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Independent Bank Corp (Mass) (NASDAQ:INDB)
Q2 2019 Earnings Call
Jul 19, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Independent Bank Corp. Second Quarter 2019 Earnings Conference Call. [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 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 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 measure and additional information regarding our non-GAAP 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.

Christopher Oddleifson -- President and Chief Executive Officer

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 Ruggieroare, 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 per share, significantly above both prior quarter and prior year's 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 1, 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 on key financial categories.

But suffice it to say, we're very happy with how things have gone thus far. The talent of 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 Blue Hills have been very helpful in providing continuity and achieving a smooth assimilation. Very noteworthy is that during a 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 stands just a tad below $4.25 billion, we had record commercial loan originations, record residential loan originations, and 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 as having the highest customer satisfaction in Massachusetts continues to serve us well in building our business.

Our footprint continues to extend in a continuous 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, to the 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 of becoming the biggest local bank is not our ultimate goal. Rather, we seek to sustain our track record as a high-performing company and the preferred financial institution 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 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 on other key initiatives. Foremost among them are the significant strides we continue to make in a digital space. Our implementation of online account opening technology that allows a customer to open an account in five minutes or less is proving [Phonetic] quite successful. The deposit accounts opened online increased 18% over a similar 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 in an intelligent cost effective fashion by our prioritizing efforts in areas that improve the customer experience. We've also enhanced and broadened the scope of our enterprise risk management program in tandem with becoming a much larger institution. This included forming a board risk committee, revising the membership on other board committees, refining risk appetites and thresholds, expanding dashboard reporting in key metrics, strengthening our internal risk department and obtaining independent third-party reviews. These are just a few of the things we're working on. Needless to say, we're not sitting still, and we're optimistic about the future.

Despite the clouds of trade disputes, weak global economies and and the Fed appearing to signal that the economy is about to weaken 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 a bigger bank, we believe we are creating the foundation needed for a sustainable future and at the same time preserves our all-important culture of Rockland Trust, one that sets us on a path 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 customer's trust and added business. It's a seemingly simple idea, but there is a complex to put into action and deliver on a continual basis. My Rockland colleagues have taken this to heart and exhibit the passion and dedication to continually 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 that competitive challenge and external uncertainly will persist. Yes, we feel confident in our ability to sustain our track record of growth and performance.

That's it from me. Rob?

Robert D. Cozzone -- Executive Vice President & Chief Operating Officer

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 1, we converted all systems and facilities over the weekend of June 7. I can't say enough about the combined efforts of the conversion teams on both the Rockland and Blue Hill sides. Despite the stress associated with learning all new systems 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 cease to be amazed by the talented colleagues we have working on our integrations, and I can't thank them enough. With the Blue Hills acquisition, we added $2.1 billion of loans, $1.9 billion of deposits, $197 million of securities and $125 million of borrowings. As previously discussed, some balance sheet delivering 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 held for sale.

In addition, we have 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 rundown. On the business side, on-boarded Blue Hills commercial loan officers 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 more than 50% in cost saves as of 6/30. 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?

Mark J. Ruggiero -- Chief Financial Officer

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 $0.89 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 pre-tax 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 in 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 remains 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 runoff 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. Our 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 as evidenced by an improved commercial pipeline at June 30 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 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 costs.

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, majority of which consists 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. 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 can be difficult to predict due to the potential volatility associated with pay off 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' lower margin balance sheet. 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 hedge 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 a 25 basis point Fed cut near the end of July to result in a decrease in net interest income of approximately $700,000 to $800,000 in the third quarter and a decrease of 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 note include the following. Enhanced post acquisition mortgage production capabilities, an 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 and core households resulting from the acquisition have generated higher levels of deposit into change in 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 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 cost. When excluding merger-related expenses, non-interest expense increased approximately $13 million from the prior quarter with the major driver as being salaries and benefits increase of $5.7 million, including the new combined higher workforce base, increased incentive expense, as well as well as some transitionary costs through the acquisition core conversion date of June 7. 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 deleverage security sale previously mentioned by Rob, which is included in other non-interest expense. Other drivers of that category increase from the prior quarter include increased amortization of intangible assets acquired in the acquisition, increased consulting expenses, director's 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 remain 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 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 in non-acquired loan balances.

For a 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 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'll 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 and 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, a reminder that 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 over mortgage banking is anticipated to remain strong into early fall, combined with decreases from non-recurring items realized in the second quarter being offset by an anticipated gain on the pending deleverage residential sale. With no anticipated non-recurring gain, 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 in full Blue Hills bank cost save expectations to be realized in Q3, quarterly non-interest 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 are noted for the near-term, eventual deterioration is likely inevitable. And lastly, the tax rate for the rest of the year is expected to remain around 25%. That concludes my comments, Chris?

Christopher Oddleifson -- President and Chief Executive Officer

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

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator instructions] Today's first question comes from David Bishop of D.A. Davidson. Please proceed.

David Bishop -- D.A. Davidson -- Analyst

Hi, good morning, gentlemen. How are you?

Christopher Oddleifson -- President and Chief Executive Officer

Good morning. [Speech Overlap].

David Bishop -- D.A. Davidson -- Analyst

Good. A question for you in terms of -- you saw the uptick in deposit costs. I think that was sort of telegraph of some of the pressure, 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 that's the pace of growth in funding costs on the deposit side in the second half? Or you think maybe those can plateau just given some of the remix and strong demand you've had on the noninterest-bearing side? Just curious how you're thinking about the deposit costs as we head into the back half of the year?

Christopher Oddleifson -- President and Chief Executive Officer

Sure, David and think you, you hit upon certainly a concept that we're looking at closely, and that's essentially the mix of deposit. As you can look at the second quarter results, we had very strong growth in demand deposit at 4.6%, although we'd love to see that growth continue into the third quarter, that may be 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 our potential rate cuts is certainly starting to resonate among our competitors. So, with all that being said, I think we're -- 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.

David Bishop -- D.A. Davidson -- Analyst

Got it. Have you all started lowering -- I guess some of your legacy rates on terms of savings and you see these across the board?

Robert D. Cozzone -- Executive Vice President & Chief Operating Officer

We have not, David. We have lagged, as you'll probably recognize 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 the impetus to do so. But as of now, we have not reduced any of our rates on deposits.

David Bishop -- D.A. Davidson -- Analyst

Got it. And then, sounds like a clearly strong quarter on the origination front. I'm just curious that it sounds like clearly there was some run off in some of the legacy, Blue Hill sectors, maybe talk about sort of the pace, the volume of commercial and residential originations, and I'd be curious just to hear what was the sort of planned attrition on the legacy Blue Hill side versus maybe what was the sort of -- sort of legacy or organic runoff that may have caught you by surprise? That math sound like pretty strong organic loan growth?

Christopher Oddleifson -- President and Chief Executive Officer

Yes, 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 upper middle market customer base. As you know, we've opened a commercial lending office in Worcester and we're really starting to see some opportunities, especially in the C&I and ABL portfolios there. And we think there's some 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 the 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's 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 loans where the pricing just didn't really fit what we think made sense or C&I relationships that again, just didn't really fit into our typical profile. So nothing unusual. As we said that runoff was expected, but I think there'll still be a combination of that runoff offsetting what should be another strong closing quarter going forward.

Mark J. Ruggiero -- Chief Financial Officer

And then on the residential side, David, as I stated in my comments, we had record closing volumes, about $240 million dollars in the quarter. Combination of combining the sales force of Blue Hills with Rockland, and 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.

David Bishop -- D.A. Davidson -- Analyst

Got it. Good, cool color. And then -- I guess, Chris, from a holistic basis, you guys were over the $10 billion mark closing in on a $12 billion. Obviously your relationship banking model has produced strong ROA. Do you look at it from an asset size, you worry about getting away from the relationship-driven models to more transactional basis as you get bigger and have to do sort of bigger credits. Is that sort of a holistic concern as you move forward in terms of -- just growing bigger?

Christopher Oddleifson -- President and Chief Executive Officer

Yes, I think you have to be very, very focused and diligent to mitigate the natural tendency before 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 is people who are rarely 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 culture that is -- that sort of naturally mitigates that tendency. And certainly in our acquisition strategy, we spend a lot of time on the people side, you know, the numbers and the technical stuff that yields to a lot of hard work, the people stuff, -- you really have to focus on and be e thoughtful on how to really include everybody in the ongoing entity. So that is -- that definitely is a risk that we understand exist and we're -- our continued high performance depends on our ability to really maintain our 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 about my colleagues as serial -- employee numbers rather than people.

David Bishop -- D.A. Davidson -- Analyst

Got it, great. Thank you for the color, guys.

Christopher Oddleifson -- President and Chief Executive Officer

Thanks, David.

Operator

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

Laurie Hunsicker -- Compass Point -- Anal;yst

Yes, hi. Good morning.

Christopher Oddleifson -- President and Chief Executive Officer

Good morning.

Laurie Hunsicker -- Compass Point -- Anal;yst

I'm just wondered on your other expense, that $18.2 million. I know that it included $0.5 million [Phonetic] from sale of securities. You mentioned that there was some other higher consulting fees. Can you tell us what else non-core was in that figure?

Mark J. Ruggiero -- Chief Financial Officer

Sure, Laurie. So in terms of non-core items, I wouldn't say there's this significant items 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 was with a lot of the strategic priorities we have crossed in $10 billion preparing for CECL and a number of other factors that the consulting expense sort of run rate has certainly ticked up a bit in 2019, and it 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 $0.5 million. So I think when you look at the loss on the sale securities and the director's fees, there's $2 million there within that category that we can assuredly say would not occur again in the third quarter. So I'd say those two biggest components within that.

Laurie Hunsicker -- Compass Point -- Anal;yst

Okay. And then just so that I heard you right, the outsize consultant fees, they'll continue to run elevated just simply as you've crossed 10.

Mark J. Ruggiero -- Chief Financial Officer

Correct. And in terms of -- they 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.

Laurie Hunsicker -- Compass Point -- Anal;yst

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 for the back half of this year and also into next year as we think about the net interest income line?

Mark J. Ruggiero -- Chief Financial Officer

Sure. 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 a good gauge of what a normal run rate would be.

Laurie Hunsicker -- Compass Point -- Anal;yst

Okay, that's helpful. Great. And then, Chris, last question for you. Oh, go ahead. I'm sorry.

Christopher Oddleifson -- President and Chief Executive Officer

I was just going to say, Laurie , that would peg the margin to be right in line with the 4% high 3s that we've been talking about.

Laurie Hunsicker -- Compass Point -- Anal;yst

Okay, right. So I guess, yes, right. If we're looking at that, then the accretion income, which was 16 basis points on your NIM will jump down to 10, nine, eight, that type of thing as we go forward?

Mark J. Ruggiero -- Chief Financial Officer

Exactly, exactly.

Laurie Hunsicker -- Compass Point -- Anal;yst

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? Even what you're avoiding, any color you could give would be helpful. Thanks?

Christopher Oddleifson -- President and Chief Executive Officer

It wouldn't be a complete call without this question from you Laurie, . So, thank you. Our -- sort of orientation continues to be a strong sort of regional franchise. We've seen examples of banks who get a little bit too far field and I'd call kind of a gangly franchise. And it's 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. If I were to paint a perfect picture, I mean, we'd have a bank in the $15 billion to $20 billion, $25 billion range that's from West includes Worcester and then arcs to the Atlantic Ocean, both north and south. That is where there's real concentration of economic activity is. I mean, if there is a franchise, it's sort of a little bit out of that, that comes available we certainly would have a conversation and we'd love -- we'd love to be in conversations. I mean, you know better than -- either [Phonetic] banks or sold, not bought. And any board that wants to have a conversation -- I'd love to engage and see whether something is -- makes sense.

We are disciplined or disciplined as a whole thing. So we don't do strategic acquisitions. We do acquisitions that makes sense from a strategic point of view, but also are physically super responsible.

Laurie Hunsicker -- Compass Point -- Anal;yst

Great. Thank you, Chris.

Christopher Oddleifson -- President and Chief Executive Officer

Thanks.

Operator

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

Matthew M. Breese -- Piper Jaffray Companies -- Analyst

Hi, good morning.

Christopher Oddleifson -- President and Chief Executive Officer

Good morning.

Matthew M. Breese -- Piper Jaffray Companies -- Analyst

Just want to round up the NIM discussion, make sure I have everything right. So all else equal, no Fed cuts. Just given your comments that the top line NIM can be in the high three kind of 90 range. Does that imply all else equal to core NIM at this point is going to face compression of a couple of basis points a quarter. Is that accurate?

Unidentified Speaker

Yes, I think certainly the implications would be on the deposit side.

Mark J. Ruggiero -- Chief Financial Officer

So, as I alluded to earlier, to the extent we have 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, one to two basis points is a pretty good estimate.

Matthew M. Breese -- Piper Jaffray Companies -- Analyst

And if you layer in a Fed cut, I think your comment suggests that perhaps per Fed cut is on a quarterly basis, it's -- maybe 3 basis points of additional pressure on core NIM?

Mark J. Ruggiero -- Chief Financial Officer

On a -- for a full quarter it would be more like about 5 bps. So -- I mentioned a $1.5 million [Phonetic].

Matthew M. Breese -- Piper Jaffray Companies -- Analyst

Oh, I understood. Okay.

Mark J. Ruggiero -- Chief Financial Officer

For the third quarter it would be about 3 basis points because they're being essentially halfway through the quarter.

Matthew M. Breese -- Piper Jaffray Companies -- Analyst

Got it. Okay. And then just thinking about the hedges you have in place, $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?

Mark J. Ruggiero -- Chief Financial Officer

Sure. So of that $750 million portfolio, right now, approximately $550 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 $375,000, $400,000 in terms 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 hedges provide protection, but not until we get to 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 [Phonetic] range.

Matthew M. Breese -- Piper Jaffray Companies -- Analyst

Understood. Okay. 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 things on a go-forward basis. The quarter, do you expect to be really strong in the categories you expect to be different? And how we should be factoring that into the model?

Robert D. Cozzone -- Executive Vice President & Chief Operating Officer

Yes. In terms of the deposit side of the 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 impacted. You're talking single-digit kind of percentage decreases in production as a result of that seasonality.

Matthew M. Breese -- Piper Jaffray Companies -- Analyst

Okay, alright. And just a final one from 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, --$1 million in quarterly accretable yield, I know it's tough to model, but, -- just trying to gauge the ramp down cadence on that over the next 18 months.

Unidentified Speaker

Yes, I guess, the nuance part of this is essentially a large credit assumption included in that fair value mark, essentially the accounting rules, because of how you bifurcate the loan books, that entire mark is getting accreted and just based upon sort of normal paydown activity. So full payoffs of loans would create volatility. But you can think about the 1% credit mark on that Blue Hills book are $24 million. 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 significant dip in any quarter, after a period of time that should result in sort of a level interest earning accretion. But the nuance of loan payoffs in any quarter would create the volatility.

Matthew M. Breese -- Piper Jaffray Companies -- Analyst

Understood. Okay. All right. That's all I have. Thanks for taking my questions.

Unidentified Speaker

[Speech Overlap]

Operator

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

Collyn Bement Gilbert -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Thanks, good morning, guys.

Christopher Oddleifson -- President and Chief Executive Officer

Good morning.

Collyn Bement Gilbert -- Keefe, Bruyette, & Woods, Inc. -- Analyst

I apologize, I just got kicked off for a quick second one when Matt was asking his question. So, I hope I'm not repeating what he already asked. But -- just curious on the run-off of the BHBK portfolio, can you just remind us again of where the balances are, what you intend to run-off?

Mark J. Ruggiero -- Chief Financial Officer

So, it's a combination of a few portfolios in particular on the commercial side. It's primarily isolated to the C&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 category will naturally either payoff or move into a permitting CRE loan over time. But the bulk of what we've been saying is --- seeing for payoff activities to-date had been in the C&I and CRE 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 in much higher than what we have had, this natural runoff of that portfolio anticipated as well. So that in the second quarter there is around $40 million of runoff on the resi book. Some of that was due to full payoffs, though.

Christopher Oddleifson -- President and Chief Executive Officer

So of the $2.1 million we acquired, Collyn were down to about $2 billion.

Collyn Bement Gilbert -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay. Sorry. And that was what I was going to ask you, is just the balances of what -- I mean, is the anticipation of runoff that fell to $2.2 billion?

Unidentified Speaker

[Speech Overlap] Of course, no.

Mark J. Ruggiero -- Chief Financial Officer

Yes. So that's a small fraction. Call it a couple of hundred million within that book. That doesn't line up with the categories of commercial lending that we're comfortable with, and so we'll let those to trade over time. So little less than $100 million through the second quarter, looking at probably a similar amount as we head into the third quarter and then should start to slow thereafter.

Collyn Bement Gilbert -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Got it. Okay,that's helpful. And then just in terms of the dynamics between new originations and pay downs that you're seeing, what's the rate differential that you're seeing on some of these loans, the credits that are paying down, and then -- versus what the origination rates are.

Mark J. Ruggiero -- Chief Financial Officer

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 come in. But those are the deals 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 fixed rate side, certainly pricing has come into it. And that's anticipated obviously with what's expected from the Fed. But in terms of the delta between the runoff in new originations, we don't see much of a significant impact as a result of that.

Robert D. Cozzone -- Executive Vice President & Chief Operating Officer

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

Collyn Bement Gilbert -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay. That's helpful. And then just lastly on mortgage banking, you guys offered great color there, and that seems to be obviously coming in really strong. How do you beyond [Indecipherable] third and fourth quarter, just longer term kind of broadly? How do you see that business contributing to you guys? You know, in 2020 and beyond? I mean, 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?

Robert D. Cozzone -- Executive Vice President & Chief Operating Officer

Yes. Historically, we've struggled with the mortgage business, Collyn, and had -- to some extent deemphasized it and favored the offering as a supplement to our banking relationships. The majority are 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 the like. But that was largely because we were not successful in recruiting LOs that had relationships with local COIs. Blue Hills, on the other hand, has had lots of success recruiting those individuals. And so they're able to bring the bank new 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 the equation is the ability to leverage the infrastructure and have an infrastructure that delivers 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 and in terms of mortgage operation that delivers a great customer experience because Blue Hills made the right investments in customer facing as well as LO facing 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 we'll be able to enhance our offerings to both customers and prospects. But certainly, you know, if these -- this quarter or next quarter, any indication, we're feeling very good about what we've done in the mortgage side.

Christopher Oddleifson -- President and Chief Executive Officer

I think we should probably add that, our aspirations in the mortgage business are consistent with our branch footprint franchise.

I mean, we don't have aspirations to go super regional or national.

Robert D. Cozzone -- Executive Vice President & Chief Operating Officer

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

Collyn Bement Gilbert -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay. Okay, that's good. That's all I had. Thanks, guys.

Robert D. Cozzone -- Executive Vice President & Chief Operating Officer

Thanks, Collyn.

Operator

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

David Bishop -- D.A. Davidson -- Analyst

Yes, good morning, guys. Just one quick follow up. Chris, you mentioned the health of the regional economy there. And I think there is discussion about loan pricing. That being said, any loan segment, maybe especially on the CRE side where you guys are pulling back from just being -- pricing and structure just getting too frothy, where you're just cutting the breaks on and stepping aside?

Robert D. Cozzone -- Executive Vice President & Chief Operating Officer

I can answer that, David. You've seen the decline in the CRE portfolio over the last several quarters, flat to down on the CRE book, and that is purely due to the 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 declines in the CRE book to continue. Where we have been seeing opportunities is obviously on the construction side and 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, 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 the hospitality side. So we're only allowing really new production to existing customers there, while that portfolio runs down to free up some headroom.

David Bishop -- D.A. Davidson -- Analyst

How big is that portfolio?

Robert D. Cozzone -- Executive Vice President & Chief Operating Officer

Yes, you have to ask me that David. I don't think I have it at my fingertips. 350 issues what I remember, but I could be wrong.

David Bishop -- D.A. Davidson -- Analyst

I can pop up on. Thanks for the color guys. [Phonetic]

Christopher Oddleifson -- President and Chief Executive Officer

Okay. Thank you.

Operator

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

Christopher Oddleifson -- President and Chief Executive Officer

Thank you, everybody, for all your questions. We appreciate your interest. We'll talk to you again in three months. And be careful this weekend with this heatwave. Stay cool. Good bye.

Operator

[Operator Closing Remarks]

Duration: 52 minutes

Call participants:

Christopher Oddleifson -- President and Chief Executive Officer

Robert D. Cozzone -- Executive Vice President & Chief Operating Officer

Mark J. Ruggiero -- Chief Financial Officer

Unidentified Speaker

David Bishop -- D.A. Davidson -- Analyst

Laurie Hunsicker -- Compass Point -- Anal;yst

Matthew M. Breese -- Piper Jaffray Companies -- Analyst

Collyn Bement Gilbert -- Keefe, Bruyette, & Woods, Inc. -- Analyst

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