Good morning, and welcome to the Independent Bank Corp. Second Quarter 2016 Earnings Conference Call. [Operator Instructions] 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, this event is being recorded. I would now like to turn the conference over to Chris Oddleifson, Chief Executive. Please go ahead.

Great. Good morning. Thank you, Nicole. Thank you, everybody, for joining us this morning. With me as usual is Rob Cozzone, our Chief Financial Officer, who will take you through our financial results following my comments. Our second quarter can be best described as the one where all the stars were perfectly aligned in our favor to produce one heck of a quarter. Core earnings in the second quarter came in at $20.5 million or $0.78 per share, well above both prior quarter and prior year. Everything came together this quarter in virtually across-the-board fashion. Healthy growth in the commercial loan portfolio in each major business sector, including small business. Competitive conditions, as we've talked about, remain tough, but we are very much in a deal flow in our region, and loan pipelines remain in good shape. Home equity activity also continues to be fairly robust. Core deposits have more than kept up, with another quarter of strong growth. Our relationship focus here is really paying off and new household formation remains solid. Every category of fee income was up this quarter, with higher volumes across the range of deposit, interchange, mortgage and loan -- commercial loan level swaps. And our investment management unit is now responsible for our assets that rose to $2.8 billion. Credit quality continues in excellent shape. Every quarter, we caution that trends will inevitably return to cyclical norms, but not just yet, with another quarter of net recovers -- net recoveries and benign nonperforming trends. Expense levels remained well-contained with a further lowering of our efficiency ratio. And all this led to an ROA of over 1.1% and an ROE above 10%. And, of course, capital continues to build, reporting strong capital ratios and a platform for future growth. Tangible book value per share continue…

Thank you, Chris. Good morning. As Chris just described, things came together especially well for us in the second quarter. Versus the first quarter of 2016, GAAP net income and diluted earnings per share increased 10% and 8%, respectively, to $20.4 million and $0.77. Operating diluted earnings per share, which excludes the non-core items referenced in the press release, was $0.78 in the second quarter, an increase of 8% versus last quarter and 15% versus the same period a year ago. Performance ratios for the quarter were quite strong. On an operating basis, the return on average assets was 1.14%, the return on average equity was 10.31% and the return on average tangible equity was 14.02% for the quarter. Strong earnings results continued to drive growth in tangible book value per share, which increased to $22.52 at June 30, a $0.62 or 3% increase from the prior quarter-end. In addition, despite strong balance sheet growth, tangible capital and tangible assets remained consistent with the prior quarter at 8.22%. Total annualized loan growth for the quarter was 6.1%, reflecting good growth across all commercial categories as well as a solid increase in the home equity portfolio, which was partially driven by better direct mail response rates. Relatively high payoffs during the quarter were offset by excellent closing volumes. The influence of competition and the extremely low rate environment, however, has led to further large commercial loan payoffs in the first few weeks of the third quarter. As of June 30, all loan pipelines were at multi-quarter highs. The improved commercial pipeline ended the quarter at $214 million compared to $150 million in the prior quarter, with a meaningful portion of our new business coming from our existing commercial client base. Deposit growth was also impressive for the quarter, with all core…

Great. Okay, Nicole. We're ready for questions.

[Operator Instructions] Our first question comes from Mark Fitzgibbon of Sandler O'Neill + Partners.

Rob, just to clarify one of the comments you said, I think you expected expenses to be higher in the back half of the year related to marketing campaigns and expansion. Could you help us think about the magnitude of the increase or incremental costs from this expansion?

Yes. Well, we expect full year expenses to still be in the range that we indicated, which was 3% to 5% growth over 2015. I would anticipate that we would be in the lower end of that range, actually, based upon first couple of quarters of performance, but I would expect about a $1 million round numbers of increase in total operating noninterest expense in the third quarter versus the second quarter.

Okay. And how does that translate into sort of your de novo plans? How many new branches are you thinking about in the back half of the year?

Yes. Actually, no de novo branches. When I mentioned branch transformation, we're in the process of converting a number of branches from the traditional teller layout to pawn [ph] style formats. So we have 3 in process at the moment, all of which we expect to complete -- actually one, I think, just completed. The other 2, we expect to complete in the third and fourth quarters. So the cost of making those transformations will start to impact our expense items, particularly occupancy and equipment expense.

Okay. And then, changing gears a little bit. It looks like commercial real estate growth has slowed a little bit for you guys recently. And, I guess, I'm curious whether that might be a function of either the heightened regulatory focus on CRE lending or there's the fact that maybe the Boston commercial real estate market might be getting a little overheated. I'm just curious as to your thoughts.

Yes. We -- we're not concerned about the regulatory focus. We have been a CRE lender since our inception. We have been close to our regulators in terms of our processes and our risk management practices. And they are very comfortable with continued growth in that portfolio. However, we have begun to run up against some of our internal concentration limits, specifically multifamily. So we have slowed that as a result of reaching internal limits. In terms of the market, we are concerned. We have been concerned about the valuations in the greater Boston market. Our commercial real estate and construction production is diversified across our footprint. I was looking at a report yesterday and our production in second quarter, collateral was in 78 different cities and towns across the state, so well-diversified. But we do continue to think that we have an opportunity to grow within the Boston markets, just maybe not at such a rapid pace.

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

I just wanted to -- it's interesting, the growth that you're seeing in this quarter and the pipelines being as strong as they are. Do you think that, that momentum can continue to build? Or was it somewhat of an anomaly? I mean, I know you guys sort of in your prepared remarks indicated that this quarter just everything kind of came together somewhat perfectly, but just curious as to how you're thinking about the business building from here.

Well, I think competition is certainly very aggressive, Collyn. It continues to be the case. I did mention in my comments that in the first few weeks of the third quarter here, we've had a number of large commercial payoffs, certainly [indiscernible] to be replicated here in the third quarter. However, we're seeing a lot of activity. As -- also, as I mentioned, the pipelines are very strong and not just in commercial, but our mortgage pipeline, our home equity pipeline, our small business banking pipeline all had multi-quarter highs. So we think we will have a good closing quarter in the third quarter, but it just won't result in the same level of growth that we experienced in the second quarter because of some accelerated payoffs.

Okay. Okay. That's helpful. And then, similarly on the fee side, I mean, I know, obviously, the derivative income is going to be volatile. But the momentum that you're seeing on the wealth side and then the interchange side, is that also has the potential to build here, as you had indicated kind of more customer penetration and that type of thing? Or would the interchange be also an anomaly this quarter?

No. No, certainly not an anomaly. I would expect that to grow as we head into the third quarter and continue to acquire core checking customers. Investment management income, remember, we have tax prep fees here in the second quarter. That was about $400,000 of the increase. So if you were to strip that out, we would expect the remainder to continue to grow because we've had nice growth in assets under management and a good pipeline of new business there. And then, as I said, the swap income is unpredictable. With the commercial pipeline the way it is, we should have a pretty good third quarter. But second quarter was just a standout.

Okay. That's helpful. And then, just finally on the margin, Rob, you had indicated maybe settling out at the 3.40% level. What are some of your assumptions that are going into that? I mean, what are some of the trends that you're seeing in terms of new loan pricing and sort of your outlook for where funding costs will go to sort of get you to that 3.40%?

Yes. New loan pricing is off a little bit, frankly, because of where the yield curve is, right? So the yield curve moves down and, without necessarily having any sort of spread compression, the absolute rate drops. So I do expect new loan yield -- and we saw a little bit of it here in the second quarter -- new loan yields to come down a bit, and so that will certainly impact the margin. If you average the first 2 quarters, we're at 3.43%. I would expect us to be slightly less than that in the third quarter and probably a little bit lower than that, again, in the fourth quarter. But my guidance was the low 3.40s for the year. So it might be a little north of 3.40%, Collyn.

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

Thank you very much, everybody, for joining us. Have an enjoyable rest of the summer, and we'll talk to you in October.

Thank you.

Bye.

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