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F.N.B. Corp  (NYSE:FNB)
Q3 2018 Earnings Conference Call
Oct. 23, 2018, 12:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello and welcome to the F.N.B. Corporation Third Quarter 2018 Earnings Conference 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 that this conference is is being recorded.

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

Matthew Lazzaro -- Manager of Investor Relations

Thank you. Good morning, everyone, and welcome to our earnings call. This conference call of F.N.B. Corporation and the reports it files with the Securities and Exchange Commission often contain forward-looking statements and non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. Reconciliations of GAAP to non-GAAP operating measures to the most directly comparable GAAP financial measures are included in our presentation materials and in 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 available on our corporate website.

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

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

Vincent Delie -- Chairman, President and Chief Executive Officer

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

We are very pleased with the quarter's results, highlighted by a 30% year-over-year increase in earnings per share to $0.30 per share. Tangible book value per share increased $0.18 to $6.44 and return on average tangible common equity exceeded 19%. Operating net income available to common shareholders was $95 million and produced $0.29 per diluted share for the quarter, a 21% increase from the third quarter of 2017. The strong performance for the third quarter reflected positive operating leverage, solid loan growth, very strong deposit growth, improving core net interest margin and positive asset quality results. The quarter's record high total revenue of $310 million reflected continued loan and deposit growth and positive results from our fee-based businesses, notably capital markets, wealth management, insurance and mortgage banking.

A key item I want to highlight is the significant reduction in operating expenses to $171 million this quarter. We continue to focus on carefully managing our expenses while generating consistent total revenue growth. The efficiency ratio of 53.7% improved meaningfully on a linked quarter basis and we have ongoing initiatives in place to control expenses and drive positive operating leverage moving forward. On a linked quarter basis, average loan growth totaled 6%, led by commercial equipment, finance in direct auto and residential mortgage. On the commercial side, we had strong quarterly production in Cleveland, Charlotte the Piedmont Triad and across the Mid-Atlantic region specifically from our team in Washington DC.

Our commercial and industrial and leasing portfolios grew a combined 8% while commercial real estate was flat, reflecting an escalation in permanent market takeouts. We are optimistic that our record pipelines coupled with our geographic diversification will provide a path for continued growth. The consumer loan portfolio growth of 12% reflects strong residential and indirect origination volumes during the quarter. On the funding side, total deposits grew steadily through the quarter with benefit from seasonal inflows and new household acquisition. Total average deposit growth of 11% includes a 14% increase in non-interest-bearing DDA balances and continued growth in average time deposits. On a spot basis, total deposits were up 17%, I'll also note that as you can see in the FDIC data through June, we grew almost 5% year-over-year in the Carolinas and gained market share in the majority of our markets across the FNB footprint. I want to reiterate that we are keenly focused on increasing total deposits and striving to improve the mix.

Our strategy has always been to be the primary provider of capital to our commercial clients and to offer complementary high value fee-based products and services, particularly treasury management services. Successful execution of this strategy is evident in consecutive quarters of double-digit annualized growth in DDAs. Generating these organic balances and expanding relationships with our holistic clients will further strengthen the mix of the balance sheet by increasing the portion of customer driven funding. On a spot basis, the funding position improved compared to the second quarter with the loan to deposit ratio of 92.9%.

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

Now I'd like to focus on the key strategic development since our last call. In September to support future deposit growth, we launched an initiative to expand the use of digital capabilities by targeting new households for deposits and adjacent markets. Through this offering, FNB is continuing to build out the digital bank platform, making it attractive to new prospects and strengthening relationships with existing customers. FNB has extended these digital bank capabilities so that it can offer deposit products across the eastern seaboard to complement areas where we have a physical delivery channel and where we see selective opportunities. These efforts provide flexibility to source deposits on an opportunistic basis going forward. It's early on for this initiative and we're still refining our offering and applications, but we were excited about its potential to grow core deposits going forward.

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

Gary Guerrieri -- Chief Credit Officer

Thank you. Vince, and good morning everyone. We are pleased with the performance of our portfolio during the third quarter with continued positive credit results and credit metrics, which continue to trend favorably over the last several quarters. On a GAAP basis, delinquency ended September at 1.23%, which represents an increase of 14 basis points over historically low June levels, while NPLs and OREO, ticked up slightly by 2 basis points linked quarter to end September at 63 basis points. Core net charge-offs were solid at 14 basis points annualized excluding the 13 basis points accounting impact from the sale of Regency Finance.

Let's now take a look at the originated portfolio results for the quarter followed by some brief remarks on the acquired book. Turning first to the originated portfolio, the level of delinquency ended September at 79 basis points, which represents an increase of 11 basis points from very low June levels. The long-term trend continues to move in a favorable direction marked by a year-over-year improvement of 12 basis points. The level of NPLs and OREO remained fairly stable for the quarter ticking up slightly by 2 bps to end September at 73 basis points and when compared to the year ago period, improved by 18 basis points. Absent the accounting impact of the Regency sale, originated net charge-offs were solid at 16 basis points annualized. The originated provision at $14.9 million covered net charge-offs and organic loan growth, reflecting an ending originated reserve position of 1%.

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

In summary, we are pleased with our third quarter results and the position of our portfolio as we enter the final quarter of 2018. Our credit portfolio continues to demonstrate consistent results throughout a variety of economic cycles, a proof point of our strong credit principles and risk management philosophies that are focused on sound underwriting, proactive risk mitigation and maintaining a well-balanced loan book by remaining selective in our credit decisions. Our strategy of positioning the company in higher growth and diverse markets continues to provide us with high quality credit opportunities, which further positions us for growth without sacrificing our credit standards or risk profile. We remain committed to our core principles for both new and existing lending opportunities to support our long-term growth and risk objectives.

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

Vince Calabrese -- Chief Financial Officer

Thanks, Gary, and good morning everyone. Today I will discuss our financial results for the third quarter and high level outlook for the fourth quarter. As you can see on slide four of the presentation, we earned $0.30 per share for the third quarter including a penny per share from the gain on the sale of Regency. On an operating basis, earnings for the quarter were $0.29 per share, an increase from $0.27 in the second quarter and $0.24 in the third quarter of 2017.

Let's start with the balance sheet for the quarter starting on slide six. Linked-quarter average loan growth was $330 million or 6% annualized. In consumer lending, we continue to see healthy growth in residential and indirect auto up a combined $300 million while home equity balances declined. On the commercial side, we had solid origination volume across the footprint and Commercial Leasing had another strong quarter, up 74% annualized as that business continues to build in our newer markets. As Vince noted, the combined C&I and leasing portfolios grew 8.3% annualized during the third quarter. Also contributing to our overall lending performance, the acquired portfolio runoff declined substantially this quarter to $320 million compared to $450 million in the prior quarter. The moderation of this runoff 18 months after we entered the Carolinas is an encouraging sign regarding stability of the team and the potential growth prospects going forward.

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

Turning to the income statement on slide seven, net interest income decreased $4.6 million reflecting an $8.7 million reduction in cash recoveries on acquired loans and the sale of Regency Finance two months into the quarter. The third quarter net interest income did benefit from higher earning assets and the upward movements in prime and one month LIBOR-based loans funded with a more attractive mix of deposits and borrowings. The net interest margin was 3.36% compared to 3.51% in the second quarter, largely reflecting a 13 basis point reduction from the high level of cash recoveries on acquired loans realized last quarter. Additionally, the sale of Regency two-thirds of the way through the quarter, net of the reduction of short-term borrowings with the sale proceeds were moved about 3 basis points of margin from the third quarter. On our core margin basis, NIM was up 1 basis points to 1.5 basis points, consistent with our prior guidance. Looking ahead to the fourth quarter, we expect another 6 basis points or so of margin impact from the Regency sale on a full-quarter basis, consistent with the guidance we provided in July.

Let's look now at non-interest income and expense on slides eight and nine. Total reported non-interest income increased $9.9 million or 15.3%, driven by continued solid contributions from our fee-based businesses combined with the $5.1 million Regency gain while the second quarter included a $3.7 million loss on fixed assets related to branch consolidations. Service charges grew 2.6%, reflecting seasonally higher levels of activity, while wealth management and mortgage generated fee income, in line with strong second quarter results. Additionally, insurance was seasonally strong, up 9.5% and capital markets posted another strong quarter with healthy swap activity across the footprint, including continued increased contributions from the Carolinas.

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

Moving to capital, the tangible common equity to tangible assets ratio increased 10 basis points to 6.89% which represents another quarter of progress toward our goal of reaching a 7% level we have discussed with many of you. Tangible book value per share grew $0.18 building our quarterly increases of $0.12 last quarter and $0.08 in the first quarter of this year. Lastly, our dividend payout ratio dipped below 40% for the quarter, enabling a faster build in efficiency ratio and tangible book value per share.

Finally, I'll comment on our expectations for the fourth quarter. Now that we are nine months into the year, fees and expenses both look on track and we do expect provision to be better than the range previously provided. We saw strong deposit growth this quarter and expect to be in line with prior guidance. Given the competitive environment for loan growth combined with the Regency sale, we would now expect to be more in the mid single-digit area as supposed to high-single digits for loan growth. With the sale of Regency closing at the end of August, we expect net interest income growth to be in the low to mid single-digit area. Regarding the tax rate, it has been in line with our expectations. On a net--net basis, our bottom line view of our guidance is still right in line with our previous guidance for earnings per share. Overall, we produced a solid quarter and feel good about the way the company is positioned for the fourth quarter and 2019.

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

Vincent Delie -- Chairman, President and Chief Executive Officer

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

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

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

Questions and Answers:

Operator

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.

Frank Schiraldi -- Sandler O'Neill + Partners -- Analyst

Good morning.

Vincent Delie -- Chairman, President and Chief Executive Officer

Hey, good morning Frank.

Frank Schiraldi -- Sandler O'Neill + Partners -- Analyst

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

Gary Guerrieri -- Chief Credit Officer

Yeah. The portfolio in the Carolinas has shown steady increases over the last three months during the quarter, so we've had incremental increases in the portfolio. The portfolio -- we are doing I think very well in terms of new business. Production there is much higher than it has been historically for that company and we are getting to the point where the runoff that the designed runoff is starting to trail-off Frank. So that that portfolio is starting to contribute. I mentioned in my prepared comments that the Piedmont Triad and Charlotte as well as the Washington DC team and Cleveland where they had contributed nicely to production during the quarter. So we are our strategy is geographic diversification, so that we can sustain the growth rate that we need to sustain in our investment thesis and I believe that we're well positioned to do that.

Frank Schiraldi -- Sandler O'Neill + Partners -- Analyst

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

Gary Guerrieri -- Chief Credit Officer

Well, I would and I did call out the Carolinas again. I think if you look at the FDIC data that's out there, we were up in just about every market excluding areas like the headquarters branch where we moved deposits centrally away from the Carolinas. They have performed extraordinarily well in terms of deposit origination and we're just scratching the surface, because we're still not the primary treasury management bank for a lot of those customers and we're starting to see momentum there. So I would expect the Carolinas to contribute significantly in the future in terms of deposit growth. Having said that we, had great success across the board. This most recent quarter saw some very strong growth in the central part of the state of the Metro acquisition from several years ago, Pittsburgh had some significant deposit growth, it really is all over the Board and I think that it's a testament to the strategies that we pursue. We have a number of up strategies both with data analytics in the consumer bank and targeting good treasury management prospects in the wholesale bank that will continue to drive deposit growth, particularly in the demand deposit category.

Frank Schiraldi -- Sandler O'Neill + Partners -- Analyst

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

Vincent Delie -- Chairman, President and Chief Executive Officer

Vince Calabrese, can address the expense base.

Vince Calabrese -- Chief Financial Officer

Yeah, I would say a couple of things. The branches as a whole we announced that we had 20. Once this cost savings are fully realized, it's about 300,000 per branch, so $6 million was the figure that we commented on, it's kind of a full year impact, but you don't have that right out of the gate. I would say for the 13 branches that we closed in May, we have about 85% of the savings kind of realized at this point where you have properties that you own for instance, we own eight of those 13, you started to sell the property to take out the rest of the carrying cost, so kind of once everything sold and the properties are fully gone, you kind of get to that $6 million run rate. We had six that we consolidated late in September so five of the six are owned. So you will get say, 80% to 85% of the 300,000 per branch for those in the fourth quarter, so there is some incremental benefit there and then we are still in the process of selling the branches that we had consolidated in May. So it takes a few quarters to kind of get to the full $6 million run rate.

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

Frank Schiraldi -- Sandler O'Neill + Partners -- Analyst

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

Vince Calabrese -- Chief Financial Officer

80% to 85%.

Frank Schiraldi -- Sandler O'Neill + Partners -- Analyst

Great, thank you.

Vince Calabrese -- Chief Financial Officer

Sure.

Vincent Delie -- Chairman, President and Chief Executive Officer

Thanks Frank.

Operator

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

Austin Nicholas -- Stephens Inc. -- Analyst

Hi guys, good morning.

Vincent Delie -- Chairman, President and Chief Executive Officer

Good morning Austin.

Austin Nicholas -- Stephens Inc. -- Analyst

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

Vincent Delie -- Chairman, President and Chief Executive Officer

We're really not commenting on '19. I think Vince was trying to give you an indication for the fourth quarter what our expectations are given that we have three quarters behind us. I will tell you, we feel pretty confident about what we put out there. We have a strong pipeline. Pipeline is up about 20% over the previous period. We're not disclosing pipeline information anymore, because it confuses everybody, but we have record levels across the company. So we're feeling good about moving into the fourth quarter. Having said that, I will caution you in this environment we have become very selective in terms of credit approval. So we're focusing on higher quality credit opportunities there are others that are more robust in terms of their pursuit of credit. So pull through in that pipeline changes, it varies based upon credit appetite really credit appetite of others. And I think that we're being very guarded. So as we move forward we're focusing, we're leveraging the investment in multiple geographies to help us manage risk and still achieve our growth objectives.

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

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

Gary Guerrieri -- Chief Credit Officer

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

Vince Calabrese -- Chief Financial Officer

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

Vincent Delie -- Chairman, President and Chief Executive Officer

That's a good point.

Austin Nicholas -- Stephens Inc. -- Analyst

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

Vincent Delie -- Chairman, President and Chief Executive Officer

Yes, I think just a few comments on margin, I think that when you look through the numbers for the quarter, the core margin excluding purchase accounting, excluding Regency was up 1 basis points to 1.5 basis points that I mentioned in my remarks. I think a key part of that for this quarter is, we had good success reducing short-term borrowings and reducing our overall cost of funds beta. So cost of funds went up 9 basis points this quarter, which is a 36% beta last quarter, it went up 10, so kind of managing the overall cost of funds is key part of the strategy. As you look ahead, obviously the better we do generate and continuing to generate deposit funding, it supports the margin, the mix of the earning assets obviously has an impact to commercial versus retail.

And then remind everybody, our overall posture on interest rate risk management is generally neutral, I mean we are asset sensitive as we disclosed in the IRR data that's in the 10-Q every quarter, but kind of overall look for a stable margin on a core basis excluding purchase accounting subject to the mix earning assets and funding that you have. So it's hard to predict with certainty, but I would look for a stable margin on that core basis. And while a lot of people talk about that in steepening of the yield curve and the tenure had moved up, I guess it was 3.20% yesterday It's 3.15% this morning. It does help somewhat, but important to remember, 45% of our loans are tied to prime or one month LIBOR, so the tenure it's not a huge impact and it's volatile as we know, I mean it went down 5 basis points this morning. So kind of overall I would say, stable margin on a core basis as you get into the fourth quarter.

Austin Nicholas -- Stephens Inc. -- Analyst

Understood. Thanks for time today.

Vincent Delie -- Chairman, President and Chief Executive Officer

Thank you, Austin.

Operator

Thank you. And the next question comes from Michael Young with SunTrust.

Michael Young -- SunTrust Robinson Humphrey Inc -- Analyst

HI, good morning.

Vincent Delie -- Chairman, President and Chief Executive Officer

Good morning Michael.

Michael Young -- SunTrust Robinson Humphrey Inc -- Analyst

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

Vincent Delie -- Chairman, President and Chief Executive Officer

No. I think as we've said in the past, we've focused on consolidation improvement, de novo expansion for the last 10 years. So we have an ongoing process, we evaluate locations, we look at transaction volumes, profitability, market potential. I think there is opportunity for us to continue to reduce the number of legacy branches. Now that will be tempered by expansion, because we're also opening locations selectively and high growth areas, areas that we feel we can produce at production levels that are greater than the ones we're closing. But they're not offsetting the closures, so I think when you look at it in total, there is more room and we're keen focused on it and I don't lose sleep over the fact that we're just going to sit still, we continuously look at. And I think the deposit growth is a positive sign but I will say something. I think this company has proven over time that this is a deposit generating franchise and if you look at the shift in deposit mix over a very long period of time in the growth that we've experienced, it's significant and that bodes well for us moving forward as we change our funding mix and rely more heavily on originated deposit balances versus wholesale funding.

Michael Young -- SunTrust Robinson Humphrey Inc -- Analyst

Okay. Thanks for that. And just curious in the quarter was there any purchase loan growth whether it would be next you're trying to build relationships are on the consumer indirect side.

Vincent Delie -- Chairman, President and Chief Executive Officer

No.

Michael Young -- SunTrust Robinson Humphrey Inc -- Analyst

Okay. Real core and then -- I'm sorry.

Vincent Delie -- Chairman, President and Chief Executive Officer

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

Michael Young -- SunTrust Robinson Humphrey Inc -- Analyst

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

Vince Calabrese -- Chief Financial Officer

Yeah. Just a couple comments on acquired. First of all, on the guidance we did change it slightly to mid-single digit from high-single digit given the commercial real estate market impacts as well as taking Regency out of the mix, just to clarify that. As far as the acquired portfolio, as far as the income statement impacts just briefly, we've always said there's a lot of volatility there in excess cash recoveries from quarter-to-quarter depending on our level of activity resolving acquired loans. So last quarter was really high at 15 basis points, which was a new high watermark. This quarter we're at 2 basis points, which is the same as the first quarter, so kind of the lower end of the range. So while I have something each quarter, but that piece of it does vary quite a bit from quarter to quarter. The incremental purchase accounting accretion was stable that was 8 basis points to same as last quarter, which kind of I consider that the normal accretion and then the runoff in the acquired loan book came down significantly into the 300 level. We expected it to continue to moderate. When you look at the levels over the last four quarters now it was 400 in the second quarter, 400 in the first, 500 in the fourth quarter last year. So the third quarter level at 320 feels like a good run rate, I mean it's hard to predict with precision, but where we stand and the comments I made in my prepared remarks about kind of the stability of the team and the prospects there I would expect next quarter to look more like this quarter than where it had been running, so it's probably pretty good reasonable run rate to use going forward.

Michael Young -- SunTrust Robinson Humphrey Inc -- Analyst

Okay, thanks.

Operator

Thank you. And the next question comes from Casey Haire with Jefferies.

Casey Haire -- Jefferies & Company -- Analyst

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

Vince Calabrese -- Chief Financial Officer

Well, historically we were running down CD balances as I mentioned in the past, because the FTP, funds transfer pricing benefit wasn't positive in the past. It shifted because of the change in the yield curve. I would say that it's a strategy that we pursue, pricing of time deposits has helped us grow DDA balances in the consumer bank. We've attracted about 2,000 new customers that have operating accounts with us as well and I focus on the DDA balances increasing 14% and that's part of the strategy. Actually this is the second quarter with double-digit growth in DDA balances. So we will moderate that strategy over time, so I wouldn't say that that's the way it's going to be moving forward, but it has helped us grow our non-interest-bearing balances which was the objective.

Casey Haire -- Jefferies & Company -- Analyst

Okay, I understood. And I guess switching to the asset side, we've heard a lot about, it's very competitive out there from a loan pricing perspective and structure, but from your -- if I look at your core loan yields it looks like the loan book is yielding about 46% (ph) so in terms of production, what is the new money yield versus that 46% (ph)?

Vince Calabrese -- Chief Financial Officer

I would say that, if you look at where the rate on the new loans versus kind of the starting portfolio so this is just a couple of comments on that topic So this is the second consecutive quarter where the new loan rates were higher than the starting portfolio yield, which obviously helps. The rate on the new loans was up 20 basis points from last quarter and up from the starting yield. The overall rate on those I have that here. 4.77% is the overall rate on the new loans that we put on, which is up 20 bps from last quarter like you said and additive to the yields starting yield and then also contributing the reinvestment rates on the securities portfolio we have another quarter where we're investing higher than kind of the roll-off rate, so this quarter we invested $468 million at a 3.31% tax equivalent yield so 105 basis points higher than the roll-off rate. So that's similar to the loans coming on higher than the starting rate, both are additive to interest income.

Vincent Delie -- Chairman, President and Chief Executive Officer

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

Gary Guerrieri -- Chief Credit Officer

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

Vincent Delie -- Chairman, President and Chief Executive Officer

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

Casey Haire -- Jefferies & Company -- Analyst

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

Vince Calabrese -- Chief Financial Officer

It'll be between 19% and 20% for the fourth quarter is what we would expect.

Casey Haire -- Jefferies & Company -- Analyst

Okay, thank you.

Vince Calabrese -- Chief Financial Officer

Thanks Casey.

Operator

Thank you. And the next question comes from Collyn Gilbert with KBW.

Collyn Gilbert -- Keefe, Bruyette & Woods, Inc. -- Analyst

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

Vincent Delie -- Chairman, President and Chief Executive Officer

We really don't disclose the blended rate.

Collyn Gilbert -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay. How about how that compares with the borrowings that were paid down just generally, I know you are sort of aware that the given takes are on the funding remixing?

Gary Guerrieri -- Chief Credit Officer

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

Collyn Gilbert -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay. And then just to clarify some of the discussion around the NIM, do you happen to have Vince what the months and the September month end loan yield was?

Vince Calabrese -- Chief Financial Officer

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

Collyn Gilbert -- Keefe, Bruyette & Woods, Inc. -- Analyst

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

Vince Calabrese -- Chief Financial Officer

Yes.

Collyn Gilbert -- Keefe, Bruyette & Woods, Inc. -- Analyst

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

Vince Calabrese -- Chief Financial Officer

We'll give you all account from January when we provide our guidance for the full year, next year.

Collyn Gilbert -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay. I'll leave at there. Thanks.

Vincent Delie -- Chairman, President and Chief Executive Officer

Thanks Collyn.

Operator

Thank you. And then question comes from Russell Gunther with D.A. Davidson.

Russell Gunther -- D.A. Davidson & Co. -- Analyst

Good morning, guys.

Vincent Delie -- Chairman, President and Chief Executive Officer

Good morning Russell.

Russell Gunther -- D.A. Davidson & Co. -- Analyst

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

Vince Calabrese -- Chief Financial Officer

No, it's an incremental 6 basis points. So the figures that we gave last in July as far as the dollar impacts, the net interest income of $8 million is a 9 basis points 10 basis point impact on margins so once you have it fully out which would be in the fourth quarter it's kind of 9 basis to 10 basis poins in total so we had 3 basis points there's another 6 basis points on top of that. And then the charge-off rate just also is relevance, 4 basis points to 5 basis points impact on the company's total charge-off rate and then again when you look at all the pieces as I said last July, the pre-tax income impact is about $1.05 million overall, the kind of gets removed from the income statement and then you have effect of the branch consolidations going the other way.

Russell Gunther -- D.A. Davidson & Co. -- Analyst

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

Vincent Delie -- Chairman, President and Chief Executive Officer

Yeah. I think that was called out because it's important I mean I think over time, we've had a relatively high dividend payout ratio I think when I started as CEO is closer to 80% that the strategy over time was to to grow the balance sheet organically and through acquisition take cost out, improve the profitability of the company and grow tangible book value per share and ultimately grow TCE as well. As we've moved through that process and we've completed several very large acquisitions, we had indicated several years ago that our goal was to in terms of dividend payout ratio look more normal relative to the peers. Over the last 10 years, we've contributed to shareholders nearly a $1 billion in dividends so that capital repatriation cannot be used for other purposes and went back to the shareholders. Now that we're at a point where we're growing our TCE level to where we expect, we continue to add to our tangible book value per share over time and our profitability has improved. We're at a point now where we have options relative to capital.

So buyback, dividend increase whatever we decide to do, investing in the company for growth if growth is an objective in the future, that's what we can use that retained earnings for. It's a unique time for our company and when you think about it, it positions us very well as we move forward. So I wouldn't take anything off the table, I simply wanted to point out that our ability to manage capital has been enhanced, because of our progress and driving profitability and growing our capital levels organically without the need of a capital raise.

Russell Gunther -- D.A. Davidson & Co. -- Analyst

Very good. Thanks for taking my question.

Vincent Delie -- Chairman, President and Chief Executive Officer

Thank you. I appreciate it.

Operator

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

Brian Martin -- FIG Partners -- Analyst

Hey, guys.

Vincent Delie -- Chairman, President and Chief Executive Officer

Hey Brian.

Brian Martin -- FIG Partners -- Analyst

Just a couple of things I guess one covered, but maybe one for Vince, just on the expenses Vince, just kind of going back to that for a second, obviously the numbers were a little bit better than I thought this quarter from the expense standpoint, but the biggest driver of the change as you look at fourth quarter is just kind of the Regency impact and that's a couple, that's maybe three or little bit more than $3 million a comes out on an absolute basis. Is that sound correct based on the annual number they were putting up from expense standpoint?

Vince Calabrese -- Chief Financial Officer

Yes,if you just look at the Regency piece, Brian but I think it up, just a couple comments on expenses. So the second quarter run rate when you take out the kind of non-run rate items was $175 million, this quarter is $171 million. So when you look ahead to the fourth quarter, you do have the full savings coming out of Regency, but we also do have some seasonal things that happen in the fourth quarter, you have medical claims, people get through their deductibles. So medical claims always increase in the fourth quarter. We have higher energy costs, it's been a really cold October around here, so that comes true with some higher costs. And then you also have normal true ups right of incentive accruals and commissions and the teams are always very focused on closing out the year strong, so there's always if they are successful, there is a level of increase in those incentive accruals that you end up having to to book in the fourth quarter and that typically does happen.

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

Vincent Delie -- Chairman, President and Chief Executive Officer

But we are rooting for higher incentive compensation accrual. We hope that happens.

Brian Martin -- FIG Partners -- Analyst

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

Vince Calabrese -- Chief Financial Officer

I would say that the non-interest income as you saw was very strong, 6.6% increase if you put the significant items on the side, 10% year-over-year. The increases were nice, I mean it was really across the Board I mean, you look at year-over-year results for wealth management, mortgage banking capital markets through contribution from the whole footprint and then the Carolinas continue to increase every quarter. For instance, the swap revenue has increased every quarter in the last few quarters and there's still a lot of upside there. So there is kind of more to keep building through there and we just look forward to that. So nothing individual I call out but just kind of continued revenue generation out of our whole footprint.

Brian Martin -- FIG Partners -- Analyst

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

Vincent Delie -- Chairman, President and Chief Executive Officer

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

Brian Martin -- FIG Partners -- Analyst

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

Gary Guerrieri -- Chief Credit Officer

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

Vincent Delie -- Chairman, President and Chief Executive Officer

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

Brian Martin -- FIG Partners -- Analyst

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

Vincent Delie -- Chairman, President and Chief Executive Officer

That is the strategy to continuously drive those overnight borrowings down preferably with low-cost deposits not CDs. The reality is we have seen fluctuations you see it. So there will be periods of time where we will have to be into those facilities to fund our operations. That's normal cycle, seasonal cycles in our business, but our goal ultimately is to eradicate and we want to reduce our dependency on those overnight borrowings and do it in a way that creates upside from a margin perspective for us in the long run. That's the strategy.

Brian Martin -- FIG Partners -- Analyst

Got you. Okay. I appreciate you taking the questions guys. Thanks.

Vincent Delie -- Chairman, President and Chief Executive Officer

Thank you.

Operator

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

Vincent Delie -- Chairman, President and Chief Executive Officer

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

Operator

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

Duration: 56 minutes

Call participants:

Matthew Lazzaro -- Manager of Investor Relations

Vincent Delie -- Chairman, President and Chief Executive Officer

Gary Guerrieri -- Chief Credit Officer

Vince Calabrese -- Chief Financial Officer

Frank Schiraldi -- Sandler O'Neill + Partners -- Analyst

Austin Nicholas -- Stephens Inc. -- Analyst

Michael Young -- SunTrust Robinson Humphrey Inc -- Analyst

Casey Haire -- Jefferies & Company -- Analyst

Collyn Gilbert -- Keefe, Bruyette & Woods, Inc. -- Analyst

Russell Gunther -- D.A. Davidson & Co. -- Analyst

Brian Martin -- FIG Partners -- Analyst

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