Good morning and welcome to the Independent Bank Corp. Second Quarter 2015 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. This call may contain forward-looking statements with respect to the financial condition, results of operations and business of Independent Bank Corp. Actual results maybe 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. I would now like to turn the conference over to Mr. Christopher Oddleifson, President and CEO. Please go ahead, sir.

Thank you, Chad. Good morning, everyone and thank you for joining us today. I am accompanied by Rob Cozzone, our Chief Financial Officer, who will walk you through our financial results following my comments. While we delivered strong financial performance in the second quarter, core earnings came in at $17.9 million, or $0.68 per share, well above both prior quarter and prior year results. As expected, our business volumes rebounded nicely in the second quarter following harsh winter conditions at the beginning of the year. The quarter was marked by positive fundamentals and virtually across the board fashion and prudent solid commercial loan growth, exceptional core deposit growth, increases in all major fee income categories, continued stellar credit quality and steadily rising capital levels. This all resulted in higher returns as an ROE just over 1% and an ROE approaching 10% on a core basis. Last quarter, we spoke about the heightened competitive environment, especially in the lending arena, which garnered a lot of attention from our investor audience. In addition, we really haven’t changed, but as our commercial loan growth this quarter indicates, we can still get our fair share of good deals and loan pipelines also remain in good shape. As you know, we built a highly successful commercial lending franchise that truly connects with customers, our in-depth knowledge of local markets and overall relationship orientation are the real glues here. Over the years, we have expanded the breadth and depth of this business in terms of experienced talent, product sophistication and lending capacity that allows us to retain our customers over their growth cycles. And as I have said on previous calls, we have had – we have the discipline and confidence whether to undertake a loan transaction or not based upon our risk return criteria and…

Thank you, Chris and good morning. I will now provide more detail on our second quarter results. Independent Bank Corp. reported net income of $17.5 million and GAAP diluted earnings per share of $0.67 in the second quarter of 2015. This compared to net income of $9.5 million and GAAP diluted earnings per share of $0.38 in the prior quarter. Both quarters included items that the company considers to be non-core, including $0.01 of net securities losses in the current quarter, primarily arising from the sale of trust preferred securities and $0.25 of M&A expense in the prior quarter. Excluding those and other minor non-core items, operated diluted earnings per share were $0.68 in the second quarter compared to $0.63 in the prior quarter. On an operating basis, the return on average assets was 1.03% and return on average equity was 9.65% for the second quarter. As Chris mentioned, business volumes rebounded nicely from the weather-related slowdown in the first quarter. Loan growth resumed. Deposit growth accelerated. And all fee income categories experienced an uptick in activity. Total loans increased to net 0.8% during the quarter, which tends to mask the solid 6% annualized growth in our commercial loan portfolio, with the C&I category being the most significant contributor. C&I growth benefited from strong activity within the asset-based lending division. Small business loans grew nicely as well, reflecting our concerted efforts to target this segment. The home equity portfolio also experienced healthy growth as our direct mail offers continue to resonate with existing customers and end-market prospects. Offsetting the growth in those categories which refinancing related payoffs in the residential book, especially the purchased residential book. Although we plan to continue to sell the majority of our residential mortgage production, the rate of decline in the residential portfolio should slow…

Alright. Chad, we are ready for questions.

Certainly, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes today from Mark Fitzgibbon with Sandler O’Neill.

Hey guys, good morning. Rob, I wondered if you could share with us your thoughts on the net interest margin trends over the next couple of quarters assuming rates sort of stay in the current range. And I am curious if you begun to slowly increase the asset sensitivity of the balance sheet in anticipation of rates moving higher, either later this year or early next year?

Well, to your second question, we have continuously been emphasizing asset sensitivity for the last several years and that has not changed. We tried to swap the majority of our commercial lending transactions and certainly any transactions that are beyond 5 years for a fixed rate period. We continue to grow our home equity line book, which is tied to prime. So our total loan portfolio that is tied to either LIBOR or prime is now at $2.3 billion that was at $2.2 billion last quarter. And then we have a meaningful portion of our loan portfolio that also was tied to a 1 year indices. So we continue to emphasize asset sensitivity. And as you can see by our results on the liability side, we emphasized what historically has not been non-rate sensitive deposits whether they are in this cycle or not, remains to be seen, but certainly has been an emphasis for us. In terms of where we expect the margin to go, my guidance there has not changed. From a core perspective, which I would exclude kind of fluctuations in our liquid balances at the Fed because that can impact the margin 2 basis points to 3 basis points in any given quarter, we do expect loan yields to continue to gradually compress. And that will bring down our margin to the tune of 2 basis points to 3 basis points or 1 basis point to 2 basis points per quarter.

Okay, great. And then secondly, I wonder if you can update us on the Peoples integration and recognition of the cost saves from that deal?

The cost saves have been 100% recognized. And the technology conversion is completely done [indiscernible] Rockland Trust. And then on the Peoples side, I mean all of the folks are in place and trained up and we are beginning to then add some enhanced training on top of the basic training, so it’s going really well.

Okay. And then it looked like advertising costs were pretty high in the second quarter and I think they have been in years past, are we likely to see that come down a fair bit in 3Q?

It should come down a little bit. But the third quarter is an active season for advertising for us. And so we won’t see it go back down significantly in the third quarter, but it will go up significantly heading into the fourth quarter. There are some other expense line items however that will decline going into the third quarter. And so we should see fairly meaningfully to the tune of $1 million or thereabouts, lower our expense in the third quarter relative to the second quarter.

Great. And then just lastly on the commercial pipeline, I think you said it was $150 million, which is down from sort of $175 million last quarter, is that because the competitive environment has just gotten so tough, your pipeline shrunk a little bit?

Well, it’s due to lots of closings in the quarter. And we had a very strong closing quarter that isn’t exactly reflected in our growth numbers for the quarter because of some payoffs, both due to competitive refinancing as well as we continue to see customers liquidate properties because of valuations and liquidate businesses, again because of valuations. So we do expect loan growth to continue, Mark in the second half of the year as I said in my prepared comments to the tune of 1% to 2% for the rest of the year. And we feel good about the pipeline. And we are certainly seeing lots of activity. I wouldn’t read too much into the $25 million decline because it’s a point in time. Activity continues to be robust. But at the same time, the competitive environment is very challenging. And that has -- phenomenon has not relaxed at all.

Thank you.

Thank you, Mark.

Our next question comes from Laurie Hunsicker with Compass Point.

Yes. Hi, good morning gentlemen.

Hi Laurie.

A follow-up on net interest margin, what was the accretion income this quarter?

About $600,000, Laurie.

Okay. So basically the same as last quarter?

Last quarter was actually higher. Prior to that, it had been in the $600,000 range for a few quarters prior to that.

Okay. And how should we think about that for the duration of this year, is that...?

Yes. We expect it to be stable. Obviously, it depends upon prepayment activity and those acquired portfolios. But we have no reason to believe that it will change significantly.

Okay, great. And then with respect to your C&I growth, your strong C&I growth, was that all organic or was any of that purchased?

Well, we consider it organic. It occurred within our asset-based lending division. And the asset-based lending division does tend to do more participations. So, we don’t call that a purchased loan, we are participating with a number of other parties in originating a new deal.

And how big is your ABL portfolio now?

Almost $150 million in balances and about $250 million in exposed.

Okay. And it does not come with a deposit, is that correct?

Typically, it doesn’t come with significant deposits, no.

Okay, okay. And where would we expect to see that ABL portfolio go?

Well, we had very good growth this quarter. We have a very strong team that has some great relationships. We had brought that team originally over from another institution. It was a lift out that we were successful doing. And they have been meeting our expectations for growth. I would say this quarter we saw some outsized growth. We don’t have a specific target for them really outside of kind of our total commercial portfolio growth, but we would expect the rate of growth in that portfolio just because of the newness to be faster in the double-digit pace range over time.

Okay, great. And then last question here on commercial, your charge-offs, you had in every single category of commercial, you had recoveries this quarter, which is great. Can you talk a little bit about that? And I mean, was this just sort of a one-off showing up of things or what happened this quarter? And obviously, your credit trends look great, you are conservative, but that was unusual. Can you just…

Yes, it was unusual this quarter, but it’s not atypical of this point in the cycle. We had losses earlier on in the cycle and you have collateral that appreciates. You have economy improving and that can tend to improve your position relative to when those charge-offs were taken. And so we would expect to continue to periodically have recoveries. This quarter may have been unique, because it’s a little bit more broad-based, but we had very high recoveries last quarter as well. And we expect recoveries to continue to trickle in. It’s tough thing to forecast, Laurie, as I am sure you can imagine, but it’s really not too atypical of being at this stage in the cycle.

Laurie, when I joined the bank in 2003, that year and two years after that, we saw zero to negative net charge-offs in the commercial division, so harvesting the recoveries from the ‘90s.

Okay, great. Thanks.

Thanks, Laurie.

[Operator Instructions] Our next question comes from Collyn Gilbert with KBW.

Thanks. Good morning gentlemen.

Good morning, Collyn.

I just want to clarify first, the comments that you guys made on credit. I think you said the back half of the year, it was going to be kind of a $1 million to $2 million range I am guessing on net charge-offs and then maybe $2 million to $3 million on provision?

That’s right.

Is that – okay, was that for the full six months or was that on a quarterly basis?

No, that was actually full year guidance. So, my loan growth guidance was second half guidance, which is 1% to 2%, but I – net charge-offs and provision guidance was full year guidance. So, we are $300,000 in net charge-offs year-to-date. We expect to be $1 million to $2 million for the full year. Provision is $200,000 year-to-date, $700,000 in the most recent quarter. And we expect to be $2 million to $3 million for the full year.

Okay. So that’s a huge drop I think from what you guys were thinking maybe after the fourth quarter?

Yes.

That’s very true.

Okay. Yes, so that is just a reflection of the environment, which is much better than what you had thought it would be, I guess?

Well, both from a current perspective, but also loan growth is less than we thought to when we don’t need to provide for the loan growth.

Okay, okay. Alright, I just want to confirm that. And then one thing obviously Rob, you have talked about still seeing some NIM conversion, but yet the commercial loan yield was up this quarter. It seems to be holding in well there. What’s the dynamic that’s going on there? And is that sustainable or are we finally seeing an inflection on within that portfolio?

Yes, I would expect it to continue over kind of a several quarter period to decline. We are – we have been able to maintain our new volume yields, but the stuff that is paying off tends to be stuff that was originated and it’s in a higher rate cycle. And so the stuff that’s paying off has a higher yield and still it’s coming on, even though we have been pretty good at maintaining the yield on new volume. And also the number of days in a quarter has an impact on the annualized yields because of all of the accrual works on some of those portfolios, whether at 33.60 versus actual 3.60.

Okay. And then also, can you just talk a little bit about what your outlook is for construction, I know that, that kind of have been a source of strength earlier in the year and just sort of where you see that portfolio going?

Yes. We would expect growth to resume on the construction book. What happens with the construction book is some of that eventually converts to permanent. And the moves from construction into CRE and some of that took place this quarter. But we would expect growth in the construction book to resume.

Okay. And then just on the interchange fees, nice growth there, is that – is there and – we are seeing that kind of across the board which could just be a reflection of just a rebound after what was such a dismal first quarter, but how are you thinking about kind of consumer transaction activity throughout the remainder of the year?

Well, this – these two quarters tend to see good activity from summer vacationers. So we expect a good start to the third quarter as well and it tends to tail off at the end of the third quarter and then you get the kind of Christmas buying season, you see a lot of activity as well. So we would expect it to at least be maintained relative to the second quarter. And we are also having a lot of success, more success than we have ever had in getting debit cards in the hands of our customers, our cross-sell campaigns and some of the branch incentives we have in place are – have been very successful.

Okay, that’s helpful. And then just one final question, on the competitive environment, is it a pricing issue that’s keeping you guys sort of more constrained on the growth or is it a structure issue or is it both. And I guess, the base book came out this week and just there was a comment about Boston, certain competitors or certain banks in the Boston area are really offering also, ultra, ultra low rates, so I just didn’t know if it was a pricing issue that you are seeing or structure or is it everything?

I would sort of say that, I hear more about pricing on a daily basis. But I do also hear structure. So my balance [indiscernible] is price. So, I think if prices were a little more firmed up, as you see a lot more volume from us and are really satisfied with the credit terms. Is that fair to say, Rob?

Yes, it’s definitely both, but more heavily weighted towards pricing.

Okay. That was all I had. Thanks guys.

Thanks, Collyn.

Thanks.

[Operator Instructions] The next question comes from Tom Alonso with Macquarie.

Good morning gentlemen.

Good morning, Tom.

Just a quick – you guys called out the 10/31 exchange is driving some of the deposit growth this quarter, could you sort of size that for us, I guess, is it – the best way to look at it, sort of the increase in your interest earning deposits with other banks, is that probably a way to think about what came in for 1031 and could potentially flow back out?

It’s actually much lower than that. It’s close to $100 million. So we had very strong growth in other core – more core categories and more longer term stable deposit categories as well. It was a very good quarter for deposit growth.

Okay, great. So about $100 million is the number for that, perfect. Okay. Thanks guys.

Thanks Tom.

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

Thanks, Chad and thank you everybody for joining us and we look forward to giving you an update in three months. Have a good rest of the summer. Bye.

Thank you.

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