FNB Corp
NYSE:FNB
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FNB Corp
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Welcome to the F.N.B. Corporation's Third Quarter 2019 Earnings Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation there will be an opportunity to ask questions. [Operator Instructions] Please note, today's event is being recorded.
And now, I'd now like to turn the conference over to Matt Lazzaro, Manager of Investor Relations. Mr. Lazzaro, please begin.
Thank you. Good morning, everyone, and welcome to our earnings call. This conference call of F.N.B. Corporation and the reports it file 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 in 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 24th and the webcast link will be posted to the About Us, Investor Relations and Shareholder Services section of our corporate website.
I’ll now turn the call over to Vince Delie, Chairman President and CEO.
Good morning and welcome to our earnings call. Joining me this morning are Vince Calabrese, our Chief Financial Officer; and Gary Guerrieri, our Chief Credit Officer.
Today I'll provide highlights of F.N.B.'s exceptional third quarter results, which reflect record earnings of over $100 million and earnings per share of $0.31. I'll then discuss some exciting developments related to our long-term strategies that will enhance the F.N.B. brand and support our future growth objectives. Gary will discuss asset quality, and Vince will review the financial results and provide an update for the projected CECL adoption impact.
Third quarter EPS of $0.31 is another example of F.N.B.'s long standing ability to execute our organic growth strategy, as we continue to have success across broad geographies. This quarter's performance represents EPS growth of 7% on a linked quarter basis. Tangible book value per share increased 14% year-over-year to $7.33, as the pace we build capital continues and is consistent with our capital management strategy.
Even with this higher capital position, return on tangible common equity was again a solid level of over 17% and the efficiency ratio equaled 54%. Looking across the footprint, spot loan growth was 9% on an annualized linked quarter basis, driven by continued commercial growth of 8% and consumer growth of 11%. This was led by very strong commercial production, and F.N.B.’s Pittsburgh, Cleveland, Baltimore, and Washington D.C. markets.
In the Carolina region, Charlotte, Raleigh and Eastern North Carolina exceeded expectations this quarter and are generating meaningful commercial activity this year.
On the deposit side, we had growth of over $1 billion in interest bearing demand deposits and 9% annualized growth in non-interest bearing deposits. As I mentioned earlier this year, growing low cost deposits through household acquisition and deepening commercial relationships has been a focus of not only the management team, but the entire organization, as the loan to deposit ratio further improved to 94% at September 30th, with a more favorable funding mix.
We continue to be laser focused on generating noninterest bearing and transaction deposit growth, given the current interest rate environment and the impact of margin pressure. Even when these balances have declined for the industry, we've continued to grow organically. We attribute the successful execution of our strategy that focuses on expansion into higher growth markets, along with infrastructure and technology investments.
Looking at the 2019 FDIC market share data, we saw market share gains across most of our major metro regions, F.N.B. is now ranked in the top 10 of retail deposit market share in seven MSAs across our footprint. And we've gained substantial share in Cleveland, Baltimore in the Piedmont Triad, compared to 2018. Looking specifically at the Carolinas, we continue to drive organic growth with market share gains in Charleston, South Carolina, Charlotte, Greensboro High Point and Winston-Salem.
On an operating basis, non-interest income increased 15% year-over-year, with sizable contributions from mortgage banking, capital markets and wealth management. Capital markets and mortgage banking provided meaningful contributions to non-interest income at $8.7 million and $9.8 million, respectively. This represents a year-over-year increase of over 70% for capital markets, and over 60% for mortgage banking.
We are pleased with the growing contributions these business units have had over the past few quarters, with significant increases from our newer markets in the Mid-Atlantic and Southeast.
The efficiency ratio was again solid at 54%. As expense control remains a focal point, particularly given the current interest rate environment. We remain focused on our credit culture as evidence by favorable performance in asset quality.
For more details, I'll turn the call over to Gary to comment on our asset quality metrics. Gary?
Thank you, Vince and good morning, everyone. We had another quarter of positive credit results with our loan portfolio continuing to perform in a stable and consistent manner, further improving our position on already solid levels.
GAAP results were favorable for the quarter marked by improved levels of delinquency that ended September down 4 basis points to stand at 91 bps, while NPLs and OREO also trended favorably during the quarter, down 3 bps to 52 basis points.
Total net charge-offs remained flat at 11 basis points annualized with an ending reserve position of 84 basis points. We are very pleased with these solid levels and the overall positioning of the portfolio as we remain at multi-year lows.
I'll now walk you through the quarterly details for the originated and acquired portfolios. Turning first to the originated portfolio delinquency ended the quarter flat at 66 basis points, with the long-term trend continuing to move in a favorable direction. NPLs and OREO further improved during the quarter to stand at a solid 56 basis points, a 5 bps reduction on a linked quarter basis, which was driven by healthy OREO sales activity.
Originated net charge-off levels for the third quarter remained consistent with Q2, ending September at a solid $5.3 million or 11 basis points annualized. On a year-to-date basis net charge-offs totaled $15.4 million, also standing at 11 bps annualized. Provision expense for the quarter totaled $10.5 million and adequately covered net charge-offs and strong organic loan growth, bringing our ending reserve position to 95 basis points.
Let's now review some results for the acquired portfolio, which stands at $3.2 billion at quarter end. Our credit results remained consistent, as this book continues to perform in line with our expectations. Contractual delinquency levels continue to trend favorably decreasing $9 million on a linked quarter basis to stand at $78 million at the end of September.
On a year-over-year basis past dues continued to reduce down by $51 million, representing a 40% reduction since September of 2018. The acquired reserve ended the quarter at $4.7 million and was up only slightly over the prior quarter.
In closing, we had another solid quarter of positive credit results marked by consistent and stable performance in the portfolio, which remains favorably positioned entering the final quarter of 2019. We will continue to execute our disciplined credit and lending decisioning processes as our banking team seek out the highest quality lending opportunities to support our growth objectives, and that fit our targeted risk profile and asset mix.
This complements our risk management philosophy of proactively and attentively managing risk, as we remained focused on strategically positioning the portfolio in this later stage economy. Looking back on the year, we are very pleased with our performance and we look forward to finishing out the year in a solid position.
I will now turn the call over to Vince Calabrese, our Chief Financial Officer for his remarks.
Thanks, Gary. Good morning, everyone. Today I will discuss our financial results for the third quarter, comment on our 2019 remaining outlook and provide an update on CECL.
As noted on slide three, third quarter operating EPS totaled $0.31. This represents a 7% increase to both the prior year quarter and second quarter results. Our results for the period reflect the continued execution of our strategies, as demonstrated by building our capital position, with a TCE ratio of nearly 7.5% leveraging our geographic expansion by generating consistent organic growth in loans and deposits, and increasing the contributions from our fee based businesses, and sustaining favorable asset quality throughout the cycle.
Let's start with the balance sheet for the quarter. Looking at the average quarterly balances on slide six, total loans were relatively flat compared to the prior quarter, reflecting sales of residential mortgage loans in both the second and third quarters.
Looking forward, I think it's important to focus on the spot growth compared to last year, and where the balance sheet is positioned today. On a year-over-year basis spot commercial loans and leases were up 7%, reflecting a 19% increase in C&I loans and 20% growth in commercial leases. In consumer lending, we saw an increase of 3% year-over-year, which is impacted by mortgage loan sales amounting to roughly $250 million.
Compared to the second quarter of 2019, average deposits increased 4% annualized, primarily due to 8% growth in interest bearing deposits and 9% growth in non-interest bearing deposits, partially offset by planned decrease in time deposits.
As Vince noted, our deposit growth remains a focus for us building on our commercial and consumer relationships as well as benefiting from seasonal growth in business deposit balances.
Let's now look at non-interest income and expense on slide eight and nine. Non-interest income reached a record $80 million increasing 7% linked quarter, primarily due to significant growth in mortgage banking and insurance and another near record level for capital markets. Mortgage banking income increased $2.1 million, driven by normal seasonal increases and downward movement in interest rates as production volume increased 25% over last quarter.
Insurance revenues increased $1.7 million with continued organic commercial growth and benefit from new business in the Mid-Atlantic and Carolina regions. Capital markets was again at very good levels, experiencing year-over-year growth of 71% with solid contributions from elevated activity in interest rate swaps, international banking and syndications.
Turning to slide nine, non-interest expense increased $2.5 million compared to the second quarter, primarily due to a $3.2 million charge from a third quarter renewable investment tax credit transaction. The related renewable energy investment tax credits were recognized during the quarter as a benefit to income taxes.
On an operating basis, salaries and employee benefits expense decreased $0.7 million, or 0.7% and occupancy and equipment expense was essentially flat. This reflects our efforts to manage expenses companywide, as well as benefits from our ready program.
Looking at revenue on slide seven, net interest income was flat compared to the second quarter as solid loan and deposit growth was mostly offset with lower asset yields on loans tied to one month LIBOR, which declined 38 basis points from 240 at the end of June, compared to 202 at the end of September.
The resulting net interest margin was 3.17%, compared to 3.20% in the second quarter, primarily due to the downward move in benchmark interest rates. While we are never pleased with net interest margin compression, we feel good about the relative performance given challenges presented by the volatile interest rate environment that existed throughout the quarter.
Now I'd like to turn to our guidance for the remainder of the year. Overall, our bottom line EPS expectations are unchanged from January, as we expect to mitigate that interest income pressure, with better than expected non-interest income and provision expense. As you may recall, last quarter, we updated our guidance for net interest income to end up closer to flat on a year-over-year basis, which included a different rate forecasts than what we experienced during the third quarter.
The current Bloomberg consensus economists forecast is calling for one additional Fed move in 2019, which has an impact to net interest income next quarter relative to our expectations in July. We would expect the margin to remain under pressure if current forecasts and cuts materialize in 2019 and for net interest income to decline in the low-single digits for the full year of 2019.
We're very pleased with the performance of our fee-based businesses and current pipelines indicate a healthy fourth quarter. We now expect full year non-interest income to grow in the mid to high-single digits, as mortgage banking and capital markets continue to exceed expectations from earlier this year. Given our asset quality trends, we now expect provision to be $50 million to $55 million and our expense outlook is for expenses to be down year-over-year. The success in the key fee-based business segment highlights the importance of diversifying revenue sources beyond spread income.
Lastly, we expect the full year effective tax rate to be around 18%. Overall, we are very pleased with the financial performance this quarter and believe we are on track to meet our bottom line guidance for the year even in a challenging interest rate environment.
Lastly, I'd like to provide an update on the expected impact of adopting CECL in 2020, as our cross functional teams continue to make good progress on our end implementation efforts. Beginning on slide 10, we show the estimated day one increase to our allowance for credit losses of 25% to 35% for the originated loan portfolio. The related capital impacts are expected to range from 11 to 15 basis points of TCE and 14 to 20 basis points of CET-1 regulatory capital on a fully phased in basis.
While originated and acquired loans are treated the same on day two, we felt that it was important to bifurcate the originated and acquire portfolio day one impacts for this presentation since day one capital is only impacted by the originated portfolio.
Turning to slide 11, the day one CECL allowance on the acquire portfolio is estimated to be $65 million to $75 million. The CECL transition on acquired portfolio results in a balance sheet gross up of loans and allowance with no capital impact. Once the day one CECL allowance is established on the acquired portfolio, the remaining credit and non-credit marks of $115 million $235 million on these loans is accreted into interest income perspectively over the remaining life of the portfolio.
The recognition of this accretion is similar to our current process, except that the remaining marks or discounts are maintained at the loan level, as opposed to loan pools. The estimated increase to our allowance is driven by the fact that the allowances must cover expected credit losses over the estimated life of the loan portfolios considering forecasts of future economic conditions. These estimates are still subject to change based on continuing work on the models, macroeconomic conditions and interest rates at the time of adoption and the size, composition and credit quality of the loan portfolio.
We will continue to evaluate and refine the results of our loss estimates until implementation in 2020. As you can see on the slide, the estimated day one capital impact to our existing capital ratios is manageable and doesn't impact our capital management strategies.
Next, Vince will give an update on some of our strategic initiatives in 2019.
Thanks, Vince. Now, I'd like to focus on our progress regarding key strategic initiatives since our last call. In our consumer bank, we continue to focus on optimizing delivery channels. F.N.B. will be deploying a new interactive website in 2020 to engage and better serve our customers.
We are utilizing data analytics to improve our customers experience and better align products and services with their needs. We are keeping pace with enhanced technology and expect to be a top tier provider of these services.
Regarding our physical delivery channel, we continue to execute our established ready program to optimize our branch network, which includes consolidation and expansion opportunities in higher growth markets. We recently announced plans to develop additional de novo locations in the DC metro area, Northern Virginia, Charlotte, North Carolina and Charleston, South Carolina, which will further enhance our retail strategy and support our corporate banking efforts in these attractive markets.
Earlier this month, F.N.B. announced a 150 million share repurchase program that runs through the end of 2020. The Board of Directors unanimously approved this program to provide incremental value to our shareholders. This share repurchase program demonstrates our confidence in F.N.B.’s business model as well as our future expectations for continued increased capital generation. Our Board’s philosophy is to prudently return capital to shareholders. This is evident in our commitment to our dividend program, which has returned over $1 billion over the past decade.
Given the company’s continued growth in earnings and higher capital levels, we have flexibility relative to our capital management plans with a dividend payout ratio under 40%. We have been able to lower our payout ratio by executing strategic acquisitions enabling F.N.B. to takeout costs, gain scale and grow revenue faster on an organic basis, all while maintaining an attractive dividend.
In the past we have emphasized our capital management strategy and we are very pleased with our progress and the opportunities this presents for our shareholders. Over the past three years we have demonstrated our ability to drive organic growth and execute our proven business model as we have diversified geographically and expanded our products and services. This diversification will allow us to support our long-term growth objectives, while maintaining our underwriting standards through the entire risk cycle.
Given our improved capital position, we will evaluate the optimal methods to deploy capital that results in increased shareholder value, which may include dividends, buybacks, as well as other strategic investments that provide attractive returns.
One key element necessary for F.N.B. to continue to deliver performance for our shareholders is our commitment to our employees. I am pleased to share that F.N.B. was also included for the ninth consecutive year on the 2019 best places to work in Western Pennsylvania list, presented by the Pittsburgh Business Times. This accolade builds on the company’s recognition as a top work place in Cleveland for the fifth consecutive year. The recognition from these publications is a testament to our culture, and what we value most, our people.
Before turning the call over to the operator, I want to reiterate how strong the results were this quarter. To summarize, net income to common shareholder surpassed $100 million for the first time in company history. Return on tangible common equity and the efficiency ratio were again peer leading, as we continue to deliver these returns in a very challenging economic environment. Something our team has proven time and again throughout past economic cycles.
Tangible book value per share grew 14% year-over-year to $7.33, which is the highest level in recent decades. We are pleased with our progress and remain focused on growing tangible book value. Our dividend payout ratio reached 39% and our TCE ratio increased to 7.44%. And we've announced $150 million buyback on top of returning over $1 billion in capital to the shareholders over the past decade.
Non-interest income reached record levels of $80 million and increased 15% from last year. Our company continues to generate consistent organic growth in loans and deposits, as evidenced by spot growth this quarter of 9% and 15%, respectively. All of these results benefit our shareholders and we would like to recognize the hard work and dedication of our employees who make these results possible.
With that, I'll turn the call over to the operator.
Yes, thank you. We will now begin the question-and-answer session. [Operator Instructions] And this morning's first question comes from Frank Schiraldi with Sandler O'Neill.
Good morning.
Good morning, Frank.
Just done the -- Vince, you talked about -- you gave the updated guidance on NII, just wondered, if you would hazard an estimate on NIM compression here in the fourth quarter. I think in the third quarter if you exclude purchase accounting accretion, the core NIM, call it the core NIM was down 4 bps. Is that a reasonable expectation for 4Q?
Well, I would say Frank that there's a lot of moving parts to it. So, I think as we look ahead to the fourth quarter what's the Fed going to do, that's the key driver. Right now the guidance has baked into it one move from the Fed. Our job overall is to manage the balance sheet in this interest rate environment. So, kind of core being down 4 feel pretty good about it. We still have a lot of levers, kind of in our pocket as we look at kind of protecting the net interest income.
The mix of loan growth obviously is a big impact during this quarter, commercial is 80% of the growth in the loans that obviously helps on the positive side. The funding mix was also favorable. We had another quarter with strong DDA growth. Our success in doing that helps to protect the margin as you get into the fourth quarter too. And then going the other way, right one month LIBOR continues to decrease methodically toward a forecasted Fed cut potentially later this month. The current level is already down 15 basis points from the 204 was right after the last rate cut. So that affects our LIBOR based loans, which is about 33%, 34% of the total loan portfolio.
So I think, our ability to manage all those pieces and then when you look at interest bearing deposits in total, while it was up 2 basis points this quarter, it's clearly slowing. I expect that to turn the corner in the fourth quarter it was up 11 basis points in the first quarter, 6 in the second, and then only up 2 in the third. And I expect that to come down a few, 3 to 5 basis points in the fourth quarter. So that's a positive going the other way.
And then CD rates, just another element, I know this is long answer sorry, but CD rates, I expect across this quarter. So the new rate for the new CDs will be lower than kind of what's rolling off. So that's also a positive. And then we still continue to have a significant portion of our deposits that kind of hit priced up as rates were going up. And that -- the beta is on the way down had been slow and it takes time to kind of manage through those, particularly on the business side of the deposits.
So there's still meaningful amount of deposits that we're actively working to kind of reprice those down, commensurate with declines in rates and if the Fed moves again, that creates more covers. So there's a lot of pieces there. I mean, there's still pressure on the margin, but I would expect it to be manageable in the fourth quarter given all these pieces. And the better we do repricing in growing GDAs the less impact you would have in the fourth quarter.
Yes, and I think just to add from a competitive perspective, I think that we're in a better position than we were in previous quarters in terms of managing the rate that we paid down. Others have not performed as well in terms of maintaining margin. So there is more pressure on our competitors some of our larger competitors to rethink pricing.
The other thing I'd like to just put back up for a second. From a total guidance perspective, though, I made the comment in my remarks that; we're still tracking from a bottom line perspective right where we guided in January. So while there's some pressure on the margin and net interest income. Going the other way, we've revised our guidance up for fee income to mid-to-high single digits given the success we've had the last couple of quarters, reduced our provision guidance to $50 million to $55 million from $55 mm to $65 mm given the credit quality we've been experiencing. So that's a positive.
And we're still managing expenses to be down year-over-year. So kind of from a bottom line perspective, we're right on top with the guidance we had at the beginning of the year, which is important.
I got that, that's great. I appreciate all the color. And then just on the loan growth, you guys talked about the spot balances a couple of times. And the commercial spot balance growth does look very -- it looks quite normalized. I'm just trying to get a sense of -- if I look resi mortgage, quarter-over-quarter, balances end of period up $300 million. What is the normalized expectation there? I mean, just trying to get a sense if there's any noise in there.
Well, the only item that needs to be considered, when you look at particularly the average balance change. We sold about $260 million in mortgage loans, that a good piece of it was sold at the end of the second quarter. So right around the end. So that's going to impact the average balances.
I think it's kind of tough to say that the growth rate in the mortgage business is going to continue at the levels that it is. I mean, we're -- obviously we're in peak season in terms of origination. We're in an environment where we got some benefit from interest rates being lower in that business unit, which has helped offset -- we've generated more income and it's helped offset the margin compression.
But I think it's difficult to call how we're going to perform moving forward, because it's so lumpy. But I will tell you that moving into the fourth quarter our pipeline is significantly higher, significantly over the prior period last year.
Okay, great. And then if I can – yes...
Hey, Frank, if I could just follow up on that just to give you -- just a couple data points. So the $260 million that Vince mentioned, $111 million of that we sold in June, $100 million in August, $50 million in September just so you kind of understand how it rolled through the numbers.
And then we had $120 million it was in was in held for sale at the end of June that was put back into held for investment at September 30th. So that's kind of making the number a little bit higher for the quarter and then kind of gives you the go forward from there. But like Vince said, it's seasonally kind of lumpy kind of from a core business perspective.
Got you. Okay, great. And then just finally, it seems like you guys again had some pretty good traction now in the Carolinas. I'm sure after -- right after the acquisition now you get some pay downs and that hurts net growth. But I wonder at this point if you could -- if you have what the net commercial growth you're seeing in the Carolinas region at this point?
Yes, it's fairly consistent with the guidance that we've given for the whole company. I mean, we don't -- we've said before we don't expect them to produce outsized production in total. I think when you look at -- when you break down the pieces, we've had in excess of double digit growth in Charlotte. And we've performed very well in Winston-Salem n the Piedmont region. And now Raleigh is starting to come on.
As I mentioned on the last call they had significant pipeline that's starting to pull through. So they've had some very nice fundings. Still, they've had a lot of pressure from real estate transactions paying off because the Yadkin was more of a real estate lender, particularly in that market. But they're doing really well and I'll tell you the teams down there, the people that we have are excellent. They've done a tremendous job and I think tremendous job transitioning from a smaller community bank to adopting the products and services and really driving a lot of that fee income growth that we speak about.
We mentioned that early on when we bought the bank down there, we said hey, we feel the biggest upside that's not modeled is the fee income. And they're really delivering on many fronts. And the mortgage business is our mortgage leader, Dave Green has done a tremendous job rebuilding the teams down there. So the contributions coming out of the Carolinas has grown steadily. And I think, again, it's having some really good people that are committed and believe in the company and have been performing very well.
So we're very pleased with where we are.
Great, thank you.
Thanks.
Thanks, Frank.
Thank you. And the next question comes from Jared Shaw with Wells Fargo Securities.
Hi, good morning.
Hi, Jared.
Just following up a little bit on the margin, like you were just saying going into the end of the year. As we look at going into 2020, [Technical Difficulty] but with an expectation that rates may continue to have downward pressure. Should we expect to see any more significant I guess restructuring in how you’re positioning the overall balance sheet? Or should we expect that you stay fairly consistent with how you while any additional rate pressure we see could continue to flow through the margin.
Yes, we'll just continue to actively manage the balance sheet, Jared, for kind of where we are and kind of what we see in front of us. For example, this quarter where the first half of the year we really had not been reinvesting cash flows out of the securities portfolio in the third quarter we had some opportunities to put some money into work. So we actually grew securities on a spot basis about $100 million from June 30th to September 30th.
So, I mean, we're talking every day and every week with our pricing committee as far as are there any tactics we should do. We funded a good portion of that securities with overnight borrowings in the short run to give us some protection from lower interest rates. So, that was some of the tactics that we did this quarter. And then earlier in the year we took advantage of very low rates and terms out some few hundred million dollars worth of term borrowings for -- in the mid-ones for like two to five year money.
So, we'll continue to be opportunistic when we see those opportunities to kind of tweak the balance sheet a little bit. As you know, we kind of manage conservatively and in kind of neutral from a philosophy standpoint. So -- and I mentioned all the different levers that we have talking about for the quarter and our teams are going after DDAs.
We're looking at both the asset and the liability side of the balance sheet to take advantage of whatever we can to preserve the margin. We've been here before so it’s the same management 10 years of this stuff we become experts at finding rabbits. I think that the strategy that we've laid out is to continue to focus on non-interest income, growing non-interest income it's to continue to focus everyone on the funding side, generating low cost deposits.
That means we're investing in technology to keep consumer depositors, we've been growing our consumer deposit base. We had good growth in the Southeast, and in the Mid-Atlantic regions, which was very helpful for us, we're very fortunate that we expanded into those markets when we did. So that will help us as we move through this time.
And then we constantly look at the asset side of the balance sheet, we look at loan portfolios and contribution, we look at margin on origination, we look at the investment portfolio and we look for opportunities to enhance yield and we'll continue to do that.
On the expense side, we've been very diligent over the last two years. And I think it's showing we've been disciplined in managing expenses. We still have to make investments in our company. So some of the expense saves from the branch consolidation went into repositioning in high growth markets and investing in technology. But I think overall, we've done a good job of holding costs down and we have other avenues we're pursuing to continue that into 2020.
Yes, actually that was going to be my second question was when you look at the expenses coming out of branch optimization offset by the expansion into the DC markets and some of the other markets. Is that going to be a net cost increase when you look at sort of the branch footprint combined with some of those tech initiatives? Or should they generally be a little more neutral to expenses?
Well, I think Vince will be mad at me, if I start giving guidance for 2020. But I think, let me give expensive guidance. Our goal there is to try to fund that with those reductions. So, as we transition and move towards a more technology oriented delivery channel, we have to come up with ways to reduce expense, we can't do both. So -- and I think we've proven if you look back over the last 12 months, we've made significant investments in the company in a number of areas, and we've proven that we're able to do that fairly effectively.
And we use relationships with vendors that we have, who see the bigger picture and say we want to grow with you, who help us and we're very diligent on adds to staff and having efficient FTE deployment across the company. And that's going to continue into 2020 and we're going to do everything we can to benefit the shareholders as we move through this difficult interest rate environment.
Okay, thanks. And then finally, just really on the capital management conversation, certainly hearing what you're saying with the dividend and the buyback. But, should we think that you're leaving the door open to get back into sort of whole bank M&A with the growth in TCE, and the time that’s passed with the [indiscernible] are you thinking more not necessarily whole bank M&A but opportunistic portfolio or non-bank acquisitions?
Well, I wouldn't say that we're shifting gears, I think we're still focused on driving organic growth we have a great platform now and we're well positioned in a number of markets. Whole bank deals are not what we're focused on. In terms of other investments, speaking specifically to investment opportunities to grow particular businesses like we did with capital markets. For us, we grew that from the ground up. And, that's $20 million a year in revenue for the shareholders that we didn't pay anything for other than investing in the personnel and some minor operating expenses. So I think that, that's really our focus. And, we're going to continue to stay, down that path.
In terms of capital, our goal is not to -- we've never been in this position before. I -- three years ago, when we rolled out our analysis, our model or discussed our model gave guidance relative to the acquisition, one of the things that we said was that we needed to grow from a scale perspective to cover investments and infrastructure. We successfully -- we did that by doing a large acquisition taking the cost out from that acquisition and then growing revenue overtime. And we've gotten a lot of benefit from that.
One of the things we called out was having our dividend payout ratio fall below 40%. We said, hey, if you look at this and you model and we execute, we're going to be in a much better position for our shareholders from a capital perspective. Because we're going to be able to grow TCE organically without raising capital through a common equity raise and preventing dilution and grow organically, we're going to be able to do that and get that dividend payout ratio down.
Once we do that, we'll have options. I -- buyback didn't make sense for us in the past, because of the valuation that we had at certain points in time it makes sense. So I think given where we are in the cycle, the best part about all of this is we've delivered what we said we were going to deliver, we’re below 40% dividend payout ratio this quarter. We have TCE ratio that's approaching the 7.5% mark that we indicated.
Now, we have flexibility, we can do different things to provide the best benefit for the shareholders. That's where we wanted to be. Very patient, I know the street is not often patient, but I think we're in a very good position from a capital perspective. And that's what we wanted to emphasize.
I could comment too, Jared, just on the buyback program that we announced. As we sit here today, we're going to look to be opportunistic, kind of through CECL. So, we have the CECL estimates out there, but we'd like to get through the CECL impact kind of at the beginning of the year. And then look at whether the buyback should be kind of opportunistic or kind of more programmatic as you go forward from there. But I think that's to Vince's point, we haven't had that in our toolbox before and now we do and it's something we'll use in a smart way to benefit the shareholders.
Great, thanks a lot.
Thank you.
Thanks, Jared.
Thank you. And the next question comes from Michael Young with SunTrust.
Hi. Good morning.
Hey, Mike.
Good morning.
Wanting to start just on the fee income side the non-interest income, you’ve talked about obviously the strengths that you have had in those businesses, but it's been kind of record quarters. Is that sustainable in the next year given the trajectory of interest rates will that continue to be a tailwind or do you think there has been some pull forward of some activity here in the past couple quarters that it may wane a little bit as we move forward from here?
It’s a tough call, I think, would we have expected the mortgage company to produce what they're producing, if we had the initial Bloomberg economic forecasts from the beginning years, the answer would be no, because rates were supposed to go up, not down. So we got -- that was -- that's why we entered into that business and made the investments because we said, hey, it's going to protect us in an environment where we have declining rates, and it's paid dividends for us.
If we -- if the economic environment is consistent, if the yield curve stays pretty much the way it is or rates stay low, let's say that let's hope we don't have an inversion forever, but let's say rates stay low, our prospects for delivering these types of results increases significantly. So that was the strategy, and it really is dependent on macroeconomic factors.
There's an element of core fee income built-in here that we won't fall off of. So, I think that that'll keep us in the game. And what we've done with our capital markets platform building it out, we're still in early stages, relative to the build out of that platform. So there's upside in international fee income, there's upside in our wealth platform, there's up insurance, you saw significant uptick in insurance fee income as we spread into those new geographies.
So, it's our goal to sustain these levels. It's lumpy, tends to be stronger in the middle parts of the year, the second and third quarter. But I feel pretty good about where we sit.
Have a good pipeline going into the fourth quarter too.
This year the fourth quarter because of the rate environment should help us. I hope that's helpful.
Okay. Yes, no, it is. I just wanted to make sure there wasn't anything large or one tiny in there that, we shouldn't carry forward.
It's pretty-- it's fairly diverse. It's pretty granular. The biggest chunk of the capital markets fee income is derivatives fee income and that's a function of the rate environment and activity…
In the new markets.
In the new markets. I think, given the markets we've expanded into and we said this early on, there's a tremendous amount of opportunity in Charlotte and Raleigh and Charleston and other markets, the DC market that we're expanding into there's a tremendous opportunity.
Okay, thanks for that color. And maybe just one other question on loan growth as we look forward into next year, I know you guys don't want to provide guidance, but just philosophically, as we think about kind of lower rate environment and the implementation of CECL, will that impact either the structure of the loans that you make, or the types of loans that you're pursuing next year or pricing any color you could provide around that would be helpful.
Hey, Michael, this is Gary. In terms of our underwriting and the loans that we pursue and we've -- I think we've talked about this in the past, we're going to be consistent in how we do business. We don't change our views, we don't change our underwriting, migrating up the curve in good times and down the curve in bad times, we're going to stay where, we're going to underwrite the way that we underwrite each and every day and we stay the course and we’ll continue to do that as we move into 2020.
And in terms of CECL, CECL should have an impact, obviously, we're not a price setter, we've got some big competitors, there's hundreds, thousands of financial institutions and non-financial institutions lending, but I will tell you that the structures will change, because of the absolute return on capital. We -- if the amount of reserve is doubling or more term becomes important. And I think as we look forward in terms of how we underwrite, we're going to make sure we get -- I hope the industry made sure we get paid for that, and I would expect us to pursue strategies to maximize returns on capital.
Yes. And shorter is going to be better just generally speaking across the portfolios from a maturity standpoint.
Okay. And just last one on the efficiency ratio. It's been good to see that kind of come down into below 55% here and hold, but there could be some revenue pressures, obviously, going forward. Do you think there's an ability to continue to defend kind of that efficiency ratio or bottom line number into 2020, with some of the expense leads that you discussed earlier?
I would just -- I guess, what I would comment on that is as you know expense management has been a focus here for as long as we've all been here. So, being able to achieve an efficiency ratio in the 54s with the investments in the businesses that Vince discussed it takes a lot of work. And something we’ve focused on a lot.
Every year next year will be no different than this year we’ll have a long list of opportunities to create more efficiency. The items we've talked about in the past are kind of ready program and vendor renegotiations that's just constant, that's kind of part of life as far as evaluating kind of your footprint as well as your relationships with all your partners. And, we've put in a new phone system to save money. How we manage raw cash, we're optimizing facilities next year that's going to be a focus.
We have a lot of buildings and locations throughout our footprint. And there's opportunities to optimize facilities. We're looking at bringing in third party contractors who can bring stuff in house and save some money. And I could go on and on, there's probably 50-60 items on the list of things that we’ll continue to focus on.
So our focus to manage the overall profitability to continue to drive the profitability forward and manage the expenses and efficiency ratio and the returns. So...
And I think, it's a metric in our incentive compensation plan. It's focused on by the board of directors, I don't think management focuses on it. Trust me, there's a lot of oversight over expense control here. And we're very aware of the environment that we're in. But we also can't stop investing in the company. I think that we have to balance this as business leaders, as managers of this enterprise. We have to balance what's good for the long-term and good for the short term.
So we try to manage that efficiency ratio at those levels or better. And we look to make investments that will position the company either from a technology perspective or facilities perspective to drive better revenue. And have better revenue growth results and better penetration in the markets that we're in. Anyway, that's...
Very helpful. Thank you.
Thank you.
Thank you. And the next question comes from Casey Haire with Jefferies.
Yeah, thanks. Good morning, guys. Wanted to follow-up -- one more follow up on the NIM, I was hoping to get the new money yields on loan origination versus the 478 existing yield in the third quarter here.
I mean, with rates having come down, obviously, the rates on the loans are lower the reflective of the kind of market kind of the rate on new major 4.50% to 5% to 4.45% to 4.50% as far as the rate, overall. Now, as you know the mix has a lot to do with that. So, this quarter I mentioned earlier, we had a vast majority in the commercial space, driving the growth, the 80% of the growth was in the commercial arena. So that kind of helps that rate. But the mix will affect it every quarter, but that's kind of the rate for the as I call it the mage [ph] the new loans that we’ve put on the books.
Okay, very good. And just question on the purchase accounting adjustments. On slide 11 you guys talk about $125 million to be recognized post CECL day one. So if I assume -- just want to make sure my math is right here. If I assume that's a four year life that's about $31 million of accretion per annum over four years. And then -- which would be about $8 million a quarter, which is obviously in line with what we saw here in the third quarter. Is that a decent way to think about it?
Well, the way it will work going forward is just kind of loan by loan. So, we have loans that are -- will be kind of accretion will be coming in over a year. You have loans that will be coming in over 25-30 years. So it's truly a function with this kind of what are the prepayments doing? So the pace of it I mean the $115 million to $135 million will be over the remaining life of the loan that life can flex up or down.
Yeah I think Casey, what Vince is saying is you can apply four years but that's an anagram.
Yeah, your math is accurate if you use four but...
Yes, it works mathematically. But there's a lot of analysis that has to go into where we end up and it really depends on changes in interest rates, the overall health of the economy…
Payoffs.
There's so many factors that go into it, but your math works.
Okay, great. Alright. And just lastly, on the capital management, I think everyone was excited to see the buyback and it sounds like you guys are going to hold off until you digest CECL, if we roll forward TCE going forward March 31st, you'll probably be right around where you are at 7.5% TCE, which obviously is a little bit light versus peers. So I'm just trying to get a sense, everyone's excited about the buyback, but also a little bit nervous given where you are. So where do you guys stand on that debate?
Yes, I guess what I -- I didn't mean to interrupt your Casey. Yes, I think relative to the peers, we've said this repeatedly, we don't have the same portfolio as the peers, they have elevated capital, because they do some things that have an elevated level of risk, higher yields, more risk, more capital. We're managing a lot differently.
So as we move through this credit cycle, which I believe we're in later -- we still have not lost focus, as Gary said, on where we are in the cycle. We've been in a sustained economic expansion, we're very conservative, we feel that the capital ratios that we operate with and have operated with significantly lower by the way for a number of -- almost a decade, since I've been here, we feel pretty good about that, about those levels.
So 7.5% for us is given the makeup of our portfolio and the quality of the portfolio is equivalent to somebody that might have a much higher TCE ratio with a lot more risk a lot more maybe multifamily housing risk or some other risk in the portfolio that is outsized doesn't necessarily mean that's a bad thing for them, it just means that we shouldn't be managing our capital relative to peers, if that's how we're going to operate.
Gary, I don't know if you want to mention anything else about the credit.
I think it's a very valid point. I mean, it's how we run the company, it's how we do business. And one of those areas that we are not heavily involved in at all we don't have a private equity book. We've got a couple of clients that we do some business with, but the book is consistently underwritten as we touched on earlier, and we feel it will perform well through the cycle.
Plus the actions we've taken over the last three years just to take risk off the table that we've done positions us very well as we sit here today.
And that action was a late cycle action to position the balance sheet the way we wanted it going into a later stage economy.
And Casey just to clarify too, we'll look to be opportunistic as far as the buyback this quarter. And then once kind of CECL is in place, and we take a look at the environment going forward then we'll kind of evaluate whether it becomes kind of more programmatic over the course of the year versus opportunistic. But for now, we will be opportunistic, where it makes sense to do it and the returns makes sense.
So -- and when we -- if we get north to the 7.5%, or when we get north to the 7.5% we're going to look at the loan growth and the loan growth prospects going forward. And if we can deploy the capital in mid-to-high single digit loan growth we'll put it into that. If we're -- it looks like we're going to build capital beyond the 7.5%, the level that we're very comfortable with, as Vince and Gary described, then we'll look to either do something with the dividends, or maybe do more of the buyback at that point. But again, over the course of the years is the kind of the game plan for that amount.
Understood, thank you.
Thank you, Casey.
Thank you. And the next question comes from Collyn Gilbert with KBW.
Thanks, good morning guys.
Good morning, Collyn.
Just back to the loan growth. So -- and if you offered this, I apologize for missing it. But I think, your original guidance for the year was, I think, 4% to 8% in the loan growth, should we -- just based on kind of the commentary that you're offering? I mean, I would assume that it's likely that you'll come in closer to the low end of that range for the year.
Number one is that just clarity on that, and then number two, just back into the -- in terms of the loan yield discussion as you said, Vince, obviously it varies on the -- within the segments. But just, I was curious to get a little bit more detail as to what the yields are that you're putting or the structures that you're putting on in the resi book? And then what maybe some of the yields were on the CRE versus C&I?
If want to comment on the commercial side.
Yes, I mean, in terms of the commercial book, the rates continue to be under pressure Collyn. We've talked about quarter point step downs over time, I think you're seeing that again. You're in the high ones to 2% range. On good solid paper on extremely strong paper, you're 1.25% to 1.50%. And, we've seen a few of those very solid investment grade type companies that we do some good business with, as well as ancillary business and deposit business. So, you look at the whole relationship and it all gets priced in together. So that's kind of where -- what we're seeing today from a commercial standpoint, as far as pricing is concerned.
On CRE, you're still at 2%, 2.25% some are higher. Some, you're going to get down to 1.75%, as well on the stronger transaction. So it's just continued to be pressured slightly downward as the economy has continued to perform.
Collyn, were you asking relative to implementation of CECL going forward? Or were you just asking about…
No, no, no, just -- yes, what Gary answered just the loan originations that you're seeing in the market. Yeah, and there's some comparative pressures and the impact? Yeah. Perfect.
Okay. Because I was going to say, I don't think anybody's pricing term differently today, that's all, relative to the implementation of CECL.
Collyn on the mortgage side, I mean, if I look at the new rates for the last couple months of the quarter, we were in the 3.65% to 3.70% kind of area for the fall in for the mortgage loans that we originated.
Okay. Okay. And are you retaining? Is it a blend of what you're retaining there in terms of duration?
Yes.
Yes.
Okay. Okay. Okay, that's helpful. And then just on the muni deposit side you guys have seen some strength there and continue to build that business. How are you seeing the pricing within that segment? Are you able to lower the rates there as rates have come down? Or is that also somewhat competitive?
It's very -- everything is competitive when you're -- when you start talking about big dollars. So I would say that they manage -- they're managing, because they're on budgets. And we're in a declining rate environment. There -- the treasures of these large municipal entities are trying to drive as much income as they can. So I would say it is competitive. I think the differentiator for us is that we don't just participate in the high yielding pieces of that relationship.
We go after the whole relationship, we provide them with a whole bunch of treasury management services, and they use free balances to pay for those services. Typically, the municipalities typically like to use their balances that way. I would say as we move forward and as I mentioned earlier, typically we're competing against large banks in that space. They start to feel pressure, margin pressure, the pricing starts to become more favorable.
So I think in certain respects as we move through this point in the cycle with the yield curve the way it is and pressure on margins. I think you'll see us benefit from that. Because we're in the driver seat with the relationship basically.
Okay. Okay, that's helpful. And then just broadly, you guys had indicated, you'll continue to look for offsets to the business in general right to continue to drive performance next year if this rate environment holds. But I guess my question is a little bit more specifically to the balance sheet. So are there -- Vince, as you look at it with the goal and the objective be to try to keep core NIM flat in 2020? Or if this, let's say we see another cut in the beginning of 2020, will you continue to see core NIM compression? Just trying to get a sense…
Yes, I assume you were asking for Vince C. So I'll let him answer.
You're welcome Vince D to answer it, if you'd like. But yes.
Well, go ahead, Vince.
I guess, what I would say, Collyn, is as we talked about earlier. I mean our job is to protect the net interest margin and the net interest income dollars are key, right? So the better we do on loans and funding it with deposits, the better we're going to do. And we've had GDA growth now every quarter for how many quarters, so the success we've had there obviously protects the margin too.
So, I mean, we're all very focused on protecting that as we go forward and dealing with whatever's in front of us and growing the loans and deposits growing the fee revenue sources like Vince talked about, and there're still upside, particularly in the new markets and in the capital markets. So I mean, we're going to be working hard at the whole, all pieces of the profitability to grow the earnings and protect the margin, and net interest income.
Okay, okay. I will leave it there. Thanks, guys.
Thank you, Collyn.
Thank you. And the next question comes from Brian Martin with Janney Montgomery.
Hey, good morning, guys.
Good morning, Brian.
Hey most of mine were answered, just -- I guess just a couple things. I mean, Vince, did you talk about the or give any color kind of on the forward loan pipeline today, just kind of where it stands relative to last quarter just with the performance?
Yes, we haven't done that. We weren't planning on giving pipeline information. But I will tell you, it remains strong. Commercially it's strong, mortgage I already mentioned is strong on a relative basis, on a quarter-over-quarter basis.
And Carolinas are strong too.
Carolinas are strong. Raleigh still has a big pipeline. And they're still one of our top performers on an FTE basis. So I think we're pretty optimistic about that. But we're cautious about where we are in the cycle. So we're trying to balance that with a little bit of discipline.
Right. Certainly I’ve understood. And how about just your ability to hire folks, I mean, some of your competitors have talked about a lot of the disruption in the markets and the success they're having, I guess. And I know it's an ongoing process for you guys as well. But just any comments you guys can share on your ability to hire this year based on kind of what you've done in years past. I mean, have you seen more momentum on the hiring side, or anything on that?
We've -- yeah, I think we were probably out there pretty early, if you go back to, I think if you pulled transcripts from eight years ago, we talked about our ability to hire people from larger institutions that can cross sell effectively, if we're allowed to say cross sell, sophisticated products and services. I think that we've always done a great job of bringing in the best talent we can bring in. And we've had no issue at all attracting people to this company, zero. And just because we don't brag about it every quarter doesn't mean it's not happening.
So we tend to be a little more quiet about it, we respect the other financial institutions that we compete against. And we're able to secure a good person, we bring him in and we have had no issue doing that. So -- and we will opportunistically bring people in, if we feel somebody is interested and we feel there's potential upside.
So, we just don't talk a lot about it. That's not our culture. We think that it's best to just continue to focus on running the business and not talk about those things. Anyway.
Yes, I guess, I just kind of wanted to get the sense that if you saw any momentum or the disruption in the market giving you more opportunity than you’ve seen in the past?
Absolutely, it absolutely does. It has for us over a decade and a half. So Pittsburgh is a great example. I mean, look what happened 12 years ago, 10 years ago, I mean, there was an incredible amount of disruption and we were able to benefit and many of the people that we hired from larger institutions there are still here. So I -- and I mentioned, we keep winning these awards in all the markets we go into, those are -- our employees commenting on the culture, I think that that's important, and that helps us attract people and retain them.
Got you. Okay. And then maybe once for Vince C, just Vince, when you look at just kind of going back to the margin for a minute, but just if you look at the repricing of the earning assets and the lag on the deposit side, I mean, is it fair to think about it that, if we do get more increases if we get several more rate decreases here, the moderation I guess the decline in the margin could moderate some the more rate cuts you get, I guess the deposit beta could get higher the more rate cuts we get. Is that fair way to think about it? I guess, I'm just not sure the pricing dynamics on the loans versus deposits. I know there's a lag initially, but as that catches up seems like it would allow it to the segregation on the margin to moderate some. But is that the wrong way to think about it?
No, I think it's the right way to think about it. I think like Vince talked about, it's very competitive on the deposit side. So there's opportunities to do it, but you're balancing keeping the account and the balance and repricing it down. So there's -- I mean the more the Fed moves, the more cover you have so that you kind of have to keep pace.
I mean, on the way up, I can assure you those customers were calling us every time the Fed move to try to get their rate to go up. So it's a -- there's definitely opportunity there to kind of continue to reprice those and right size them for kind of where rates are. And that's part of the yield curve. What happens to the rest of the yield curve. The longer end of the yield curve actually gone up a few basis points.
Yes, I think in your scenario, the slope of the curve matters. So if they continue to cut and, we don't see significant deterioration in the middle part of the curve, we -- obviously it would moderate. The margin pressure moderate. So it really matters the slope matters. And we'll see what happens. I'm not smart enough to forecast what happen when the rates are cut by the Fed, given all the other elements in the analysis. But if you talk to a bunch of economists, they probably tell you that it's likely that the yield curve starts to resemble a more normal curve as those cuts occur.
So in that case you would be right that there would be moderation in the pressure.
Okay, I got you. That's helpful. And just remind me as you guys talked about the floors you have in the loan portfolio. What percentage the loans have floors in this kind of where they're at today?
We don't have a substantial amount of floors in the portfolio. We have found that for higher quality borrowers particularly in the commercial space, they don't accept them. So we try to utilize derivatives to the best of our ability to fix rates for our borrowers and to create callers and that really protects us. Because we're receiving -- they're receiving a fix rate, we're getting the variable rate revenue stream or income. And I think that that's how we go after it.
The floors are very challenging to put into effect, probably a little easier, maybe on the consumer side, but I'm not sure that we have many even in the consumer book.
Okay. Yeah. Okay. And then you answered my question on efficiency, but just the last one for Gary. Just anything you're seeing on the credit front, Gary? It doesn't sound like it from a systemic standpoint that there's any worries out there. Just any areas you'd point to that are I guess maybe you're more cautious on today as you get later in the cycle?
Brian, as we've discussed we continue to see solid performance across the portfolio. I mean that said and Vince mentioned it earlier we're managing the book from a late stage economy perspective. And we have been for a while now. So we're really focused on the economically sensitive commodity tariff related segments, as well as transportation. So, those economically sensitive areas we're continuing to watch very closely. We've not seen softness at this point.
And based on the diversification across our book and the concentration management techniques that we have in place and the industries and also geographical diversification, we feel very good about where we are at this point. So we'll continue to watch those as the economy moves forward.
Okay, I appreciate it. Thanks, guys.
Thanks, Brian.
Thank you. And this time, I would like to return the floor to management for any closing comments.
Yeah, thank you very much. And we're very pleased with our accomplishments through the first three quarters of this year. We're looking to finish strong. Our focus is and will continue to be focusing on sustaining earnings per share growth and delivering on all of the areas that we mentioned, expense control, loan and deposit growth, managing the margin through difficult climate that will continue to be our focus.
So, I'd like to thank all of our employees again for their tremendous contribution. I think we've had a great year so far this year. We're looking to close it out strong and thank you for participating in the call. We appreciate your interest. And we like to thank the shareholders for supporting us along the way. Thank you.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.