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Centerstate Banks Inc (NASDAQ:CSFL)
Q3 2019 Earnings Call
Oct 23, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Hello, ladies and gentlemen, welcome to the CenterState Bank Third Quarter 2019 Earnings Release Conference Call. [Operator Instructions].

I would now like to turn the conference call over to your host, Mr. Will Matthews, Chief Financial Officer. Please go ahead.

William E. Matthews -- Executive Vice President and Chief Financial Officer

Thank you. Good morning, everyone. We appreciate you joining our call to discuss our third quarter financial results. Joining me in our presentation today are Ernie Pinner, our Executive Chairman; John Corbett, our CEO; Steve Young, our COO; and Richard Murray, the CEO of CenterState Bank.

Before we begin our remarks, I want to remind you that our comments may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any such forward-looking statements we may make are subject to the safe harbor rules. Please review the forward-looking disclaimer and Safe Harbor language on Page 12 of our earnings release. I'll also remind you that you can find our earnings release and other financial information in the Investor Relations section of our website.

I will now turn the call over to Ernie.

Ernest S. Pinner -- Executive Chairman of the Board

Thank you, Will. Good morning. I want to thank all of you as always for calling in and for having interest and confidence in our Company. The third quarter has been a great quarter both in balance sheet growth and income statement. In fact, from my point of view, the Bank has had a great growth and excellent returns for our shareholders -- shareholders over the last 20 years. Many of you are aware, this is probably my last earnings call, and I want to say what a great experience it has been being involved in a growth Company and has not be on a job, so to speak, but rather a source of proud and memorable experiences. Many of you have been a dependable source of advice and counsel and has helped in CenterState success as well as helped keep me on track. Thank you.

As I step down from the role of Executive Chairman and gladly accept the role of Board Chairman and not Officers' Director, I will miss being a working banker for these past 55 years and especially the last 20 years as a CenterState banker. John Corbett, the gentlemen who is my friend and partner, is an excellent CEO. He and I have worked closely for 30 years. I have always recognized John's leadership and focus would empower him to charge the future for CenterState and he has done so and will continue.

John has requested in my new role as Board Chairman. I have spent some time visiting our branches and often was thanking our bankers for their hard work and dedication. I look forward to doing so. I will miss the relationships with many of you, but I continue to wish the best for each you in the coming years.

Now let me return the meeting over to John for his thoughts on this quarter. John?

John C. Corbett -- President & Chief Executive Officer

All right. Thank you, Ernie. So the older you get, the more you appreciate your true friends. When you look back, it gets easier to see how they influenced your life. When I was in high school, Ernie and I attended the same church, and then after I got to college, he sent me to the bank management training program in Charlotte, North Carolina. And then in 1999, he talked me into this crazy idea of joining with him to raise some capital and started the Novo Bank that we named CenterState. Along the way, we successfully attracted a team of bankers led CenterState through the great recession and he has created a significant wealth for our shareholders since the day of our IPO. I want to reiterate that Ernie is not going anywhere. While he won't have the word executive in his title effective January 1, he will continue to lead CenterState as our Board Chairman and continue to be the true north of our Company's culture.

Now switching gears to the Company's third quarter results. The CenterState team continue to advance the ball down the field. If you adjust for merger cost, the Company produced earnings of $0.53 a share; a return on assets of approximately 1.6%; and a return on tangible equity of approximately 18%, which is pretty consistent with the last two quarters.

The highlights for the quarter was strong organic revenue growth. This was the first quarter that we experienced the headwinds of the Durbin Amendment, which resulted in $3 million of loss revenue. But even including the loss of $3 million of interchange fees and including NIM compression, the Company's total revenue still increased by nearly $7 million during the quarter. This is a clear illustration of the benefits of the diversified business model that we have built, the model works.

Back in the summer of 2016, the 10-year treasury fell below 1.4%, and Stephen and I were worried about a prolonged low and flat yield curve environment. So that fear motivated us to increase our investment in countercyclical fee income businesses. The primary two investments were: one, to ramp up our residential mortgage department; and two, build a team at our correspondent division to provide interest rate swaps to our correspondent bank clients. These two investments begin paying off this year and kicked into hyper drive in the third quarter, and Steve will walk you through the numbers.

Not only did we see solid organic revenue growth, but we also experienced a healthy level of balance sheet growth as well. After a little slower start to the year than we would have liked, loans grew in the third quarter at an annualized rate of 7% and deposits grew at 6%, which is consistent with the mid-single digit guidance that Richard gave last quarter.

Finally, I'm happy to report that we had a very successful systems conversion at National Bank of Commerce in September. When I think about the culture of our Company, it is on full display when we're under stress and have to pull together. I think back -- to the three back to back hurricanes we faced in 2004, the great recession a few years later, and then the 27 systems conversions that we've completed together over these last 20 years through every stress the CenterState teamwork, communication, trust and professionalism continues to get stronger. Although there's hundreds of people that had part in the success of the conversion, our Bank President, Mark Thompson; and our Chief Administrative Officer, Jennifer Idell, really deserve the credit for leading the effort.

I'll now turn it over to Steve and Will, and they can give you details on the quarter and future guidance for your models.

Stephen Dean Young -- Executive Vice President and Chief Operating Officer

Thank you, John, and good morning everyone. I will report out on our third quarter revenue results in both net interest income and non-interest income, as well as our updated expectations for both balance sheet and revenue for the remainder of 2019 and into 2020.

First of all for revenue results. Revenue increased $6.8 million or 3.5% annualized compared to the second quarter. Net interest income, excluding accretion income, declined by $1.7 million or 1.2% annualized, but was more than offset by the $10.5 million increase in non-interest income. Reported net interest margin declined 26 basis points to 4.19% in quarter three from 4.45% in the second quarter, and was lower than our 4.30% to 4.40% guidance. Loan accretion decreased as expected 8 basis points to 36 basis points, which was in line with our 35 basis point to 40 basis point accretion guidance.

Net interest income, ex accretion, fell $1.7 million from the second quarter due to an 18 basis point decline in NIM to 3.83%, which was below our guidance of 3.90% to 4%. The decline in NIM was offset somewhat by strong interest earning asset growth of 9.5% annualized or about $350 million. This 18 basis point decrease occurred as interest earning asset yields ex accretion decreased by 13 basis points, while total cost of funds increased 5 basis points from the prior quarter.

During a rate cutting cycle, we would expect for the earning asset yield to reprice down as they did, but we'd normally see relief on the funding side to help offset some of the earning asset pressure. But in order to protect the core deposit franchise and because of the potential customer impact, we are hesitant to cut rates on our income and deposit accounts in the third quarter, even though the Fed cut rates by 50 basis points. Now that we had a successful conversion with our customers, we now have the confidence and discipline to lower the appropriate deposit rates in order to reflect this new environment.

As an aside, we did see our interest-bearing deposit cost peak in the month of July at 1.08% and declined to 1.04% in September. After the rate adjustment occur at the end of September, we adjusted deposit rates down again late in the quarter which will be reflected in the fourth quarter.

Overall, we have -- over the years demonstrated discipline in managing deposit costs through our strong core deposit and checking franchise. And over the course of the next few quarters should be able to make good progress as rates continue to trend lower.

Secondly, as it relates to non-interest income, during the current quarter we are pleased that non-interest income as a percentage of average assets increased 21 basis points from 91 basis points in the second quarter to 112 basis points in the third quarter, and significantly better than the guidance of 80 basis points to 90 basis points post-Durbin. Total non-interest income increased $10.5 million from the prior quarter, primarily due to increase in correspondent banking of $9.5 million and mortgage banking revenue increase of $2.6 million offset as expected by approximately $3 million decrease in interchange income due to the impact of the Durbin Amendment.

Correspondent banking revenue increased $9.5 million from the prior quarter and it was due to the continued increase in interest rate swap revenue as well as increase in the fixed-income revenue. Both the interest rate volatility in the flat and then inverted yield curve help propel these businesses even while this was a headwind to the Bank's net interest income. Interest rate swap revenue in the pipeline is strong and should continue to be a tailwind in a very yield curve environment, while fixed income will pick up more if the curve steepens with the Fed cuts rates.

Mortgage banking non-interest income increased by $2.6 million in the $9.4 million. New mortgage loan origination for the quarter was a record $484 million versus $416 million in the second quarter. 77% of the production was in the secondary market, while 23% was booked on the portfolio. Secondary gain on sale margins were 2.57%. Purchases represent 65% at closings, while 35% were refinances.

Before I comment on the specific areas of guidance, I would like to make a few comments on how we constructed a diversified business model and how our various revenue sources react to rates and the shape of the yield curve. As you think about modeling CSFL earnings, I'd like to describe three different environments and how we have positioned our balance sheet and income statement to perform in these environments.

First of all, in an inverted yield curve like the third quarter, NIM decreases significantly as we're unable to reprice deposits as fast as our loans, but we have fee income like mortgage and interest rate swaps have record quarters to more than offset revenue pressure from NIM. The second environment is the low flat yield curve. NIM continues to be challenged as we will be unable to reprice deposits very fast while new loan yields continue to come on lower. Environment for NIM is less challenging than in an inverted yield curve though. Fee businesses like mortgage, fixed income and interest rate swap businesses outperform but likely they reduce rate as we saw in the third quarter.

The last curve is a steep yield curve. In this environment, NIM outperforms as core deposits gain more value with more asset sensitive balance sheet. Fee businesses such as mortgage, interest rate swap and fixed income moderate. So with that, loan of deposit guidance is expected -- loans are expected to increase mid-single digits for the remainder of 2019 and 2020, and we expect the deposit growth will be aligned with loan growth for the remainder of 2019 and '20, so no change in guidance there.

Net interest income. Based on the new lower yield curve and current shape of the yield curve, as well as our expectation this quarter of two more rate cuts this year, one in October and December, we continue to face NIM headwinds and we expect 5 basis points to 8 basis points of NIM contraction in fourth quarter as interest earning asset yield decreased similar to last quarter, but this quarter offset somewhat by the funding pressures declining and the previously discussed NCOM customer conversion completion.

Reported NIM continues to be a little higher than expected due to higher payoff of higher loan accretion. Based on our forecast, we would expect loan accretion to be approximately the same levels to quarter three. In total, we would expect reported margin to be between 4.05% and 4.15% for the remainder of 2019.

Non-interest income. Non-interest income to average assets was 1.12% for the third quarter, which was better than expected. Based on the environment, we expect non-interest income to continue to perform at a higher level, but not to the extent of quarter three unless yield curve continues to stay inverted. As a result of these impacts, we would expect the ratio of non-interest income to average assets to range between 90 basis points and 110 basis points in this environment. We've recognized some uncertainty and how volatile the interest rate markets will be as well as the shape of the curve. As discussed before, any changes here, both positive and negative, should have a corresponding opposite effect on the Bank's net interest income.

With that, I will turn the call over to Will to discuss about the loan loss, non-interest expense and capital management.

William E. Matthews -- Executive Vice President and Chief Financial Officer

Thank you, Steve. We had net charge-offs in the quarter of $2.3 million, which was 8 basis points annualized, that brings our year-to-date nine months net charge-offs to an annualized 7 basis points. Our non-accrual loans in the quarter at $39 million, which is 34 basis points of total loans. While up from Q2, this 34 bps is the fourth lowest quarter-end level in our last eight quarters. So pretty consistent trend wise with what we've seen the last two years. I'll note that approximately $4 million of the increase wasn't government guaranteed loans, so we would expect these to have a more potential -- a more favorable potential loss outcome, the most non-performers.

Our allowance was 67 basis points of originated loans at quarter end. I'll also note again, direct your attention to Page 6 of the release as we did in the second quarter, we have some breakout on our PCI loans. You all know that our PCI loans had a legal balance of approximately $210 million, carrying balance of $143 million, so a discount of $67 million. That $67 million was made up of approximately $25 million related to credit, with the remaining $42 million non-credit. If CECL were adopted October 1st, and yes, the CECL model indicated the same required allowance for credit losses as it's in the credit discount today, then this $25 million of the discount will move into the allowance for credit losses under CECL and that $42 million would remain in the discount and accrete in over the life of those loans.

With respect to CECL, we've had conversations with our auditors and we've been advised that CECL guidance in a form such as this would constitute a disclosure requiring model validation, SaaS control testing, policy and procedure review, etc, and we're not yet at the stage to give you guidance therefore as we had originally planned to do. But I will say, we're working with an outside advisor that's used by a significant number of SEC followers and our belief is that our final CECL results will not cause us to be an outlier versus our peers.

Turning to non-interest expenses. Our efficiency ratio in the quarter was 51.9%, pretty consistent. As Steve noted, our non-interest income was up $10.5 million versus the second quarter, and would have been up $13.5 million, but for the Durbin impact. With that growth coming almost entirely in areas with commission based compensation structures, correspondent, mortgage, SBA, those three grew by about $12.3 million quarter-over-quarter. And our non-interest expenses grew by $3.8 million quarter-over-quarter.

As I said on the second quarter call, the NIE base will fluctuate a bit with the revenue volume in these business lines. I'll also note, we did benefit in the quarter from a reduction in the FDIC assessment expense of approximately $1.7 million due to the assessment credit. So without that credit, our NIE growth versus Q2 would have been approximately $5.5 million versus the $10.5 million growth in non-interest income, which again was after that $3 million Durbin hit.

Let me, sort of, high level reconcile our NIE versus expectations for you. When we announced the NCOM merger in November of last year, at the time we announced, expected Q4 of '19 NIE of around $100 million after achieving our cost saves. Our NIE in the third quarter was $110 million, excluding merger expenses, but our non-interest income was up $19 million from the Q3 '18 levels if you combine the two companies together last year and that's normalizing for Durbin. So if you used an approximate marginal efficiency ratio of 50% for these businesses that will generate about $10 million more in NIE from this additional fee revenue. So the point being that we believe we're on target with our cost saves in the NCOM acquisition.

Let me also just reference. We did exercise the option on our 30% minority interest in the factoring subsidiary in the quarter as it is stated in the release, but the window for the call option opened in the third quarter and we exercised on September 30th at a price of $11.4 million. There was just no impact in the income statements in this minority interest repurchased given that we bought in the last day of the quarter, but future periods will reflect 100% ownership of that income stream. I'd also like to pause and note how much we appreciate our relationship with our former partners in that business.

Let me turn to capital formation and buyback. We continue to have strong capital generation. Return on tangible common equity was almost 18% for the quarter and the nine months year-to-date excluding merger-related expenses, and over 15% year-to-date including merger-related expenses. With a very active quarter for repurchases, 3.1 million shares, our 7% annualized loan growth and our dividend payout of $0.11 per share, we still maintain healthy capital ratios with TCE at 9.6% at the end of the quarter, which is down slightly from 10% at Q2.

As is noted in the release, we've continued repurchasing shares under an ongoing 10b-5 plan after quarter-end and we repurchased approximately 1 million shares thus far in Q4. This brings our total share repurchases year-to-date to 5.7 million shares, representing approximately 4.4% of the shares outstanding at the time of our May 2019 increased repurchase authorization. This also leaves us with just under 800,000 shares remaining in that authorization. We recognize that repurchases are an important component of our capital management and capital return toolbox along with dividends, growth in capital retention and will be discussed in the Company's repurchase authorization and dividend levels with our Board in the context of our 2020 planning.

As we stated on last quarter's call, as investors and capital managers will continue to assess the environment and make the capital decisions we believe to be best for the Company and its shareowners. If we face a challenging environment for growth of an acceptable quality in an environment where bank stocks are out of favor, we would expect to continue to return capital via share repurchases while also maintaining a very -- very healthy capital ratios. So as to allow us to operate from a position of strength should we head into an economic downturn. As we also said, repurchase activity will likely be lumpy from quarter-to-quarter.

Finally, our effective tax rate in the quarter was 23.6%, similar to the rate last quarter. Looking ahead, we expect the effective tax rate to drop by approximately 50 basis points due to a reduction in the Florida state income tax rate absent any noise from excess tax deductions on equity compensation, which is of course lumpy.

Thank you. We will now take questions.

Questions and Answers:

Operator

[Operator Instructions]. Your first response is from Michael Young of SunTrust. Please go ahead.

Michael Young -- SunTrust -- Analyst

Hey, good morning everyone.

John C. Corbett -- President & Chief Executive Officer

Good morning.

Michael Young -- SunTrust -- Analyst

I wanted to start on the NIM commentary. Steve, maybe just going a little further, obviously, you kind of mentioned that there is some additional opportunity to reprice deposits downward, then maybe you didn't take as much of advantage of this past quarter and I understand that the guidance for the fourth quarter. But will that continue to be sort of an offset or benefit as we move into early next year and what are your kind of general thoughts given the shape of the curve and kind of Fed funds expectations as we move into next year?

Stephen Dean Young -- Executive Vice President and Chief Operating Officer

Yes, Michael, good question. Let me kind of that phrase in a couple of way. In our deposit book, half of it is in checking accounts, which really doesn't have much of a chance to reprice, because it's virtually zero that the part portions are sensitive our -- in the money market range, we have about $2.6 billion of special priced money there in our CD book which is about $2.4 billion. So it's about $5 billion worth of, you know, the things that repriced.

Our CD book is short. I think we've got $750 million of that reprices in the fourth quarter, another $500 million reprices in the first quarter. So about half of the book reprices in the next six months, and about 83% of that reprices in the next four quarters. So we kept the liability side pretty short not knowing which way rates would hit. So I think we're going to see in the short run, as I mentioned, our deposit cost peaked in July, they started on a downward trend in September. Once we got the income conversion done, we were able to move rates again and I think what you'll see over the next few days -- few quarters depending on what rates do is -- will be a lag effect meaning we will catch up to the rate that probably everybody else will, but then probably when rates -- stop cutting, we will probably catch up a little bit more at the end. That's how I would characterize it. So I would tend to think that the margin pressure that we saw in this quarter will be -- will catch up on that toward the end of the rate cutting cycle. That makes sense.

Michael Young -- SunTrust -- Analyst

That's helpful. Thanks. And then maybe just kind of a bigger picture question on overall profitability. I don't know if the efficiency ratio is kind of the correct way to talk about it or just bottom line profitability, but as we move into next year with some pressures on NII still lingering, but fee income obviously picking up some of that loss revenue. Do you think we can sort of tread water here at these good profitability levels or is there some incremental pressure that you expect as we move through 2020?

Stephen Dean Young -- Executive Vice President and Chief Operating Officer

Michael, it's Steve. Just to comment, you know maybe a way to think about it as our efficiency ratio. So if you think about the plus and minuses of what's heading, what we will describe coming into the fourth quarter and as we think about next year. We do have some cost saves still left in the queue for the NCOM mergers in fourth quarter which will of course help that efficiency ratio. But the minuses are, there's continued NIM compression -- NIM pressure and probably the -- as we guided toward the non-interest income, we would be surprising if it were as good as last quarter. So there's going to be some revenue headwinds there, but we're going to offset some of that through expense saves in the fourth quarter.

And as you look ahead, I would think that as we look at it today that our efficiency ratio would remain reasonably steady in that with all the puts and takes there, maybe -- maybe it will increase as a percent or so but it would be in the general range and then it will be our job to manage the fixed cost of that. But I'm hopeful that's helpful as you think about landing it.

Michael Young -- SunTrust -- Analyst

That is helpful. Thanks. I'll step back for now, but I did want to wish Ernie the best and we will miss your wisdom on this call.

Ernest S. Pinner -- Executive Chairman of the Board

Thank you very much.

Operator

Thank you. Your next response is from Brady Gailey of KBW.

Brady Gailey -- KBW -- Analyst

Hey, good morning guys.

John C. Corbett -- President & Chief Executive Officer

Hi, Brady.

Brady Gailey -- KBW -- Analyst

Yeah. And I wish the same to you as well Ernie. It will be different not hearing your voice open up the call.

Ernest S. Pinner -- Executive Chairman of the Board

Thank you very much.

Brady Gailey -- KBW -- Analyst

I want to start with -- I want to start with the opportunity from Truist. I just get an update on -- I know you are spending a lot of time here in Atlanta. Just how the conversations are going on with your potential new lenders or on the customer side, it seems like there's just a lot of banks looking to capitalize on the opportunity here in Atlanta, like BankUnited just announced an hour ago that they hired a C&I team in Atlanta and that they're going to expand into the market. So it seems like competitions going to be great and a lot of people are going to look in to take the opportunity. Just an update on Truist and how you're thinking about that opportunity?

Richard Murray -- Chief Executive Officer of CenterState Bank

Sure. Hi, Brady. This is Richard. As we said last quarter, recruiting remains our priority really in all of our markets, most of the customer-facing folks, RMs, the business bankers, the branch managers. While the SunTrust, BB&T event is a very unique event and we're taking very proactive steps to take advantage of the opportunity we've got, sort of, a long-term plan. We're working on that plan. We've got it -- we feel like it's going to be a long-term event. A lot of the good folks we're talking to are being taken care of. They're waiting to see kind of how things shake out in terms of supervisors and market leaders and whatnot. But we have had some success to date in terms of hiring folks from SunTrust and from BB&T, but we're also mindful that they don't have a clear on the market and all the good bankers. So we're focusing on who we think are the best bankers in the market and who we think can thrive in our environment.

And we're also very mindful of our own shop in the disruption that our M&A activity has going on especially in Atlanta, having to conversion a couple of weeks ago. It's definitely something that we're focused on in making sure we're keeping our back door covered as well. But we definitely have a plan. We're working that plan. We feel like we have some opportunities there. We have had some successes with those folks, but we do feel like it's probably 12 months to 18 months event and one that we will -- hopefully have some further successes down the road.

Brady Gailey -- KBW -- Analyst

Okay. And then next I wanted to ask about M&A. I mean, I know you just converted in time and it's still a fresh deal, but your stock is up over 15% year-to-date. You now trade at 2 times tangible, so that gives you a little more power to announce a good deal. How are you thinking about M&A as we look into 2020?

John C. Corbett -- President & Chief Executive Officer

Brady, it's John. Getting the National Commerce integration complete, getting the conversion behind us, those have been our priority. That's what we said a year ago, but now we can check that box. I mean, things are going incredibly well with the National Commerce team. They're now with CenterState team. So that gives us some freedom to be engaging in some conversations that we've had for quite some time. I mean, we just -- we just are firm believers that this industry will continue to consolidate and we think we're in a unique position to create value through that consolidation and the priorities for us have not changed as we think about the landscape, we think about the three Ms.

We want to focus, number one on the math; number two on the management team that we're building; and then ultimately the math that we create for our shareholder return. And when you think about the math, just pull up SNL and look at the markets that have the highest population in migration, that's where we're focused. If you go back to the Ernie Pinner wisdom here, shoot where the ducks were and they're flying where the populations are moving. And we're in great markets right now. We would love to continue to dial down where we are, but if we -- if we look outside of the markets, it will be in markets where there's a lot of population in migration.

Brady Gailey -- KBW -- Analyst

All right. And then last for me. The $1.7 million benefit from the credit for the FDIC assessment, is that -- is that pretty much all of it or do you all have anymore that could be a benefit in future quarters?

William E. Matthews -- Executive Vice President and Chief Financial Officer

Hi, Brad, it's Will. We expect a similar amount in Q4, and then just a sliver insignificant amount in Q1 of 2020.

Brady Gailey -- KBW -- Analyst

Okay, great. Thanks guys .

John C. Corbett -- President & Chief Executive Officer

Thank you.

Operator

Thank you. Your next response is from Michael Rose of Raymond James.

Michael Rose -- Raymond James -- Analyst

Hey, good morning guys.

John C. Corbett -- President & Chief Executive Officer

Hi, Rose.

Michael Rose -- Raymond James -- Analyst

I just wanted to follow-up on the -- on the accretion comments, understanding that fourth quarter expected to be, kind of, similar to the third quarter. As we think about 2020 with CECL, should we think about the PCI loan accretion essentially going away or do you have any sort of initial estimate for what the accretion could look like next year? Thanks.

William E. Matthews -- Executive Vice President and Chief Financial Officer

Sure, Michael. We do not have an -- to answer the second question, we do not have an estimate yet that we are ready to disclose. And I was trying to get some sort of a hypothetical look with that disclosure on Page 6 of our release and my comments around that, but we have a fairly significant discount for our PCI loans today that has a number of acquisitions over the years and where many of those loans have had better performance than was anticipated at the time of acquisition, part of that's due to the economy being better and -- better performance in general. But the $143 million book balance on that $210 million legal balanced portfolio, and of that $67 million discount, $25 is credit. So again, CECL isn't -- in fact, October 1, and we don't know for certain if that amount is exact same that would be required under CECL's allowance methodology. But if those two things were true, that $25 million would drop down below as allowance, that $42 million noncredit discount as of September 30, would remain above and accretive over the life of those loans. So I don't think it necessarily goes away on the PCI loans. It will go from a full basis to loan-by-loan basis on those, but I don't have a good guidance, but that will give you sort of a flavor of the bucket so to speak.

Michael Rose -- Raymond James -- Analyst

So just to be clear. And again, I think, obviously everyone's understanding CECL. It is kind of all over the Board. But are you saying that $25 million will be substantially less under CECL? I guess, I'm just --

William E. Matthews -- Executive Vice President and Chief Financial Officer

No I'm -- I'm sorry. So the -- what I'm saying is that we have a discount, a larger portion of which is not credit related. So $67 million total discount on that book of $210 million. $25 million of it's credit related, the rest is non-credit related. The non-credit related will not go into the allowance for credit losses under CECL. A allowance will have to go into proceeds for those loans. And if you -- the same CECL determine that the -- the CECL methodology determine that the appropriate allowance for that book of PCI to become PCD loans was $25 million, and then that would drop in the allowance, and the other $42 million would stay above as a rate discount it would come in over the life.

John C. Corbett -- President & Chief Executive Officer

If you think about it Michael, just maybe summarize it -- if we have roughly a $67 million discount in the non-PCI which nothing changes, it continues to do what it does. In last quarter, it was $8 million, of course, that will decline over time, but the other -- the PCI discount will move if CECL is today and we did that would be $42 million versus $67 million. So it's what two-thirds of that number. So in theory, what would happen is that would -- that accretion sort of be [Indecipherable] would be 5 and of course is declining there. So I think --

Michael Rose -- Raymond James -- Analyst

Okay.

John C. Corbett -- President & Chief Executive Officer

So it's hard to model, because there's tons of different functions in it. So I think that's probably the way to think.

William E. Matthews -- Executive Vice President and Chief Financial Officer

Yeah, the weighted average liners of those launch going forward will impact it of course.

Michael Rose -- Raymond James -- Analyst

Okay. Now I get it. Very helpful. Thanks for clarifying that for me. Hey, last quarter you guys had talked about mid-single digit annualized growth in the back half of the year. Obviously, you're kind of already there after this quarter. Any sort of updates just given what appears to be pretty strong production in pipelines as we -- as we go into the fourth quarter and any kind of initial stab at 2020? Thanks.

Richard Murray -- Chief Executive Officer of CenterState Bank

Sure, this is Richard. We did have a nice rebound in the organic loan growth, roughly 7%. Nice production increase, about $100 million or 11% that resulted in the loan growth of roughly $200 million. Our loan payoffs and paydowns were flat to the second quarter. So that always plays a role. And so, it's hard to tell exactly where that will be for the fourth quarter.

But looking back at the production, we had good production, really spread out over most all regions. Atlanta and Alabama stood out. We had really nice production in both of those markets which was encouraging given the amount of conversion activity going on during the third quarter in those two markets. South Florida and West Florida also good production months -- quarters (Technical Difficulty), excuse me, but the pipelines are still really strong there. On paper, maybe down slightly, but I think that's probably conversion related. We're merging our nCino pipeline into the CenterState pipeline, and I think roughly it's flat -- you know that done. So we feel very good about the economic activity in the pipeline given the strong production we had last quarter.

So I think looking ahead to the fourth quarter now that mid single-digit growth rate seems like something that we should expect and I think our thoughts about 2020 are the same. There is a lot -- a lot of good economic activity, but there's still a fair amount of caution as we talked about in the previous quarters out there with the customer base and the prospect base. So we think that mid single-digit growth rate would work for the fourth quarter and for 2020.

Michael Rose -- Raymond James -- Analyst

Yeah, obviously, you guys want to be cautious over -- at least cognizant of pricing and structure which is seemingly under some pressure here. And then just finally, just wanted to clarify some of the guidance. So I think what you said was total non-interest expenses may be up roughly $10 million, but a lot of that's going to be related in the fourth quarter to just a higher level of incentive comp related to the fees, and I think you said 90 basis points to 110 basis points fees to average assets. Did I get that right?

Stephen Dean Young -- Executive Vice President and Chief Operating Officer

You did. And then just to clarify on the NIE, we would love for our NIE in Q4 to be well north of that $100 million bogie, because that was set at a level of non-interest income significantly below where it is, but it wasn't third quarter and $19 million below looking back Q3 of '18. So -- because if we have not a $10 million increase in non-interest expenses from that, then we'll have a revenue increase of roughly double if you assume an approximate 50% efficiency ratio for those businesses. So yeah, it's hard to predict those businesses, but it's still a pretty good environment for all for those businesses.

Michael Rose -- Raymond James -- Analyst

If I back into kind of the comments around efficiency at least for kind of next year. Would you -- it seems like you would still expect a fee to average asset ratio in excess of 90 bps, is that the right way to think about it?

John C. Corbett -- President & Chief Executive Officer

Michael, as you know, from a total perspective, I think pre-Durbin, or excuse me post-Durbin, just to kind of frame it up. Post-Durbin, we were about 80 basis points. If you take the second quarter adjusted for the $3 million a quarter, that's about 80 basis points. This quarter we did 112 basis points, and what we're saying is this probably elevated for a quarter or two here, don't know how much, but I would think you would settle back down in that range even though in an environment where you think that the curve is low and flat, that will be better for those businesses, but probably not to the extent of 112 basis points. So I think you're thinking about it -- was right.

Michael Rose -- Raymond James -- Analyst

Okay, perfect. Thanks for all the color. Appreciate it.

John C. Corbett -- President & Chief Executive Officer

Thank you.

Operator

Thank you. Your next response is from Tyler Stafford of Stephens. Please go ahead.

Tyler Stafford -- Stephens, Inc. -- Analyst

Hey, good morning guys.

John C. Corbett -- President & Chief Executive Officer

Good morning.

Tyler Stafford -- Stephens, Inc. -- Analyst

Hey, Will, just one more from me on the CECL discussion. Do you have what the weighted average life of the PCI portfolio is?

William E. Matthews -- Executive Vice President and Chief Financial Officer

I do not, and it's -- and the contractual whatever the life on those portfolios is probably less instructive then it would be for a normal past portfolio, but I don't to -- I don't answer your question directly.

Tyler Stafford -- Stephens, Inc. -- Analyst

Okay. On the buyback topic, I appreciate you guys are -- will be having this conversations with the Board over coming weeks or months. Can you just remind us the capital ratios that you kind of fill or a bogie that you're targeting in terms of how much excess or deployable capital you do have there?

William E. Matthews -- Executive Vice President and Chief Financial Officer

Our view depends somewhat upon the economic environment we're facing. And our thought is that if we are heading into an eventual downturn, we would rather enter that from a position of strength so that we can take advantage of opportunities that might arise. So we would hold heavier capital in that environment than we might hold, say, in the middle of an emerging economy. Specific levels, I don't know that we have a specific target we communicate, but we're certainly are comfortable below the 9.6% we are today. And so if you drove that 9%, we still feel like we're pretty -- pretty healthily capitalize.

Our formation rate does give us the luxury of -- to some extent having our cake and eating it too, and that we can be active with repurchases. This quarter was probably a bit of an anomaly and that we've bought back 3.1 million shares in one quarter, but we have said it will be lumpy. But we think we can still form capital, buy back shares, pay healthy dividend, and hold really growing strong capital ratios all at the same time.

I don't know, John or Steve or Richard have different comments,

John C. Corbett -- President & Chief Executive Officer

Okay. Tyler, this is John. Another comment thinking about the buyback and just how nice it is to have as an option, I mean, don't forget, the 2020 we're going to head into this political cycle and you just have to believe that the volatility bank stocks with that political cycle, you're going to want the flexibility and the optionality to use buyback if it's attractive.

Tyler Stafford -- Stephens, Inc. -- Analyst

Yeah, understood. Okay. Thanks, John. So the income conversion was in September. Can you give us an approximation of how much expense saves that should fall out of the 3Q run rate and 4Q from that conversion?

William E. Matthews -- Executive Vice President and Chief Financial Officer

Approximately $2 million left to achieve in Q4 from that conversion.

Tyler Stafford -- Stephens, Inc. -- Analyst

And then that will be the complete cost saves realization at that point Will?

William E. Matthews -- Executive Vice President and Chief Financial Officer

There'll be -- substantively yes. There would be still some dribbles that would -- if some advantage pick in Q1. Therefore, in Q1, you always have your higher FICO match and all that sort of stuff that kind of creates noise in Q1 for the whole bank regardless of any cost saves. So effectively the fourth quarter would be plain.

Tyler Stafford -- Stephens, Inc. -- Analyst

Okay. Perfect for that. And then just lastly on the credit side. Non-accruals increased $13 million or so, still obviously manageable and low. Just curious if guys can provide any comments on what drove that, any particular chunkiness that's in the portfolio and I'll hop out? Thanks.

John C. Corbett -- President & Chief Executive Officer

Hi, Tyler, it's John. There was -- the larger credit inflow in that increase was a $4 million government guaranteed loan. So the nice thing is that that loan there won't be any loss on. And then the other inflows were small, owner occupied, C&I kind of type credits, nothing major.

Tyler Stafford -- Stephens, Inc. -- Analyst

Okay, perfect. Thanks, John.

Operator

Thank you. Your next response from the line of Stephen Scouten of Sandler O'Neill. Please go ahead.

Stephen Scouten -- Sandler O'Neill -- Analyst

Hey everyone, good morning.

John C. Corbett -- President & Chief Executive Officer

Good morning.

Stephen Scouten -- Sandler O'Neill -- Analyst

I'm curious maybe Richard to follow-up on your commentary about loan demand and kind of how your customers are thinking about the economy. I think you mentioned still some skittishness as you guys talked about last quarter, but last quarter I think you gave some numbers about maybe $700 million of opportunities that you had kind of passed on or 45% or 50% of total looks. Can you -- can you give us some idea on -- of that this quarter and how much of your potential deals maybe you passed on because of structure or pricing or overall just cautiousness?

Richard Murray -- Chief Executive Officer of CenterState Bank

Yeah, sure. We did -- last quarter we looked at about $1 billion. We passed on about 43% of that. We had good production, but passed on about $650 million and that was the first quarter that we have collected this data. We collected it again in the third quarter. We looked at about $1.7 billion, passed on about $735 million. So pretty similar percentage pass rate, sort of, the reasons behind the primary issues we were dealing with were really the same as what we experienced in the second quarter credit structure, sort of, the type of projects that we might be bearish on in a particular market or overall in the CRE world.

We're very focused on cap rates. I think the cap rates that we issued or -- excuse me, utilizing in credit that we closed in the third quarter was pretty similar to the cap rate in the second quarter. So what we did do is pretty consistent cap rate wise and we're focused on the late cycle position that we're all in as well as looking at cash out repass and making sure that we're using common sense whenever there is a cash out. But some of the takeaways are really nothing crazy going on in terms of what we saw, reasons we lost particular credits to bank competitors.

If you're talking about, a non-bank competitors, some of their models are different. And so they might -- it might make more sense for them to do something we wouldn't do. But just like last quarter, most issues or most credits had more than one issue. We could solve for one, but probably not solve for both of them. So we ended up passing on the transaction. It wasn't really much consistency in market over competitor or excuse me -- yeah, no consistency there in market or competitor was really across the board. Nobody standing out, just really cases, we're just a little bit more of a stretch than what we will do or willing to do.

But some of the main takeaways, there is still a fair amount of economic activity out there. We mentioned our pipelines are still pretty good. There has been caution. There still remains caution out there. The late cycle discussion that we're constantly having, the China trade talk, the political instability, all those things are creating a fair amount of apprehension and caution. So people are just trying to be smart about what they're -- what they're doing and that's appropriate. They should be at this point in time. And so I think we're seeing some discipline out there. We're trying to exercise discipline ourselves, but we still feel like we should be able to achieve that mid single-digit growth rate in volume going forward.

Stephen Scouten -- Sandler O'Neill -- Analyst

Okay. Very helpful. And in terms of that pricing competition. I know your average yields were, I guess, 5.09% none in the quarter. What was the new production coming on in that this quarter maybe versus last?

Stephen Dean Young -- Executive Vice President and Chief Operating Officer

Yeah. Stephen, this is Steve. The funded production in the third quarter was 4.75%. I believe last quarter was 5.09%. So we -- what we tried to do around here is manage the spreads can't manage the interest rate environment, obviously yields fell. But if you think about the average part of the curve that we deal and it's probably in the five year part of the curve, probably average in the 1.50% to 1.75% range. So it's a pretty healthy spread. But we are seeing -- we are seeing competition in pricing there for sure.

Stephen Scouten -- Sandler O'Neill -- Analyst

Okay, helpful. And then, with the correspondent banking, I mean, I know you've kind of given a range on fee to average assets. But with these remaining elevated, when you say it could remain elevated, is that like still a $20 million number or is that going back to a $12 million or $13 million number. Is there any way to narrow that range between kind of the $11 million last quarter and the $21 million this quarter?

John C. Corbett -- President & Chief Executive Officer

Yeah, I mean, as you mentioned, it probably depends upon the volatility and other things, but I would assume that last quarter is a bit of anomaly. There was -- there is multiple things that kind of came together at the same time for -- particularly on our interest rate swap business. Normally when rates fall like that, the economy is not doing all that well. But what we found was rates fell and our correspondent banks and their customers were borrowing money and they were very healthy. So we saw sort of a convergence of multiple things.

What will happen this quarter as you see LIBOR starting to move toward toward the same part of the curve, the 10 year, last -- we started last quarter it, I want to say 2.25% on LIBOR and 1.75% 10 year, while now that is starting to converge together. And so we're seeing -- we're seeing a strong October. We would expect that November-December, as the Fed cut rates that will moderate a little bit. How to predict that? I think that range is the right way to think about it. I would say that, it was probably down a few million dollars this quarter and then probably moderate a little bit more, but probably stays elevated to the extent we have flat yield curve and low yield curve.

Stephen Scouten -- Sandler O'Neill -- Analyst

Perfect. Makes a lot of sense. And then just last thing from me on the factoring business. Was that still about a $600,000 impact, and I guess, well, that $600,000 a quarter impact and where would that flow through specifically?

William E. Matthews -- Executive Vice President and Chief Financial Officer

Yes, if you look at the bottom of the income statement on Page 2, you see that earnings attributable to non-controlling interest of $603,000. So that going forward will be above the line.

Stephen Scouten -- Sandler O'Neill -- Analyst

Okay, perfect. Great, guys. Thanks for all the color. I appreciate the help.

John C. Corbett -- President & Chief Executive Officer

You're welcome. Thank you.

Operator

Thank you. We have a follow-up from Tyler Stafford of Stephens.

Tyler Stafford -- Stephens, Inc. -- Analyst

Hi. Thanks for the follow-up. Just one clarification question. The $2 million, Will, that you mentioned earlier that will fall out of on the expense run rate from the September NCOM conversion, is that a annualized expense number?

William E. Matthews -- Executive Vice President and Chief Financial Officer

No, that's a quarter.

Tyler Stafford -- Stephens, Inc. -- Analyst

That's quarterly. Okay, perfect. Thanks.

William E. Matthews -- Executive Vice President and Chief Financial Officer

Thank you.

Operator

There are no further responses at this time. I would now like to turn the conference back over to John Corbett.

John C. Corbett -- President & Chief Executive Officer

All right. Thank you for joining us on the call and thank you for your continued interest in CenterState. We're planning on attending the Sandler Conference this quarter, as well as the Hovde Conference. So I hope to see many of you there. In the meantime, if we can be of any help, feel free to reach out to any of us and have a great day.

Operator

[Operator Closing Remarks].

Duration: 0 minutes

Call participants:

William E. Matthews -- Executive Vice President and Chief Financial Officer

Ernest S. Pinner -- Executive Chairman of the Board

John C. Corbett -- President & Chief Executive Officer

Stephen Dean Young -- Executive Vice President and Chief Operating Officer

Richard Murray -- Chief Executive Officer of CenterState Bank

Michael Young -- SunTrust -- Analyst

Brady Gailey -- KBW -- Analyst

Michael Rose -- Raymond James -- Analyst

Tyler Stafford -- Stephens, Inc. -- Analyst

Stephen Scouten -- Sandler O'Neill -- Analyst

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