with respect to the first quarter of 2019 earnings. Have a good weekend. Bye.

Operator

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

Duration: 42 minutes

Call participants:

Christopher Oddleifson -- Chief Executive Officer

Robert D. Cozzone -- Chief Financial Officer and Head of Consumer and Business Banking

Laurie Hunsicker -- Compass Point -- Analyst

Brody Preston -- Piper Jaffray -- Analyst

Collyn Gilbert -- KBW -- Analyst

More INDB analysis

Transcript powered by AlphaStreet

This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.