Good day and welcome to the Independent Bank Corp. Third Quarter 2019 Earnings Call and Webcast. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions [Operator Instructions].

Before proceeding, let me mention that this call may contain forward-looking statements with respect to the financial condition, results of operations and business of Independent Bank Corp. Actual results may be different.

Factors that may cause actual results to differ include these identified in our Annual Report on Form 10-K and our earnings press release. Independent Bank Corp.

cautions you against unduly relying upon any forward-looking statements and disclaims any intent to update publicly any forward-looking statements, whether in response to new information, future events or otherwise.

Please note 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 our non-GAAP measures. Also, please note that the event is being recorded.

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

Thank you, Andrea, and good morning everyone and thank you for joining us today. I'm accompanied today by Rob Cozzone, our Chief Operating Officer and Mark Ruggiero our Chief Financial Officer. Our string of record quarterly performance continued in the third quarter, excluding M&A related charges.

And a loan sale gain operating net income grew to $51.7 million or $1.50 per share, which was above both prior quarter and prior year results by a healthy margin. On a year-to-date basis operating EPS is up 24% over the prior year. The stars align this quarter as we benefit from several advantageous items Mark will cover shortly.

The strength of our underlying fundamentals remains very much intact. The quarter is marked by solid loan generation, which was masked by ongoing run off in various acquired Blue Hill portfolios, along with elevated pay downs induced by the low rate environment.

Continued strength in our demand deposit generation, across the board growth in all major fee income categories, continued investment management success with assets under administration rising nicely to $4.5 billion, lower expense levels, benign credit quality trends, strong operating ROAs and ROEs and ample capital levels with tangible book value per share rising another 4% in the past quarter alone.

So another solid quarterly performance. Our simulation of our largest acquisition to-date Blue Hills bank has proceeded well. Integrating acquired banks is a competence of ours is borne out by our proven track record over the years. Our combined revenue generators are now hard at work pursuing the added business opportunities presented by this merger.

The more expensive mortgage platform brought over by Blue Hills has been a home run in the current rate environment. As a now $11 billion plus bank, we are equally focused on ensuring that our infrastructure keeps pace in order to accommodate our bigger size and growth opportunities.

This will require ongoing investing in a cost sensible matter and evolve deepening our risk management resources amplifying our cyber security efforts, keeping measured pace in a digital space and fortifying our overall operating platform.

As always, we will be attentive to bottom line considerations while keeping medium and long-term value creation in mind. Near-term we continue to maintain momentum with initiatives designed to sustain our progress.

These include, we recently launched our credit card offering aimed at retail high net worth and small business customers, we have imminent openings of two new branches in targeted markets, we're extending our sales force to our retail businesses to enhance our marketing sales and revenue and service efforts, we've streamlined our home equity application process, and we've completed conversion of a major upgrade to our investment management business system.

On the economic front, we continue to monitor the increasing risk associated with trade tension Brexit, in a tighter labor market. In addition we've seen some signs of a slowdown within the national income data. Despite these challenges, we continue to operate with a robust economic environment.

Nationally, the 10 year expansion is continuing on the back of a strong labor market, with unemployment reaching a 50 year low in September at 3.5%. Q2 GDP is estimated at about 2% down from 3.1% in Q1.

Importantly locally, the Massachusetts unemployment rate is expected to hold steady at an incredible 2.9% with an estimated state GDP of 1.4% in the second quarter. While we have a lot going on at our company, we remain laser focused on the customer.

This extends to our pathway [ph], ease of access service quality, the competitive stakes you're keep getting raised here, but we feel confident we have the scale, market presence and brand to sustain our success. What gives us much confidence in the -- is the undying commitment and energy of our Rockland colleagues and their desire to excel.

It brings such passion and enthusiasms to our customers, which has led to our superior customer satisfaction and service quality competitive rankings. All of our success as a result of my colleagues quest for excellence, and for that I am very grateful. That's for my comments.

Mark?.

Thank you, Chris. I will now cover the third quarter results in more detail. GAAP net income of $51.8 million and diluted EPS of $1.51 in the third quarter of 2019 reflect increases of 69% and 70%, respectively, from the prior quarter’s results.

As the prior quarter included $24.7 million in pre-tax merger and acquisition expenses associated with the Blue Hills acquisition.

Excluding merger and acquisition expenses in both quarters, as well as a gain on sale of residential loans in the third quarter in conjunction with the company's balance sheet deleverage strategy, and their related tax impacts net income and diluted EPS for the third quarter were $51.7 million and $1.50, respectively, both new records for the company.

Echoing Chris comments, everything seem to fall our way this quarter. As the adjusted results reflect 6% increases from operating income and diluted EPS in the second quarter.

These record earnings results drove a 1.77% operating return on average assets and fueled an additional increase in tangible book value of $1.36 in the quarter bringing the September 30, 2019, tangible book value per share to $33.36.

This represents a 21% increase over the prior year level, inclusive of the two acquisitions completed over that period. In addition, return on average tangible common equity on an operating basis was 18.1% for the quarter.

With our continued strong capital growth, modest balance sheet growth and industry wide pressure on stock valuations, we approved a 1.5 million share stock repurchase program yesterday. Our long-term views regarding prudent capital management remain the same. And the buyback program is another tool to effectively manage capital.

We will only buyback shares on an opportunistic basis, if and when the stock price and overall impact meets our financial criteria. Shifting back to the third quarter results, net loans decreased slightly in the third quarter due to strong closing volumes being offset by heightened payoff activity.

And as noted last quarter, this payoff activity is being further accelerated by anticipated run off of certain Blue Hills loans.

With the majority of payoff activity being driven by refinance opportunities and accelerated exit events, such as sales of properties within the commercial real estate category that loan segment contracted during the quarter. Beyond that, strong demand continued to drive growth in the commercial construction and commercial and industrial portfolios.

Further evidence in robust new business activity, the approved commercial pipeline rose to $275 million as of September 30, 2019.

On the consumer real estate side, the small net reduction in balances is due primarily to a couple of factors, including the current shape of the yield curve, shifting home equity demand to more cash out refinance mortgage opportunities.

As such that shift in demand and the company's strong mortgage production is reflected primarily in its mortgage banking income results versus balance sheet growth. As the majority of production continues to be sold in the secondary market. On the deposit side, relatively flat core deposit growth is also reflective of strong new deposit sale activity.

Being mitigated from expected run off in certain pockets of the higher cost Blue Hills bank acquire deposits, as well as a couple of larger single customer outflows.

From a liquidity management perspective, broker deposits obtained over the last two quarters were used to successfully replace maturing CDs within the Blue Hills deposit base, as well as to significantly reduce the company's overnight borrowing position with the Federal Home Loan Bank.

With minimal impact from the mix of deposits in the current quarter the overall cost of deposits remained relatively consistent with the prior quarter at 50 basis points, an increase of only 1 basis point.

On the heels of both July and September Federal Reserve, Fed funds rate cuts, the net interest margin of 4.03% for the third quarter reflects a 6 basis point decrease from the prior quarter.

And as a result of the strong loan payoff activity noted previously, margin compression was mitigated as loan accretion income on acquired loans remained at an elevated level, with approximately $3.9 million recognized in the third quarter. Shifting gears to non-interest income -- to non-interest items.

Included in third quarter non-interest income was a $1 million gain attributable to the deleverage sale of $67.2 million of Blue Hills Bank’s acquired residential loans.

Excluding this gain third quarter non-interest income of $30.9 million reflects a 7.7% increase from the prior quarter, as every major fee income category increased during the quarter.

Some key items to highlight for the quarter include strong business momentum driving increases in deposit fees, ATM and interchange income another very strong quarter of originating new assets under management combined with a significant short-term single customer custody inflow of $200 million drove assets under administration in the wealth management business to $4.5 billion.

As such fee revenue for the third quarter was consistent with Q2 results, despite Q2 benefiting from seasonal tax preparation fees.

And lastly, both mortgage banking income and loan level derivative income increased significantly over the prior quarter, as both line items experienced some level of outsized benefit from the rapid decline in rates during the quarter.

When excluding final merger related expenses incurred in the third quarter, as well as the second quarter total non-interest expense of $66.8 million for the third quarter of 2019 represents a 2.2% decrease from the prior quarter.

The decrease is a reflection of the company's full realization of cost save initiatives associated with the Blue Hills acquisition, as well as the following key differences quarter-over-quarter.

FDIC assessment expense was zero in the third quarter due to credits received as a result of the reserve fund reaching its target level, at which point small bank credits were to be allocated.

In addition, the company has an additional $2 million in credits available to be offset against future quarterly FDIC assessments assuming the fund reserve level stays stabilized.

Within the other expense category, a reminder that the prior quarter included a net loss of approximately $1.5 million realized on a $47 million deleverage security sale, whereas current activity -- whereas current quarter activity included an approximately $400,000 write-off of other real estate owned, as well as increased advertising and charitable contributions.

The combination of strong fee income and contained expense management further reduce the operating efficiency ratio to 49.3% for the quarter. Asset quality metrics remain strong. During the third quarter, the company was able to successfully settle previous charge off claim, resulting in a $1 million recovery.

With minimal other net charge-off activity for the quarter and stable loan levels, no provision for loan loss was needed. In addition, non-performing assets remained consistent with the prior quarter at approximately $48.2 million or 0.4% of total assets.

We continue to move forward with implementation of the current expected credit loss or CECL model. We are performing a full parallel run of the CECL model in tandem with the current incurred loss model using September 30, 2019 balances.

While it is too soon to disclose CECL model outcomes the parallel run will help us finalize and document our CECL model over the next couple of months. I’ll now provide an update on guidance for the fourth quarter.

Anticipating minimal changes in the competitive and economic landscape net loan growth is expected to remain relatively flat, while deposits are expected to grow modestly in the fourth quarter. Regarding the net interest margin, there is certainly a couple of moving pieces.

First, when adjusting for a more normalized level of loan accretion the third quarter margin would have been in the mid-3.90s range. Second, with the full impact of the September rate decrease assuming a normalized loan accretion level and assuming no other fed funds decreases in Q4.

The margin is expected to attrite down to the low-3.90s for the fourth quarter. And to reiterate last quarter guidance, any future 25 basis Fed reserve rate cut would expect to further reduce the margin prospectively by approximately 6 basis points. Excluding the Q3 gain on sale of loans fee income is expected to decrease in Q4 when compared to Q3.

The degree to which depends on how long mortgage banking and swap income remain at their elevated levels, which is certainly hard to predict. Although the rate environment is expected to keep early quarter mortgage and loan level swap demand strong.

At this point we do anticipate the activity in those categories to eventually taper off later in the year. Also, items such as BOLI debt benefits and debit card incentives would not expect to be recurring items in the fourth quarter.

Excluding merger-related expenses incurred in Q3, non-interest expense is expected to be flat with the third quarter levels. Provision for bad debt level should continue to reflect general allocations needed for organic loan growth with no immediate significant credit concerns noted. Lastly, the tax rate is expected to remain around 25%.

That concludes my comments, Chris. .

Great, thank you, Mark. Andrea, we're ready for some questions. .

We will now begin the question-and-answer session. [Operator instructions] And our first question will come from Mark Fitzgibbon of Sandler O'Neill. Please go ahead. .

Hey, guys. Good morning. .

Good morning..

Hi, Mark..

First question I had is on your funding cost. I mean, you guys have done a remarkable job holding your funding cost particularly deposit cost down.

Are you seeing any pressure at all out there on any particular categories?.

No, Mark, I think what's optimistic to see is certainly the rate environment is helping to drive down some of the promotional pricing on the CD base in particular to our situation we're continuing to have a transitionary couple of quarters where we have some of the Blue Hills deposit base and funding base roll off.

And we are redeploying that money either back into brokered CDs or to the extent from a liquidity perspective, we don't need that we may just have some level of sort of short-term funding wholesale borrowing.

So I think in the immediate near-term we're not seeing significant challenges in the market in terms of pricing from a funding side and I think we’ll be able to hold the line pretty well on the deposit base..

Okay, great. And then, I mean, I certainly applaud the buyback given your capital position and desire to support the stock if we have pullbacks in the market.

But I guess I'm curious how do you think about tangible book value dilution it strikes me that the earn back of tangible book dilution would be fairly long with your stock trading at the valuation level it currently is.

Could you help us thinking about that?.

Absolutely and to that point the decision to put this in place is really an opportunistic decision, should in the event that our stock price is at a level that we think it makes sense, obviously managing initial tangible book value dilution and earn back expectations.

I think to your point given the current stock valuation today, I think it would be safe to say that that would infer there is more tangible book dilution than we would be comfortable with.

So this is really just to provide an opportunity should we see the price trading maybe at levels we were seen earlier in the year or as we continue to grow capital at the pace we are and have modest balance sheet growth. This may provide an opportunity in the future should the economics make sense..

I'm just curious why not just boost the dividend a bit as a means to deploy some excess capital..

Yes, we typically don't view that as one of our most opportunistic deployment of capital. I think we feel the buyback processes is a better, longer term solution. And give us a little more flexibility to act when we think it's prudent. .

And I think our sort of general sort of conservative sense is that we don't want to increase the dividend unless we're pretty confident we can maintain that dividend well into the future. I mean, we don't want to make up kind of increase it more than difficult to sort of draw down some of the capital then sort of bring the dividend back in-line..

And it certainly won't preclude us from increasing the dividend in the future, Mark. We typically evaluate the dividend on an annual basis and as you know have increased it nicely in the last couple of years and based upon our current earnings growth rate when we make that evaluation in the first quarter, we would likely come to the same conclusion.

So….

Okay. And that -- I'm sorry..

This did not preclude us from increasing the dividend when we revisit that decision in the first quarter..

Okay.

And then I'm curious, are there any particular lending niches that you're sort of watching closely or maybe dialing back given the environment that we're in today?.

Yeah, I'd say Mark. It's been pretty consistent over the last few quarters in terms of constantly assessing our underwriting standards and looking for the right credit spreads.

I wouldn't say there's niches in particular, that that we’re heightened concerned about, but as you can see in our overall balance sheet growth, we continue to stay very disciplined. There's a lot of great opportunity out there.

The pipeline is very strong, we continue to have very good success in our corporate banking initiatives, in our asset based lending programs. So we still think there is good opportunity out there, but we continue to be very disciplined ensuring that all credit metrics are where we need them to be..

I would say that -- I mean, at the high end multifamily, I mean, we do watch our concentration there. And we see a lot of that going on around here. So we have our eyes peeled for that, I'd say..

Okay. And then lastly, Chris, you guys are sort of pretty involved with M&A.

And I'm curious, whether you feel like M&A chatter is sort of picking up going down or maybe about the same?.

I'd say it’s about the same a lot of chatter and I don't count on anything until something actually lands on my desk. And we certainly are super. Now we've been on -- sort of our trend is one every year and a half or so for the last 15 years. And now I would hope that we continue, but you never really know.

So we just focused on what we’ve been focused on right now is really crossing the $10 billion to really firming up our operating base and making some infrastructure investments and getting ready for the next opportunity..

Thank you..

Our next question comes from Dave Bishop of DA Davidson. Please go ahead..

Yes, good morning, gentlemen..

Good morning, Dave..

Good morning..

Maybe circling back to Mark's question. Every so often I get to speaking to clients. There's some x about maybe just the supply demand balance, maybe in the Greater Boston or Boston market there.

Just curious what you're seeing within that market in terms of the overall health, especially on the commercial real estate side?.

Yes, I think to Chris's point certainly there's pockets of real estate deals, where there's an element of concern over valuations and looking at making sure we feel good about debt coverage service ratios. So we're certainly heightened in terms of understanding that dynamic in today's marketplace.

But I think in terms of opportunity, we continue to see plenty of opportunity in that market. We've continued to expand and bring on a couple of new officers that have good ties in that market. So I think there's still opportunity there, we just continue to be very selective over which ones to go after..

Got it.

And then from a pricing perspective, or I guess interest rate risk perspective, any sense in terms of loan portfolio, and how many are at floors or maybe hit floors within the next one or two rate cuts?.

Yeah, so just to remind you there, David, what we've done over the last couple of quarters is put in place a macro level hedge program to address obviously the -- primarily our swap book and other variable rate loans.

So as of September 30, we have $750 million of hedges available to protect on rates going down $550 million to $600 million depending on a couple basis points of where LIBOR is today are already in the money and have already provided protection on further rate cuts. The other $150 million to $200 million will provide coverage over another cut or two.

So on the commercial book, we feel very good about how we've been able to effectively mitigate much of the risk for rates going down. On the consumer side, we've also been very successful in getting floors on our home equity generation and new home equity loans.

So those are already originated with floors on them that will vary depending on the time and the rating environment at which they are originated, but there's also good protection on that portfolio as well..

Got it.

And then one final question, the FDIC assessment credits I think you said you had $2 million available well that -- should we see that offset the assessment in the fourth quarter flow into 2020 before being used up from mid-year?.

You're right. So assuming the reserve stays at that level the credits are available to be utilized, we've been running out about a $750,000 to $800,000 per quarter expense charge. So to your point if you just do the math that would be able to absorb 2.5 quarters worth of expense..

Great, thank you. .

You're welcome..

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

Yeah. Hi, good morning. .

Good morning, Laurie.

How are you?.

Great, thanks. Mark, just wanted to go back to your comments around margin you were talking low-3.90 range for fourth quarter.

Can you just share with us what your accretion income assumption is for fourth quarter?.

Sure. So for the fourth quarter that range that I provided would assume a sizable decrease in accretion income. It is a tough number to predict as you can imagine, but as we guided and I believe talked about last quarter, I continue to sort of peg a normalized accretion level in the $2 million to $2.5 million on a quarterly basis.

So should that level come in that range that would equate to the low-3.90 margin that I guided. .

Got it. Okay, that makes sense.

And then I guess, in terms of accretion for full year 2020, how should we be thinking about that because that does run down pretty quick?.

It does I think it'll certainly be dependent on payoff activity, and that's been the biggest driver over the last couple of quarters. So a little that would be predicated on whether this environment continues to foster accelerated payoff and runoff activity.

But certainly, my guess would be going into 2020, we should certainly see the accretion income come down to sort of those normalized levels that I just alluded to, that were included in the fourth quarter guidance..

Okay, alright. And then if we're thinking -- I'm sorry, go ahead..

It's tough to get to an actual number just because of the payoff volatility. .

Sure, no, that makes sense. And I guess, if we look at core margins, so if I just -- if I take your 4.03% and strip out, all the accretion come at 3.88%, so you have 15 basis points of accretion income. If we think about just that 3.88% margin as we head into next year with the shape of the yield curve.

Can you help us think about directionally what margin would look like if we assume two more cuts? How should we be thinking about that, or whether I should ask what are you assuming? How should we think about that?.

Sure. So just to reiterate on the earnings guidance outlook, a 25 basis point cut currently, we anticipate that to have about a 6 basis point reduction in our overall margin.

So, I think that could vary a little bit to the extent, certainly we have new production coming on at lower rates versus what some of the runoff is it’s riding off at so that could skew that number a little bit a basis point either way, but for the most part with the hedges we have in place, and our current assumptions over where we'd be able to move the needle on the deposit side, we estimate about a 6 basis point reduction with each cut..

Okay, that’s helpful.

And then you mentioned two new branches, when do those open and are you going to be doing deposit specials? How should we be thinking about that in terms of deposit growth, and also on the expense side?.

Hi, Laurie, its Rob..

Hey, Rob. .

How are you? The two branches one in Needham in December is our current expected open date. The other is our first branch in the City of Whistler [ph], we expect to open that in January.

And as we've talked about over the last handful of quarters, we are adding staff in the city of Whistler and expect to continue to grow our Whistler operation, which will include likely, hopefully a couple of retail locations in the next 12 to 18 months. But our first one there will be in January.

In terms of deposit growth expectations from those two new locations, we have very modest assumptions when we think about the first couple of years of growth in a branch. So it's not really going to change their trajectory of a deposit growth meaningfully from a total company perspective because we focus on building out relationships.

We will open a new branch with a couple of deposit promos, both rate driven promos as well as some cash offers. But spend more time getting ourselves better in the community and finding the right staff that have connections in the community to be able to really generate relationships..

And so -- I'm sorry. So when you think about just how those might grow over the course of the next year, are you projecting that you could maybe get $50 million per each one, given that the promos? Or are you thinking half of that, how should we….

It would be meaningfully less than $50 million per location in the first 12 months. And as we get going -- let me use our Boston location as an example. We just exceeded $20 million in our Boston location. And that's been open for about 10 months now..

Perfect. Okay, that's helpful. Okay. And then on expenses, I just wonder, Mark, if you can just take us back through on the other expenses the $17.326 million. I know that there was the $400,000 OREO was there anything else in there that's one time in nature? I feel like I'm missing something..

We had -- compared to the second quarter a couple of elevated items such as charitable contributions and advertising was up a bit, but nothing specifically that was unusual or I would consider sort of one time..

Okay.

And how much was the charitable contribution?.

That was $250,000..

Okay, great. Okay, great. And then, Chris, just last question for you. And I've asked you this before you certainly publicly said that you would like to be at $20 billion at some point.

Can you just help us think about even with CECL coming how you're viewing M&A? And in light of your Whistler expansion, how you're thinking about that?.

Well, I think for the Whistler, let me talk about Whistler first. We've had our eyes at Whistler for well over a decade. As we've thought it was, even before came into vogue a very attractive and before the [indiscernible], a very attractive market. But we just weren’t willing to go in until we really felt comfortable. We had the team to do it.

And with the hiring of Mike Crawford, what six, nine months, over a year now, wow time flies. He's building out of team across all our business lines and that's gaining some nice momentum with our retail branch opening up in December. I think that really is going to bode well for us over the medium and long-term. On the acquisition piece.

Now, it's a very -- if you take a look at our last 15 years and we first really had developed a formal M&A strategy back in 2003, 2004, it was all about being opportunistic, because we really had no known competency and you had sovereign Bank North and citizens having just a major apparatus now mopping up banks.

And so we got our start very modestly with Falmouth, coupe [ph], and Falmouth that was and followed by Slade's Ferry and we built up on our expertise, our performance gave us some good currency and 15 years later, 10 bank acquisitions, two non-bank acquisitions.

I look in the rearview mirror Laurie and say those acquisitions are pretty critical to achieve scale that we need today to survive sort of in this some highly regulatory -- regulated environment. So when I look now in 2019 on the task for 2020, I can't do anything, but say that we're still opportunistic. I mean, we -- good banks are sold, not bought.

I think, I don't go out on a limb by predicting that the secular trend has been underway for 35 years of bank acquisitions. Both nationally, regionally will continue, there will be opportunities.

And with our currency, I expect to be at the table and I would very much like to be there and you can look at the list of the publicly traded companies yourself, it's a limited number each of them has sort of the unique sort of positioning and story.

And I have no predictions as to which one will raise their hands first, but I hope we're there and hopefully could strike a deal and I hope -- I do firmly believe that this region would like a bank in the 15 to -- I said 12 to 18 years ago, I sort of up that to 15 to 20 that is a really solid -- as we are today, a very visible, more visible alternative to the big banks that pretty much can offer you anything the big banks can with exception of maybe some complex international stuff.

So I don't have any specific insight for you like, I can just lay out at the vision I just have and I was so long-winded, sorry about that..

Thank you, Chris. I appreciate it. .

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

Thanks. Good morning, guys. .

Good morning, Collyn..

Could you just give us an update Mark on where sort of the legacy Blue Hills portfolio stands and maybe what you are sort of anticipating in terms of potential payoff still to come in the near-term and maybe what the corresponding yield is of that? Just trying to get a sense of how far into this process you guys are?.

Sure, so in the third quarter the payoff activity across the board from Blue Hills was around $90 million so similar to what I believe we talked about in the prior quarter, we were anticipating about $100 million of continued payoff activity.

And going into the fourth quarter, we still anticipate some more pay down and payoff activity associated with that portfolio. As we look at it today, I would gauge it’s in that $75 million range again going into the fourth quarter.

Now this is in primarily on the commercial book side, the residential portfolio as you know, we had already carved out the portion that we were looking to sell as part of the deleverage strategy last quarter that sale executed in the third quarter and those loans are off the books.

That portfolio is naturally going to attrite just with normal pay down activity and as we're continuing to put -- as we're continuing to sell most of the production balance sheet additions on the residential side would be somewhat limited.

So that portfolio we would just naturally attrite down and that will be combined with some expected payoff on the commercial book as well going into the fourth quarter..

Okay, that’s helpful. And then just in terms of -- I completely understand and appreciate the volatility within the mortgage banking line and the derivatives line and hard to predict going forward, but can you just kind of give us an update as to where you've expanded the resources to support each of those businesses.

We knew obviously with Blue Hills they brought a great platform and that was going to be kind of a focus for you guys. You've been building out the commercial strength as well on your side.

So just kind of -- sort of give us a little bit background as to what the resources look like now that are supporting each of those businesses going forward?.

Sure, hi Collyn, it’s Rob, I will speak to mortgage first and then I can talk little more about commercial and I can add color if needed. On the mortgage side in terms of the actual sales staff we essentially doubled the sales staff or less than double went from just over 20 to about 40 in total number of originators.

Blue Hills former originators were much more heavily geared towards self sourcing and not necessarily partnering with the branches on the existing deposit customer base like legacy Rockland Trust loan offers is often due.

So we had a combination of increased Los with access to more CLIs because Blue Hills loan originators leverage relationships with real estate agents, attorneys and the like. So a lot more of their production is coming from a non-customer perspective.

So we have been to combine those two not dilute the combined production because we’re fishing off the same peers and really leverage what we have been able to do. So total production in the third quarter was $275 million a healthy record for us, certainly.

On the support side, we’ve obviously had to add to the former Blue Hills team just to deal with the combined volumes, but the scale effects in the mortgage business are very strong.

And so we’ve only at this point added a handful of individuals, we have a couple of open positions pending, but to the tune of about six or seven I think in total we’ve had to add to the operational team to support this increased production level..

Okay, that’s helpful..

And maybe just to add color on the loan level derivative program, I guess, I wouldn’t necessarily say there is added costs or resource allocation that’s needed to that.

As you know we’ve had a loan level swap program in place for a number of years already, the commercial lenders are very familiar with that program, our treasury team is very much involved in taking a look at those opportunities.

So really that growth is primarily just a function of the rate environment and our customers taking advantage of what the yield curve is providing for them and making a decision to actually go ahead and get some fixed rate pricing at rates that are very compelling in this environment.

So that’s a program that we’ve had in place we’ve continue to utilize it, it’s primarily the current rate environment that’s driving out those elevated number. And from a resource allocation it doesn’t require much of a change of anything..

Okay, that’s helpful. And then, I guess, just more broadly as we look into next year how are you guys thinking about just balancing of growth and margin specifically obviously any assets that you are putting on the books today is going to be margin dilutive from where you are.

How do you think about that in terms of just their trajectory of growth from an organic standpoint obviously, Chris, get it from an M&A standpoint, but just thinking about the incremental asset add in this rate environment as we look into next year?.

Yes, there is a lot of factors to consider Collyn and certain where we are we believe all of the reports and the data out there are we in the late innings of the expansion. So certainly we are cognizant of being careful about our growth, and selective about our growth on the loan side.

And to be honest with the challenges of the rate environment it’s tough to look at opportunities and bring on long duration assets at fixed rates that we feel just doesn’t make a lot of long-term economic sense.

So a couple of headwinds on that front certainly challenge our growth initiatives, but as I said earlier that the pipeline is very strong going into the fourth quarter we continue to see a lot of opportunity.

So in the event pay down or payoff activity starts to taper off that would just naturally equate to maybe a little bit more growth than what we’ve seen over the last couple of quarters. But, certainly, we enter into 2020 very cautious continuing to protect the margin and taking credit concerns into consideration in each deal that we are looking at.

So naturally we are not going to -- as I sit here today I don’t think we would be going out with 2020 guidance of double digit loan growth for those factors..

Thank you, Mark..

Like if you ever giving double digit loan growth guidance. Okay. Alright, that’s helpful color. I will leave it there. Thanks, guys..

Okay, thank you..

[Operator instructions] And our next question will come from Bernard Horn of Polaris Capital Markets. Please go ahead. .

Hi, Bernie. Well, Andrea, I think he has dropped off..

Bernard, your line is open, you perhaps have it muted on your end..

Okay, Andrea, we will reach out to Bernie offline to see if he has a question. You still there..

Okay, if that’s the case. This concludes our question and answer session. And I would like to turn the conference back over to Chris Oddleifson for any closing remarks. .

Great. Thanks, Andrea. And thank everybody for joining us on this call. We look forward to talking you again in January. Have a good weekend. Bye..

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