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Berkshire Hills Bancorp (NYSE:BHLB)
Q3 2019 Earnings Call
Oct 29, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Good morning, and welcome to the Berkshire Hills Bancorp Q3 earnings release conference call. [Operator instructions] Please note, this event is being recorded. I would now like to turn the conference over to David Gonci, capital markets director. Please go ahead.

David Gonci -- Capital Markets Coordinator

Good morning, and thank you for joining this discussion of third-quarter results. Our news release is available on the Investor Relations section of our website, berkshirebank.com, and will be furnished to the SEC. Our remarks will include forward-looking statements, and actual results could differ materially from those statements. For detail on related factors, please see our earnings release and most recent SEC reports on Forms 10-K and 10-Q.

In addition, certain non-GAAP financial measures will be discussed on this conference call. References to non-GAAP measures are only provided to assist you in understanding our results and performance trends and should not be relied on as financial measures of actual results or future projections. A comparison and reconciliation to GAAP measures is included in our news release. And with that, I'll turn the call over to CEO, Richard Marotta.

Richard Marotta -- Chief Executive Officer

Thank you. Good morning, everyone, and thank you for joining us today for our third-quarter earnings call. With me this morning are Jamie Moses, our CFO; Sean Gray, our president; Georgia Melas, our chief credit officer; and George Bacigalupo, our commercial leader. I'll begin the call today with a high-level overview of the quarter and then turn it over to Jamie who will dive deeper into our numbers.

The third quarter was eventful on several fronts. Our teams have moved forward together on bringing to fruition the financial and cultural initiatives that we've had in the works since last year. In most ways, our financial performance was in line with our plans and previous guidance. Before I discuss our performance, I'll take a few moments now to address the loan charge-offs that we announced last week.

As you know, in September, we announced that we identified a $16 million problem loan, which resulted from potential borrower fraud. I need to mention upfront that there have been various articles in the media about this, but our policy is that we don't discuss the names of borrowers or provide specifics about customer relationships. Given that, we have no comment on any news reports, but I will address our assessment of the situation, which resulted in us charging off the $16 million loan balance, and that reduced third-quarter EPS by approximately $0.23 after tax. This credit is a loan participation and is secured by business assets.

In situations with potential fraud, the realizability of loan collateral can be significantly impaired, and it was our judgment that we should charge off the balance based on the information available to us. We've reviewed our overall portfolio exposures and our loan participations, and we remain confident of our overall credit quality. While borrower fraud is a business risk that we can never fully eliminate, we have strong underwriting and administrative disciplines. And we fully reviewed our practices to make sure we're prudently controlling risk.

Before this charge, we would have both achieved our earnings expectations, as well as leaving unchanged our outlook for the year. Our strategies have produced solid results. Our initiative to reduce wholesale funding lowered our funding costs and supported our NIM. We bought back stock below book value and returned capital freed up by our loan strategies.

We made further progress with our efficiency projects. We completed the integration of the SI Financial operations earlier this month and are on track with our objectives for this acquisition. Our teams had solid progress in building our relationship-oriented 21st century community bank. I'll let Jamie take you through some of the numbers for the quarter.

Jamie?

Jamie Moses -- Chief Financial Officer

Thanks, Richard. We had $0.46 in core income in the third quarter, and that would have been $0.69 before the $0.23 impact of the loan charge, which was on pace toward our full-year objective. GAAP EPS came in at $0.44 in the third quarter and included merger-related charges as we prepared for the systems conversion, which we completed earlier this month. Total loans declined in the quarter, including targeted runoff of indirect auto loans and accelerated mortgage prepays as interest rates declined.

We moved about $50 million of commercial outstandings off the balance sheet based on our selective criteria for relationship benefit and return. We've had good experience with our acquired Savings Institute deposits and were up a little across the franchise. Total deposits decreased due to daily fluctuations in our payroll deposits and also due to a targeted reduction in broker deposit balances. We continue to focus on our strategy of reducing our use of wholesale funds, which decreased by about $100 million during the quarter and are down by nearly $0.5 billion since the start of the year.

The ratio of loans to deposits decreased to 93% from 101% so far this year. The net interest margin increased quarter over quarter by 3 basis points to 3.22%. We benefited from higher accretion, and our teams brought in higher-than-expected recoveries in resolving purchased credit impaired loans. Measured before accretion, the margin decreased slightly by 2 basis points to 3.06% as we anticipated.

Our strategy to reduce higher-cost wholesale funds lowered our funding costs by 9 basis points, which mostly offset the impact of asset sensitivity in the falling interest rate environment. Including a full quarter of acquired SI Financial balances, net interest income grew by 6% quarter over quarter. Looking forward, we expect fourth-quarter NII to decrease as a result of both margin and balance sheet changes while advancing strongly year over year due to the SI Financial contribution. Turning to noninterest income.

Total fee income increased by 17% over the prior quarter. Our SBA team had a strong quarter and achieved record quarterly revenue. For the fiscal year ending September 30, Berkshire was the 18th largest lender in the country based on SBA approvals of 7A loans. This was up from the 28th spot in the prior year.

Commercial loan swap fees also improved in the third quarter due to volume gains, and our SI Financial team is experienced in delivering swap solutions to their markets. Deposit-related fee income increased, including a full-quarter benefit from our acquired SI Financial operations. We're targeting to achieve further fee income gains in the fourth quarter based again on a higher contribution from loan-related fees. Including the $16 million loan charge-off, total net charge-offs were $22.5 million in the quarter.

This also included a writedown of a commercial real estate balance that we have commented on in previous quarters, and that writedown was based on an updated appraisal. All other net charge-offs were within the range of recent quarters. We expect our provision in the fourth quarter to be within the range of those recent previous quarters. Looking forward to 2020, we're well along with validating our methodologies for the new CECL reserving process, which will be effective at the turn of the year, but we won't be providing estimates of the impact of this accounting change at this time.

I would note as we've previously disclosed, the balance of nonaccretable credit risk on purchased credit impaired loans will be transferred to the loan loss allowance when we implement CECL at the start of 2020. The balance of that discount was $91 million at September 30. Also, any future accretion on recoveries of these loans will be credited to the allowance rather than to interest income as we presently do. I'll turn now to noninterest expense.

GAAP expense decreased from the prior quarter due to lower merger charges. Core expense increased by 2%, including a full quarter of acquired SI Financial operations. We recorded a $1.9 million FDIC insurance premium rebate and anticipate another $1.4 million in the fourth quarter. Our efficiency ratio improved to 53% from 56% in the prior quarter.

We brought down our headcount and expect to bring it down again in the fourth quarter as we complete our merger integration. We expect to achieve our merger-related cost saves as planned and to keep total merger costs within our original estimate. We're targeting to achieve an efficiency ratio in the area of 55% for the fourth quarter. Putting it all together, we expect to bring in our core EPS at the target of $2.60 or more for the year before the impact of the $0.23 loan charge-off that we have discussed.

Our outlook anticipates that we will maintain our pace of share repurchases, which will, of course, depend on market conditions. We cannot provide GAAP EPS guidance for the quarter. We plan to record our final SI Financial merger costs, and our GAAP results will also be affected by FCLS mortgage results, including any potential sale impacts. This concludes my comments, and I'll turn the call back over to Richard.

Richard Marotta -- Chief Executive Officer

Thanks, Jamie. The strategies we put together at the start of the year are keeping us on pace for our target of core earnings at $2.60 or more before the $0.23 impact of the loan charge-off. In addition to our earnings release yesterday, we also announced that our Chair Bill Ryan is stepping aside from the chairman responsibilities. We're grateful for his vision and leadership that he has contributed since taking the position of board chair five years ago.

While he's reducing his role for health reasons, we're pleased that he'll continue to remain active on the board of directors. On a personal level, I'd like to thank Bill for the guidance and wisdom he provided me since I assumed the CEO position. Bill, thank you. The board has elected Bill Dunlaevy to take the position of chair effective December 1.

Bill is also a career bank executive and have served on our board since 2011. He fully supports our vision of building a 21st century community bank with a culture of belonging. Bill knows our markets and is well-positioned to lead the board's oversight of our enterprise. I'd also like to thank former Director Rick Murphy for his service.

Rick has moved on due to increased professional opportunities. He will be missed. I'm pleased to report that during the third quarter, we were proud to partner with The Runway Project to create the Friends & Family Fund CD, aimed at helping entrepreneurs of color access to seed capital they need in order to launch the businesses of their dreams. Together, we're doing our part to help close the racial wealth gap by investing in communities of color.

We also moved forward with our storefront initiative as we pursue our plans to open these collaborative workspaces to expand our support of underbanked communities and engage with community influencers. We'll have more news on this in the coming months. Looking ahead to next year, we'll be moving forward with the benefit of our strategic initiatives in our fully integrated Eastern Connecticut and Rhode Island operations. While we won't be providing 2020 guidance in this call, I can share that we'll be targeting to improve our profitability while investing in our 21st century community bank and providing leadership in meeting the diverse and evolving needs of all of our communities.

At this time, I ask the operator to open the call to questions.

Questions & Answers:


Operator

[Operator instructions] Our first question comes from Mark Fitzgibbon with Sandler O'Neill and Partners.

Mark Fitzgibbon -- Sandler O'Neill + Partners, L.P. -- Analyst

Hey, guys. Good morning.

Jamie Moses -- Chief Financial Officer

Hi, Mark.

Richard Marotta -- Chief Executive Officer

Hello, Mark.

Mark Fitzgibbon -- Sandler O'Neill + Partners, L.P. -- Analyst

Terrific. Jamie, I wonder if you could help us think about sort of the size of the balance sheet at the end of the year, given the planned runoff in some of those selected portfolios you discussed previously.

Jamie Moses -- Chief Financial Officer

Yeah. I mean, I think the balance sheet will be slightly smaller than it is at the end of the third quarter by the end of the year. We're going to continue to run down the indirect auto portfolio. And we're going to continue to look for sales on the aircraft portfolio as well.

So while we look at -- the commercial pipeline is strong for us at this moment. We're going to be very selective in the loan that we bring on to the balance sheet, making sure that the relationships are there, as well as the profitability. So I think you can -- you'd still see the overall balance sheet to be slightly down, Mark.

Mark Fitzgibbon -- Sandler O'Neill + Partners, L.P. -- Analyst

And does that kind of continue for another couple quarters, do you think? Or --

Jamie Moses -- Chief Financial Officer

Yeah. I think so, Mark. When we look at it, we had almost close to $3 billion in wholesale funding on the balance sheet at the beginning of the year, and we're going to try to drive that down to much more manageable levels as we go forward. Ideally, we'd have no wholesale funding on the balance sheet, right? But that's going to depend on our ability to drive core organic deposit growth.

And we're going to actively and prudently manage that in consideration of earnings and profitability.

Mark Fitzgibbon -- Sandler O'Neill + Partners, L.P. -- Analyst

OK. And then, I heard your comments about NII, but I'm curious as to your thoughts on the margin.

Jamie Moses -- Chief Financial Officer

Yeah. So yes, right. So we -- organically or ex accretion, I guess, I'll say, we were down 2 basis points from third quarter to second quarter. In fourth quarter, there's -- we're anticipating another rate cut here at the end of October.

We had -- end of September, there was a rate cut. And so when those two cuts sort of flow through the balance sheet, we expect probably 5- or 6-basis-point decline in the NIM in the fourth quarter.

Mark Fitzgibbon -- Sandler O'Neill + Partners, L.P. -- Analyst

The reported NIM, not the core NIM, correct?

Jamie Moses -- Chief Financial Officer

Yes. That's right. And so if you assume that the accretion, the recovery and workouts that we do in the fourth quarter are the same in -- as they were in the third quarter, you would expect that to decline also by 5 basis points or so.

Mark Fitzgibbon -- Sandler O'Neill + Partners, L.P. -- Analyst

And should we assume the effective tax rate will be around 20% going forward?

Jamie Moses -- Chief Financial Officer

Yes. I think that's right. Maybe it could be 19%, 20%, somewhere in that range. If you're flat, I think you're in the right spot.

Mark Fitzgibbon -- Sandler O'Neill + Partners, L.P. -- Analyst

OK. And then also, I noticed that you took a commercial real estate charge-off in the quarter. I assume it was related to that ski place up in Vermont. Are we sort of through most of that, do you think, at this point? Or are there additional charges that are coming because I thought I'd noticed that they filed for Chapter 7.

Jamie Moses -- Chief Financial Officer

We don't like to comment on our customers and the borrowers in this regard. We have previously mentioned this loan on other calls. I -- it's still kind of up in the air, but we feel comfortable where we are charged off on that loan at the moment.

Richard Marotta -- Chief Executive Officer

And Mark, as you know, as these situations go to their finality, the bank continues to update the value of the underlying collateral.

Mark Fitzgibbon -- Sandler O'Neill + Partners, L.P. -- Analyst

OK. And then lastly, I wonder if you could just help us think about this Be FIRST program, and what the implications will be from a cost standpoint?

Jamie Moses -- Chief Financial Officer

So great question, Mark. I mean, we continue to manage Be FIRST as part of our overall cost expense. Be FIRST is a cultural initiative that we're very proud of, very excited about. And so from that perspective, I don't think you're going to see any additional expense gained or expense costs, right, that on a go-forward basis, we're going to continue to manage the efficiency ratio in that 55%, 56% efficiency range.

Richard Marotta -- Chief Executive Officer

Yeah, Mark. I mean, it's the core of who we are. And so that basically is a core expense to us, and it's all built into all of the things that you've seen.

Mark Fitzgibbon -- Sandler O'Neill + Partners, L.P. -- Analyst

Thank you.

Operator

Our next question comes from Dave Bishop with D.A. Davidson.

Dave Bishop -- D.A. Davidson -- Analyst

Yeah. Good morning, gentlemen.

Jamie Moses -- Chief Financial Officer

Good morning, Dave.

Richard Marotta -- Chief Executive Officer

Good morning, Dave.

Dave Bishop -- D.A. Davidson -- Analyst

You mentioned the outlook for fee income and some confidence, I guess, in terms of maintaining the level of fee income related to maybe some of the contribution from the SIFI. Maybe just remind us in terms of where you're seeing some of their core competencies sort of flow through the fee income generation this quarter and anticipating moving forward?

Jamie Moses -- Chief Financial Officer

Yes. So there were some gains on the -- on swap income. The SI Financial team, as we said in the call, is experienced in delivering swaps to their markets. So I'm very pleased with how they deliver that to their customers and markets.

And then also, obviously, on the deposit side, right, you add in $1 billion or so of deposits, you're going to get higher fees based on that as well. So that's generally how they're delivering in the -- on the fee income side of things. And from an overall perspective, we think there's a little bit of room in Q4 on the fee income side. We think we'll do a little bit better than we did here in Q3.

Dave Bishop -- D.A. Davidson -- Analyst

OK. Got it. And then you've talked about sort of focusing on the core loan and deposit relationship generation here in the past several quarters. And any sort of success story or early indications that you're winning more on the core sort of commercial side and any sort of success stories on core deposit generation, thus far?

Jamie Moses -- Chief Financial Officer

So I guess, what I'll say, Dave, is from an individual success story, it's probably not. Overall, we're looking at what we would consider our organic deposit growth throughout the year has been healthy, right? So this -- we wouldn't count payroll or brokered deposits in this number. And I think we're doing very well in that regard. So go ahead.

Richard Marotta -- Chief Executive Officer

And I also think one of the other successes is, I think, as the SI acquisition and integration has happened, I think there's been minimal, if any, runoff there. If anything, there's actually been some growth.

Jamie Moses -- Chief Financial Officer

Yes. That's a good point.

Richard Marotta -- Chief Executive Officer

And so we've done that, I think, consistently historically as we've gone in and gone into new markets. I guess the other thing that I would say is as we start to go into the underbanked communities, and we start to tie it to some of the things that we talked about in here, the Family & Friends CD, our anticipation is that we're going to start to drive some core deposits through that whole process. So we will have, I'm assuming, very good win stories in the not-too-distant future.

Dave Bishop -- D.A. Davidson -- Analyst

Got it. And then maybe just any sort of update on the aircraft portfolio, the outlook for that? Just any update you can provide?

Jamie Moses -- Chief Financial Officer

Yeah. We continue to market that portfolio. In the meantime, we're letting it run off as an existing operation. So that's basically the only update I have for you on that, Dave.

Dave Bishop -- D.A. Davidson -- Analyst

Got it. Thank you.

Operator

Our next question comes from Laurie Hunsicker with Compass Point.

Laurie Hunsicker -- Compass Point -- Analyst

Yeah. Hi. Good morning.

Jamie Moses -- Chief Financial Officer

Good morning, Laurie.

Laurie Hunsicker -- Compass Point -- Analyst

Just wanted to go back to the aircraft for a minute. So when would you expect that that book would be completely run to zero if you don't actually sell it?

Jamie Moses -- Chief Financial Officer

We were looking at a three and a half year -- three and a half to four-year weighted average life.

Laurie Hunsicker -- Compass Point -- Analyst

OK. And just remind me, what is the coupon on that?

Jamie Moses -- Chief Financial Officer

It's in the mid-fives.

Laurie Hunsicker -- Compass Point -- Analyst

OK. And are there currently any delinquencies in that?

Jamie Moses -- Chief Financial Officer

None that are material. I'm sure there must be a delinquent loan or two in there. I can get back to you offline on that, Laurie.

Laurie Hunsicker -- Compass Point -- Analyst

OK. And then, just same question in terms of charge-offs because, obviously, your C&I charge-offs were elevated, even excluding that $16 million. Was there anything from aircraft in that number?

Jamie Moses -- Chief Financial Officer

No.

Laurie Hunsicker -- Compass Point -- Analyst

OK. Great. And then what were your total substandards? Where did those come in at relative to last quarter, they were $150 million?

Jamie Moses -- Chief Financial Officer

Yeah, we're going to kick that over to Georgia.

Laurie Hunsicker -- Compass Point -- Analyst

Hi, Georgia.

Georgia Melas -- Chief Credit Officer

Good morning, Laurie. It's Georgia. The total criticized of the total, you're looking just for the substandard?

Laurie Hunsicker -- Compass Point -- Analyst

Just the substandard.

Georgia Melas -- Chief Credit Officer

OK. So the total there is roughly 170 -- $162 million.

Laurie Hunsicker -- Compass Point -- Analyst

$162 million. OK. And then how much of that is C&I?

Georgia Melas -- Chief Credit Officer

C&I is roughly -- well, $50.5 million. It's actually down a little bit from last quarter.

Laurie Hunsicker -- Compass Point -- Analyst

OK. And then -- and how much is CRE?

Georgia Melas -- Chief Credit Officer

CRE is $112 million, and that's up roughly $25 million from last quarter, and that's due primarily to the -- to a hand -- well, actually, three accounts from Savings Institute.

Laurie Hunsicker -- Compass Point -- Analyst

OK. And that includes the Hermitage -- or, I guess, you're not mentioning by name, that includes the ski resort? Is that in that number?

Georgia Melas -- Chief Credit Officer

Yes. This is total commercial, yes.

Laurie Hunsicker -- Compass Point -- Analyst

OK. And so you guys did update us on that loan about a year ago. About a year ago, I had it at $17 million, no specific reserve against it, 50% LTV. Can you just help us think about that? I mean, I guess, that loan is still about $17 million?

Georgia Melas -- Chief Credit Officer

No. We've written it down to the liquidation value. We received an appraisal earlier in the third quarter with a lower liquidated value, and we did write it down to that level.

Laurie Hunsicker -- Compass Point -- Analyst

OK. And so what is that number? I mean, right. Actually, you did have $3 million, $2.7 million in NCO. So if it's related to that that brings it down to what, about $14 million?

Richard Marotta -- Chief Executive Officer

Laurie, this is Richard. So we're not going to comment on specific deals like that for a couple of reasons. And one of the reasons is when we're in a situation that we are now, which is I think someone mentioned Chapter 7, so we are a secured creditor. We are not going to give out what we're carrying on our books for many reasons, and a lot of them revolve around just the legality of it.

Laurie Hunsicker -- Compass Point -- Analyst

Got it. No, that makes perfect sense. OK. So sorry, just a few more questions here on credit.

So looking at your C&I charge-offs, they were $19 million for the quarter. Obviously, $16 million related to the C&I fraud. What was the other $3 million because that's an outsized number relative to where you guys have been running?

Georgia Melas -- Chief Credit Officer

Well, actually --

Laurie Hunsicker -- Compass Point -- Analyst

Can you give us any color around that?

Georgia Melas -- Chief Credit Officer

Well, the $3 million in charge-offs for the quarter, when you take out the fraud and the real estate transaction, is right in line with what we've been running on a quarterly basis. We typically run between $3 million and $4 million. So it is right in line with where our charge-offs have been. And I think you're asking is there anything else significant in there? And there really isn't.

It's just the quarterly charge-off number.

Laurie Hunsicker -- Compass Point -- Analyst

OK. I mean, because your C&I chart, I'm just looking back over the last many, many quarters, they've been bouncing around between a low of $200,000 and a high of $1.5 million, right? So I guess let me ask this a different way. So you're -- within that -- within the C&I charge-offs, was there anything related to Firestone or taxi?

Georgia Melas -- Chief Credit Officer

No, there was no charge-offs in Firestone. Actually, they had a small recovery. And there was nothing in there for the Taxi Medallion portfolio.

Laurie Hunsicker -- Compass Point -- Analyst

OK. And then where are the taxis on a net basis?

Jamie Moses -- Chief Financial Officer

Right around $26 million.

Georgia Melas -- Chief Credit Officer

Oh, I'm sorry, balances. I apologize. Balances are actually down to $24 million.

Jamie Moses -- Chief Financial Officer

$24 million.

Georgia Melas -- Chief Credit Officer

We had about a $2 million reduction this quarter. So they're just around $24 million.

Laurie Hunsicker -- Compass Point -- Analyst

OK. Great. And then can you just update us where you are on Firestone?

Georgia Melas -- Chief Credit Officer

Balances for Firestone are about $266 million.

Laurie Hunsicker -- Compass Point -- Analyst

OK. And then what were the originations this quarter?

Georgia Melas -- Chief Credit Officer

Firestone, $32 million.

Laurie Hunsicker -- Compass Point -- Analyst

$32 million. OK. And are you guys -- how are you thinking about Firestone as we head into CECL? Will there be any changes? Or you're still going to be running at around the same run rate?

Jamie Moses -- Chief Financial Officer

There will not be any business impact or decisioning based on a new accounting change. So I think we'll continue to run Firestone the same way.

Laurie Hunsicker -- Compass Point -- Analyst

OK. Great. Very helpful. And then just one last sort of more macro question.

As we head into fourth quarter, obviously, we're going to see some more merger charges. Round numbers, you've got about $8 million or so left off of what you were initially stated. Are you still on track for that? And I guess more importantly, as we look forward to next year, absent anything going on in the aircraft, are we done with merger and restructuring charges? How should we think about that?

Jamie Moses -- Chief Financial Officer

Yes. That's absolutely how you should think about it, Laurie. We're probably going to do a little bit better than the $8 million left in terms of merger charges. The -- so as we look forward, we'll get to our clean quarters that we're all hoping for, and we all want.

So we'll get there. The only other thing I mentioned here in the fourth quarter is there's a potential for our mortgage group, FCLS, those are showing up in discontinued ops on our balance sheet and income statement here. And so just we're excluding anything that we're talking about with that team.

Laurie Hunsicker -- Compass Point -- Analyst

OK, great. And actually, I'm sorry, Jamie, one last question here.

Jamie Moses -- Chief Financial Officer

Yes?

Laurie Hunsicker -- Compass Point -- Analyst

Going to the other, other noninterest income line?

Jamie Moses -- Chief Financial Officer

Yes.

Laurie Hunsicker -- Compass Point -- Analyst

So the $609,000 compared to a loss of $216,000. And I know embedded in that number is the tax-advantaged commercial project investment, that linked quarter that was roughly unchanged, right? A loss of $1.9 million in each one. You had an $800,000 swing there. Can you help me think about what's in that, what's nonrecurring? Or how that should look going forward?

Jamie Moses -- Chief Financial Officer

Yeah. You should -- that was BOLI income, Laurie. So there was a -- we had a premium capture in the -- in death benefit in Q3. So hopefully, you won't see a change in that next quarter.

Laurie Hunsicker -- Compass Point -- Analyst

Got it. OK. So that death benefit was about $800,000?

Jamie Moses -- Chief Financial Officer

That's right.

Laurie Hunsicker -- Compass Point -- Analyst

OK. Perfect. Thanks. I'll leave it there.

Operator

Our next question comes from Collyn Gilbert with KBW.

Collyn Gilbert -- KBW -- Analyst

Thanks. Good morning, everyone.

Jamie Moses -- Chief Financial Officer

How are you, Collyn?

Collyn Gilbert -- KBW -- Analyst

Good. Thanks. So just wanted to first set on the loan book. What kind of just -- if you could offer us a little bit of color as to what the pipeline is looking like, where you're seeing some good kind of organic demand? And then what some of the blended origination yields are running on that pipeline book?

George Bacigalupo -- Commercial Leader

Collyn, this is George. Our pipeline is doing pretty well. It's north of $200 million. And we've been continuing to be selective in terms of both pricing and credit.

So we feel good about the totals, and we're continuing with our relationship approach. We've seen that Boston continues to be strong. There's good opportunity on the real estate side in the greater Boston area. But we also have some strength in various places around the footprint.

Some good pipeline in -- for ABL, but also in New Jersey markets. So we feel good about contributions from our various regions.

Collyn Gilbert -- KBW -- Analyst

OK, OK. And then just tying into the broader balance sheet moves. So Jamie, obviously, you're building a lot of cash, and I would expect that to continue as portfolios are running off. Do you have kind of a near-term and a long-term plan for the cash or how you're going to manage that part?

Jamie Moses -- Chief Financial Officer

Yeah. I mean, I think, near term is we're going to continue to deploy that into stock buybacks. When we get through the $2.4 million authorization, share authorization that we have, we will go back to the board and ask for more is our thinking at the time. And I think what you do see is we are building capital even though we are buying back some shares.

So I think that's kind of how we're thinking about it right now is until and unless we see more and better opportunity to deploy that capital into asset generation, we'll continue to return it in the form of buybacks.

Collyn Gilbert -- KBW -- Analyst

OK, OK. And then just breaking into the NIM a little bit, some of the drivers of that. Can you just kind of talk about -- I mean, obviously, you're shifting the mix significantly and getting the wholesale part of the funding off the balance sheet. But just in terms of your core customers and where your deposit pricing strategy is right now as we look into the fourth quarter and with the rate coming -- rate cut coming tomorrow?

Jamie Moses -- Chief Financial Officer

Yes. So I think that we expect our deposit costs will be reduced in the fourth quarter. I don't think it's going to be a major reduction in deposit costs. The -- where we'll see the benefit is on the -- in funding costs, where we are continuing to reduce the reliance on wholesale funding there.

The markets, I guess, I'll let Sean comment in a minute here on just those things. But from my seat, what I see is muted competition, right? The same thing we've experienced over the last couple of quarters where there are less and less rates out there at the high end of things. We've been able to reduce our CD rates over the past quarter and a half or so. I think we're generally seeing people follow the market in that regard -- other competitors follow the market in that regard.

Sean, do you have anything else to add?

Sean Gray -- President

I agree. Where there's discipline in markets, the price is staying flat from a competitive perspective.

Collyn Gilbert -- KBW -- Analyst

OK, OK. That's helpful. And then just on the expense side. So should we assume that if a similar FDIC credit is going to run through this fourth quarter, the expense will be zero on that line? And then does it normalize in the first quarter of next year?

Jamie Moses -- Chief Financial Officer

So we're going to see about a $1.4 million rebate in Q4 for the FDIC, right? So it's a $500,000 swing to the negative in Q4 on that. And then you will see a normalized run rate after that starting in Q1.

Collyn Gilbert -- KBW -- Analyst

OK, OK, OK. That's helpful. And then just on thoughts, Richard, on M&A? I mean, you guys are -- you had a lot in your plate. You're changing and restructuring and such.

But just curious if you could give us some thoughts as to how you're thinking about M&A as you look into 2020?

Richard Marotta -- Chief Executive Officer

Yeah. Collyn, the short answer is I have absolutely no thoughts on it just because it's not in -- on anybody's radar or certainly not on my radar.

Collyn Gilbert -- KBW -- Analyst

OK. All right. That's good. I'll leave it there.

Thanks, guys.

Jamie Moses -- Chief Financial Officer

Thank you.

Operator

This concludes our question-and-answer session. I would like to turn the conference back over to CEO, Richard Marotta, for any closing remarks.

Richard Marotta -- Chief Executive Officer

Thank you for joining us today. We look forward to speaking again in January to discuss our results for the fourth quarter and for the full year. Thank you.

Operator

[Operator signoff]

Duration: 35 minutes

Call participants:

David Gonci -- Capital Markets Coordinator

Richard Marotta -- Chief Executive Officer

Jamie Moses -- Chief Financial Officer

Mark Fitzgibbon -- Sandler O'Neill + Partners, L.P. -- Analyst

Dave Bishop -- D.A. Davidson -- Analyst

Laurie Hunsicker -- Compass Point -- Analyst

Georgia Melas -- Chief Credit Officer

Collyn Gilbert -- KBW -- Analyst

George Bacigalupo -- Commercial Leader

Sean Gray -- President

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