Fulton Financial Corp (FULT) 2014 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Fulton Financial Corporation third-quarter earnings conference. This call is being recorded.

I would now like to turn the call over to Laura Wakeley, Senior Vice President of Corporate Communications. Please go ahead.

Thanks, Dana. Good morning, everyone, and thank you for joining us for Fulton Financial's conference call and webcast to discuss our earnings for the third quarter of 2014. Your host for today's call is Phil Wenger, Chairman, President and Chief Executive Officer of Fulton Financial, and joining him is Pat Barrett, Senior Executive Vice President and Chief Financial Officer.

Our comments today will refer to the financial information included with our earnings announcement, which was released at 4:30 yesterday afternoon. These documents can be found on our website at FULT.com by clicking on Investor Relations and then on News.

On this call, representatives for Fulton may make forward-looking statements with respect to Fulton's financial condition, results of operations and business. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and other factors, some of which are beyond Fulton's control and difficult to predict and which could cause actual results to differ materially from those expressed or forecasted in the forward-looking statements.

Fulton undertakes no obligation other than required by law to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

In our earnings release, we have included our Safe Harbor statement on forward-looking statements, and we refer you to this section, and we incorporate it into today's presentation. For a more complete discussion of certain risks and uncertainties affecting Fulton, please see the sections entitled Risk Factors and Management's Discussion and Analysis of Financial Condition and Results of Operation set forth in Fulton's filings with the SEC.

In discussing Fulton's performance, representatives of Fulton may refer to certain non-GAAP financial measures. Please refer to the supplemental information included with Fulton's earnings announcement released yesterday for a reconciliation of those non-GAAP financial measures to the most comparable GAAP measures.

Now I would like to turn the call over to your host, Phil Wenger.

Thanks, Laura, and good morning, everyone. Thank you for joining us. I have a few prepared remarks before CFO Pat Barrett shares the details of our financial performance. When he concludes, we will both respond to your questions.

For the third quarter, we reported diluted per share earnings of $0.21, equal to what we reported last quarter and for the third quarter of last year. Return on average assets was 0.9%, and return on average tangible equity was 9.88%.

We saw good loan growth across our five-state footprint. Linked quarter, we grew end-of-period loans by $191 million and average loans by $127 million. By year-end, we believe our annual loan growth will place us in the lower end of the 3% to 7% growth range we projected at the beginning of the year.

Our loan pipeline is stable as we enter the fourth quarter. On the liability side, average core deposits showed a healthy 4.6% increase linked quarter, with time deposits declining slightly.

We are pleased with our deposit growth this year. At the end of the third quarter, average year-to-day core deposit balances were up 5.4%.

Earning asset yields declined by 2 basis points, but our deposit funding costs were unchanged, contributing to the overall 2 basis point decrease in net interest margin. We believe we are positioned to benefit from a rising rate environment whenever that occurs. We do expect to see modest pressure on our net interest margin over the next several months due to near-term continued pressure on asset yields.

Overall asset quality again showed improvement. Nonaccrual nonperforming loans decreased, along with classified and criticized loans, as well as total delinquency. Total nonperforming assets fell to the lowest level in over five years. The provision for loan losses was unchanged linked quarter.

Noninterest income declined modestly due to a decrease in mortgage banking income caused primarily by lower net servicing income.

Other expenses remained elevated in the third quarter but were down slightly linked quarter. As we previously disclosed, during the third quarter, the Corporation and four of our banking subsidiaries received BSA/AML regulatory enforcement orders. As we have been reporting, we are accelerating the buildout of our risk management and compliance platforms, including the enhancement of our BSA/AML compliance programs through additional staffing and outside consulting services.

Total BSA/AML-related outside services expense was approximately $3 million in the third quarter and $6 million for the first nine months of 2014. We have spent approximately $12 million in outside services related to BSA/AML since the beginning of 2012, and we expect to spend an additional $3 million in the fourth quarter.

We expect outside consulting services related to BSA/AML to decrease by approximately $5 million in 2015.

As we intended, the impact of these investments on our expense run rate has been offset by the cost savings initiatives announced earlier in the year. Those expense reductions included 14 branch office consolidations, as well as organizational and employee benefit restructuring. We continue to look for ways to reduce our expenses as we build out these critical areas.

We are actively deploying our capital. As you know, the Board authorized a 4 million share buyback in May. During the third quarter, we completed that entire program, bringing the number of shares we have repurchased since the second quarter of 2012 to 18.1 million shares at an average cost of $11.40 per share.

I would like to take a moment to review our progress and strategic direction. We are aggressively building out our risk management and compliance processes while working hard to resolve our BSA/AML deficiencies. We have added new talent to prepare us for the future growth and to provide required management expertise. Our valuable franchise operates in strong markets. Our relationship banking strategy differentiates us in the marketplace and creates lasting customer relationships.

Earning assets are growing, and asset quality is consistently improving. We have controlled expenses where we are able to do so and have ample capital that we are deploying in the best interests of our shareholders.

Thank you for your attention. At this time I would like to turn the call over to our CFO, Pat Barrett, for a discussion of our third-quarter financial performance. Pat?

Thanks, Phil, and good morning. Unless I note otherwise, quarterly comparisons are with the second quarter of 2014. As Phil noted, the earnings per diluted share this quarter are $0.21 per share on net income of $39 million, which represents a $1 million or 2.6% decrease compared to the prior period. Earnings per share were equal to the prior quarter and the third quarter of 2013. The decrease in earnings resulted from lower noninterest income, partially offset by an increase in net interest income and a decrease in noninterest expense.

Net interest income increased $1.5 million or 1.1% due to growth in average loans and an additional day in the quarter, partially offset by a 2 basis point decrease in net interest margin.

Average earning assets increased $144 million or 0.9%, driven by $127 million increase in average loans. Average yields on interest-earning assets decreased 2 basis points with the yield on average loans decreasing 1 basis point to 4.20%.

Strong origination volumes and demand for floating-rate loans resulted in lower yields than the previous quarter with total average origination yields dropping to the mid-3.50s%.

The average cost of interest-bearing liabilities increased 2 basis points due to a change in funding mix from lower cost short-term Fed funds purchased to longer-term time deposits and FHLB advances. This change in funding mix reflects our ongoing efforts to extend maturities and lock in longer-term rates.

Average deposits increased $434 million or 3.4% due to increases in demand and savings accounts. The growth in both account types resulted from seasonal increases in municipal account balances, as well as solid growth in business account balances.

Our net interest margin for the third quarter of 3.39% was at the higher end of the range we provided last quarter, which was 3.35% to 3.39%. For the fourth quarter, we are expecting continued modest compression within the range of 3.33% to 3.37%.

The provision for credit losses for the third quarter remained unchanged from the second quarter at $3.5 million, reflecting continued improvement in credit metrics. Total delinquencies decreased by $4.4 million, due primarily to a decrease in loans 90 days or more past due. Net charge-offs decreased from $9 million to $6 million for an annualized net charge-off rate of 18 basis points compared to 28 basis points during the second quarter. Our allowance to loans ratio declined 4 basis points to 1.47% as of September 30.

Turning to noninterest income, we saw a $1.9 million or 4% decrease, excluding the impact of securities gains. Mortgage banking income decreased $1.7 million, largely driven by the absence of the $1.3 million decrease in amortization of mortgage servicing rights that occurred in the second quarter.

Other service charges and fees declined $572,000 or 5%, primarily due to a decrease in commercial loan swap fees.

Moving to expenses, total noninterest expenses decreased slightly to $115.8 million for the quarter. Salaries and benefits declined $1.2 million due primarily to a decrease in self-insured health care costs. Other noninterest expense decreased $1.6 million or 13%, including a reduction in the reserve for debit card reward points.

Partially offsetting these decreases was a $1.4 million or 19% increase in other outside services. The majority of this increase was related to risk management and compliance efforts and was in line with the range of our expectations for the quarter.

In addition, ORE expense and operating risk losses, which are subject to volatility, increased $1.1 million combined in the third quarter.

As we stated last quarter, expenses will likely remain elevated for the remainder of 2014, particularly outside services and professional fees, due in large part to our continued risk management compliance efforts.

You'll recall that our internal projections for the second half of 2014 indicated that expenses would be in the range of $232 million to $238 million. Based on our third-quarter actual expenses and our internal projections, we believe our fourth-quarter total expenses will be in the range of $116 million to $120 million.

As always, and in addition to our projections of outside services and professional fees, run rates of certain other expenses such as ORE expense and operating risk losses can experience volatility based on timing or events that cannot always be reasonably predicted.

Moving to income taxes, our effective income tax rate for the third quarter remained steady in the 25% to 26% range, where we are expected to be for the remainder of the year.

Concluding briefly on capital, our ratios remain very strong, with estimated Tier 1 and total risk-based capital at 12.9% and 14.5%, respectively. Active capital management remains a key priority for us.

Thanks for your attention and for your continued interest in Fulton Financial Corporation, and now we will be glad to answer your questions.

(Operator Instructions) Frank Schiraldi, Sandler O'Neill.

Just a couple questions, if I could. Just first, I am just curious obviously we can look in your Q last quarter at least and take a look at your interest rate risk profile and any shock up rate environment where you expect NII to increase to. Just wondering, first I would imagine, given locking your longer-term liabilities this quarter, that that maybe improves somewhat in 3Q. And then just curious how that calculation is affected, how significantly that calculation is affected if the longer end of the curve is anchored, and we get a flattening of the curve rather than an increase across the board of 100, 200 basis points.

Well, that was a really long question, Frank. So I guess I would say first off that what we have done is sort of incremental and on the margin. And we don't see a significant impact on extension risk or duration from doing this.

I think your question on the steepening versus shift of the curve, again, given where we are positioned, which is very I guess fairly modestly positioned and with extension risk in the -- around the five-year range, again, the impact of either/or will probably not be significantly different.

Okay. Okay. And then just curious if you can give a little color in terms of on the deposit growth, the core deposit growth in the quarter. You mentioned seasonally higher municipal deposits. Could you characterize maybe about how much would you say was seasonally stronger deposits versus just some good growth in commercial?

I think that the seasonal impact from the municipalities probably represents about half of the growth.

Okay. Perfect. And then just finally, just on the loan growth, noticed the construction balances continue to tick up pretty significantly as a percentage of that total portfolio. And just wondering, given what it looks like the yields are on that construction product that's going on, if you could just give a little more color on what sort of particular lending is going on there that's boosting that construction bucket.

So that increase really was spread out. It was not really in any particular category, but it was spread across a number of different commercial investment properties.

Okay. So it would be mostly commercial-oriented construction, not residential?

No. Almost all construction. Commercial.

Okay. And just would you happen to have -- just wondering what the average size of those loans, so maybe going -- if you don't have it, if you could maybe follow up with me off-line on the increase in the construction, the average size of the loan put on.

I do not have that number for you, Frank, but we will follow up off-line.

Sure. Sounds good. Thanks, guys.

Chris McGratty, KBW.

Kind of looking at 2015 as we kind of address the incremental costs on BSA/AML, can you talk to maybe what else may be being looked at in terms of expenses, whether it be the charters, whether it be branch consolidation, and then maybe answer the question in context of how we should be thinking about the overall situation?

So we are looking at a wide range of cost initiatives again that would include branches, employee benefits, and collapse of the charters. And we see our efficiency ratio as we've been saying in 2015 between 60% and 65%.

Okay. Just switching to the margin, I think, Pat, in your remarks, you said a few more months, if I heard you correctly, of pressure. I guess ultimately, with the new production up [4.20%] in the quarter, I'm just wondering where that was last quarter and kind of a sense of where you might think the market may trough in terms of the timing of the status environment.

I was wondering if we were going to get that first or second as a question. So just to be clear, what we saw this quarter was a pretty significant drop in our new origination yields. Over the past few quarters, we had been seeing the gap of new originations to rolloffs and payoffs -- paydowns narrowing to where I think in the second quarter our gap between the two, new versus rolloff, was down to maybe 10 basis points.

What we saw this quarter because of a pretty good uptick in production and demand for interest rates to go down again, surprisingly. For floating-rate notes, we actually saw origination yields dropping all the way down to the [mid-3.50s%], and rolloffs didn't move that much. Most of our rolloffs are pretty well scheduled in fixed. So that was still in the a little above [4%] range.

So what we actually saw was a gap or widening between the two. And until we see that trend, I guess until we see the rate environment stabilize and see that trend stop and actually reverse and resume narrowing, I'm not sure that it would be very useful for anybody to guess when we see an inflection point.

Okay. Is there anything to talk about in terms of the borrowings that you still have? Obviously time has gone on since we've all kind of adapted about the FHLB. But with prepayment penalties presumably maybe a little bit narrower and your capital dilution strong, is there anything that is being considered in terms of getting rid of those longer-term borrowings?

Yes, we looked at that fairly steadily this year. And while the prepayment penalties have narrowed and the shorter the maturity is, the lower the interest rate environment is, the lower that gets, it is still kind of an even trade. So it doesn't really change our economics from a funding cost perspective, but we definitely continue to look at that and think in terms of locking in longer-term funding. But at this point, nothing beyond that.

All right. And just the last one and I will hop off. Did you say there was an MSR impairment in the quarter, and if so, what was the amount?

I did not. So in the second quarter, I think we had $5 million -- $5.5 million of servicing income. And of that, close to $1.5 million was an adjustment to the amortization of our MSRs. We carry our MSRs at lower cost or market. We don't fair value them. So rather than us having a MSR gain, which a lot of companies did in the first half of the year on changes in prepayment -- slowing the prepayment speed, we actually had a true-up of our amortization, which resulted in the same thing. It was a benefit in the second quarter. So our third quarter didn't have that. So it was from that perspective, anyway, was -- didn't have the noise of the amortization in the third quarter. Does that make sense?

Yes, I got it. Thanks a lot, Pat.

Casey Haire, Jefferies.

So just to clarify on the expense run rate, Pat, so $116 million to $120 million, you mentioned there can always be volatility with OREO and the operating risk loss. I'm just curious, is that what's driving the wide range? I mean, are you guys happy with where the regulatory spend is, and I mean do you have a good visibility into what that is this quarter, and that's not what's driving that wide variance?

When you say wide range, so we pretty typically give a $4 million range on our guidance each quarter. So I'm guessing that you meant the implied increase of the fourth-quarter compared to the third-quarter question?

Yes, so I'm basically, I know you guys do give that range, but I'm just curious, is that do -- I mean, is the $4 million variance, is that due just to give you a nice cushion in case you get surprises on the operating risk loss or OREO lines?

Or any other line? Yes, I call that a margin of estimation error of around 1% either direction. And we get seasonality, but we found in certainly in the last year to year and a half that between platform buildout, regulatory costs, transformation of a big part of our infrastructure, as well as the volatility of those line items, which we always call out around ORE and operating risk losses, it's impossible to predict big frauds. It's impossible to always predict put backs, although unfortunately we think most of that is behind us.

So we definitely leave room for volatility in those. And I would say that for items like healthcare costs, we are definitely seeing volatility. You'll recall in the second quarter we had to top up $1 million in those accruals. That eased a little bit in the third quarter. But I think there's as good a chance as not that those are going to continue to climb, and I am sure that we are not the only companies that are seeing rising healthcare costs in this environment.

Right, okay. Switching to margin, I know you mentioned obviously it's gotten a little bit top run from a pricing standpoint. But the loan yields did hold in very well, just down 1 basis point. And I'm just curious, was there anything, was there any recoveries or any kind of noise that inflated that hire that masked what was some decent compression in the quarter?

Not significant. I think we came in on the high end of the range that we guided to last quarter at 3.39% versus from a range of 3.35% to 3.39%. I would say that our normal yields came in at exactly where we thought they would. So there was probably a little bit of upside on either cash flows from securities or other yield adjustments. And I would say that anything that you put on in the current quarter is going to have a muted impact on overall yields, both because it's partial quarter but also because on the $13 billion loan book, putting on a net increase of under $200 million, regardless -- even if it's at half of the portfolio yield is only going to move you by a couple of basis points once it builds into the average quarterly basis.

Understood, okay. And then just finishing up on capital, you got the buyback taking care of for the back half of this year. Can you just give a reminder what the TC ratio at 9.25%, what are you guys managing to, and just capital management priorities going forward?

Well, we still think we could manage that TC number down. I think between 8.5% and 9% is an area we are comfortable with. And we will continue to look at opportunities to manage our capital between now and the end of the year at the Board level and see what happens.

Okay. Thank you.

David Darst, Guggenheim Securities.

It feels like earlier in the quarter you were more confident that you could have gotten to the midpoint of your loan guidance range, and now you are looking for the low end of the range. Has something changed from either a demand or competitive standpoint?

David, I think we have been pretty consistent since the second quarter in saying that we would be in the low range of that 3% to 7%.

Okay. So, if you look at your expectations to bring the efficiency ratio under 65%, obviously you're going to need a revenue inflection in the next year, and and then also I guess you have outlined a number -- three or four things. So do you feel comfortable you can bring down this expense range by, say, $4 million for next year?

Yes, we do think increasing our revenue is a big part of lowering our efficiency ratio at this point. I think it will be a big challenge for us to maintain expenses or have a small increase next year. It will be a challenge, but we do think we can increase revenue.

So maybe you see limited room to actually bring the absolute dollar expenses down.

I would say yes.

Okay. Thank you.

I guess I would add to that just that you guys need to figure out the wildcard of what interest rates are going to do and what's going to happen with our margin. So that still has a pretty meaningful impact, given the structure of our balance sheet.

Matthew Kelley, Sterne Agee.

On the deposit growth, outside of the municipal growth during the quarter and the seasonal changes there, have there been any promotional deposit rates, and where are you seeing the biggest inflows, again outside of the municipal stuff, on a seasonal basis?

Well, we are always promoting core deposits, and we continue to do that. We saw a growth on the business on the corporate side in core deposits, which was helpful. We have had promotional rates on longer-term time deposits, but overall that really hasn't increased our growth rate there. It has just kind of shifted the mix from a shorter-term time deposit to a longer-term.

Okay.

I would add on to that that the bigger impact to the promotions was probably in the second quarter. There was probably a little bit of lingering impact, but you actually saw our spending CD balances drop slightly. That's where you would have seen an uptick.

So if rates don't change, what would you anticipate happens to your average cost of deposits, which are interest-bearing deposits I think around 37 basis points? Where does that migrate if we don't see a big change in the overall short end of the curve?

Probably flat with a very modest bias towards the upside, because the longer it goes, the closer we are to higher rates. Whenever that occurs.

Okay, okay. And then as you have closed branches over the last couple of years, can you talk a little bit about what you had been modeling for deposit and customer run-off versus what actually occurred, to give us a sense of how that process has gone as you have been able to shrink the branch footprint versus the actual retention of the customer and the deposits?

So we thought that we would be able to retain most of the deposits. I think we thought we could retain between 85% and 90%. Our actual retention rate has been 95%, and we compare that to a control group of branches that weren't impacted from the consolidation. And our retention rate there was 95% also. So we have been extremely pleased with our ability to retain, to consolidate and retain.

Okay. Got it. And then just a question on your new production yields. You had mentioned that gap versus the origination versus payoffs had widened quite a bit in the third quarter. I think you said the new money yields were around 3.50%. Did you see more compression on commercial real estate or C&I? A little detail on where that compression occurred on a sequential basis between Q2 and Q3.

So we did have C&I growth in the quarter, and that tended to be floating-rate. And they are obviously at lower rates, and that really was the driver of moving that number down. I was just going to say we were in the [mid-3.50s%] on new money. That was all. I was just going to clarify.

And was there any change in utilization rates on lines of credit in the C&I book, or is it growth from just new relationships there?

It was growth. I will tell what happened. Well, first off, the utilization rate actually went down slightly. I think we went from 37.9% to 37.6%. Just a slight decrease. But really what we've seen is our new production mix had been running 50% new customers and 50% existing customers. And in the quarter -- and I think this is actually really good news -- our new production from new customers stayed about the same level, but the mix, that percent went from 50%/50% to 35%/65%. So our existing customers finally are coming to us with new projects and capital requirements, which to me is just a really good sign.

Okay. So an acceleration of C&I growth should lead from that, I assume, in the coming quarters?

Yes, I think it's possible. But first it has to be sustained over time. The first step was for existing customers to start with some expansion projects, which we are seeing.

Now the next step will be to have that utilization rate go up, and that could really help us. If both of those things happen, that would really be beneficial on new loan production.

Got it. Thanks a lot.

Blair Brantley, BB&T Capital Markets.

A question on the loan growth. Can you give us a breakdown from a geographic perspective where you saw some strength and where you think there may be some more opportunity going forward?

Sure, Blair. That was also really positive news for us. We saw pretty good growth in all our states. From a dollar amount, Pennsylvania grew the most. But from a percent linked quarter, Pennsylvania grew 0.7%, which was our -- actually the lowest of all the states. New Jersey grew 1.2%, Maryland 0.9%, Virginia 1.4%, Delaware 2.7%. So it was really spread across the entire region, which is also really good news for us.

Okay. And in terms of pipelines, you mentioned they are stable. Is that spread across those five states pretty evenly too, or is it more Pennsylvania focused?

Well, it's more Pennsylvania driven just because that's a much larger percent of our portfolio, but it is spread across all our states, yes.

Okay. And then just one more follow-up. On the investment portfolio, what are you seeing there trend-wise where rates are right now? Are you -- is that going to shrink some more, or what were your plans there?

Unless you have got some great ideas of some very high quality investments that yield higher than about 2.35%, then I think that we are probably going to continue to see or to have some challenges reinvesting all the cash flows each quarter.

So I think we were at 2.36% this quarter. We are not changing our investment in our credit risk profile. We really want to keep our credit risk in our loan book. So I would say it wouldn't surprise me to see a continued 1% or 2% decline in that, just from a natural runoff, notwithstanding a change in the investment environment.

Okay. Thank you very much.

Matthew Keating, Barclays.

Most of my questions have been addressed. But I did have a question about the mortgage banking application volumes, given the new balance in the 10 year, have you seen any shift? Or maybe you could just provide your typical detail on that front as well as (multiple speakers) your finance mix?

So, Matt, our pipeline going into the fourth quarter is actually down from $195 million to $155 million. Anecdotally, I observed that it has picked up some the last couple weeks.

Okay. That's helpful. And I guess that's actually all I had. Most of my questions have been addressed at this point. Thanks.

Frank Schiraldi, Sandler O'Neill.

Just two follow-ups, if I could. Just on provisioning, you've given some limited guidance on back half of the year expectations for loan-loss provision. I'm just wondering if you had any thoughts on directionally what you are seeing, what you are thinking right now for provisioning in 4Q, and then how you think about 2015? Is there still some significant credit leverage here, or would you say that for 2015 provisioning perhaps has to pick up and at least meet charge-offs?

So, Frank, I think we have been consistent in giving some guidance by range on the provision between zero and $5 million, and I would see that continuing into the fourth quarter.

So where we end up would still be -- depend on growth would be a big factor at this point, and we would make the assumption that we don't get any kind of surprises.

When you look into 2015, it's hard to see that we can reduce the provision a whole lot more. However, I do think we are still at [1.47 million shares] provision to total loans, and I do see that number coming down further.

Okay. And then just on expenses one more time. I know, Phil, I don't think you are giving specific guidance, but you made a comment about next year I think that it would be challenging to expect, if I heard right, the total dollar amount of expenses in 2015 to be held flat or be reduced from 2014. Just want to make sure I heard that right because I know you are expecting about $5 million less in outside services expense in 2015.

Yes, I think it's going to be a challenge for us to decrease the total level of expenses. We are going to have some areas where we think we can benefit, and outside services would be one. But we are also adding people, have been adding people in risk management and compliance, and we will have a full year's run rate for a lot of those ads. So that is really what -- that's the challenge that we have right now.

I guess I would say probably different challenges, but similar place as we were as we ended last year, which is why we are working hard to find ways to become more efficient in other areas. So we are working hard on that. So that's our challenge, will be to keep expenses from growing in an environment where we are still investing and having to invest to finish up a lot of the great work that has been started over the last couple of years.

Okay. Great. Thank you.

(Operator Instructions) Chris McGratty, KBW.

Thanks for taking the follow-up. Pat or Phil, on the buyback, is there any reason to the fact that you finished the buyback in the quarter and we didn't get a new authorization? Or just really a technicality of when the Board meets --

I would call it more of a technicality.

Okay. So you're not ruling out a buyback for the rest of the year is what you're saying? Okay.

Well, I would not rule out a buyback moving forward at some point, yes.

Okay. (multiple speakers). Understood.

On capital, I see you've got about $100 million or so subdebt that matures into the first quarter, and you've also got some trust preferreds. Is there anything to think about from either of these levers kind of into next year?

Well, the trust preferreds, we kind of like those from a tax deductibility, from a capital standpoint. It's another 22 years at [mid-6s%]. So I wouldn't -- even under Basel III, it is still Tier 2 capital treatment. The subdebt that matures in April, we are looking to balance the need for growth and capital deployment opportunities against the cost of carry.

So we could get cheaper debt. It is just a question of do we have the need and ability for the funding and the incremental capital that would add because if we reissue that would be fully Tier 2 capital versus zero, which is what it gets right now. It's fully amortized from a capital perspective.

Okay. Thank you.

Jason O'Donnell, Merion Capital.

I just wanted to follow-up on the discussion around interest rate sensitivity. I know that you had mentioned that you all expect to receive a benefit in a rising rate environment. I'm just wondering, does that apply to the first 50 or 75 basis points of increase, and how do you think about the way that net interest income plays in the first 50 or 75 basis point lift?

I'd say it's probably half the impact that you would see in the second half of the first 100 basis point rise. And you are referring to the loans of the floors we have got, which is about 25% of our loan book has floors and is at them. And I think that the spread between the average yield on those and rates remains very steady. This quarter it's at 55%, 55 basis points.

So, yes, we would get a moderate -- I guess a moderated impact of a full percentage point of rate rise. But we still would get an impact.

So that first 100 basis points, we would probably get a 3%, 3% to 3.5% improvement in net interest income, call it $20 million. The next 100 basis points we get would be closer to 7%, call it 40, high 30s, just based on today's rate, and that is using 100 basis point shocks. Because that reflects the impact of the floors.

Got it. Listen, thanks a lot, guys.

David Bishop, Drexel Hamilton.

I apologize if this was asked earlier. I just hopped on. But the growth in the construction and land development there as we look out across the landscape in terms of the overall loan portfolio mix, is there a target level of loans you want to allocate to that bucket? How are you thinking about it in terms of future loan growth in that category?

So, David, when we peaked in that construction loan portfolio, we were about at 12% -- it represented about 12% of the portfolio. So over time, it was down to about 5% of the portfolio. We think somewhere in the middle there would probably be where we would feel comfortable taking it to.

And gentlemen, we have no further questions at this time. I will turn the call back to you for any additional or closing remarks.

So thank you all for joining us today. We hope you will be able to be with us when we discuss fourth-quarter and year-end 2014 results in January.

Thank you and that does conclude today's conference. Thank you for your participation.