Image source: The Motley Fool.
CVB Financial Corp (CVBF -0.06%)
Q3Â 2019 Earnings Call
Oct 24, 2019, 1:30 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning , ladies and gentlemen, and welcome to the Third Quarter 2019 CVB Financial Corporation and its subsidiary Citizens Business Bank Earnings Conference Call. My name is Chuck and I'm your operator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Christina Carrabino. You may proceed.
Christina L. Carrabino -- investor relations, corporate communications, management consulting
Thank you, Chuck, and good morning everyone. Thank you for joining us today to review our financial results for the third quarter of 2019. Joining me this morning are Chris Myers, President and Chief Executive Officer and Allen Nicholson, Executive Vice President and Chief Financial Officer. Our comments today will refer to the financial information that was included in the earnings announcement release yesterday. To obtain a copy, please visit our [email protected] bank.com and click on the investor tab.
Before we get started let me remind you that today's conference call will include some forward-looking statements. These forward-looking statements relate to among other things, current plans, expectations, events and industry trends that may affect the company's future operating results and financial position. Such statements involve risks and uncertainties and future activities and results may differ materially from these expectations.
The speakers on this call claim the protection of the Safe Harbor provisions contained in the Private Securities Litigation Reform Act of 1995. For a more complete discussion of the risks and uncertainties that may cause actual results to differ materially from our forward-looking statements, please see the company's Annual Report on Form 10-K for the year ended December 31, 2018 and in particular the information set forth in Item 1A risk factors therein.
Now I will turn the call over to Chris Myers.
Christopher D. Myers -- President and Chief Executive Officer
Thank you, Christina. Good morning everyone and thank you for joining us again this quarter. Yesterday, we reported net earnings of $50.4 million for the third quarter of 2019, compared with $54.5 million for the second quarter of 2018 and $38.6 million for the year-ago quarter, earnings per share were $0.36 for the third quarter compared with $0.39 for the second quarter and $0.30 for the year-ago quarter. The third quarter of 2019 represented our 170th consecutive quarter of profitability and 120th consecutive quarter of paying a cash dividend to our shareholder. The first nine months of 2019. We earned a $156.5 million compared with $108.8 million for the first nine months of 2018.
Diluted earnings per share were $1 and 12 cents of the nine month period ended September 30 2019 compared with 94 cents for the same period in 2018. Our tax equivalent net interest margin was 4.34% for the third quarter, compared with 4.49% for the second quarter of 2019 and 4.06% for the year ago quarter. Total loans declined by $41.2 million for the third quarter, or about 0.5% to $7.49 billion. To decrease in loans was primarily due to a $41.7 million decline in commercial real estate loans. Average loans declined by $63.2 million, or 0.84%, quarter over quarter. We actually achieved positive loan growth in the month of September if looked at by itself. Net loan growth continued to be impacted by loan payoffs from the loan portfolio acquired from community bank. In many cases, we have chosen not to compete for new loans or renew loans that were not properly priced are underwritten to our bank standards.
Nonetheless through the third quarter of 2019 new loan production is tracking ahead of 2018 by about 10% Loan yields were 5.23% for the third quarter of 2019, compared with 5.40% for the second quarter of 2019 and 4.99% for the year-ago quarter. Excluding interest income related to purchase discount accretion and non-accrual interest paid loan yields were 4.81% for the third quarter, which was 5 basis points lower than the second quarter of 2019. This decline was primarily due to the impact of the Federal Reserve's two recent rate decreases. After excluding interest income related to purchase discount accretion and non-accrual interest paid our loan yields increased by 16 basis points over the third quarter of 2018. At September 30, 2019 the allowance for loan and lease losses was $68.7 million or 0.92% of total loans compared with $67.1 million or 0.8% of total loans at June 30 2019.
During the third quarter of 2019, we recorded a provision for loan losses of $1.5 million. The provision was primarily due to loan growth of approximately $90 million in non-acquired loans. Conversely, our portfolio of acquired loans decreased by approximately $130 million from the second quarter. The allowance for loan losses as a percentage of non-acquired loans was 1.37% at September 30, 2019 compared with 1.36% at June 30, 2019. At quarter end non-performing assets defined as non-accrual loans plus other real estate owned were $16.1 million compared with $13.6 million for the prior quarter and $16.9 million at September 30 2018. Total non-performing assets included $11.7 million in non-performing loans and OREO originated by community bank.
At September 30, 2019 we had loans delinquent 30 to 89 days of $1.4 million. Classified loans for the third quarter were $60 million, a $10.7 million increase from the prior quarter. The increase was primarily due to an increase in classified dairy & livestock loans. Total classified loans included $18 million of loans acquired from community bank. We will have more detailed information on classified loans available in our third quarter Form 10-Quarter. Now I'd like to discuss deposits. For the third quarter of 2019, our non-interest bearing deposits totaled $5.9 billion compared with $5.25 billion for the prior quarter and $5.22 billion for the year-ago quarter. Non-interest bearing deposits were 61.2% of total deposits at the end of the third quarter compared with 60.6% for the prior quarter and 57% for the year-ago quarter.
At September 30, 2019 our total deposits and customer repurchase agreements were $9.2 billion compared with $9.0 billion at June 30 2019 and $9.51 billion for the same period a year ago. Our cost of deposits and customer repurchase agreements for the second quarter was 22 basis points, an increase of 2 basis points compared with the prior quarter. Our total cost of funds was 23 basis points compared with 25 basis points for the prior quarter, quarter-over-quarter deposit growth really exclusively in the non-interest bearing category resulted in the repayment of all short-term borrowings, thereby reducing our overall cost of funds. Interest income, interest income for the third quarter of 2019 totaled $113.6 million compared with $116.8 million for the second quarter and $96.6 million for the same period a year ago.
The decrease in interest income for the second quarter of 2019 was the result of a combination of factors including $1.2 million and lower non accrued interest rate and $861,000 in lower discount accretion on acquired loans. We also experienced an additional 8 basis point decline in earning asset yields, which resulted in about a $2 million decline in interest income. Offsetting these declines the third quarter included an additional $1 million in interest income due to one more calendar day. The increase in interest income from the third quarter of 2018 was the result of $822 million of growth in average earning assets and an increased yield on earning assets of 32 basis points.
The third quarter of 2019 reflected a $2.5 million increase in loan discount accretion and non-accrual interest paid over the third quarter of 2018. The tax equivalent yield on earning assets for the third quarter was 4.55% compared with 4.72% for the prior quarter and 4.23% for the year-ago quarter When loan discount accretion and non-accrual interest paid are excluded the tax equivalent yield on earning assets for the third quarter decreased by 8 basis points compared with the prior quarter and increased by 24 basis points compared with the third quarter of 2018. Interest expense. Interest expense for the third quarter of 2019 totaled $5.4 million a $324,000 decrease over the second quarter and a $1.6 million increase over the third quarter of 2018.
Average interest bearing liabilities decreased by $194 million compared with the second quarter, while the cost of interest bearing liabilities decreased by 1 basis point. The decrease in volume and the reduced cost of interest bearing liabilities were primarily due to a $122 million decline in short-term borrowings. Interest-bearing deposits decline in average by $54.5 million for the prior quarter, while the cost of interest bearing deposits increased 6 basis points. The increase in interest expense for the third quarter of 2018 can be attributed to higher average interest bearing liabilities of $111 million and a $17 basis point increase in the cost of interest bearing deposits.
Net interest margin, our tax equivalent net interest margin was 4.34% in the third quarter of 2019, compared with 4.49% for the second quarter, when the impact of discount accretion on acquired loans and non-accrual interest paid is excluded the adjusted tax equivalent net interest margin decreased by 6 basis points from 4.084% to 4.02%. Our tax equivalent net interest margin grew by 19 basis points over the third quarter of 2018. Non-interest income was $11.9 million for the third quarter of 2019, compared with $18.2 million for the prior quarter and $10.1 million for the year-ago quarter. Non-interest income for the second quarter included a $5.7 million gain from the settlement of a lawsuit over an eminent domain time dimension of one of our branches.
For the third quarter of 2019, the Durbin amendment pricing requirements reduce our bank card fees by approximately $400,000. Non-interest income grew by $1.8 million compared with the third quarter of 2018. As a result of the fully integrated merger with Community Bank fee income from bank-service charges increased by approximately $500,000. International services fee income grew by approximately $300,000 and interest rate swap fees increased by $300,000 over the third quarter of 2018. And income from bank-owned life insurance, increased by $860,000 over the prior year including income from death benefits afforded of $470,000. Now expenses, non-interest expense for the third quarter was $47.5 billion compared with $50.5 million for the second quarter of 2019 and $48.9 million for the year-ago quarter.
The third quarter of 2019 included $244,000 in acquisition expenses compared with $2.6 million for the prior quarter and $6.6 million for the third quarter of 2018. The third quarter also reflected $600,000 decrease in FDIC assessment expense, salary and benefit expense grew by $1.3 million compared to the second quarter and by $3.8 million over the third quarter of 2018. Higher expense for stock grants and bonus compensation contributed to the increase over both prior periods. While the year-over-year growth also included approximately $2 million in greater salary and benefit expense from staffing growth related to the acquisition of Community Bank.
Occupancy and equipment expense decreased by $550,000 in the third quarter due to the consolidation of centers all related to the merger. Non-interest expense totaled 1.68% of average assets for the third quarter compared with 1.81% in the second quarter and 1.93% for the third quarter of 2018. Our efficiency ratio was 39.6% for the third quarter of 2018, compared with 39.09% for the prior quarter.
Now I'd like to turn the call over to Alan Nicholson, our CFO to discuss our effective tax rate, investment portfolio and overall capital position out. Allen?
E. Allen Nicholson -- Executive Vice President and Chief Financial Officer
Thanks , Chris. Good morning, everyone. Our effective tax rate was 29% for the third quarter and the second quarter of 2019, compared with 28% for the third quarter of 2018. Slight increase from the prior year was due to the greater relative increase in taxable income compared with the increase in tax-advantaged income. Now looking to our investment portfolio at September 30, 2019. Our combined available for sale and held to maturity, investment securities totaled $2.3 billion, a $54 million decrease from the second quarter and a $291 million decrease from September 30 of 2018. At quarter end, investment securities available for sale totaled $1.57 billion due to lower interest rates.
The portfolio went from a pre-tax unrealized gain of $15 million to a pre-tax unrealized gain of $21 million. In addition, we own held to maturity, investment securities totaling $700 million. The tax equivalent yield on the total credit portfolio was 2.47% for the third quarter compared with 2.53% for the second quarter and 2.49% for the third quarter of 2018. During the third quarter, we purchased $227 million of mortgage-backed securities with an average expected yield of approximately 2.60%. We also sold $150 million in securities that book value that we're yielding interest income at approximately 0.28%.
Now turning to our capital position. For the nine months ended September 30, 2019 shareholders' equity increased by $115.7 million to 1.97 billion. The increase was primarily due to $156.5 million of net earnings and a $30.4 million increase in other comprehensive income from the tax-effected impact, of the increase in market value of available for sale securities. Partially offsetting these increases to equity were $76 million in cash dividends.
I'll now turn the call back to Chris for some closing remarks.
Christopher D. Myers -- President and Chief Executive Officer
Thank you, Allen. Now let's talk about economic conditions. Turning to the California economy, according to various economic reports. California's unemployment rate remain unchanged at 4.1% for August 2019, July 2019 and August 2018 with a tight labor market steady job growth in California wages continue to decline. Healthcare, professional scientific and technical services these are in hospitality and construction accounted for the majority of the state's job gains. Due to the tariffs and trade restrictions, both California exports and imports are down year-over-year due to the fact that the state's labor market remains tight job gains have continued on a sustained basis and many of the states key industries continue to advance.
California economy has been bruised but not broken by ongoing trade conflicts imposed by the central government. In terms of the dairy industry milk prices are on the rise and expected to be higher for the remainder of 2019 and into 2020 due to the strong economy and an increased demand for non-fat dry milk exports. In closing, we are pleased with our financial results for the first nine months of 2019 as we finish up the year our strategy remains unchanged, as we are committed to our existing relationship banking model and operating our business in an efficient and focused way. In terms of the new CEO search, the Board is well under way in identifying and interviewing candidates. That concludes today's presentation.
Now Allen and I will be happy to take any questions that you might have.
Questions and Answers:
Operator
[Operator Instructions] And the first question will come from Jackie Bohlen of KBW. Please go ahead.
Jackie Bohlen -- KBW -- Analyst
Hi, good morning, guys.
Christopher D. Myers -- President and Chief Executive Officer
Good morning.
Jackie Bohlen -- KBW -- Analyst
I just wanted to talk about some of the balance sheet mix shift that's taking place right now. I know the cash balances were a little bit elevated both on an average and on a period basis. So I wanted to see your plans for redeployment and then how much of an impact that had on some of the margins movements in the quarter?
Christopher D. Myers -- President and Chief Executive Officer
You know look deposits remain, I know that rates are coming down, but I still think deposits are the key to running a regional community bank. And I was very pleased with our deposit growth in the third quarter, we rebounded very well. We're doing a great job of retaining key deposit clients from the Community Bank acquisition. I mean, we grew at an annual clip of 10% I think for the third quarter and all of that was in non-interest bearing. So I feel like we are in a great position on the deposit side. I like the fact that we're a net fund and we need to catch up in loans to our deposits to become more efficient and that's what we need to do, we need loan growth now. But we need quality loan growth and we are not going to sacrifice our underwriting principles and to what is become a very, very competitive lending environment.
We are expecting a certain yield on loans but we're managing it on a risk return basis. I do think we're late in the credit cycle. But at the same time, I don't see anything materially bad happening on the credit side, but we just want to be cautious about that. One other thing as I wrap up my career here's Citizens Business Bank. I want to make sure I deliver a really clean bank to the next CEO and that includes all our efficiency metrics, our net interest margin, our loan portfolio, our deposit portfolio, all those things, great people. So, that's my goal as we're going forward here. And so we're not doing anything new right now, we're focused on what we're really good at doing and we're going to continue that and the new CEO will have to figure out what they're going to do going forward.
Jackie Bohlen -- KBW -- Analyst
Okay. It sounds, just based on what you're seeing available in the market in terms of loan bookings, we could see some of that liquidity deployment into additional securities purchases.
E. Allen Nicholson -- Executive Vice President and Chief Financial Officer
Well, that's the goal. Absolutely. In fact, if you look at the third quarter, yes, we were down $42 million from point to point, but on average, we were down $62 million. So, we actually grew loans in the month of September. Now we're not throwing a party here at the bank as we had one month of positive loan growth, but we're hoping to carry that into the fourth quarter and continue on from there. That is what's going to protect our net interest margin. In the absence of loan growth, our net interest margin is going down because the average loans booked into the bank right now are probably in the low-to-moderate fours and the average loan yield, if you take out the discount accretion in the blah-blah-blah, is somewhere around 4.8%, is that right now?
Christopher D. Myers -- President and Chief Executive Officer
Correct. Yes, and remember we'll see some dairy borrowings at the end of the quarter as well.
E. Allen Nicholson -- Executive Vice President and Chief Financial Officer
That will help us seasonally. But we look at that as transitional and temporary, not permanent, we're trying to increase the permanent, but the good news is we're running probably $250 million a day in excess deposits that we can deploy those into loans. We're going to pick up another, call it 2% to 2.5% in margin on those. And that's 5 million bucks a year.
Jackie Bohlen -- KBW -- Analyst
So, one last addition to that, and then I'll step back. The loan growth that you saw in September, is that more of a function of added origination volume or lower payoffs from the acquired portfolio?
Christopher D. Myers -- President and Chief Executive Officer
Yes to both. We're averaging about where our productivity in terms of new loan production is up 10% year-over-year. I would like to see that up 20% year-over-year. So, we haven't done exactly what we wanted to do this year, but again, it's a transitional year, we did a big acquisition. We've got to get our arms around those clients. Our team is doing a fabulous job on this stuff. So, I'm really pleased with it. That is all settling down, we're 90%, 95% through all of that stuff. So it's really like we're purified being Citizens Business Bank again.
And then, what are we going to do, we're going to be transitioning to a new CEO, we'll be on the prowl for new acquisitions. We'll be trying to grow our same-store sales, which is loans and deposits and fee income, just like we've done all along. So, I think we're in a good position. One of the things, it's a little bit off-the-beaten-path from what we're discussing, but I also want to talk to you a little bit, about our salary and expense was elevated a little bit now, once you talk a little bit about why that was elevated, what we anticipate for the next few quarters.
E. Allen Nicholson -- Executive Vice President and Chief Financial Officer
Sure. So Jackie, as Chris mentioned earlier, we saw about $1.3 million increase in an overall staff expense. More than half of that was accelerated restricted stock expense and our CEO had an amended agreement. So, we'll see some elevated levels of that in the high 6 figures through the first quarter of next year and then, of course, it should level off. So, that's what Chris is referring to.
Christopher D. Myers -- President and Chief Executive Officer
Yes. So, we've got elevated expenses that I think ultimately will be non-recurring once we get into the second quarter of 2020 and I am fully retired.
Jackie Bohlen -- KBW -- Analyst
Okay. Well, and congratulations on your upcoming additional free time and then best of luck in the coming quarters as you continue to manage the bank and I look for replacement. They have some big shoes to fill.
Operator
Our next question will come from Matthew Clark of Piper Jaffray. Please go ahead.
Matthew Clark -- Piper Jaffray -- Analyst
Hey, good morning. Can you just, and I may missed this in your prepared comments, but can you quantify the dollars of interest recoveries in 2Q and 3Q, please? How are you -- non-accrued interest paid?
Christopher D. Myers -- President and Chief Executive Officer
Yes, in the margin. Not, it was down about $2 million. Not, it was down about $2 million.
Matthew Clark -- Piper Jaffray -- Analyst
Can you give us the absolute done up change?
Christopher D. Myers -- President and Chief Executive Officer
I just want to clear, you're talking about any IP, not accounting discount accretion, right?
Matthew Clark -- Piper Jaffray -- Analyst
Correct.
Christopher D. Myers -- President and Chief Executive Officer
It was $1.2 million last quarter and I know it was effectively zero this quarter. $1.0 and then if you include the decline of about 900,000 in discount accretion in total was down a little bit over $2 million.
Matthew Clark -- Piper Jaffray -- Analyst
Okay. And then, maybe just thinking through to recalculate the court yields, but thinking about the progression and repricing of your loan portfolio from here, given the full quarter impact of the two rate cuts here in the fourth quarter and potential one here this month as well. Just your thoughts on loan yields and in the margin in general.
Christopher D. Myers -- President and Chief Executive Officer
I think it's something that's obviously on our mind. So, we have about 25% of our loan portfolio we'll reprice within 30 days of an interest rate. So 25% reprices within 30 days, because that's either priced using 30-day LIBOR, or a prime-based pricing. You build that into whatever model that is, but as far as the NIM is concerned, yes, we are going to have NIM pressure because of that. No question about it. Good news is I think our deposit costs, the deposit pressures are really moderating a lot. Bad news is, I don't think we have a tremendous amount of tick-up by lowering deposit rates because we're already at 23 basis points cost of funds and just how far down cannot really go. I mean, even at our lowest I think we were 10 basis points. So, I think that's the lowest we've been, and it's just not as much pickup as the other side.
But again, the answer is, if we can grow our loans and put on loans at 4.5% instead of buying our securities yields, we buy securities now, we'll be in the low twos probably right now, and low-to mid-twos. So, that's a 2% take-up and that's going to be really important for us, to get back to organic loan growth and it's challenging right now because it's very competitive for loans. In the marketplace today, there is too much money chasing too few investments and we've got to pick and choose our customers as much as we're picking and choosing them because there's not a lot of room for credit failure. And so, we're trying to play for the a-paper as much as we can and we're in a position to do that, based on our cost of funds and our balance sheet. So, I think we're in a good relative position. It just isn't that exciting, busting your tail to get a 4.25% yield on new loan.
Matthew Clark -- Piper Jaffray -- Analyst
Yes. Okay. And then on the uptick in NPAs. I know it's modest and you're at a low level, but can you give us some color behind the increase in OREO?
Christopher D. Myers -- President and Chief Executive Officer
Yes. First of all, the three new pieces of OREO that have come into us are all former community bank loans and it consists of one SBA7a loan, which we've marked, all of this stuff has been marked. We don't feel like there is any material or any real downside to where we mark these properties. One of the loans that we foreclosed on is a property in Brentwood, California. If you know that area, right at the border of Pacific Palisades, which is subject to a $4.9 million First Trust Deed. We believe it's worth a lot more than that, but that $4.9 million market OREO, we can hand that property back and take zero loss. So, we don't really have any downside on that.
We believe we have upside on that and can sell that property for significantly more than $4.9 million and take a gain. So, the OREO was really, for the most part, a shifting of non-performing assets into OREO, and then we had to increase it by that $4.9 million, because it's subject to a first trustee lean that's in front of us in our new ownership of that property. So, OREO, yes, it's elevated, but I think there's some opportunity for us to make money off that.
Matthew Clark -- Piper Jaffray -- Analyst
Okay. And then last one, just on Cecil an update and potential impact on reserves and capital.
Christopher D. Myers -- President and Chief Executive Officer
We're not really commenting on that yet. I mean, we're in the process of validating our model and when we get into our early next year, with our 10-K we'll release more information about that. I can tell you we're working really hard on Cecil though. And I think we are on pace to what our expectations are, do you agree with that?
Matthew Clark -- Piper Jaffray -- Analyst
Yes, nothing surprising.
Operator
Our next question will come from Gary Tenner of D.A. Davidson. Please go ahead.
Gary Tenner -- DA Davidson -- Analyst
Thanks, good morning. Chris, you made the comment a couple of times that your loan production is up 10% year-over-year. Your loan portfolio is obviously up 50% year-over-year, so, the math fits to where it would be a bit of a challenge, you've commented on obviously the pricing and credit discipline. Is there anything from a manpower perspective, staffing, that would be an opportunity to help on that side of things?
Christopher D. Myers -- President and Chief Executive Officer
Yes, I mean one of the great things we had to the acquisition is we really deepened our pension, the bank and even expanded our first team, because we merged two teams together. Some of the people left and some of them we wanted to leave and some of them we didn't want to leave. But at the same time, we're pretty well staffed up on the relationship and sales side, we always want new salespeople that are good and productive. So, we're out there hunting around for good people to join us at Citizens Business Bank. Now, when I say that we're up 10% year-over-year. That's the good news. The bad news is, as we budgeted, we were forecasting that we'd be up 20% year-over-year.
So, the production has been not as good as we thought, but I think some of that is related to the interest rate environment. The interest rate environment has turned here, interest rates have backed up on us and it's simply not that compelling if you have to compete for loans at 3.5% when you can buy security for 2.5%. So, we're looking at that very carefully of how we manage that and how we manage our balance sheet and our margins. And, if it's a high quality loan that's well funded by deposits, we're going to compete to the end degree, but anything else besides that is a decision-by-decision basis, or case-by-case basis.
Gary Tenner -- DA Davidson -- Analyst
Yes, thanks. And then some on the interest-bearing deposits. I don't know if you specifically said this or not, but is it clear that the interest-bearing deposit costs have crested sometime during the course of the third quarter?
Christopher D. Myers -- President and Chief Executive Officer
Yes. The answer to that is I think, yes, on a point-to-point basis we actually lowered some of our deposit rates effective October 1th of the bank on some money markets, not anything material. But, I do think they crested. Now on an average basis, it may be flat quarter-over-quarter. On the interest-bearing side, I don't know, but that would be my best guess. But I do think it will start coming back down a little bit, it's not going to be anything that we're going to get -- don't expect a 5 or 10 basis points quarter-over-quarter or anything like that, but I do think we can creep the rates down as time goes on, especially, if we have a couple of more rate decreases.
Gary Tenner -- DA Davidson -- Analyst
Thank you.
Operator
[Operator Instructions] Our next question will come from Aaron Deer of Sandler O'Neill. Please go ahead.
Aaron Deer -- Sandler O'Neill -- Analyst
Hi, good morning everyone. Chris, I just wanted a follow up on your comments regarding the competitive environment because you also mentioned in the press release, just things are pretty acute out there. And obviously, it's keeping you guys from doing things that you're not comfortable doing, but when you're talking to customers and they're bringing new term sheets different from others, what kind of things you see the other banks doing in the market that you guys are stepping away from?
Christopher D. Myers -- President and Chief Executive Officer
Well, I think, pricing gets really, really competitive on a transactional deal, meaning there is very little funding that goes along with that in terms of deposits. That's where we're not as aggressive on the interest rate side. I we have a customer with $5 billion in deposits and they've got $6 or $7 million in total loans, we're going to be very competitive on the interest rate on the loan side, because we're protecting our deposits as well. But when you have a loan that's $5 billion and you have $200,000 in deposits related to it, we've got to fund that independently.
So, we don't look at providing as aggressive a price for that type of loan. So, it really has to do with relationship banking and I'm trying to incent our people more and more to get, to bring in relationships as opposed to transactions, because those are the things that are going to carry us through the cycles as they go along. That's really what it comes down to, transactional versus relationship, and we're going to save the very best pricing for the most comprehensive clients.
Aaron Deer -- Sandler O'Neill -- Analyst
Okay. So, it's not that you're seeing crazy structures and terms out there, it's just the focus on bringing in the core deposits, along with those relationships.
Christopher D. Myers -- President and Chief Executive Officer
Yes, well, I didn't think there is no question that we were seeing some times, people waiving guarantees that we won't do, we've let some stuff go on that basis, saying-look at this, we need to have a guarantee on this deal, because I always say this to our guys and they roll their eyes a little bit. I mean, yes, it were a cash flow lender that wants collateral and that's because we want to second way out of this whole thing and that's what we do, we've led to the most quality companies, the highest, that's why I think are our credit has been good. That's why we've made money at 170 consecutive quarters through a whole bunch of transitionary recessions and that's what we're going to continue to do in my mind, and we don't need to chase yield or chase risks to get yield, to still make a good profit.
Remember in the history, when I joined this bank in the first quarter of 2017, our net interest margin fell below 3%, first quarter of 2017 fell below 3%. And so I doubted at that time that we were going to drive deposit growth to pay off all of our debt. I'm sorry, 2007, thank you. Yes, long time ago, 2007. So, I doubted at that time I'm going to grow deposit growth, I may get rid of debt and I'm going to get our cost of funds as low as possible, so that I can compete with anybody, I can compete with the big boys and it's taken us a long time, but we're able to do that now. And so, we can pick and choose our way along the way and I feel really good about that and I hope that the new CEO appreciates the foundation that's been laid here and then, they can map out their growth strategy from there.
But the funding is critical. I think its superior here and I think one of the things that's going to be brushed under a little bit this quarter, I think from the analyst side, is our deposits. I mean, for us to hang on to these deposits and keep the cost of funds that we have and have 61% non-interest bearing deposits is pretty phenomenal. And, it is the foundation of this company and it's going to be the differentiator going forward in a big way, especially if we get in a recession.
Aaron Deer -- Sandler O'Neill -- Analyst
Yes, that's phenomenal deposit base, no doubt. And then Allan, sorry to get into the minutia on this, but I thought I heard reference to 402 core margin and I missed some of the early part of this call, so I apologize, but can you walk through again the dollar amounts? I heard $1.2 million in recovery is about 800,000 in accretion and then, was there any prepayment fees or anything else to get to that 402 core margin then that was highlighted?
E. Allen Nicholson -- Executive Vice President and Chief Financial Officer
I guess first of all, we were time off the decline of $1.2 million, but you're right, our core interest margin on tax-effective basis was 402, and that was in a prior period. During the third quarter, we had about $7.2 million in discount accretion and a modest amount of NAEP, whereas if you look at the second quarter, we had 9.4 million in total, 8 of that being discount accretion. Hopefully that helps you with your numbers. In our payment lease, we're down a little over $300,000 for the quarter-over-quarter.
Christopher D. Myers -- President and Chief Executive Officer
In total, this quarter we didn't have anything unusual happen, extraordinary happen. We didn't have any interest income recoveries of any substance. It was really kind of a bare bones quarter for us in terms of our income side, and on the expense side, we were little elevated because of the acceleration of my retirement here and that's caused some more expenses than we will have, once we get through the next few quarters.
Aaron Deer -- Sandler O'Neill -- Analyst
Good. That's all I had. Thanks guys.
Operator
[Operator Instructions] At this time there are no more questions. I would like to turn the call back to Mr. Myers. Please go ahead.
Christopher D. Myers -- President and Chief Executive Officer
Thank you very much. I want to thank everybody for joining us again this quarter. We appreciate your interest and look forward to speaking with you again in January for our fourth quarter and year-end 2019 Earnings Call. Have a great day and thanks for listening. Take care.
Operator
[Operator Closing Remarks]
Duration: 40 minutes
Call participants:
Christina L. Carrabino -- investor relations, corporate communications, management consulting
Christopher D. Myers -- President and Chief Executive Officer
E. Allen Nicholson -- Executive Vice President and Chief Financial Officer
Jackie Bohlen -- KBW -- Analyst
Matthew Clark -- Piper Jaffray -- Analyst
Gary Tenner -- DA Davidson -- Analyst
Aaron Deer -- Sandler O'Neill -- Analyst
