FNB Corp (FNB) 2018 Q3 法說會逐字稿

Hello, and welcome to the F.N.B. Corporation Third Quarter 2018 Earnings Conference Call. (Operator Instructions) Please note, this conference is being recorded.

And now I'd like to turn the conference over to Matthew Lazzaro, Manager of Investor Relations. Mr. Lazzaro, please go ahead.

Thank you.

Good morning, everyone, and welcome to our earnings call. This conference call of F.N.B. Corporation and the reports it files with the Securities and Exchange Commission, often contain forward-looking statements and non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, our reported results prepared in accordance with GAAP.

Reconciliations of GAAP to non-GAAP operating measures to the most directly comparable GAAP financial measures are included in our presentation materials and our earnings release. Please refer to these non-GAAP and forward-looking statement disclosures contained in our earnings release, related presentation materials and our reports and registration statements filed with the Securities and Exchange Commission and available on our corporate website.

A replay of this call will be available until October 30, and the webcast link will be posted to the About Us, Investor Relations & Shareholder Services section of our corporate website.

I will now turn the call over to Vince Delie, Chairman, President and CEO.

Good morning, and welcome to our earnings call.

Joining me today are Vince Calabrese, our Chief Financial Officer; and Gary Guerrieri, our Chief Credit Officer. I will provide highlights of the quarter's results and cover the recent developments since our last call. Gary will review asset quality, and Vince will provide further detail on our financial results. And then we'll open the call up for any questions.

We are very pleased with the quarter's results, highlighted by a 30% year-over-year increase in earnings per share to $0.30 per share. Tangible book value per share increased $0.18 to $6.44, and return on average tangible common equity exceeded 19%. Operating net income available to common shareholders was $95 million and produced $0.29 per diluted share for the quarter, a 21% increase from the third quarter of 2017.

The strong performance for the third quarter reflected positive operating leverage, solid loan growth, very strong deposit growth, improving core net interest margin and positive asset quality results. The quarter's record high total revenue of $310 million reflected continued loan and deposit growth and positive results from our fee-based businesses, notably capital markets, wealth management, insurance and mortgage banking.

A key item I want to highlight is the significant reduction in operating expenses to $171 million this quarter. We continue to focus on carefully managing our expenses while generating consistent total revenue growth. The efficiency ratio of 53.7% improved meaningfully on a linked-quarter basis. And we have ongoing initiatives in place to control expenses and drive positive operating leverage moving forward.

On a linked-quarter basis, average loan growth totaled 6%, led by commercial equipment finance, indirect auto and residential mortgage. On the commercial side, we had strong quarterly production in Cleveland, Charlotte, the Piedmont Triad and across the Mid-Atlantic region, specifically from our team in Washington D.C. Our commercial and industrial and leasing portfolios grew a combined 8%, while commercial real estate was flat, reflecting an escalation in permanent market takeouts.

We are optimistic that our record pipelines, coupled with our geographic diversification, will provide a path for continued growth. The consumer loan portfolio growth of 12% reflects strong residential and indirect origination volumes during the quarter.

On the funding side, total deposits grew steadily through the quarter with benefit from seasonal inflows and new household acquisition. Total average deposit growth of 11% includes a 14% increase in non-interest-bearing DDA balances and continued growth in average time deposits. On a spot basis, total deposits were up 17%.

I'll also note that, as you can see in the FDIC data through June, we grew almost 5% year-over-year in the Carolinas and gained market share in the majority of our markets across the FNB footprint. I want to reiterate that we are keenly focused on increasing total deposits and striving to improve the mix. Our strategy has always been to be the primary provider of capital to our commercial clients and to offer complementary, high-value, fee-based products and services, particularly treasury management services.

Successful execution of this strategy is evident in consecutive quarters of double-digit annualized growth in DDAs. Generating these organic balances and expanding relationships with our holistic clients will further strengthen the mix of the balance sheet by increasing the portion of customer-driven funding. On a spot basis, the funding position improved compared to the second quarter with a loan-to-deposit ratio of 92.9%.

As I mentioned earlier, FNB continues to grow tangible book value per share and achieved attractive returns on tangible common equity. As our profitability has increased, the dividend payout ratio has moved below 40%. At this lower level, we are generating capital at a more rapid pace, which more than supports our growth. This is an inflection point, which provides us with more flexibility going forward in capital management and creates incremental value as we build tangible book value while achieving higher returns.

Now I'd like to focus on the key strategic developments since our last call. In September, to support future deposit growth, we launched an initiative to expand the use of digital capabilities by targeting new households for deposits in adjacent markets. Through this offering, FNB is continuing to build out the digital bank platform, making it attractive to new prospects and strengthening relationships with existing customers. FNB has extended these digital bank capabilities so that it can offer deposit products across the Eastern Seaboard to complement areas where we have a physical delivery channel and where we see selective opportunities.

These efforts provide flexibility to source deposits on an opportunistic basis going forward. It's early on for this initiative, and we are still refining our offering and applications, but we are excited about its potential to grow core deposits going forward.

With that, I will turn the call over to Gary so he can share asset quality results. Gary?

Thank you, Vince, and good morning, everyone.

We're pleased with the performance of our portfolio during the third quarter with continued positive credit results, and credit metrics which continue to trend favorably over the last several quarters.

On a GAAP basis, delinquency ended September at 1.23%, which represents an increase of 14 basis points over historically low June levels, while NPLs and OREO ticked up slightly by 2 basis points linked quarter to end September at 63 basis points. Core net charge-offs were solid at 14 basis points annualized, excluding the 13 basis point accounting impact from the sale of Regency Finance.

Let's now take a look at the originated portfolio results for the quarter followed by some brief remarks on the acquired book.

Turning first to the originated portfolio, the level of delinquency ended September at 79 basis points, which represents an increase of 11 basis points from very low June levels. The long-term trend continues to move in a favorable direction marked by a year-over-year improvement of 12 basis points. The level of NPLs and OREO remained fairly stable for the quarter, ticking up slightly by 2 bps to end September at 73 basis points and, when compared to the year-ago period, improved by 18 basis points.

Absent the accounting impact of the Regency sale, originated net charge-offs were solid at 16 basis points annualized. The originated provision at $14.9 million covered net charge-offs and organic loan growth reflecting an ending originated reserve position of 1%.

Now looking at the acquired portfolio, which totaled $4.5 billion at quarter end, credit quality results remained favorable with some slight migration noted in the delinquency level. Contractual delinquency increased $10 million linked quarter, totaling $130 million at quarter end, though it continues to trend in a positive direction as evidenced by a 25% year-over-year reduction, totaling $45 million. The acquired reserve was up slightly for the quarter to stand at $4.6 million. Inclusive of the credit mark, the total loan portfolio remains adequately covered, reflecting a combined ending coverage position of 1.55%.

In summary, we are pleased with our third quarter results and the position of our portfolio as we enter the final quarter of 2018. Our credit portfolio continues to demonstrate consistent results throughout a variety of economic cycles, a proof point of our strong credit principles and risk management philosophies that are focused on sound underwriting, proactive risk mitigation and maintaining a well-balanced loan book by remaining selective in our credit decisions.

Our strategy of positioning the company in higher-growth and diverse markets continues to provide us with high-quality credit opportunities, which further positions us for growth without sacrificing our credit standards or risk profile. We remain committed to our core principles for both new and existing lending opportunities to support our long-term growth and risk objectives.

I will now turn the call over to Vince Calabrese, our Chief Financial Officer, for his remarks.

Thanks, Gary, and good morning, everyone. Today, I will discuss our financial results for the third quarter and high-level outlook for the fourth quarter.

As you can see on Slide 4 of the presentation, we earned $0.30 per share for the third quarter, including $0.01 per share from the gain on the sale of Regency. On an operating basis, earnings for the quarter were $0.29 per share, an increase from $0.27 in the second quarter and $0.24 in the third quarter of 2017.

Let's start with the balance sheet for the quarter, starting on Slide 6. Linked-quarter average loan growth was $330 million or 6% annualized. In consumer lending, we continued to see healthy growth in residential and indirect auto, up a combined $300 million, while home equity balances declined. On the commercial side, we had solid origination volume across the footprint, and commercial leasing had another strong quarter, up 74% annualized, as that business continues to build in our newer markets. As Vince noted, combined C&I and leasing portfolios grew 8.3% annualized during the third quarter.

Also contributing to our overall lending performance, the acquired portfolio runoff declined substantially this quarter to $320 million compared to $450 million in the prior quarter. The moderation of this runoff 18 months after we entered the Carolinas is an encouraging sign regarding stability of the team and the potential growth prospects going forward.

As you may recall from our July investor call, we have a strategic focus to replace short-term borrowings with lower cost deposits. We were successful in that endeavor this quarter with growth in average total deposits of $638 million or 11% annualized, including growth of $202 million or 14% annualized in non-interest-bearing deposits and $445 million or 37% annualized in time deposits. On an average balance basis, short-term borrowings decreased $234 million even with earning asset growth of $458 million. On a spot basis, short-term borrowings declined $655 million.

Turning to the income statement on Slide 7, net interest income decreased $4.6 million, reflecting an $8.7 million reduction in cash recoveries on acquired loans and the sale of Regency Finance 2 months into the quarter. The third quarter net interest income did benefit from higher earning assets and the upward movements in prime and 1-month LIBOR-based loans, funded with a more attractive mix of deposits and borrowings.

The net interest margin was 3.36% compared to 3.51% in the second quarter, largely reflecting a 13 basis point reduction from the high level of cash recoveries on acquired loans realized last quarter. Additionally, the sale of Regency, 2/3 of the way through the quarter, net of the reduction of short-term borrowings with the sale proceeds, removed about 3 basis points of margin from the third quarter. On a core margin basis, NIM was up 1 to 1.5 basis points, consistent with our prior guidance.

Looking ahead to the fourth quarter, we expect another 6 basis points or so of margin impact from the Regency sale on a full quarter basis, consistent with the guidance we've provided in July.

Let's look now at noninterest income and expense on Slides 8 and 9. Total reported noninterest income increased $9.9 million or 15.3%, driven by continued solid contributions from our fee-based businesses, combined with the $5.1 million Regency gain, while the second quarter included a $3.7 million loss on fixed assets related to branch consolidations.

Service charges grew 2.6%, reflecting seasonally higher levels of activity, while wealth management and mortgage generated fee income in line with strong second quarter results. Additionally, insurance was seasonally strong, up 9.5%. And capital markets posted another strong quarter with healthy swap activity across the footprint, including continued increased contributions from the Carolinas.

Turning to Slide 9, expenses decreased $8.5 million or 4.7% linked-quarter when excluding the branch consolidation costs in the second quarter. The biggest driver was compensation and benefits, which declined $8.2 million as we recognized savings from the branch consolidations announced earlier in the year and the sale of Regency. Additionally, the reduction in expenses reflects the medical insurance claim, payroll tax adjustment and discretionary 401(k) contribution that we mentioned last quarter. As a result, the overall efficiency ratio improved 191 basis points to 53.7%.

Moving to capital, the tangible common equity to tangible assets ratio increased 10 basis points to 6.89%, which represents another quarter of progress towards our goal of reaching the 7% level we have discussed with many of you.

Tangible book value per share grew $0.18, building off quarterly increases of $0.12 last quarter and $0.08 in the first quarter this year. Lastly, our dividend payout ratio dipped below 40% for the quarter, enabling a faster build in the CC ratio and tangible book value per share.

Finally, I'll comment on our expectations for the fourth quarter. Now that we are 9 months into the year, fees and expenses both look on track, and we do expect provision to be better than the range previously provided. We saw a strong deposit growth this quarter and expect to be in line with prior guidance. Given the competitive environment for loan growth, combined with the Regency sale, we would now expect to be more in the mid-single-digit area as opposed to high single digits for loan growth.

With the sale of Regency closing at the end of August, we expect net interest income growth to be in the low- to mid-single-digit area. Regarding the tax rate, it has been in line with our expectations. On a net-net basis, our bottom line view of our guidance is still right in line with our previous guidance for earnings per share.

Overall, we produced a solid quarter and feel good about the way the company is positioned for the fourth quarter and 2019.

With that, I'll turn the call back over to Vince. Vince?

Thank you.

Before returning the call to the operator, I would like to thank our team for their hard work and dedication as we have accomplished a great deal during 2018. In addition to these efforts, FNB was included for an eighth consecutive year on the 2018 Best Places to Work in Western Pennsylvania list presented by the Pittsburgh Business Times. These accolades build on the company's recognition earlier this year as a top workplace in Pittsburgh, PA for the eighth consecutive year and in Cleveland for the fourth consecutive year, and best place to work finalist in Baltimore, Maryland for a second year. The recognition from these publications is a testament to our culture and what we value most, our people.

In summary, our team delivered strong quarterly results with record total revenue, record net income, a 19% return on tangible common equity, 30% year-over-year EPS growth, continued loan growth, double-digit deposit growth, solid noninterest deposit growth and an improved efficiency ratio of 53.7%. These metrics are proof points of our team's ability to successfully execute our strategy while creating sustainable long-term shareholder value.

With that, I will turn the call back over to the operator for questions. Thank you.

(Operator Instructions) And this morning's first question comes from Frank Schiraldi with Sandler O'Neill.

Just a couple of questions on, first, on commercial loan origination. Could you just talk a little bit about how the Carolinas segment is fairing or trending compared to other geographies in your footprint and if growth there is enough to offset the runoff down there at this point?

Yes. The portfolio on the Carolinas has shown steady increases over the last 3 months during the quarter. So we've had incremental increases in the portfolio.

The portfolio, we were doing, I think, very well in terms of new business. The production there is much higher than it has been historically for that company. And we're getting to the point where the runoff, the designed runoff is starting to trail off, Frank. So that portfolio is starting to contribute.

I mentioned in my prepared comments that the Piedmont Triad and Charlotte as well as the Washington D.C. team and Cleveland were the -- had contributed nicely to production during the quarter. So we're -- our strategy is diversification, geographic diversification so that we can sustain the growth rate that we need to sustain in our investment thesis, and I believe that we're well positioned to do that.

Okay. And then the deposit growth in the quarter, is there any geography you would call out there? I mean, you talked about, obviously, the noninterest-bearing growth was very nice and you talked about going after larger corporate customers. Is there any geography that stands out from that standpoint?

Well, I would and I did call out the Carolinas again. I think if you look at the FDIC data that's out there, we were up in just about every market, excluding areas like the headquarters branch where we move deposits centrally away from the Carolinas. They have performed extraordinarily well in terms of deposit origination, and we're just scratching the surface because we're still not the primary treasury management bank for a lot of those customers. And we're starting to see momentum there.

So I would expect the Carolinas to contribute significantly in the future in terms of deposit growth. Having said that, we had great success across the board. This most recent quarter saw some very strong growth in the central part of the state, the Metro acquisition from several years ago. Pittsburgh had some significant deposit growth. It really is all over the board, and I think that it's a testament to the strategies that we pursue. We have a number of strategies, both with data analytics in the consumer bank and targeting good treasury management prospects in the wholesale bank that will continue to drive deposit growth, particularly in the demand deposit category.

Okay. And then just finally, I wonder if you could just remind us, as we think about expenses here, you guys talked about, obviously, Regency closed -- the Regency deal closed this quarter, in the 3Q, and the branch consolidation cost helped. What sort of incremental benefit, just in terms of those 2 pieces of the story, the branch consolidation and Regency, what sort of incremental benefit does that push through to expenses in 4Q quarter-over-quarter?

I'll let Vince Calabrese to kind of address the expense base.

Yes, I would say a couple of things. The branches as a whole, we announced that we had 20, once these cost savings are fully realized, it's about $300,000 per branch. So $6 million was the figure that we commented on as kind of a full year impact.

Now you don't have that right out of the gate. I would say for the 13 branches that we closed in May, we have about 80%, 85% of the savings kind of realized at this point. Where you have properties that you own, for instance, we owned 8 of those 13, you still have to sell the property to take out the rest of the carrying cost. So kind of once everything's sold and the properties are fully gone, you kind of get to that $6 million run rate.

We had 6 that we consolidated late in September. So 5 of the 6 are owned. So you'll get, say, 80% to 85% of the $300,000 per branch for those in the fourth quarter. So there's some incremental benefit there. And then we're still in the process of selling the branches that we had consolidated in May. So it takes a few quarters to kind of get to the full $6 million run rate.

And then the Regency expenses, you may recall in July when we kind of gave the components, and I'll give them again: net interest income, $8 million that would go away; provision, about $2 million; noninterest expense was $5 million a quarter; and noninterest income was $0.5 million to $1 million. So kind of the pretax impact in the short term is $1.5 million that would go away. So the noninterest expense, you had basically 1/3 of that benefit in September. You'll get the rest of that benefit in the fourth quarter. So you'll kind of be at that full run rate from the Regency perspective; like you said, the branches will just take a little bit longer.

Okay. So those 13 branches, I mean, if you think about what was in the third quarter for the branch consolidation, you could just assume sort of $300,000 x those 13 branches x 85%, that gives you a pretty good annualized -- yes, okay.

80% to 85%, yes.

And the next question comes from Austin Nicholas with Stephens Inc.

Maybe just hitting on the loan growth again and maybe talking about that. As we think about that mid-single-digit loan growth number, is that kind of how you're thinking about the fourth quarter? And as you look into 2019, [or] are you not ready to kind of comment out that far?

We're really not commenting on '19. I think Vince was trying to give you an indication for the fourth quarter, what our expectations are, given that we have 3 quarters behind us.

I will tell you, we feel pretty confident about what we've put out there. We have a strong pipeline. The pipeline's up about 20% over the previous period. We're not disclosing pipeline information anymore because it confuses everybody. But we have record levels across the company.

So we're feeling good about moving into the fourth quarter. Having said that, I will caution you, in this environment we have become very selective in terms of credit approval. So we're focusing on higher-quality credit opportunities. There are others that are more robust in terms of their pursuit of credit. So pull-through in that pipeline changes. It varies based upon credit appetite, really credit appetite of others. And I think that we're being very guarded.

So as we move forward, we're focusing -- we're leveraging the investment in multiple geographies to help us manage risk and still achieve our growth objectives.

I don't know if, Gary, you want to add any color to that. I think one other thing I'll mention, the reason we're guarded as well is because in the CRE portfolio, there are -- we tend to finance construction. We do construction financing and then we'll do a short mini perm to position the asset for takeout. The level of activity in the permanent market has increased significantly, so that has created a headwind. You've heard it on repeated calls, so it's not something unique to FNB, but it's happening across the industry. We're seeing it here as well.

Gary, I don't know if you want to give any color on the portfolio.

I think Vince covered it quite well there. In reference to the CRE markets and looking at the life companies coming in there, naturally, their business is nonrecourse, longer term, longer amortization, transactions with lower fixed rates. So that's what you're seeing as they've reentered the market, looking for investment opportunities and yield. So I think the industry is experiencing some of that going on at this point. I think that's going to continue for a while.

And the other thing I would add is that the guidance is from 12/31 spot, the change to mid-single digit is really related to the commercial real estate stuff that Vince and Gary are talking about, plus we're moving Regency. So we removed $132 million that will be out of the spot. So those 2 factors kind of bring us from the high single digits to the mid-single digits kind of spot to spot, just to kind of close the loop on that.

That's a good point.

Got it. Understood. Okay, that's helpful.

And then maybe just on the core margin, given some of the moving pieces. I heard your comments on that kind of 6 basis points expected negative impact as we move to the fourth quarter, just given Regency coming out. I guess beyond that, can you maybe give us some comments on how you would expect the margin to kind of look as you go out to the fourth quarter?

Yes, I think just a few comments on margin. I think that when you look through the numbers for the quarter, the core margin, excluding purchase accounting, excluding Regency, was up the 1 to 1.5 basis points that I mentioned in my remarks.

I think a key part of that for this quarter is we had good success reducing short-term borrowings and reducing our overall cost of funds beta. So cost of funds went up 9 basis points this quarter, which is a 36% beta. Last quarter, it went up 10. So kind of managing the overall cost of funds is a key part of the strategy.

As you look ahead, obviously, the better we do generating the -- continuing to generate the deposit funding, it supports the margin. The mix of the earning assets obviously has an impact, too, commercial versus retail. And then remind everybody, our overall posture on interest rate risk management is generally neutral. I mean, we are asset sensitive, as we disclosed in the IRR data that's in the 10-Q every quarter, but kind of overall look for a stable margin on a core basis, excluding purchase accounting, subject to the mix of earning assets and funding that you have.

So it's hard to predict with certainty, but I would look for a stable margin on that core basis. And while a lot of people will talk about the steepening of the yield curve and the 10-year had moved up, I guess it was 3.20% yesterday, it's 3.15% this morning. It does help somewhat. But important to remember, 45% of our loans are tied to prime or 1-month LIBOR. So the 10-year, it's not a huge impact and it's volatile, as we know. I mean, it went down 5 basis points this morning. So kind of overall, I would say stable margin on a core basis as you get into the fourth quarter.

And the next question comes from Michael Young with SunTrust.

Vince, this may be a little early to ask, but just given the branch closures that you've done thus far and kind of stronger deposit generation on an organic basis throughout the footprint, does that give you more confidence to move forward with additional branch rationalization going forward? Or is it too early to tell there?

No, I think as we've said in the past, we've focused on consolidation improvement, de novo expansion for the last 10 years. So we have an ongoing process that we evaluate locations, we look at transaction volumes, profitability, market potential. I think there's opportunity for us to continue to reduce the number of legacy branches. Now that will be tempered by expansion because we're also opening locations selectively in high-growth areas that we feel we can produce at production levels that are greater than the ones we're closing. So I -- but they're not offsetting the closures.

So I think when you look at it in total, there's more room, and we're keenly focused on it. And I don't lose sleep over the fact that we're just going to sit still and continuously look at them. And I think the deposit growth is a positive sign. But I will say something: I think this company has proven over time that this is a deposit-generating franchise. And if you look at the shift in deposit mix over a very long period of time and the growth that we've experienced, it's significant. And that bodes well for us moving forward as we change our funding mix and rely more heavily on our originated deposit balances versus wholesale funding.

Okay. And just curious, in the quarter, was there any purchase loan growth, whether it be stakes where you try to build relationships or on the consumer indirect side?

No.

Okay. And then -- I'm sorry?

No material purchases. I don't know if there were any, but I would say there were no material purchases. That's not our strategy.

Okay. And I understand you're kind of reaffirming the full year loan growth guide, but are there any reasons why you would expect an increase in payoff or pay-down activity in the acquired portfolio going forward? Or do you still feel pretty confident that we're on a kind of glide path to lower pace of pay downs from here?

Yes, I would just -- just a couple of comments on the acquired. First of all, on the guidance, we did change it slightly to mid-single digit from high single digit, given the commercial real estate market impacts as well as taking Regency out of the mix, so just to clarify that.

As far as the acquired portfolio, as far as the income statement impact, just briefly, we've always said there's a lot of volatility there in excess cash recoveries from quarter-to-quarter, depending on our level of activity resolving acquired loans. So last quarter was really high at 15 basis points, which was a new high watermark. This quarter, we're at 2 basis points, which is the same as the first quarter, so kind of the lower end of the range. So we'll have something each quarter, but that piece of it does vary quite a bit from quarter-to-quarter.

The incremental purchase accounting accretion was stable. That was 8 basis points, the same as last quarter, which is kind of I consider the normal accretion. And then the runoff in the acquired loan book came down significantly into the 300 level. We expected it to continue to moderate. When you look at the levels over the last 4 quarters, it was 400 in the second quarter, 400 in the first, 500 in the fourth quarter last year. So the third quarter level at 320 feels like a good run rate. I mean, it's hard to predict with precision, but where we stand and the comments I made in my prepared remarks about kind of the stability, the team and the prospects there, I would expect next quarter to look more like this quarter than where it had been running. So it's probably a pretty good reasonable run rate to use going forward.

And the next question comes from Casey Haire with Jefferies.

I want to follow up -- a couple of follow-up questions on the NIM outlook, specifically the funding strategy. The CD growth was pretty strong this quarter, which allowed you to pay down the borrowings. It was a positive mix shift on the funding side. Should we expect that to continue, strong CD growth to pay down borrowings?

Well, historically, we were running down CD balances, as I've mentioned in the past, because the FTP or funds transfer pricing benefit wasn't positive in the past. It shifted because of the change in the yield curve.

I would say that it's a strategy that we pursue. Pricing uptime deposits has helped us grow DDA balances in the consumer bank. We've attracted about 2,000 new customers that have operating accounts with us as well. So -- and I focus on the DDA balances increasing 14%, and that's part of the strategy. Actually, it's the second quarter with double-digit growth in DDA balances.

So we'll moderate that strategy over time. So I wouldn't say that that's the way it's going to be moving forward, but it has helped us grow our non-interest-bearing balances, which was the objective.

Okay, understood. And I guess switching to the asset side, we've heard a lot about it's very competitive out there from a loan pricing perspective and structure. But from your -- if I look at your core loan yields, it looks like the loan book is yielding about 4.6%. So in terms of production, what is the new money yield versus that 4.6%?

I would say that -- if you look at where the rate on the new loans versus kind of the starting portfolio, so this is -- just a couple of comments on that topic. So this is the second consecutive quarter where the new loan rates were higher than the starting portfolio yield, which obviously helps. The rate on the new loans was up 20 basis points from last quarter and up from the starting yield.

The overall rate on those, I have that here. Just a second. 4.77% is the overall rate on the new loans that we've put on, which is up 20 bps from last quarter, like you said, and additive to the yields -- starting yield. And then also contributing, the re-investment rates on the securities portfolio, we have another quarter where we're investing higher than kind of the roll-off rate. So this quarter, we invested $468 million at a 3.31% tax equivalent yield, so 105 basis points higher than the roll-off rate. So that's similar to the loans coming on higher than the starting rate; both were additive to interest income.

Yes, the only other thing I'll add is it's kind of difficult to look at it. I agree that it's very competitive. There's pricing pressure and structural creep. Gary can comment on that, Casey. But the payoffs that we've experienced, particularly in CRE and some of the large corporate payoffs, are investment-grade or near investment-grade borrowers. And they're being taken out by the public markets or life companies, life insurance companies on the permanent. So it really has an impact on the margins, so some of those lower-yielding assets are going first. So that's the reality of where we are in the cycle.

Yes, I mean, in reference to the structure and pricing competitiveness, it's really more of the same. We continue to see competitiveness across both structure and pricing, and more recently, as I mentioned earlier and Vince did as well, the CRE market presence. So it continues. And the factor, from our perspective, is the investments we've made in the diverse growth markets, which is critical to our strategy and to maintaining our risk profile where we want it. We're seeing plenty of credit opportunities, and we're continuing to underwrite exactly as we have forever. So that is a key strategy of ours from a growth and a risk management perspective, and we'll continue to do it that way.

And our previous M&A strategy, we've said it repeatedly, call after call, was designed to get us the significant share in large -- larger metropolitan areas so that we could compete more effectively when we come through periods like this. So I think we're positioned extraordinarily well relative to others, given how we've been able to grow geographically, as Gary mentioned, to provide us with the ability to selectively add to our portfolio. Anyway, that's where we are, right?

Okay, great. Just last one, the tax rate, I heard you said your -- this is a good rate for you. I think, I mean, year-to-date, it's 19%. I had -- I thought the expectation was 20%. I just -- what's the go-forward kind of tax rate?

Yes, it would be between 19% and 20% for the fourth quarter is what we would expect.

And the next question comes from Collyn Gilbert with KBW.

Just a follow-up on the deposit discussion. So the CDs that you guys put on this quarter, what is the sort of the blended rate of what you've put on or what you're putting on in that bucket?

We really don't disclose the blended rate.

Okay. How about how that compares with the borrowings that were paid down? Just generally, I know sort of where the give-and-takes are on the funding remixing.

Yes, I think I'd look at it holistically. I think Vince already answered the question. He looked at our funding costs overall, and that's how I would address it. Anything beyond that would not be appropriate for us to discuss in this call because it really reveals our strategies in more detail than we wish to. So I would say look at the total funding cost...

Overall cost of funds, that's how we manage it, yes.

Overall cost of funds, Collyn, that's how we manage it.

Okay, okay. And then just to clarify some of the discussion around the NIM. Do you happen to have, Vince, what the month's end -- the September month-end loan yield was?

Yes, we have it, but that's not something we disclose, Collyn. I told you where we are as far as the 4.77% for new money throughout the quarter is an indication as to where we're putting loans on. So...

Okay, okay. And then the accretion, I know, Vince, you'd said in the past, I think you guided to full year accretion of the $25 million to $35 million for 2018. I presume you're still on track there, is that correct?

Yes.

Okay. Okay. And then any incremental changes you see to that accretion number as we go into '19?

Well, we'll give you all that commentary in January when we provide our guidance for the full year next year.

And the next question comes from Russell Gunther with D.A. Davidson.

Just a quick clarifier on the margin. Vince, I heard you that 3.29% stable is what we should expect for the fourth quarter. But the incremental impact from Regency, is that an incremental 6 bps in the fourth quarter or an incremental 3 since we had 3 bps of that compression in 3Q?

No, it's an incremental 6. So the figures that we gave last -- in July as far as the dollar impacts, the net interest income of $8 million is a 9 to 10 basis point impact on margin. So once you have it fully out, which it would be in the fourth quarter, it's kind of 9 to 10 in total. So we had 3 basis points, there's another 6 on top of that.

And then the charge-off rate just also is relevant; it's 4 to 5 basis points impact on the company's total charge-off rate. And then, again, when you look at all the pieces, as I said last July, the pretax income impact is about $1.5 million overall that kind of gets removed from the income statement. And then you have the effect of the branch consolidations going the other way.

Okay, great. And I appreciate the clarification there. Last question for me is on capital. You guys mentioned you would expect to get some more flexibility here as the dividend payout is below 40%. It looks like you'll be at your kind of 7% TCE bogey at the end of the year. With that increased flexibility, should we be thinking about buybacks? And could you comment on your M&A appetite here?

Yes. I think that was called out because it's important. I mean, I think over time, we've had a relatively high dividend payout ratio. I think when I started as CEO, it was closer to 80%.

The strategy over time was to grow the balance sheet organically and through acquisition, take costs out, improve the profitability of the company and grow tangible book value per share and ultimately grow TCE as well. As we've moved through that process and we've completed several very large acquisitions, we had indicated several years ago that our goal was to, in terms of dividend payout ratio, look more normal relative to the peers.

Over the last 10 years, we've contributed to shareholders nearly $1 billion in dividends. So that capital repatriation could not be used for other purposes. It went back to the shareholders. Now that we're at a point where we're growing our TCE level to where we expect, we continue to add to tangible book value per share over time and our profitability has improved, we're at a point now where we have options relative to capital. So buyback, dividend increase, whatever we decide to do, investing in the company for growth if growth is an objective in the future, that's what we can use that retained earnings for.

It's a unique time for our company. And when you think about it, it positions us very well as we move forward. So I wouldn't take anything off the table. I simply wanted to point out that our ability to manage capital has been enhanced because of our progress in driving profitability and growing our capital levels organically without the need of a capital raise.

And the next question comes from Brian Martin with FIG Partners.

Just a couple of things that I guess weren't covered, but maybe one for Vince. Just on the expenses, Vince, just kind of going back to that for a second, obviously, the numbers were a little bit better than I thought this quarter from an expense standpoint. But the biggest driver of the change as you look at fourth quarter is just kind of the Regency impact, and that's a couple -- that is maybe a $3 million or a little bit more than $3 million that comes out on an absolute basis. Does that sound correct based on the annual number they were putting up from an expense standpoint?

Yes. If you just look at the Regency piece, Brian, but I think it's important -- just a couple of comments on expenses. So the second quarter run rate, when you take out the kind of non-run rate items, it's $175 million, right? This quarter is $171 million. So when you look at to the fourth quarter, you do have the full savings coming out of Regency.

But we also do have some seasonal things that happen in the fourth quarter. You have medical claims, people get through their deductibles, so medical claims always increase in the fourth quarter. You have higher energy costs. It's been a really cold October around here, so that comes through with some higher costs. And then you also have normal true-ups, right, of incentive accruals and commissions and the teams are always very focused on closing out the year strong. So there's always, if they're successful, there's a level of increase in those incentive accruals that you end up having to book in the fourth quarter, and that typically does happen.

So the reality is it's probably somewhere between $171 million and $175 million even with the Regency because of some of these seasonal things and it's maybe closer to the higher end of that number versus the lower, but there's still a lot to play out. The incentive accruals are a big swing item, and it's really a function of how we close out the year. So it's hard to predict that piece with any certainty, but those are kind of the key moving parts that will roll through expenses in the fourth quarter.

But we're rooting for higher incentive compensation accruals.

Yes, a lot higher. Sure.

We hope that happens.

I got you. I appreciate the color. And then just the other things, on the fee income side, with Yadkin and kind of how you guys have done, I guess, do you feel like the run rate we're at, I mean, there's no significant step-up from where we're at today, it should continue to go up as you guys continue to get some -- the benefits from that, the North Carolina expansion. But I guess nothing significant at this point is how we should think about from a big-picture standpoint on the fees?

So I would say that the noninterest income, as you saw, was very strong, 6.6% increase if you put the significant items on the side, 10% year-over-year. The increases were nice. I mean, it was really across the board. I mean, you look at the year-over-year results for wealth management, mortgage banking and capital markets, through contribution from the whole footprint and then the Carolinas continue to increase every quarter. For instance, the swap revenue has increased every quarter the last few quarters, and there's still a lot of upside there.

So there's kind of more to keep building through there, and we just look forward to that. So nothing individual I'd call out, but just kind of a continued revenue generation out of our whole footprint.

Yes, okay, fair enough. And then just the last 2. The payoffs you guys talked about on the CRE side, I mean, without putting numbers behind them, I mean, have you seen an escalation on those payoffs? Or would you say when you look at second and third quarter from first, they've been pretty -- they've just been elevated in general but more stable? Or have you seen a pickup in those payoffs?

Yes, I would say, Brian, that we have seen a slight pickup in those payoffs as the life companies have become more aggressive in that space. I would expect that to continue for a little bit here.

Okay. All right. And then just the other one for you, Gary, just on the credit quality, I mean, is there anything that's causing you guys any pause at this point? It sounds like everything feels pretty good from a credit perspective, but anything that, I guess, is concerning you at this point from trends you're seeing?

Yes. As we look at the portfolio, and it's really across all of the portfolios, we're very pleased with where we're positioned right now. We're not seeing any concerns in any of our books at this point. And as I mentioned, we really like where we're positioned here at the end of the quarter.

And I'll give Gary credit. I mean, he's gone out of his way to derisk the balance sheet. We've looked at a number of categories where we felt there may be underperformance as we moved through a cycle, and Gary and his team have addressed those portfolios. So we're sitting in pretty good shape.

Okay. And then the last one was just on the -- I think someone asked about the borrowings. But just in general, the level where the short-term borrowings are today, I guess, would your expectation be that as you continue to execute on the deposit strategy, that borrowing number on the absolute terms goes lower? Or is it -- and I know there's a big move this quarter. I guess just in general, should the path be lower on that line item as you kind of execute on the funding side? Is that the strategy?

That is the strategy, to continuously drive those overnight borrowings down, preferably with low-cost deposits, not CDs.

The reality is we have seasonal fluctuations. You see it. So there will be periods of time where we will have to be into those facilities to fund our operations. That's a normal cycle -- seasonal cycles in our business. But our goal ultimately is to eradicate that. So we want to reduce our dependency on those overnight borrowings and do it in a way that creates upside from a margin perspective for us in the long run. That's the strategy.

And as there are no more questions at the present time, I would like to return the floor to management for any closing comments.

Yes, thank you. I really appreciate the questions. I appreciate your support. And we were very pleased with the quarter, and we're looking forward to reporting another strong quarter in the fourth quarter. So we'll work hard to deliver. Thank you, everybody. I appreciate your time. Take care.

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