Independent Bank Corp (Massachusetts)
NASDAQ:INDB
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Independent Bank Corp (Massachusetts)
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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 the financial conditions, results of operations and business of Independent Bank Corp. Actual results may be different. Factors that may cause actual results to differ include these identified in our Annual Report on Form 10-K and our earnings press release.
Independent Bank Corp. cautions you against any 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 measures and additional information regarding on non-GAAP measures. Also, please note that the event is being recorded.
I would now like to turn the conference over to Mr. Chris Oddleifson, President and CEO. Please go ahead.
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, 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 details shortly. I'd like to focus my comments today on our 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 was about $1.5 billion in commercial originations along with healthy pipelines.
This is 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 in a higher cost acquire deposits, as well as cash flow volatility within some larger commercial deposits.
Our investment management group had another better year with 10% revenue growth and assets under management administration rising 26% to $4.6 billion. Credit quality remains stellar with fairly stable non-performing asset levels and a loss rate of a mere three basis points for the year.
Our efficiency ratio was in a 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 awarded our many loyal shareholders with another healthy double digit increase in our dividend last year. So all in all, our performance in 2019 was a very good one.
As we turn the calendar page over to 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] [ph] the impact of the Durbin Amendment related to the interchange fees commencing the second half of 2020.
Also some of our tax credits related to [Canadian] [ph] lending are expiring this year which will result in an increase to our effective tax rates. 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] [ph] 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 vaulted 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 had a great talent in commercial banking and retail banking, and other areas. Other progress points include our continued expansion in the Worcester market, good growth and our new downtown Boston branch, our new household formation above the population growth rate of 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, cyber security programs, and we continue to receive recognitions of excellence by reputable publications such as J.D. Power, Forbes, Global Finance, and The Boston Globe.
We position ourselves for future success, while preserving our culture by strengthening our executive leadership ranks, 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 with new branches, ATMs and marketing campaigns, continuing to satisfy the Blue Hills customer base with more extensive, with our more extensive product offerings, capitalizing on investment management opportunities especially in recently acquired markets such as Martha's Vineyard 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 with 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 space, 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 is 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 [indiscernible] GDP of about 1.4% in Q3. So, despite the headwinds I just mentioned, we continue to see a rather healthy economy around us.
In wrapping up, I want to reiterate that while we entered 2020 a much different Company in terms of size and scale, we remain the same in many important ways. Specifically, we're taking a look and feel of a local bank, totally focused on our customers. We're 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 [indiscernible] pursuits to track from it.
Once again, I wish to salute my Rockland Trust colleagues for the incredible energy, innovation and creativity 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 a next generation of leaders.
For the 11th year in a row, we earned 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 a 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?
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 private quarters results, driven primarily by margin pressure imposed by the macro level interest rate environment and timing over net charge-off and recovery activity in related provisioning.
In addition, the third quarter results included a gain associated with the deleveraged 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 reflect 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 cents.
Inclusive of the full impact of the Blue Hills acquisition and cost save initiatives absorbed in 2019, this yearend tangible book value per share represents a 19% increase over the prior year level. In addition, return on average tangible common equity with 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 continued to reflect strong loan closing activity being offset by accelerated payoffs and pay downs. Included in the payoff and pay down 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 portfolio 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 a 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 bodes well for continued strong closing volumes heading into 2020. On the consumer real estate side, the overall reduction and balances continues to primarily reflect the fact that the majority of the company's robust mortgage rates 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 continued 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 run off of higher costs 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 favorite deposit remix, the fourth quarter also reflected a full quarter of minimal wholesale borrowing balances, as well as the retirement of $35 million and subordinated debentures, further improving the Company's overall funding cost.
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 quiet loans remains at an elevated level, and it was approximately $3.4 million for the fourth quarter.
Shifting gears to non-interest items. 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.
The 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 level stays 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 the prior charge-off Blue Hills loan.
Because of the timeline of events in business combination, purchase account and implications, the charge-off impact is reflected in the Company's increase in provision for loan loss, whereas the insurance recovery is included in non-interest 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 non-performing assets remain consistent with the prior quarter at approximately $48.2 million, or only point 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 run-off 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 a 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 approximate $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 pay off 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 also expected to be in the low single-digit range. Assuming a static rate environment and with an expectation of continuing to shift balances from mature and 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 380 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 yield 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 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 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 experienced in 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?
Great. Thanks, Mark. Nick, we're ready for some questions.
[Operator Instructions] First question comes from Mark Fitzgibbon, Piper Sandler. Please go ahead.
I wondered if first you could just clarify a comment you made about the interchange fees; is that - in 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.
The guidance includes that reduction, Mark.
And then secondly, can you help us think about the purchase accounting accretion as we sort of go into the first quarter? Does that move a touch lower?
It does. Yes, 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 expectations 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 for marks on those. But on a whole basis, we do anticipate to come down to a degree, yes.
Okay. And then how much more runoff do you think is likely from the Blue Hills portfolio? Are we getting to the end of that?
Yes, I'd say big picture. When we closed on the deal and looked up 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 that the level of payoffs and paydown should subside. I wouldn't say it's all behind us by any means, but we should - certainly should see that come down compared to the levels we've been seeing.
Okay. And then lastly, I know the 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?
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're 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're willing to step away from those relationships on the permanent side.
When we look around the market, the things that concern us are things that we're staying away from. I mean, like the large multifamily high-end housing developments, all the cranes you see in Boston. I mean it's - that raises our eyebrows and that's something we historically have not been involved in and we sort of, we avoid, continue to avoid it.
So, Mark, that's sort of a - we don't really have a lot of worries right now. I mean, we just - we, as you know, we over time, we're just super, very disciplined and fairly conservative lenders and we feel we're well secured and are in good shape.
Our next question comes from David Bishop, D.A. Davidson. Please go ahead.
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?
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. It 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 a team there and 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, is that so?
Right, yes.
That's right. So that is a market we believe would really be very, very suitable for our Rockland Trust and our operating approach. That's one big thing. We did a lot of lot of work in our technology and operations area on cyber, on risk management related activities. 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 a $10 billion places higher expectations on us, even higher expectations on us. And we were - we're making a lot of headway there. We've added some headcount in our technology, in our risk areas to help us meet those.
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 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 - 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.
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 loan-to-deposit growth potential from a dollar perspective? Any targets or any numbers you can share there at this point or…?
Yes, probably too - Dave, it's Rob. It's probably 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 mid-year and, 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's 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's 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 is 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.
And maybe just one follow-up in terms of credit, noted there was a little bit of an uptick in additions to non-accrual, any color in terms of what flowed in the venture of the increase in additions to non-accrual?
Nothing, 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.
Our next question comes from Collyn Gilbert, KBW. Please go ahead.
Mark, if we could just start with the NIM and I appreciate your guidance for 2020 indicating kind of the mid to high 380 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 to the remainder of the year?
Sure, Collyn. So I'd say it really stems from where we 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 in 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-380 range. Going throughout the rest of the year in 2020, we do think this 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 a 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 380 range.
And then just on mortgage banking. Can you just talk about sort of where, 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?
Collyn, this is Rob. It's been a very successful 2019 with the mortgage business in a 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 we're 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 and there's 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 this 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.
And then just on the pay down dynamics that you guys are seeing, you 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 of Blue Hills on the resi side. Just curious how that compares to what you saw in just kind of standalone Rockland?
To be honest, we actually had even more payoff and pay down 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 pay down and payoff activity. And when you look at that translating to flat loan growth, we add just as strong success on fundings in new originations. So close to $0.5 million of increased lending to existing customers or funding on new relationships.
So there's a lot of volume and a lot of activity going through the book that is essentially washing 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 and the pipelines heading into 2020.
And the couple of things that probably worth noting that a $1.5 billion in commercial originations for 2019 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're really coming online and producing for us.
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?
That’s correct.
Okay. And then is that directly tied to the insurance claim gain that you saw or those are two separate issues?
Those are two separate events.
That happen in the same quarter very conveniently.
So just curious, what is 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, good deep dive and diligence, I would assume when you acquired Blue Hills, so just what, why this sort of came as a surprise or maybe a little bit of background as to what happened with this specific credit?
Yes, this was an individual commercial real estate deal that at the time of the acquisition was actually performing, it indicated no evidence of credit deterioration. The borrower went bankrupt since the time of acquisition, it was a single tenant facility, 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.
And my understanding was had special been somewhat special purpose of it writing, so that would require a bit of rehab thing to get us up to standard.
The refund for sort of depressed market pricing or the value of the property at the time, that was trying to be sold.
Just curious the geography of that credit to where was that?
It was in our market area.
Okay.
Just adjacent to it within our commercial market area.
And then just lastly, I mean I guess the question for both Chris and
Mark, but you know, 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?
I'd be happy to after Mark, it would be any different than what I've said in the past but I'd be happy.
I’d say from a capital management perspective, certainly in the first quarter we will 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 and what we expect to payout for dividends.
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. And 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.
That authorization is 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.
Okay.
And yes M&A, go ahead.
No, I was going to say Mark, could you 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 it in acquisition in terms of buyback on the dilution that you would take or?
Yes, turn back on tangible book dilution and the corresponding benefit on the multiple on the return on tangibles. So it doesn't really matter how we think about pricing deals, right. Just understanding the dynamics of that earn-back.
Okay, go ahead, Chris. You're going to dazzle us with a whole new, a whole new M&A strategy.
Yes, exactly or with for 35 years since 1985, we have a pretty steady trend of about 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 the bold prediction that that's going to come and that and actually it's 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 since the Dodd-Frank in the last 10 years.
Locally the great heyday of acquisitions or an acquisitions announced every month or two with Sovereign Bank North and Citizens sort of mopping up the marketplace. Those days are over. You have a handful of publicly traded bank that really are even could be sold if they wanted to, that that pool is added to from time to time with mutual conversions.
And then there's a three-year wait period and we've been the beneficiary that among our 10 acquisitions we've done in last 15 years and we like to continue to be a buyer I mean but we know we really can't control that we can't go out and do a bank store by banks, we need to wait to board of directors decide to 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 made this we continue to be an attractive buyer. And be it also we have developed the reputation of being a good acquirer one that we would say what we're going to do and we do what we say and we treat people well and we have a good culture and we just want to endeavor to maintain that.
I'll say interestingly, when we sort of started our acquisition last this point, we're at the back in 03, 04 we looked at acquisitions as an opportunistic thing. I would say that look in the rear view 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 I imagined it will. But in terms of predictions, it's really hard to say. So that's a long way of saying nothing.
That’s helpful. That’s always, it’s always good to hear your thoughts on that. Okay. Thank you, Chris and that's all I had. Thanks everyone.
Great, thanks.
Thank you.
[Operator Instructions] Our next question comes from Bernard Horn, Polaris Capital. Please go ahead.
On the press release it talks about in other non-interest expense, it was up mostly because of an increased provision on unfunded commitments. I didn't - I just don't understand why you'd have a provision on an unfunded commitments or maybe you could, maybe I missed something there.
Yes, 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. It 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.
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 little bit asset sensitive. But you talk a little bit about shifting around some deposits and borrowings but are we expecting to see the same kind of ALCO positioning for 2020?
We continue to be asset sensitive, but we have made great strides throughout 2019 of reducing that exposure. 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. We 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 have really diminished.
So it may provide the right pricing opportunities to put a little more protection on but we have, we feel very good about the level we've been able to execute during 2019 and the strategy will continue to implement through 2020.
And I'm assuming that the net interest margin guidance is built. Those hedges are built into that guidance.
They are correct.
This concludes our question-and-answer session. And I would like to turn the conference back over to Mr. Chris Oddleifson for any closing remarks.
Great. Thank you very much, Nick and thank you everybody for joining us today and we look forward to talking to you in the three months time about our first quarter 2020 results. Have a good rest of the winter. Bye.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.