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Independent Bank Corp. (NASDAQ:INDB)
Q4 2019 Earnings Call
Jan 17, 2020, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Independent Bank Corp Fourth Quarter 2019 Earnings Call and Webcast. [Operator Instructions]

Before proceeding, let me mention that this call may contain forward-looking statements with respect to financial conditions, results of operations and business of Independent Bank Corp. Actual results may be different. Factors that may cause actual results to be different include those identified in our Annual Report on Form 10-K and our earnings press release. Independent Bank Corp cautions you against any unduly relying any forward-looking statements and disclaim any intent to update publicly any forward-looking statements whether in response to new information, future events or otherwise.

Please note that during the call, we will also discuss certain non-GAAP financial measures as we view 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 measures and additional information regarding non-GAAP measures.

All please note that this event is being recorded.

I'd now like to turn the conference over to Mr. Chris Oddleifson, President and CEO. Please go ahead.

Christopher Oddleifson -- Chief Executive Officer

Thank you, Nick, and good morning and Happy New Year to everyone and thank you for joining us. I'm accompanied today by Rob Cozzone, our Chief Operating Officer, and Mark Ruggiero, our Chief Financial Officer.

We produced another solid financial performance in the fourth quarter with earnings of $47.5 million or $1.38 per share. Mark will cover the quarter in more detail shortly. I'd like to focus my comments today on the full year just completed.

Financially, we had a terrific year in 2019. We generated record earnings for the seventh consecutive year. Highlights included operating EPS of $5.62 which represents growth of 20% over the prior year, strong returns with operating ROA and ROE of 1.7% and 12.1% respectively, robust organic loan volumes with about $1.5 billion in commercial originations along with healthy pipelines. This was masked by higher levels of paydowns and runoff, especially related to the acquired Blue Hills portfolios. Similarly, organic core deposit generation remained strong, while also being offset by anticipated runoff and the higher cost acquired deposits as well as cash flow volatility within some larger commercial deposits.

Our investment management group had another banner year with 10% revenue growth and assets under management and administration rising 26% to $4.6 billion. Credit quality remained stellar with fairly stable nonperforming asset levels and a loss rate of a mere 3 basis points for the year. Our efficiency ratio was in the low 50% range. Tangible book value per share rose another 19% last year. We are quite proud of the fact that this key measure has grown at a compounded rate of 12% over the last five years despite numerous acquisitions.

And finally, we rewarded our many loyal shareholders with another healthy double-digit increase in our dividend last year. So all in all, our performance in 2018 was a very good one.

As we turn the calendar page over 2020, we do face several headwinds. Like others in the industry we head into the new year with lower interest margins that puts pressure on revenue levels. In addition, having crossed the $10 billion asset threshold, we will begin to incur the impact of the Durbin Amendment related to the interchange fees commencing in the second half of 2020. Also, some of our tax credits related to community lending are expiring this year, which will result in an increase to our effective tax rate.

Notwithstanding these weights on earnings and related growth rates, we expect to post solid returns. Mark will give you more color on this in a moment. Beyond the numbers, the Rockland Trust franchise continued to progress over the past year in many ways. First and foremost, our acquisition and successful deleveraging and assimilation of Blue Hills Bank has significantly advanced our strategic path. It has bolted us into the number one deposit share position in the state of any Massachusetts-based bank and meaningfully expanded our presence in the coveted Greater Boston market. It has also brought us a powerful mortgage origination platform and an excellent mortgage team. And of course, we added great talent in commercial banking, retail banking and other areas.

Other progress points include our continued expansion in the Worcester market, good growth in our new downtown Boston branch, our new household formation above the population growth rate in the state, new products and features such as a credit card offering, premier banking products, streamlined online account opening, expanded use of video tellers and multiple mobile banking enhancements.

We further strengthened our enterprise risk management and cybersecurity programs and we continue to receive recognitions of excellence by reputable publications such as J.D. Power, Forbes, Global Finance and the Boston Globe. And we position ourselves for future success while preserving our culture by strengthening our executive leadership ranks by internal promotions of highly talented and qualified individuals such as Rob and Mark who join me today.

Heading into the new year, our priority initiatives include continuing to build out our Worcester presence, the new branches, ATMs and marketing campaigns, continuing to satisfy the Blue Hills customer base with our more extensive product offerings; capitalizing on investment management opportunities especially in recently acquired markets such as [Indecipherable] and Nantucket; augmenting customer online access to offerings such as credit card, home equity and investment management; further streamlining our underwriting processes; and keeping pace of the growing customer preferences for mobile banking.

So it's another busy year in store for us. With the added scale and operating leverage provided by the Blue Hills acquisitions, we'll be making incremental investments in our infrastructure, especially risk management, technology and analytics to ensure we're fully equipped to pursue the concrete growth opportunities we envision arising from our increased scale. While these investments will add to our expense base, the long-term benefits will be well worth it.

Nationally, we continue to monitor the increasing risks associated with foreign tensions, global economic struggles and tighter labor markets. The 10-year expansion has continued on the back of a strong labor market, with unemployment remaining unchanged at 3.5%, a 50-year low. Locally, the Massachusetts unemployment rate has held steady at an incredible 2.9% for October, with an estimated growth of state GDP of about 1.4% [Phonetic] in Q3. So, despite the headwinds I just mentioned, we continue to see a rather healthy economy around us.

And wrapping up, I want to reiterate that while we enter 2020 a much different company in terms of size and scale, we remain the same in many important ways. Specifically, we retain the look and feel of a local bank totally focused on our customers. We are committed to continue providing top tier products and services, while building even stronger customer relationships. Our ongoing success serving our customers is validated by the consistently high customer satisfaction and service rankings we receive. We also remain committed to a path of discipline and focus which has served us well and will continue to be a cornerstone of our success. We will devote our resources to leverage our core competitive advantages while at the same time avoiding distracted by pursuits that detract from it.

Once again, I wish to salute my Rockland Trust colleagues for their incredible energy, innovation and creativity that they bring to work each and every day. We invest heavily in their potential with an integrated learning and coaching culture that provides us with the next generation of leaders. For the 11th year in a row, we are at a very high ranking in the Boston Globe Top Places to Work survey of employees, which reflects this commitment to our colleagues.

And lastly, before I hand it over to Mark, I'd like to acknowledge Brian Tedeschi, our longest-serving director who made the decision to voluntarily step down earlier this month. I greatly appreciate Brian's support and guidance over these many years. He will be missed. Mark?

Mark Ruggiero -- Chief Financial Officer and Chief Accounting Officer

Thank you, Chris. I will now cover the fourth quarter results in more detail.

GAAP net income of $47.5 million and diluted EPS of $1.38 in the fourth quarter of 2019 reflect decreases of 8.4% and 8.6% respectively from the prior quarter's results, driven primarily by margin pressure imposed by the macro level interest rate environment and timing over net charge-off and recovery activity and related provisioning.

In addition, the third quarter results included a gain associated with the deleverage sale of residential loans as well as merger and acquisition expenses and their related tax impacts. When excluding items deemed to be non-core, the net income and diluted EPS results for the fourth quarter reflect decreases of 8.1% and 8% respectively when compared to the prior quarter and reflect increases of 32.3% and 7% respectively when compared to 2018 fourth quarter results.

Despite the quarter-over-quarter decrease in earnings, the results were in line with expectations and reflects strong, consistent business momentum across a number of key areas that I will cover in more detail. In addition, the fourth quarter return on average assets of 1.64% anchored an additional increase in tangible book value of $0.75 in the quarter, bringing the December 31, 2019, tangible book value per share to $34.11. Inclusive of the full impact of the Blue Hills acquisition and cost save initiatives absorbed in 2019, this year-end tangible book value per share represents a 19% increase over the prior-year level. In addition, return on average tangible common equity was a healthy 16.14% for the quarter.

Included in the Q4 results, net loans decreased slightly in the fourth quarter as the total outstanding balances continue to reflect strong loan closing activity being offset by accelerated pay-offs and pay-downs. Included in the pay-off and paydown activity for the fourth quarter was approximately $100 million associated with acquired Blue Hills commercial loans and another $60 million in the Blue Hills residential portfolio. Similar to prior quarters, the majority of payoff activity in the commercial book is occurring in the commercial and industrial and commercial real estate portfolios as borrowers continue to take advantage of favorable conditions to pursue refinance or exit event opportunities.

Countering the payoff activity and resulting decline in these portfolios, the strong Northeast economy continues to spur solid business investment as reflected in the 5% increase in construction loan balances as well as strong closing volumes in the commercial real estate category. In addition, the approved commercial pipeline was $261 million as of December 31, 2019, which bode well for continued strong closing volumes heading into 2020.

On the consumer real estate side, the overall reduction in balances continues to primarily reflect the fact that the majority of the Company's robust mortgage production is being sold to the secondary market, resulting in strong mortgage banking income results, offsetting the decrease in residential loan balances. And as noted last quarter, the yield curve shape continue to favor cash-out refinance mortgage opportunities causing a temporary strain over home equity demand and balance growth.

On the deposit side, the balance sheet narrative is similar as healthy new core deposit sales are being offset by various sources of deposit outflow, including customer cash flow volatility and commercial checking and municipal deposits, as well as a subsiding but notable runoff of higher cost Blue Hills bank deposits.

The remix of deposit products and use of broker deposits to replace higher costing CD maturities has stabilized the overall cost of deposits, with the fourth quarter cost of 48 basis points, reflecting a 2 basis point decrease from the prior quarter. In addition to the favorable deposit remix, the fourth quarter also reflected a full quarter of minimal wholesale borrowing balances as well as the retirement of $35 million in subordinated debentures, further improving the Company's overall funding costs. As such, the decline in the net interest margin for the fourth quarter to 3.90% was also in line with expectations and it is inclusive of a full quarter impact from both the July and September Federal Reserve rate cuts as well as an additional cut at the end of October. Offsetting the rate cut compression, loan accretion income for the acquired loans remains at an elevated level and it was approximately $3.4 million for the fourth quarter.

Shifting gears to noninterest side. Fourth quarter non-interest income was $33.3 million and represents an operating 7.9% increase from the third quarter when excluding a $1 million gain attributable to the residential deleverage sale in the prior quarter. Key items to highlight for the quarter include the following.

Regarding investment management income, the outflow of a large temporary $200 million custody account that we noted last quarter was mitigated by another quarter of strong new asset generation, increasing the overall assets under administration to $4.6 billion as of December 31, 2019. This shift in asset holdings, along with increased retail commissions, drove overall increases in fee revenues when compared to the third quarter. While down from exceptional third quarter levels, both mortgage banking income and loan level derivative income remain elevated, as strong demand for both reflect a natural hedge against declines in longer-term rates.

Interchange and ATM fee income were down compared to the prior quarter due to seasonality. And lastly, recognition of a $3.1 million insurance recovery is included in the other category, which I will speak to in a bit more detail as part of my update on asset quality metrics.

Total non-interest expense of $67.4 million for the fourth quarter of 2019 represents a slightly elevated level from the prior quarter, when excluding approximately $700,000 of merger-related expenses in the third quarter. Some key items to highlight for the quarter include salaries and benefits decreased due primarily to the timing of incentive related accruals that correspond to each quarter's earnings levels. And similar to the third quarter, the FDIC assessment expense was zero in the fourth quarter due to credit utilization, with an additional $1.2 million in credits available to be offset against future quarterly FDIC assessments, assuming the fund reserve levels stay stabilized.

And as Chris alluded to in his earlier comments, the Company continues to invest prudently in its overall infrastructure. This prioritization on strategic initiative spending is focused on building scale while optimizing efficiency and includes incremental costs associated with risk management, primarily in the areas of technology risk and credit administration as well as new market expansion. Along those lines, included in the fourth quarter results were $440,000 of one-time costs associated with lease exits and restructures as well as increases in technology and consulting to further build scale while maintaining infrastructure efficiency. Despite the modest level of increased spending, the efficiency ratio for the fourth quarter remained low at 50.6%.

Asset quality metrics remain strong despite a couple of one-off items during the fourth quarter. Similar to prior experience with acquisitions, except this quarter on a larger scale, a couple of acquired relationships experienced exit events, resulting in offsetting non-recurring net income results. In particular, a $2.5 million charge-off on an acquired commercial real estate loan was offset by the previously alluded to $3.1 million insurance claim payout associated with a prior charged-off Blue Hills loan.

Because of the timeline of events and business combination purchase accounting implications, the charge-off impact is reflected in the Company's increase in provision for loan loss whereas the insurance recovery is included in noninterest income. As these items are considered to be isolated events, they are not deemed to be indicative of any other general credit characteristics within the portfolio as nonperforming assets remain consistent with the prior quarter at approximately $48.2 million or only 0.4% of total assets. The provision for loan loss of $4 million provides coverage for the large charge-off as well as general allocation for organic loan growth, essentially replacing the runoff of acquired balances that come over with zero reserve allocation.

And with the long-awaited arrival of CECL implementation heading into 2020, the Company is complete with its model build-out and is finalizing documentation of model validation and its associated processes and controls. As such, we feel it is premature to disclose the specific result at this point. However, we are comfortable indicating that the day one impact on the reserve is expected to be immaterial.

Lastly, the tax rate for the fourth quarter declined to 23.2%, which reflects the benefit of a revised state tax filing position. As such, the Company amended previously filed tax returns which resulted in a $632,000 discrete tax benefit recorded in the fourth quarter as well as additional benefit for adjusting the year-to-date 2019 tax expense to the newly determined lower effective tax rate. In conjunction with this amended position, the Company incurred approximately $370,000 of consulting expense, which also contributed to the increase noted in other expenses this quarter.

I'll now switch gears to provide full year 2020 guidance. Assuming no significant changes to the current competitive and economic landscape, net loan growth is expected to be in the low single digit range. To provide a bit more insight, new loan closing commitments are expected to remain strong into 2020, while the challenge for net growth will likely continue to be impacted by the recent increase in payoff activity from both the acquired Blue Hills portfolio as well as the current rate environment. Changes in either assumption could result in loan growth volatility or results outside of this range.

Consistent with loan growth guidance, net deposit growth is expected to be in the low single digit range. Assuming a static rate environment and with an expectation of continuing to shift balances from maturing time deposits to core deposits, the overall cost of deposits is expected to improve slightly over the course of the upcoming year.

Regarding the net interest margin, we anticipate the full year 2020 margin to be in the mid to high 3.80% range, which represents a decline from total 2019 levels of approximately 15 to 20 basis points. This 2020 guidance includes the following assumptions. No changes to interest rates from the fed reserve; loan yields stabilizing with some nominal level of compression resulting from portfolio turnover; overall funding costs to improve slightly; and a normalized level of loan accretion of $2 million to $2.5 million per quarter.

Operating fee income should remain essentially flat as compared to adjusted 2019 results, with that baseline number excluding $5 million recognized in 2019 for the aforementioned insurance recovery and other large one-time gains on asset sales. One of the factors weighing on revenue levels is an assumed reduction in interchange income from the Durbin Amendment of $5 million to $5.5 million over the last six months of the year.

Operating expenses excluding merger related and other non-core expenses incurred in 2019 are anticipated to be well contained, with the year-over-year increase in the low to mid single digit range despite continued investment in digital capabilities, internal infrastructure and new market expansion. Similar to the impact on the reserve, provisioning for bad debt under the CECL model should not materially change from previous levels and will be driven primarily by net charge-off experience and general economic and credit conditions, both of which do not pose any known significant concern over the long term horizon at this point.

And lastly, with the 2019 final expiration of new market tax credit benefit, the tax rate is expected to increase to approximately 26% for the year, with some level of discrete benefit in the first quarter due to vesting of equity compensation awards.

That concludes my comments. Chris?

Christopher Oddleifson -- Chief Executive Officer

Great. Thanks, Mark.

And, Nick, we're ready for some questions.

Questions and Answers:

Operator

[Operator Instructions] The first question comes from Mark Fitzgibbon, Piper Sandler. Please go ahead.

Mark Fitzgibbon -- Piper Sandler -- Analyst

I wanted to first -- could you just clarify a comment you made about the interchange fees? Is that $5 million to $5.5 million of lost interchange fees in the second half of the year, did you say that was including that or excluding that? I apologize I missed it.

Mark Ruggiero -- Chief Financial Officer and Chief Accounting Officer

The guidance includes that reduction, Mark.

Mark Fitzgibbon -- Piper Sandler -- Analyst

Got you. Okay. And then secondly, can you help us think about the purchase accounting accretion? As we sort of go into the first quarter, does that movement touch lower?

Mark Ruggiero -- Chief Financial Officer and Chief Accounting Officer

It does, yeah. We've been experiencing over the last couple of quarters -- if you recall, the Q3 accretion income was about $3.9 million, Q4 was about $3.4 million. Our expectation on a normalized level included in the margin guidance I gave is about $2 million to $2.5 million a quarter. So we do anticipate that to come down, but again, always somewhat contingent on individual credits and what we may have from marks [Phonetic] on those. But on a whole basis, we do anticipate it to come down to a degree, yes.

Mark Fitzgibbon -- Piper Sandler -- Analyst

Okay. And then how much more runoff do you think is likely from the Blue Hills portfolio? We're getting to the end of that?

Mark Ruggiero -- Chief Financial Officer and Chief Accounting Officer

Yeah, I'd say, big picture, when we closed on the deal and looked at the portfolio, there were a handful of credits that we certainly anticipated when they came up for renewal that we would not extend or that would just because of their transactional nature refinance out here in the near term.

So I would say the majority of that has exited through the fourth quarter. So we do anticipate that the level of pay-offs and pay-downs should subside. I wouldn't say it's all behind us by any means. But we certainly should see that come down compared to the levels we've been seeing.

Mark Fitzgibbon -- Piper Sandler -- Analyst

Okay. And then lastly, I know that couple of credit things you had this quarter were idiosyncratic. But from a credit perspective, what are the kinds of things that you're worried about out there that you're maybe dialing back a little bit or avoiding?

Mark Ruggiero -- Chief Financial Officer and Chief Accounting Officer

Yeah. I'd say certainly when you look at the growth in our construction portfolio, I think that's a portfolio that inherently may seem to be more risky. But we feel very, very good about that portfolio and the opportunities we've been seeing. And I think in particular an interesting dynamic there is, we're really getting a lot of those construction deals that are looking to have a very local banker familiar with construction lending and underwriting. And as a result, we are seeing less competition for those types of deals such that they meet our underwriting standards, the pricing is very well, we have good spreads there. We typically see borrowers putting more equity into those deals.

And when those deals get to a permanent stage and are looking to get permanent refinancing, that's when we often may see other competitors coming into the market. The underwriting gets a little bit more loose. We may not see the level of equity coming in from the borrower. And that's where we are willing to step away from those relationships on the permanent side.

Christopher Oddleifson -- Chief Executive Officer

When we look around the market, the things that concern us are things that we're staying away from, like the large multifamily, high-end housing developments or all the cranes you see in Boston. I mean, that raises our eyebrows and that's something we historically have not been involved in and we sort of continue to avoid it.

Mark Fitzgibbon -- Piper Sandler -- Analyst

Thank you.

Christopher Oddleifson -- Chief Executive Officer

Yeah. So, Mark, that's sort of a -- we don't really have a lot of worries right now. I mean, we, as you know, we over time -- we just -- very disciplined and conservative lenders and we feel we're well secured and are in good shape.

Mark Fitzgibbon -- Piper Sandler -- Analyst

Appreciate your comments. Thanks.

Operator

Our next question comes from David Bishop, D.A. Davidson. Please go ahead.

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

Hey, good morning, guys.

Christopher Oddleifson -- Chief Executive Officer

Good morning.

Mark Ruggiero -- Chief Financial Officer and Chief Accounting Officer

Good morning.

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

Appreciate the overture in the guidance. A quick question. You mentioned in terms of operating expense outlook some new market initiatives and infrastructure investment. Any details you can provide there? Just a little bit more color in terms of what you're thinking in terms of specifics?

Christopher Oddleifson -- Chief Executive Officer

So I'll start. I mean, one of the markets that we've been wanting to really sort of enter for a long time is Worcester, and over the last 18 months we've begun doing just that. Took us a while to sort of figure out sort of who we could build the team around. As we've announced a while ago, Mike Crawford joined us and is leading and team there. We're building out with this management, commercial folks, treasury services, and we will be opening our first branch in Worcester in a month or so. Rob, is that so?

Robert Cozzone -- Chief Operating Officer

That's right, yeah.

Christopher Oddleifson -- Chief Executive Officer

That's right. So that is a market we believe would really be very, very suitable for Rockland Trust and our operating approach. That's one big thing. We've got a lot of work in our technology and operations area on cyber, on risk management-related activities [Indecipherable] We are more fully fleshing out first, second and third lines of defense. We have formed a Risk Committee of the Board. And we've always had a good risk management approach. I think crossing the $10 billion places higher expectations on us -- even higher expectations on us, and we are making a lot of headway there. We've added some headcount in our technology and our risk areas to help us meet those.

Mark Ruggiero -- Chief Financial Officer and Chief Accounting Officer

And I would just add to that front. I think a lot of those spends is really looking to build scale so that we can leverage that framework as we continue to grow. I think incremental spends in the near term is still the prudent thing to do and we feel it creates longer-term value as we continue to build out that infrastructure. So, doing it right and then spending a level of incremental money at this point to really get us to scale for future growth is the right thing and the right opportunity at this point.

So that's where we're seeing a little bit more of the elevated expense that we talked about in the fourth quarter, and that'll transition a bit into 2020.

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

Got it. And then, Chris, you mentioned the Worcester effort there. Any sense, or is it too early just to ring fence how you're thinking in terms of the growth potential in terms of maybe the low end of deposit growth potential from a dollar perspective? Any targets or any numbers you can share there at this point? Or it's still a bit too early?

Robert Cozzone -- Chief Operating Officer

Yeah. Probably too -- Dave, it's Rob. It's probably a little too early to share any specific targets in terms of the development plan. Chris mentioned we expect to open one branch in early February. And we're hoping we can have another branch by midyear and maybe even a third location before the end of 2020. And that's what we've contemplated in the expense numbers that Mark shared with you.

I will tell you the Worcester market has about $4 billion of deposits in just the City of Worcester, and that is primarily owned by BofA and Berkshire and then People's United who just acquired United. So there was some disruption there with the acquisition of Commerce Bank by Berkshire a few years ago and then more recently People's United acquisition of United. So we think there is a decent opportunity for a commercial bank of our scale to make a difference in that market. It's also a nicely growing market. It's been revitalized.

There are a number of meaningful initiatives in the city itself that we expect to drive additional growth in addition to what they've already seen in the last couple of years. So we're really excited about this opportunity. And the key there was finding the right people, and we've been fortunate to find a number of Worcester based individuals with a long history of being successful in that market.

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

Got it. Then maybe just one follow-up in terms of credit. Noted there was a little bit of an uptick in additions to nonaccrual. Any color in terms of what drove the increase in additions to nonaccrual?

Christopher Oddleifson -- Chief Executive Officer

Not that I'd say indicative of any portfolio-as-a-whole concern. There was a little bit of increase on our residential side and some additional inflow on the commercial book as well. But both of them were fairly nominal compared to overall portfolios and I wouldn't say at this point represents any sort of more broader concern in terms of credit characteristics. These were, again, what we would consider to be sort of isolated events associated with individual credits.

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

Thanks for the color.

Christopher Oddleifson -- Chief Executive Officer

Sure.

Operator

Our next question comes from Collyn Gilbert, KBW. Please go ahead.

Collyn Gilbert -- KBW -- Analyst

Thanks. Good morning, everyone.

Christopher Oddleifson -- Chief Executive Officer

Good morning. How are you?

Collyn Gilbert -- KBW -- Analyst

Mark, if we could just start with the NIM. And I appreciate your guidance for 2020 indicating kind of the mid to high 3.80% range. Could you just talk a little bit about how you sort of see that trajectory going? And I know you had indicated that that assumes no more Fed cuts. But just some of the dynamics you expect kind of in the next quarter or so and then how you see that playing out the remainder of the year?

Mark Ruggiero -- Chief Financial Officer and Chief Accounting Officer

Sure, Collyn. So, I'd say it really stems from where we would peg the fourth quarter margin on a normalized basis. So, as you know, we reported a 3.9% margin for the quarter with $3.4 million of purchase accounting accretion. If we scale that back to sort of the normalized level and the range that I provided in my guidance and essentially assuming the rate environment remains benign and static, that would sort of peg our margin in the mid 3.80% range.

Going throughout the rest of the year in 2020, we do think there is opportunity to continue to just naturally try our higher cost and time deposits down, replace those with lower cost core deposits. There may also be some opportunities on the funding side as well. So we do think we can make incremental headway on our overall cost of funding which should add a bit of an increase to the margin. So I think that combination of stabilized loan yields being pegged to what I'd say is a normalized run rate through the fourth quarter with some level of increasing on the funding side should put us in that mid to high 3.80% range.

Collyn Gilbert -- KBW -- Analyst

Okay. Okay. That's very helpful. And then just on mortgage banking, can you just talk about sort of what some of the trends are you're seeing there and where you're kind of expecting incremental demand to be? I mean, I know it's baked into your fee guidance, but just trying to think about that business kind of in total, how you're thinking about the growth there.

Robert Cozzone -- Chief Operating Officer

Collyn, this is Rob. It's been a very successful 2019 with the mortgage business and the combination with Blue Hills. And we now have almost 40 LOs producing for us -- produced over $800 million in production, and if you annualize the last three quarters of the year, it would be $1 billion annually. So very excited about the opportunity there.

The momentum has continued into 2020. Application volume continues to be strong, with a healthy mix of purchase and refinance, and we think that that has made a meaningful difference to the potential stability of the combined entity having a high percentage in purchase. There is a fair amount of refi still. About 55% of our production is purchase volume. And I think as long as the local real estate market remains healthy and the yield curve is stable where it is, we continue to expect refinance volume and purchase volume to be healthy. 75% of that volume is being sold into the secondary market, and there continues to be strong demand there and we're getting healthy pricing.

So, in the next couple of quarters we expect the momentum to be good. It has certainly surprised us, the level of production that we've been able to generate as a combined team. But there are no signs that that is slowing to any meaningful extent at this point.

Collyn Gilbert -- KBW -- Analyst

Okay. That's very helpful. That's great. Okay. And then just on the paydown dynamics that you guys are seeing. You had indicated in your opening comments I think that like it was $100 million -- if I took this down correctly -- $100 million of Blue Hills on the commercial side and then $60 million of Blue Hills on the resi side. Just curious how that compares to what you saw in just kind of stand-alone Rockland.

Mark Ruggiero -- Chief Financial Officer and Chief Accounting Officer

Yeah. And to be honest, we actually had even more payoff and paydown activity on the legacy Rockland portfolio. So, in addition to the numbers you mentioned for Blue Hills, we also saw over $200 million of commercial payoff activity associated with our legacy portfolio and also another $100 million on the retail side.

So just to bring that back up to sort of the bigger picture, just in that fourth quarter, we're talking about almost $0.5 billion in overall paydown and payoff activity. And when you look at that translating to flat loan growth, we had just as strong a success on fundings and new originations, so close to $0.5 billion of increased lending to existing customers or funding on new relationships. So there is a lot of volume and a lot of activity going through the book that [Indecipherable] to net balances over the last couple of quarters. So that's why, to the extent some of this runoff activity does subside, we feel very good about the closing volumes in the pipelines heading into 2020.

Christopher Oddleifson -- Chief Executive Officer

And a couple of things probably worth noting. There was $1.5 billion [Indecipherable] commercial originations for 2019. It's like 40%, 50% sort of above our sort of previous highs. So a lot of strong. And also what bodes well is that the Blue Hills lending team was a significant contributor in the fourth quarter. I mean, they are really coming online and producing for us.

Collyn Gilbert -- KBW -- Analyst

That's great. Okay. Okay. That's helpful. And then just wanted to clarify on the credit side. So the net charge-off that you guys saw this quarter -- you indicated recent acquisition. Can we assume that that was Blue Hills?

Mark Ruggiero -- Chief Financial Officer and Chief Accounting Officer

That's correct.

Collyn Gilbert -- KBW -- Analyst

Okay. And then is that directly tied to the insurance claim gain that you? Or those are two separate issues?

Mark Ruggiero -- Chief Financial Officer and Chief Accounting Officer

Two separate events.

Christopher Oddleifson -- Chief Executive Officer

That happened in the same quarter very conveniently.

Mark Ruggiero -- Chief Financial Officer and Chief Accounting Officer

Right.

Collyn Gilbert -- KBW -- Analyst

Okay. Okay. So just curious what -- a little bit of color on the credit that you charged off. The obvious question is the fact that you kind of did a good deep dive and diligence I would assume when you acquired Blue Hills. So just why this sort of came as a surprise or maybe a little bit of background as to what happened with this specific credit.

Mark Ruggiero -- Chief Financial Officer and Chief Accounting Officer

Yeah. This was an individual commercial real estate deal that at the time of the acquisition was actually performing and indicated no evidence of credit deterioration. The borrower went bankrupt since the time of acquisition. It was a single tenant...

Robert Cozzone -- Chief Operating Officer

The tenant was who went bankrupt.

Mark Ruggiero -- Chief Financial Officer and Chief Accounting Officer

The tenant went bankrupt, sorry. The tenant went bankrupt. And it was a large facility with just one single tenant in that facility. So as a result, the property was no longer as marketable. We've actually exited that relationship in full. It has been paid off in full and resulted in the associated charge-off that we did take in the fourth quarter. But it was really a function of a single tenant, large facility, which is not indicative of what we typically see in our portfolio.

Christopher Oddleifson -- Chief Executive Officer

And, as I understand it, there was a -- I mean, somewhat special purpose out but, so that it would acquire a bit of rehab to get it up to standard.

Mark Ruggiero -- Chief Financial Officer and Chief Accounting Officer

That was just the reason for sort of the depressed market pricing or the value of the property at the time we -- it was trying to be sold.

Collyn Gilbert -- KBW -- Analyst

Okay. Just curious. The geography of that credit, where was it?

Christopher Oddleifson -- Chief Executive Officer

It was in our market area.

Collyn Gilbert -- KBW -- Analyst

Okay. Okay. And...

Christopher Oddleifson -- Chief Executive Officer

Adjacent -- just adjacent to it. So I mean, within our commercial market area.

Collyn Gilbert -- KBW -- Analyst

Okay. Okay. Very good. And then lastly, I mean, I guess a question for both Chris and Mark, but you guys continue to build a lot of capital. You did not buy back any shares this quarter. Can you just talk about sort of capital deployment plans, whether appetite for buyback, capital goals, targets and then, Chris, if you could just kind of give an update on how you're seeing the M&A landscape?

Christopher Oddleifson -- Chief Executive Officer

I'll go -- I'd be happy to after Mark gives his view.

Mark Ruggiero -- Chief Financial Officer and Chief Accounting Officer

Sure.

Christopher Oddleifson -- Chief Executive Officer

It won't be any different than what I've said in the past, but I'd be happy to help you.

Mark Ruggiero -- Chief Financial Officer and Chief Accounting Officer

So, from a capital management perspective, certainly in the first quarter, we'll, as we customarily do, we'll take a look at our dividend and revisit -- and again, as you noted, we have very healthy capital levels, which would bode for a sizable nominal increase in what we expect to pay out for dividends. But the exact number we obviously haven't determined yet, but I think it's safe to say that we'll look to make the right change in that quarterly rate going forward.

And from a stock buyback perspective, it certainly continues to be on our radar. I mean, when we look at really the levels of capital that we have been able to generate over the last couple of quarters and the corresponding increase in our tangible book value, we continue to look at that authorization as one that we really want to make that an economic decision over what the right level is to buy back at as a multiple of our tangible book.

So, as we continue to grow that capital over 2020, there may be an opportunity to execute on that buyback. But again, we still feel it's prudent to do that only when it makes economic sense. And that'll be something we'll certainly monitor closely throughout the year.

Collyn Gilbert -- KBW -- Analyst

Okay.

Christopher Oddleifson -- Chief Executive Officer

And, yeah, M&A -- oh, go ahead...

Collyn Gilbert -- KBW -- Analyst

No, I was just going to say, Mark, can I push you a little bit harder on that in terms of the economic sense. Do you look at it similar to the way you would look at an acquisition in terms of the buyback, on the dilution that you would take? Or...

Mark Ruggiero -- Chief Financial Officer and Chief Accounting Officer

Yeah. Earn-back on tangible book dilution.

Collyn Gilbert -- KBW -- Analyst

Okay.

Mark Ruggiero -- Chief Financial Officer and Chief Accounting Officer

And the corresponding benefit on the multiple on the return on tangible. So it's similar to how we think about pricing deals, right, just understanding the dynamics of that earn-back.

Collyn Gilbert -- KBW -- Analyst

Got it. Okay. Very good. Okay. Go ahead, Chris. You're going to dive into the whole new M&A strategy and...

Christopher Oddleifson -- Chief Executive Officer

Exactly, Collyn. So [Speech Overlap] for 35 years since 1985 we have a pretty steady trend of like 3%, 3.5% of the banks being acquired or merged per year. Now we've taken that from 18,500 banks down to about 5,000 banks today. And I'm going to make a bold prediction that that's going to continue and that the -- and actually it's -- that we're not -- I mean, we're not going to see sort of -- any sort of significant acceleration of de novo banks in the country given the heightened regulatory scrutiny that we've sort of entered into over the last -- since the Dodd-Frank in the last 10 years.

Locally, the great heyday of acquisitions where an acquisition was announced every month or two with Sovereign, Banknorth and Citizen sort of mopping up the marketplace, those days are over. You have a handful of publicly traded banks that are really are -- even could be sold if they wanted to. That pool is added to from time to time with the mutual conversions. And then you -- there is a three-year wait period and we've been the beneficiary of that among our 10 acquisitions we've done in the last 10, 15 years.

And we'd like to continue to be a buyer. I mean, we -- but we know we really can't control that, right. We can't go out to a bank store and buy banks. We need to wait till Board of Directors decide to -- that maybe linking up to our currency is a good idea. And so what we view our charge doing is to really maintain that high multiple on our currency so we continue to be an attractive buyer and be -- also, we have developed a reputation of being a good acquirer, one that say what we're going to do and we do what we say and we treat people well and we have a great culture and we just want to endeavor to maintain that.

I will say, interestingly, when we sort of started our acquisition in the last -- when we did it back in '03, '04, we looked at acquisitions as an opportunistic thing. I would say that looking in the rearview mirror, that it's really been pretty important to add scale and get to the scale we need today with all the fixed overhead you need now to run a bank in a risk appropriate way. And I would hope that would continue and imagine it will. But in terms of predictions, it's really hard to say.

So, that's a long way of saying nothing. So...

Collyn Gilbert -- KBW -- Analyst

No, that's helpful. It's always good to hear your thoughts on that. Okay. Thank you, Chris. And that's all I had. Thanks, everyone.

Christopher Oddleifson -- Chief Executive Officer

Great. Thanks.

Mark Ruggiero -- Chief Financial Officer and Chief Accounting Officer

Thank you.

Operator

[Operator Instructions] Our next question comes from Bernard Horn, Polaris Capital. Please go ahead.

Bernard Horn -- Polaris Capital -- Analyst

Hi, good morning. I got two questions for you.

Christopher Oddleifson -- Chief Executive Officer

Good morning. How are you?

Bernard Horn -- Polaris Capital -- Analyst

Good. On the press release, it talks about in other noninterest expense, it was up mostly because of an increased provision on unfunded commitments. I just don't understand why you would have a provision on an unfunded commitment. But maybe you could -- maybe I missed something there.

Mark Ruggiero -- Chief Financial Officer and Chief Accounting Officer

Yeah. That is a prescriptive requirement in accounting guidance. That speaks similar to the reserve for the allowance. It doesn't roll into that balance. But to the extent you've legally committed to extend credit in anticipation of actually extending that credit and applying a nominal default loss rate to that. So that number can be volatile depending on what stage of the pipeline certain loans are. So, I mentioned our approved pipeline was pretty consistent with where we were at the end of the third quarter. We just happened to shift a bit in terms of the stage of that pipeline, which really resulted in the level of increase that we had to book in the fourth quarter.

Bernard Horn -- Polaris Capital -- Analyst

Okay. All right. The other question I had is, just on the ALCO positioning. I know -- I hear the guidance on the net interest margin for next year and the puts and takes on kind of deposits. But is there anything that you anticipate to change much on your ALCO position? It looks like you must be a bit asset sensitive. But you talked a little bit about shifting around some deposits and borrowings. But are we expecting to see the same kind of ALCO positioning for 2020?

Mark Ruggiero -- Chief Financial Officer and Chief Accounting Officer

Yeah. We continue to be asset sensitive. But we have made great strides throughout 2019 of reducing that exposure. And just to reiterate, we now have $850 million of hedges in place against our loan portfolio to protect against rates going down. Of that $850 million, $750 million of that is already in the money. So that has already provided protection based on where we are today in rates. $50 million of that is neutral. It was a collar where current market rates are right in the middle of that range. And then the last $50 million will give us additional protection to the extent we have one more cut.

So that's a program that we continue to look at. Ideally, we would like to probably put some more hedge at play to give us a bit more protection on the down rate environment risk. The challenge there has really just been convincing ourselves to actually lock in at rate that the market is pricing in order to execute those hedges, so essentially taking the loss now for future protection.

We've all sort of seen over the last couple of months the outlook has certainly improved. It's comforting to see in the last round of the Fed Reserve meetings there seems to be at least consensus that rates should relatively hold flat here for a while and specific risks over any future cuts are really diminished and so may provide the right pricing opportunities to put a little more protection on. But we feel very good about the level we've been able to execute during '19 and the strategy we'll continue to implement for 2020.

Bernard Horn -- Polaris Capital -- Analyst

Thanks. And I'm assuming that the net interest margin guidance is -- those hedges are built into that guidance.

Mark Ruggiero -- Chief Financial Officer and Chief Accounting Officer

They are. Correct.

Bernard Horn -- Polaris Capital -- Analyst

Okay. All right. That's all I had. Thanks very much.

Christopher Oddleifson -- Chief Executive Officer

Great. Thanks, Bernie.

Operator

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

Christopher Oddleifson -- Chief Executive Officer

Great. Thank you very much, Nick, and thank you, everybody, for joining us today, and we look forward to talking to you in three months' time about our first quarter 2020 results. Have a good rest of the winter. Bye.

Operator

[Operator Closing Remarks]

Duration: 52 minutes

Call participants:

Christopher Oddleifson -- Chief Executive Officer

Mark Ruggiero -- Chief Financial Officer and Chief Accounting Officer

Robert Cozzone -- Chief Operating Officer

Mark Fitzgibbon -- Piper Sandler -- Analyst

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

Collyn Gilbert -- KBW -- Analyst

Bernard Horn -- Polaris Capital -- Analyst

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