Welcome to the Independent Bank Corp. Third Quarter Earnings Call. Before proceeding, let me mention that this call may contain forward-looking statements with respect to the financial conditions, results of operation and business of Independent Bank Corp. Actual results may be different.

Factors that may cause actual results to differ include those identified in our annual report from 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 performances. 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 this event is being recorded.

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

Thank you, Nick, and good morning, and thank you, everybody, for joining us today. With me as usual is Mark Ruggiero, our Chief Financial Officer.

And we'll be again joined by Rob Cozzone, our Chief Operating Officer; and Gerry Nadeau, President of Rockland Trust and our Chief Commercial Banking Officer, and will be available to answer any of your questions..

We wish again to extend our hopes for continued well-being to all of you and your families during this prolonged health crisis. As we continue to persevere and adapt during the COVID pandemic, we are encouraged by our continuing ability to produce strong business results, as demonstrated by our solid third quarter performance.

Third quarter net income came in at $34.9 million or $1.06 per share, well above the prior quarter..

This is attributable to the strength and resiliency of our business model and by Rockland Trust colleagues. Mark will be covering the quarter in greater detail, including a comprehensive review of our credit picture and trends, which have played out as expected, especially in the highest risk industries we've previously identified.

I'll start with a note on the Massachusetts economy. The unemployment rate is 9.6% in Massachusetts as of September, down from a high of 17.7% in July and up 6.8% since January of 2020. It is the seventh highest in the U.S. Although we see high levels of unemployment, we know the first round of economic stimulus has buoyed economic activity.

In fact, consumer spending in this date is up 5.9% since January of 2020. Much like the rest of the nation, we are seeing a shift in consumer spending activity, and a shift in activity will have meaningful impacts on our local businesses, some positive and some negative..

The economic outlook has -- is CECL requirement has been fully incorporated into our loan loss provision.

The third quarter benefited from a lower loan loss provision, and there were many positive trends in our business fundamentals as well, including strong fee income, solid commercial loan growth, continued core deposit growth, expense control, ample capital liquidity levels, return in assets of back above 1% and sustained tangible book value per share growth.

None of these changes the fact that much uncertainty persists during this crisis with no segment in economy or society immune from its impact..

For us, relationships remain our top priority as we strive to reduce burdens and anxieties while the crisis continues to unfold. We feel this true character of Rockland Trust has been even more evident to our customers and colleagues during this period, leading to our solid performance.

Our core businesses are really meeting the challenge and the diversity of our business lines and service offerings are buoying our resiliency. Under Gerry's leadership, our commercial bankers remain in a deal flow and are still gaining new business under good terms despite the many challenges..

In fact, our loan closings this year are running neck and neck with last year's levels. Our pipelines remain in good shape as well. Our deposit generation continues at a high level, recognizing the value of core deposit funding. We are leveraging all our learnings from the COVID experience to shape our brand strategy.

As other banks announce plans to reduce their branch footprint, we see this as an opportunity to capitalize on relationships, looking to a bank with a branch-anchored trusted adviser. .

This strategy has fueled record levels of new account openings during this period. Our branches also continue to be an important source of referrals to other parts of the bank. Our mortgage operation, one of Rob's businesses, continues to generate record volumes in this low rate environment.

Our expanded capacity resulting from the Blue Hills Bank acquisition allows us to accommodate the surge in demand. Our investment management group remains one of our prized businesses with growing fee revenues and assets under management now reaching $4.5 billion.

Our team has more than 80 professionals across 10 investment offices across our footprint. And the Rockland Trust brand remains strong. We continue to actively promote it by a rich blend of advertising and marketing campaigns. Our reputation for stellar service, product depth and reliability reinforce its strengths..

It has led us to earn new customer relationships and strengthen existing ones. Looking ahead, we will continue to look for ways to grow while adapting to our experiences and observations over the course of the pandemic. One area we're very excited about is our recent entry into the Worcester market.

We opened our first Worcester full-service branch in February, and we're about to open our second full-service branch, when we couldn't be more enthused by our progress to date and the reception we have received.

Commercial loan origination levels have been strong as our hiring of experienced commercial in using that market is really paying dividends. We also continue to invest in our mobile and digital technology to keep pace with the growing customer preferences.

No question, one of the takeaways in the past 6 months is the growing customer reliance, expectation and comfort level for these channels, especially notable is the uptake in the use of these channels among more senior individuals..

Witnessing the ease with which our customers could pivot to these channels, so strong validation of investments we've made in this area. We also continue to augment our risk management efforts to address the added challenges posed by the current environment.

Additionally, we plan to take a hard look at ways to further improve our operating efficiency..

As part of these efforts, we will continue to look for ways to improve our branch configuration while keeping a robust footprint, as discussed earlier. Throughout all this, we continue to balance short-term considerations against longer-term sustainability.

In doing so, we expect to continue to produce solid results, while enhancing our long-term profitability and franchise value. As always, I want to end my comments with heartfelt thanks to all my hard-working colleagues, who are the true secret sauce to our success, as they have so ably demonstrated over the last 6 months. .

And with that, I'll turn it over to Mark. .

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

GAAP net income of $34.9 million and diluted EPS of $1.06 in the third quarter of 2020, reflect increases of 40% and 39.5%, respectively, from the prior quarter's results, as reduced provision for loan losses, focused expense management and solid fee income drove strong core results, despite absorbing the negative impact on consumer-related fees caused by the commencement of the Durbin Amendment..

Also included in the third quarter results was a onetime loss associated with the termination of a hedge derivative, which, when excluded, results in third quarter operating net income of $35.4 million or $1.07 diluted EPS. As these results drove a notable increase in return on assets to 1.07% for the third quarter.

Pretax preprovision return on average assets of 1.64% or 1.66% on an operating basis, remained consistent with the prior quarter despite continued pressure on asset yields..

It is also important to note that both quarter metrics were negatively impacted by the outsized level of excess liquidity on the balance sheet. Focusing first on credit, we will highlight certain elements of the loan portfolio that have been a heightened interest to the investment community. I will first provide an update on loan deferral activity..

As referenced in Appendix F of our earnings release, total loans subject to future deferral dropped to $584 million or 6.2% of total loans as of September 30, 2020. Included in the reduction were approximately $275 million of loans that reached their deferral maturity date in September.

And as we talked about last quarter, we continue our disciplined approach of ensuring updated financial information and assessment of cash flow viability and considering whether to grant a request for any additional deferral.

As such, although we expect a portion of these recently mature deferral balances to enter into another round of deferral, particularly in the hotel industry, we anticipate the level of total deferrals to continue to decrease through the fourth quarter..

On a similarly positive note, although early in the process of working with those recently ended deferrals, we are starting to see those looking for further relief to be agreeable to a transition from a full-payment deferral to a principal-only deferral and any further extension.

In terms of other credit developments during the quarter, nonperforming loans increased $49.2 million during the quarter, driven primarily by the migration to nonaccrual treatment for 3 large commercial customers, including a $3.8 million charge-off associated with one of those relationships.

Not surprisingly, these 3 relationships were all included in the previously identified high COVID impacted industries..

We are hopeful that management's proactive approach to identifying problem loans and possible workout solutions will lead to near-term resolutions.

Rounding out the credit discussion, and as mentioned in last quarter's call, management continues to leverage the information contained in the various appendices regarding absolute levels and migration of deferral activity as well as overall exposure to industries heavily impacted by the ongoing pandemic to drive the allowance and related provisioning process..

In general, the overall credit picture and our future outlook for loss estimates has not changed materially from what was assumed last quarter. As such, the third quarter provision for loan losses of $7.5 million reflects a significant decrease from the $25 million and $20 million provision numbers booked in Q1 and Q2, respectively.

Given that the emergence of these loss exposures was already contemplated in the life of loan loss estimates conducted in the previous quarter, the September 30 allowance as a percentage of loans only increased minimally to 1.23%..

As a quick update on our PPP program, the company closed on another $18.7 million of PPP loans in the third quarter, bringing the total outstanding balances associated with the program to $812 million as of September 30, 2020.

In addition, while we have started to receive applications for the loan forgiveness process, similar to other banks, no SBA issued forgiveness has been granted to date. As such, there's been no meaningful acceleration of PPP fees recognized during the quarter.

Of the $27.1 million in fees expected to be earned through the PPP program, $5.4 million has been amortized into income on a year-to-date basis with $3.2 million recognized in the third quarter..

Please refer to Appendix C for more detail on the loan balance and income recognition associated with the PPP loans on a quarterly basis. Lastly, although we anticipate some level of fee acceleration in the fourth quarter of 2020, the amount and timing continues to be affected by the ongoing rollout of the SBA forgiveness process.

And it is also important to note that as PPP loans are forgiven, the asset conversion from loan to cash will further strain the near-term liquidity position and effective deployment of cash in this environment..

As the PPP program and other government support continues to unfold, the level of cash preservation in our customer base, combined with strong Q3 deposit growth, has led to significant excess liquidity on our balance sheet, which, in turn, continues to cause a drag on our reported net interest margin.

The third quarter reported margin of 3.13% reflected a decrease of 12 basis points from the second quarter levels..

However, as detailed out in Appendix C, when excluding the impact of PPP loans, excess cash balances and other onetime items, the core margin decreased by 7 basis points quarter-over-quarter.

A notable component of this decrease reflects the reversal of $1.6 million of interest associated with the loans that moved to nonaccrual status in the quarter, a number that is higher than a typical 3-month past due interest impact due to the unique dynamic of the deferral programs..

The rest of the margin compression can be attributed primarily to continued pressure on asset yields due to repricing of assets in this low-rate environment, offset by reductions in deposit costs.

And although we expect asset yields will continue to be pressured moving forward, we believe there are still opportunities to decrease deposit costs to partially mitigate the net impact in the near term. .

Lastly, we decided to exit the $100 million hedge that we entered into earlier in the year in connection with our increased FHLB borrowings positions.

With the steady buildup of liquidity experienced over the last 6 months, we were comfortable exiting the hedge in the third quarter and paid off the $100 million in borrowings upon maturity in early October.

The cost to exit the hedge of $684,000 is included in noninterest expense in the third quarter results, and the savings on interest expense on the reduced borrowings will be reflected in the margin prospectively..

I'll now provide a bit more color over some other third quarter results. When excluding PPP activity, total loans increased $26.8 million or 1.2% on an annualized basis, with 8% annualized growth in commercial loans being offset by continued runoff in the consumer portfolios.

The large drop in C&I utilization that we discussed last quarter has leveled off here in the third quarter. And despite macro level headwinds, challenging loan growth in the current environment, we were able to close on a number of deals across all commercial categories, driving a solid commercial loan growth noted in the quarter..

In fact, following up on Chris' point, our year-to-date commercial loan closings through the third quarter are $981 million on a total commitment basis. This represents 98% of total new commitments that were booked through the third quarter of 2019.

We continue to remain diligent and cautious over deal flow with prudent underwriting that reflects not only the uncertainty in business financial stability, but also that of collateral valuation.

Working within that credit framework, we are cautiously optimistic that with an approved pipeline at September 30 of $216 million, it should bode well for fourth quarter closing activity..

On the consumer side, we have seen record volumes from mortgage activity, with the majority of the activity being sold in the secondary market, combined with continued refinance and payoff activity, net portfolio balances continue to attrite, while mortgage banking income increased significantly.

And similarly, on the home equity side, we are seeing better-than-expected demand for new closing activity as well. However, attrition continues to challenge overall net growth..

As we look out into the fourth quarter, the mortgage pipeline is consistent with what we entered into the third quarter, and the home equity pipeline has increased over 50% from prior quarter levels. On the deposit side, and as referenced earlier, a number of factors continue to drive strong core deposit balances.

In addition to government stimulus money and increases from existing business and consumer accounts, we continue to see increased opportunity for new deposit relationships, as evidenced by record new core checking accounts opened over the last 3 months, despite the muted economic environment..

And as guided last quarter, with higher cost time deposits continuing to run off and further reductions made to deposit costs across the board, the cost of deposits dropped to 20 basis points in the third quarter with the ability to decline further in the near future we believe.

To echo what Chris said earlier, our branch strategy in comparison to various other banks retrenchment practices has been instrumental to our robust new business generation..

While digital product development and operating efficiency a top priority as we look into the future, we continue to see value in the branch network as a key tool in generating profitable core customer relationships.

Finally, regarding funding, the low level of total borrowings remained unchanged quarter-over-quarter that as previously discussed, the goal is to further reduce borrowings where opportunities arise, including the already mentioned $100 million pay down in Q4..

Capital levels remain in fine shape with an equity to assets ratio of nearly 13% and tangible common over 9%. This provides an ample resource to support dividend payments, future asset growth or further stock buyback considerations. .

Turning to noninterest items, we will highlight a few key items to note for the third quarter. Regarding noninterest income, deposit service charges and ATM fees experienced a rebound in the third quarter from the significantly depressed levels experienced in Q2, which were heavily impacted by the COVID-19 pandemic..

The reduction in interchange income from the Durbin Amendment was as expected with overall spending activity increasing slightly from Q2 levels.

Regarding wealth management, although new money generation continues to be challenged by the current environment, market performance drove a 3.3% increase in assets under administration resulting in increased fee income quarter-over-quarter, despite seasonal tax preparation fees included in the prior quarter's results..

As noted earlier, the mortgage banking income set a new record in the third quarter, continuing to serve as a natural hedge against the impact of the current low rate environment. And with the aforementioned healthy September 30 pipeline, origination activity is expected to remain strong through the fourth quarter.

On a similar note, loan level derivative income remained elevated at $2.5 million for the third quarter.

Regarding noninterest expense, despite notable increases in the FDIC assessment as expected and the loss on the termination of the hedge derivative, total noninterest expenses remained relatively flat with the prior quarter, as disciplined expense management remains a hyper focus through this challenging environment..

As Chris stated earlier, operating efficiency remains a strategic priority of the organization, and we are looking intently at legacy cost to challenge where there may be opportunities for improvement. Any decisions, of course, will be looked out through the lens of improving long-term profitability..

Lastly, the tax rate of 24.3% for the third quarter was in line with expectations..

That concludes my comments, and we'll now open it up to questions. .

[Operator Instructions] The first question is from Mark Fitzgibbon of Piper Sandler. .

I'm wondering if you could give us some -- maybe a little bit more color around those 3 large loans, maybe some sense of the size of each, whether they're collateralized by real estate and what the LTVs might look like, that would be great?.

Sure. I'll give some high level color, and Gerry is on the line as well, and he can certainly add elements to the discussion as needed. But without giving too much of the details, we did mention 3 relationships that are moving into nonaccrual status.

One is in the hotel industry, one is in the foodservice industry and one is in the arts and entertainment industry..

The balances are -- 2 of them are around the $18 million to $20 million range, and the other is about $12 million. So over $50 million in the aggregate, which made up the majority of what went into NPA in the third quarter. The hotel is certainly secured by real estate.

The restaurant relationship has a mix of both real estate collateral and other business assets. And the entertainment is also primarily secured by real estate..

I think the real positive note here is 2 out of these relationships, we are actively and proactively looking to get near-term resolution. So we've been very proactive in going through all of the high-risk industries, looking at the relationships that we think pose risk to long-term cash flow viability.

And these are really the 3 that we identified as being the top risk at this point. So we thought it prudent to move those into discretionary nonaccrual rather than continuing to just allow for long-term deferrals. And we wanted to get these worked out and mitigate any potential losses as quickly as possible.

So I hope that helps provide some color, Mark. .

It does.

And I guess, as you look at the $583 million you have on deferral now, and I know it's a tough question to answer, but how much of that, theoretically, do you think could end up on nonaccrual, absent additional government stimulus or intervention?.

Yes. Like you say, it's certainly difficult to pinpoint. I think the positive aspect that we are experiencing is for those that are continuing to stay on any sort of deferral program.

And this is somewhat anecdotal with really some of the more recent loans that came to the end of their maturity period on the deferral that we're continuing to negotiate with. But the positive development there is that we've actually been able to get a good portion of those from a full-payment deferral to a principal only..

So our position is that if we are continuing to get interest collection payments through the deferral process, we feel that's a fact pattern that allows and represents that these are accruing loans.

Any migration in the future to nonaccrual would likely follow a fact pattern where the borrower may be looking to get deferral but would continue on a full-payment deferral.

And we would need to really look at that situation on a one-off basis, see if we are comfortable with whether that does allow enough of a time period for the customer to cure whatever cash flow issues they may have and feel and get us to a position that we feel comfortable that when they come out of the deferral period that we actually have an accruing loan and we'd be able to get that deferred interest in the long run..

So we're looking at these very much on an individual basis. I think the strong point of our business model is that we're very much a relationship business bank. We know our customers well. Our lenders are talking to them very often throughout this pandemic. And we really have a good pulse on what the cash flow and future viability looks like.

So we'll continue to be proactive in identifying those that we think makes sense to put on nonaccrual. But as we sit here today, we believe we've really identified the top exposures at this point. .

Okay. And then it looks like you're carrying sort of $800 million or $900 million of excess liquidity on the balance sheet.

Can you give us some sense for how long you think it might take to kind of bring that down to a more manageable level?.

Yes. It's certainly, if not the biggest challenge in this environment for us, just from a -- I think, a core profitability perspective. I think, as I mentioned in my comments, the other unique aspect of this will be as the PPP loans are forgiven over whatever that future period may be, that will continue to convert those loans into additional cash.

So there's already a headwind there in terms of cash balances. But I think we have a number of opportunities to at least make a dent in that excess liquidity. We talked about the borrowings prepay that we already did. We continue to have a number of higher cost CDs that will be rolling off. There may be other borrowing prepay opportunities as well.

So that's certainly 1 avenue that we will aggressively deploy where it makes sense..

Most recently, we're starting to see a bit of an uptick in long-term rates. So we think, given our asset sensitivity position, we believe we'd be comfortable putting some more money back into the securities portfolio.

That's been a portfolio where we've been very hesitant in this environment to really deploy any of the excess liquidity on any sort of aggressive basis. And we certainly won't get too far out ahead in this environment. It's still not an optimal investment avenue.

But we think now there is some opportunity to put more money to work in the securities book and get an incremental lift over what we're earning at the Fed..

And as I mentioned, our pipelines are strong. We think there is continued opportunity to grow loans. We're continuing to be challenged by the payoff and attrition activity, but new loan generation is very strong, and we're hopeful and optimistic that we'll have some growth potential there.

And on the consumer side, I think mortgage is another lever that we'd be able to pull where we probably are at a position now where we also, again, have a bit more of an appetite to put really strong credits into our balance sheet portfolio versus selling in the secondary market..

Not to suggest that we're going to make a big shift in terms of how much is being retained in the portfolio, but we think we can make incremental increases in that avenue as well.

So I'd say, Mark, it's a combination of all of those things that we feel is sort of a balance of managing what we think we need to do to better the short-term profitability, but also not extending ourselves in the long-term to be in a position that really is not beneficial for the company. .

So last question. As you -- if you exclude PPP impact, the core margin is going to continue to come down, but maybe at a slower rate than we saw this quarter.

Is that fair?.

I think that's very fair, yes. I think when you strip out the excess liquidity, if you consider that staying equal, I think we've shown in the third quarter, we've been able to do a nice job of making cuts on the deposit side to really equal and mitigate a lot of what we're seeing on the asset repricing impact.

So we think that can continue to be the case, at least for the next couple of quarters. We have some ability to keep moving on the deposit side. So I think we'll be able to temper the margin compression. .

Just one final question, if I might. There was a large demutualization in your market with a new -- big company with a lot of capital.

I'm just curious, are you seeing any impact on pricing on either side of the balance sheet from that?.

I'll defer maybe to Gerry, if that's okay, to just give a little bit of color on what the market condition is. .

Hi, Mark. I think Eastern -- I think you talked about Eastern Bank Corp. We really had sufficient liquidity, I think, in the marketplace to make the loans that they wanted to. I think they've been over the years pretty disciplined lender. And both with respect to credit and pricing.

And I don't expect that, that's going to change, just the fact that they raise this capital. Pricing in the market has been actually on the larger side, actually has improved, spreads are greater, better flows are being installed on larger loans..

The smaller loans are still a little bit of a challenge with some of the smaller nonpublic thrifts and mutuals. But I think Eastern will -- at least in the past, they've been around a long time. They've been very disciplined. I don't think they're going to change their behavior that quickly. .

Next question comes from Christopher Keith, D.A. Davidson. .

So just, I guess, digging a little bit more into the margin, I was wondering if you could give me a sense for what new commercial real estate loans are coming on at? And maybe a sense for what set to reprice over the next few quarters?.

Sure. I think without getting too particular on some of our pricing decisions, I can say the commitments that we booked in the third quarter, we've actually been able to see a widening of spreads in some of our swap activity in the swap portfolio.

We continue to be able to see fixed rate deals with floors that are much more amenable to our pricing discipline. So in terms of recent activity, we've actually -- the commitments that we closed on in the third quarter have actually been booked at about a 40 basis point on average higher margin than what we did in the second quarter..

So I think that's a good backdrop of what we believe should be able to at least maintain and protect just the absolute level of rates repricing in this lower rate environment. So I think that's a nice new development in the third quarter that should help the asset repricing component.

And then as I mentioned, on the deposit side, we've been able to make cuts there, and we think we can continue to do so to chip away at most of that asset yield compression. .

Awesome. Okay, great. Perfect. And then, I guess, just going over to noninterest income, I think you mentioned the continued strength in mortgage banking and you were able to increase even off of the second quarter highs.

I'm just curious -- I mean, I understand continued strength in the market, but are we looking at increase based off of the 3Q? Or do you think it's just a continued strength versus the lower historical numbers, but maybe coming down a little bit over the next few quarters?.

Yes. I'd say -- I mentioned our pipeline heading into the fourth quarter was almost pretty close to exactly where we headed into the third quarter. So I think that gives some good context into big picture. All things being equal, we would expect to at least see probably similar closing activity.

I think the one caveat that I mentioned earlier is that given our asset sensitivity and liquidity position, we think there is an opportunity to look at putting a bit more of the production on to portfolio.

So should we find those opportunities in the fourth quarter, that would obviously impact the immediate P&L results of mortgage banking income, but obviously get the benefit on the interest income side and the balance sheet perspective..

So that would be the one caveat that as we look at new originations through the fourth quarter may shift some of the mortgage banking revenue into portfolio interest income. In total, it should be pretty comparable quarter-over-quarter. .

Next question comes from Laurie Hunsicker, Compass Point. .

I just hoping we can go back to your commercial detail, and I love the detail you give as always.

But leveraged loans, can you update us on where that is? And what's in deferral there? And if you have it, the amount that appears in your highlighted commercial categories, that $1.3 billion, how much of the leverage loan book is in there? And if you don't have this, I can follow up with you off-line. .

Yes. I'm just looking through real quick here, Laurie, I don't believe I have the leveraged loan isolated at this point. .

Okay. I'll follow up with you offline. .

I can certainly get back to you on that. .

Okay. Just looking at the expenses, I'm wondering how we should think about that? And maybe you can refresh us just in terms of how you're thinking about a de novo strategy now? I mean you've got a second one just about to open.

How are you thinking about that for next year? How many branches are you guys potentially considering?.

Sure. I'll let Rob maybe take the lead on that as he is sort of driving the branch strategy and in particular, Worcester in that region is really the priority heading forward in terms of any sort of branch increase initiative. But I'll let Rob give a little bit more color there. .

Thanks, Mark. Good morning, Laurie. As Mark or as Chris had mentioned, Laurie, we are planning another branch opening in the City of Worcester in the next quarter here. And then our third Worcester area location is expected to open in the first quarter and probably early in the first quarter.

We have not identified formally any additional locations beyond those next 2, but we would like to open at least 1 more location, continuing our expansion along the Route 9 corridor from our Eastern franchise to our new footprint in Central Massachusetts in 2021. But I would suspect that would not certainly mean any more than 2 additional locations.

So we have 1, we're adding another in the fourth quarter, a third in the first quarter, and then maybe 1 or 2 more after that..

In addition, we continue to look at opportunities for selective consolidations. As Chris mentioned in his opening comments, we find significant value from our branch franchise for all of our businesses, frankly. And we do not plan any sort of significant consolidation.

But as we have done over the last decade, we regularly look for opportunities to consolidate where it makes sense. And I suspect that will continue to be the case in the coming quarters and years. .

Okay. And I guess, along those lines, at one point, this probably rewinds now 2 years ago. I guess Chris had suggested potentially you all would like to at some point to be $20 billion or so in the Greater Boston MSA, which certainly means acquisition.

Can you help us think about, I guess, size that you would consider? And then also maybe just comments about pursuing an acquisition now during the pandemic or how you think about waiting, how you see clarity on credit, just how you would approach that?.

I'll let -- I think if Chris, if you wanted to just give some color into the big picture and then I can expand a bit upon how we would think about that in terms of credit considerations, et cetera..

Chris, you may be on mute?.

Can you hear me now?.

We can. .

Okay. Sorry. And my mute button wasn't working properly. I apologize. Laurie, so I'll take it maybe in reverse order. I think if a -- we have historically have done an acquisition every 2, 3 years or so. And we certainly like to continue that in the future, that's been a nice complement to our growth strategy.

We've been -- as you know, been super disciplined within and adjacent to our marketplace, don't do "strategic deals.".

Looking down the -- I think if somebody -- and of course, we're always open to calls and the Board of Directors, CEOs call me, we would definitely engage right now. I think it's sort of situational. There is a lot of uncertainty. We have a lot going on right now. So I think we'd have to be thoughtful about it.

But Laurie, what I would be unwilling to do is to sort of let a potential acquisition sort of pass us by, and somebody else pick it up. I mean we would just figure out a way. If it's an acquisition we like, we could pay the right -- come to agreement on some sort of price to say, well, let somebody else pick that up.

I would -- I have a little reticence to that. So it's a big maybe, I guess, it depends..

In terms of size, I mean, we are -- we have done with Ben Franklin and then with Blue Hills. They were about 35% of our current size. And we handled both of those without a hitch. So I am not afraid of doing something bigger than that.

If you're talking about a sort of something along the MOV lines, those that -- while I don't sort of merger of equals, I'd say, it's always of equals of size, I do believe that one -- in an acquisition of banks of equal size one needs to be acquirer and sort of be sort of the lead..

But I think that would be something we'd consider, too. But you're right, the uncertainty right now is -- adds a factor that will give us -- would require us to give it even more thought. Is that helpful, Laurie? I didn't really say much of anything, but gave you a little bit of color. .

That's super helpful. And maybe if I could just ask one more question, too. Mark, I think you mentioned buybacks in your comments.

I guess, Chris, how do you think more broadly about the timing of buybacks? I mean, presumably, you're really starting to think about it? Or you wouldn't have necessarily mentioned it in your comments, but how do you think about that?.

The timing of our stock buyback relative to acquisition, was that your question, Laurie?.

Yes.

In other words, thinking about buybacks here, is that something potentially you're going to explore between now and the end of the year? Or waiting another quarter?.

Now that Mark will give -- yes, I mean, I don't think the 2 are mutually exclusive, and Mark consider further elaborate. .

Sure. Certainly, the reality of the stock price performance over the last quarter, we've certainly seen the valuation come in. And we look out into the near term. And although we're very optimistic about our growth potentials. We've never been a historically large organic grower.

And I think in this environment, the prudent thing would be to continue to make loan and deposit growth in a very prudent manner.

So I think the combination of minimal expected organic growth and the levels -- the absolute levels that we have now today in capital despite the large provisioning we've taken and we do our stress modeling, we are very comfortable with the capital levels that we have today..

So I think it's certainly an avenue that we would see in the near future that we need to be thinking about. Certainly, this environment has a lot of uncertainty around it, and it would all be predicated on our ability to play out those stress scenarios and feel comfortable about where capital levels would be after.

But it's certainly something that is front of mind, given all the dynamics we're talking about. .

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

Maybe, Mark, if we could start with the NIM and just wanting to kind of understand that a little bit. Okay.

So can you just remind us again how much of your book is priced off of LIBOR and prime? And then, theoretically, right, that portion of the book should have already repriced down, just trying to get to the components of when we can see this NIM bottoming? So that's, I guess, the first question -- first part of that question. .

Yes. No, you're absolutely right. We've historically had about 40% of the book repriced to 1-month LIBOR or prime. And to your point, that has occurred, and it was really the biggest impact of what we saw from the margin compression through the second quarter.

So right now, the exposure we have is really just in terms of the absolute level of churn in the book and what will be coming off at higher yields and repricing into this environment..

So I think that if you look at the appendix we provide in the Appendix C, that equates -- that equaled or equated to about 8 basis points of compression this quarter. I mentioned, we've actually been able to make some improvement on new originations in the third quarter. We're seeing spreads widening a little bit in some areas.

So I think that's a good baseline to be thinking about from a core perspective, if the level of new volume and runoff is consistent with the third quarter, I think that 5 to 8 basis point range would play out in terms of yield compression..

So our ability to move on the deposits and funding side to offset that would certainly drive your net margin impact. .

Okay. And you kind of got to the answer for my question, I mean, you've kind of gave the answer, but just in terms of like, yes, the fixed rate book that you have and kind of what some of the near-term kind of expected cash flows are on that. I mean you gave the answer. So you kind of did the work for me.

I guess I don't have to go through the components of it. But one other question was just on the hedging.

Are there -- do you have hedges on the books right now that you're benefiting from that are flowing through NII that? And if so, like when do you start to see those start to roll-off?.

We do. We have -- as a reminder, we have $850 million of macro-level hedges against LIBOR-based loans. So that has been a huge benefit. And we started layering those on back in 2019 for the most part.

So those are all in the money at this point, as you would expect and give us protection or have provided protection against the rates dropping over the last couple of quarters..

I believe they'll start running off in maybe the last -- the first laddering of that will start running off later next year. And we were very deliberate about sort of this laddering approach of the maturity of those hedges such that there wouldn't be a meaningful write-off of those hedges in any given quarter.

So the maturity of the $850 million will span from 2021 through all the way out into the end of 2022 or 2023, I believe. So... .

It's actually a little later than that, Mark, sorry, to interrupt. The first one rolls off in Q1 of 2022, latter half of 2022. End of 2024 is when the majority rolls off. .

Okay. Thanks, Rob. .

Okay. That's helpful. And then just shifting to credit. So good color on what you saw kind of the movement you saw this quarter and kind of what your outlook is. If we try to quantify that and think about -- it sounds as if you're indicating that maybe you won't -- you don't have major risk migration potential coming in the next quarter or so.

But with all of this and with what you're seeing now, I'm just trying to get a sense of where you see that reserve going and kind of normalizing to over the next 1.5 years, 2 years?.

Yes. I think all things being equal, certainly, we need to account for various macroeconomic assumptions.

So I think if we assume that, that stays as we perceive it today, and the environment stays somewhat consistent, which we know is there's pressure on small businesses in certain industries, but we think we've accounted for a lot of that with an outlook that expects strain on those industries well into 2021.

So barring any changes to the macroeconomic forecast, I think we're in a position now where provisioning levels would really go back to being driven primarily off of net charge-off activity and loan growth..

So if we don't feel a need to build reserve based on macro factors, to the extent we can mitigate charge-offs, I think you'll see provisioning levels. You reflect that in, I think our current reserve levels, at least being sufficient to address the loss as we see it in the portfolio today. .

Okay. Okay. That's helpful. And then just on that then, so as we think about loss risk, one just question, the hotel charge-offs that you took this quarter. Just curious what the original loan amount was? Just trying to get a sense of what loss severity was.

I think what did you say it was $3.8 million or just under $4 million of a loss tied to that?.

It was a $20 million plus relationship, Collyn. .

Okay. Okay. And then as we think about the reserve going forward, I mean, this kind of where you have specific reserves versus a general reserve, I mean, I know you had indicated, obviously, that the ones that moved to nonperforming assets status this quarter you had already reserved for.

But just trying to get a sense of the coverage that you have in there now for specific credits versus general?.

Yes. I think what we've -- what we feel in this environment is the right thing to do is really identify specific credits that sort of really pose the most risk. And I think as we evidenced in this quarter, it always becomes the balance of looking at specific reserve and moving into a discretionary nonaccrual at this point.

So that's the approach we took with these 3 credits. Those are the 3 that right now we've identified as looking at loss exposure on a precise basis. .

The model will continue to drive reserve allocation, though not on a specific reserve perspective. But in conjunction with the approach we took, we're also -- we've mentioned a lot about how we're getting updated information and having a number of discussions with the customers.

And that really feeds our ability to think about the risk rating on a lot of these larger credits. So as -- if any credit were to migrate down from a risk-rating perspective, that will influence the model and drive further out increased allocation versus what we historically have thought about as a specific reserve..

So I think the combination of identifying migration of risk, looking at individual credits, making decisions over the extending deferrals, being proactive about putting them on nonaccrual status or not, I think that's already been all reflected in our reserve results today through the third quarter and will really be the framework that we operate moving forward to really identify individual credits and work them out as quickly as possible..

I don't know if that helps. I just -- I don't have a specific number over what is "specific reserve" because it's all a bit -- it's a little bit of a different process now under the CECL model, but having said that, any specific reserves that we have concern about, these 3 are really the ones that right now have been front of mind. .

Yes. Okay. That is very helpful. Okay. And then, I guess, my last question is for you, Chris. Well, I mean all 3 of you have mentioned it in your comments, but I'll start with you, Chris.

Taking the approach that you're reiterating your positioning on seeing significant value in your branches, which is a little bit different, obviously, than what we're hearing from others and how others are moving.

I'm just -- can you just expand on that a little bit like what is it about your branches, your customer base, the way you operate that makes you still really see meaningful value in that branch network and the desire to continue to de novo how you are?.

Sure. I think I'm off mute.

Can you hear me?.

We can. Yes. .

Okay. Great. I'll start, then Rob can chime in. I will just sort of start by saying our core deposit franchise has been one of our incredible strengths over time. And that, we believe, is completely attributable to our community-based, relationship-based branch network.

And the extent that in the short-to-medium run, I think in the long run, like 15, 20, 25 years out, maybe this is going to change, but there is going to be a segment of the population who either desire to work with the branch direct -- no, actually face-to-face or will open an account with a franchise that has a physical presence, just in case they need it..

Another point is if let's say -- just hypothetically say, we're going to minimize our branch network and skinning it down by a lot or think about becoming a direct bank only, we then -- our competitive landscape is no longer a local communities. It's the nation. And there -- I think that puts us at a competitive disadvantage.

I will also say that we have extraordinary amount of referrals that come out of our relationships in the branches. And I'll just highlight one, our investment manager group. We have cracked the code on how you build an investment manager business from referrals from your branch network and your commercial bankers..

More in the case is that there is a sort of a resonance on the part of those parts of the business to refer into a investment managed group for 2 reasons. Often, there's channel conflict, there are multiple sales forces that are competing for the same customer internally.

And also just the level of trust, a commercial banker, and Gerry can maybe speak to this is typically reluctant to hand over a really important relationship to another business unit, especially something is important than investing money, personal funds for further that the other business unit will sort of screw up the relationship..

We have -- we generate -- in pre-COVID times generate between $300 million and $400 million a year from those sources that have been really the dominant and super primary reason you've seen our asset growth in our investment management business, which is providing us really great returns.

So we think the historically and we think looking into the short and moderate future that relationships are going to be key. Now having said that, I also want to say that one of the key challenges is -- in the new technology is how do you sort of maintain some semblance of relationship when you're completely online.

So when you are looking to some opportunities there as well.

So Rob, what would you add?.

Well, you said that so well, Chris, there is very little to add. But in addition to our wealth management business, Collyn, the majority of our small business activity comes from our branches with partnership with our business banking officers. The majority of our home equity business comes from our branches.

Majority -- the vast majority of our deposit accounts are still opened in branches, and you heard in Chris' commentary that we had a record number of new checking accounts -- consumer checking accounts opened in the third quarter, 90% of those being open to the branches..

So despite the fact that we had COVID, and we had a tripling of our online account openings, 90% of all of our demand deposit openings still happen in a branch.

You'll hear many other banks talk about the retention rates when they close a branch, and they'll say, we retain 80%, 85%, 90%, maybe even 95% of our deposits are retained once we close a branch. And we see that same result. .

When we decide to consolidate a location, we retain upwards of 90-plus percent of those deposits. However, no new customer ever walks through those doors again. So although you may retain what you had, your opportunity to generate new business is severely limited when you close a location.

So we've said a lot there, but there's significant value in our estimation still coming from having the large geographic footprint that we currently have.

And all of that comes down to the people, that you have staff in those branches, of course, and how embedded they are in the community and the service that they provide to customers when they walk through the door. That service isn't differentiated, then there is no reason to have that branch..

But we are continued to have the ability to differentiate on service, as has been evidenced by lots of third-party reports. .

Let's get specific, Rob, for a second. Our third-party reports, it's Forbes magazine ranks us as the #1 bank in Massachusetts based on customer service. J.D. Power ranks us #2 in New England. I can't tell you the #1 is bank of -- bank or savings bank, that I can say, then you can deduce who's #1 in Massachusetts from that.

I can't actually say that publicly. And I will also say I hardly endorse and encourage other banks to maintain their strategy of closing branches. That is very -- I think, very appropriate. I'm sure they are very burnt out, and I would encourage them to continue to do so. .

That could be a strategy in itself right there. Well, that's really a great color and good answers.

So -- and I've taken enough time, but I just want to close that with -- then one kind of follow-up to that, right? So conceptually, as we think about the need, obviously, to get creative on the expense structure, fundamentally, right, given where we sit with rates and all that type of thing.

So -- and you guys alluded to this, but I guess most of the industry points to branches first, right, is the way that kind of rationalized cost structure.

Where within your organization, do you think there is an opportunity to be more efficient from a cost/operating perspective?.

Rob, I mean, you should -- I mean let's start, we do have efficiency gains to be had in our branch network. We're not sort of saying. We're not by saying this saying, that's off limits. .

Of course, not. That's exactly right, Chris and Collyn. There is still opportunity to become more efficient in our branches via technology in the branch and outside of the branch.

Our objective is to continue to move transactions -- non-value-added transactions to our digital channels so that we can enhance the conversations that we're having with customers when they are in front of us.

And that will -- as we're able to do that and as we've already proven we can do, will allow us to reduce the total number of FTE per branch will allow us to gradually reduce the size of our branches and make them more efficient. So that is certainly part of a continued effort to gain efficiencies throughout the retail network..

In addition to select consolidations, as I mentioned earlier, I don't want to give you the impression that we don't think there's opportunity to consolidate locations as we've done over many years. There certainly is, and we'll continue to look at those opportunities and execute on them as soon as they make sense. .

Next question is from Nathaniel Pulsifer of Pulsifer & Associates. .

I have 2 questions. One on shares.

What's the status of the buyback program?.

The program we announced earlier in the year is complete. So that program is done. There's been no buyback activity since mid-second quarter. So any future activity would have to get reauthorized as a new buyback plan. .

And the second is, what do you have in addition to required reserves with the Fed, what I would refer to as excess reserves?.

I'm sorry.

In terms of our outstanding cash balance right now?.

Yes. .

So we have well over $1 billion of cash at the Fed today. .

That is over and above the required reserve. .

Pretty much the required reserve has been pretty minimal at this point. On average, it ranges between $50 million and $100 million. So that $1 billion number in excess of that is on average where we have been. .

This concludes our question-and-answer session. Now I'd like to turn the conference back over to Mr. Chris Oddleifson for closing remarks. .

Great. Thank you. Thank you, Nick, and thank you, everybody, and we look forward to talking to you about full-year results in January. Have a safe fall..

Goodbye. .

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