Oct 18, 2014
Executives
Aarti Bowman - D. Bryan Jordan - Chairman, Chief Executive Officer, President, Member of Executive & Risk Committee, Chairman of First Tennessee Bank National Association and Chief Executive Officer of First Tennessee Bank National Association William C.
Losch - Chief Financial Officer, Executive Vice President, Chief Financial Officer of First Tennessee Bank National Association and Executive Vice President of First Tennessee Bank National Association Susan L. Springfield - Chief Credit Officer, Executive Vice President, Chief Credit Officer of First Tennessee Bank National Association and Executive Vice President of First Tennessee Bank National Association
Analysts
Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division Ebrahim H.
Poonawala - BofA Merrill Lynch, Research Division Thomas LeTrent - FBR Capital Markets & Co., Research Division Christopher William Marinac - FIG Partners, LLC, Research Division Kevin Fitzsimmons - Hovde Group, LLC, Research Division Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division Emlen B.
Harmon - Jefferies LLC, Research Division Stephen M. Moss - Evercore Partners Inc., Research Division Kevin Barker - Compass Point Research & Trading, LLC, Research Division
Operator
Good morning, and welcome to the First Horizon National Corp. Third Quarter 2014 Earnings Conference Call.
[Operator Instructions] Please note this event is being recorded. Now I would like to turn the conference over to Aarti Bowman.
Please go ahead.
Aarti Bowman
Thank you to Amy. Please note that the press release and financial supplement, which announced our earnings, as well as the slide presentation we'll use in this call this morning, are posted on the Investor Relations section of our website at www.firsthorizon.com.
In this call, we will mention forward-looking and non-GAAP information. Actual results may differ from those forward-looking information for a number of reasons outlined in our earnings announcement materials and our most recent annual and quarterly reports.
Our forward-looking statements reflect our views today and we are not obligated to update them. The non-GAAP information is identified as such in our earnings announcement materials and in the slide presentation for this call and is reconciled to GAAP information in those materials.
Also, please remember that this webcast on our website is the only authorized record of this call. This morning's speakers include our CEO, Bryan Jordan; and our CFO, BJ Losch.
Additionally, our Chief Credit Officer, Susan Springfield, will be available with Bryan and BJ for questions. I'll now turn it over to Bryan.
D. Bryan Jordan
Thank you, Aarti. Good morning, everyone, and thank you for joining the call.
I'm very pleased with our third quarter accomplishments. Our loan portfolio growth was the best in some time showing that given our customer focus, we can generate high-quality incremental business in a competitive environment.
We kept co-operating costs in check, yet didn't scale back on investment spending. We accelerated the rundown of our Non-Strategic portfolio, selling a block of held-for-sale mortgage loans at a significant profit.
The second sale of this year. Last but not least, we returned capital to shareholders, repurchasing 2 million shares of stock at an attractive price.
Our core business posted solid performance. Year-over-year, the Regional Bank's average loans were up 6%.
Linked quarter growth was 4%. Growth was driven by specialty lending areas and our expansion markets.
Year-over-year, Commercial Real Estate loans rose 31% to $1.2 billion or 7% of the total portfolio. Asset-Based Lending increased 13%.
Commercial and Private Client/Wealth Management portfolios were each up 9%. And within our markets, Mid-Atlantic booked 29% loan growth, while Middle Tennessee grew 10% year-over-year.
Average core deposits were up 1% year-over-year in the bank, and net checking accounts grew by 3%. Our active calling program's emphasis on customer service and investment in additional talent and products are enabling us to grow our portfolios, yet, maintain our risk-adjusted pricing and our underwriting discipline.
Our other core business, FTN Financial, performed well even though market conditions laid on fixed income activity. As anticipated, average daily fixed income revenues were flat to last quarter and are likely to remain so in the near term.
Meanwhile, we're building out our municipal products platform and developing our public finance capability. When the fixed income market conditions improve, we'll be prepared to take advantage of opportunities that FTN's extensive unique distribution platform provides.
We made good progress at winding down the Non-Strategic portfolio with average loans declining 17% from last year. We also made a significant addition to our litigation reserve.
We sold Non-Strategic loans in our held-for-sale portfolio for a pretax gain of about $40 million. Recall in the second quarter, we had an $8 million gain on a valuation adjustment related to a Non-Strategic loan sale.
Year-to-date, we've booked nearly $50 million in gains related to loan sales. We will continue to actively look for economically attractive opportunities to accelerate the runoff of our Non-Strategic portfolios.
Asset quality trends were stable. Year-over-year, net charge-offs declined 32% and nonperforming assets were down 36%.
Our reserve-to-loans ratio was at 151 basis points in the third quarter. As most of you are aware, we're very focused on achieving our bonefish targets.
While a rate rise is the biggest driver of hitting our targets, we're controlling what we can control for now. That includes cutting cost, managing economic profitability to better capitalize on growth opportunities and effectively deploying our capital.
Consolidated expenses decreased 8% year-over-year, excluding the net loss related to the legal matters and mortgage repurchase effects. We believe, we have more work to do on becoming more efficient.
We plan on cutting an additional $20 million to $50 million in annual expenses over the next few years through further resolution of legacy issues, process improvement, branch network optimization and other efficiencies. At the same time, we will continue to make appropriate investments that will offset some of our efficiencies.
Our economic profit efforts will also be a factor in achieving our bonefish targets. We're continuing to expand and enhance our economic profitability management tools, which are helping us to successfully execute our business plans and reach our bonefish targets.
Our capital position remains strong with Tier 1 common at 11.3%. In the third quarter, we bought back 2 million common shares for $24 million and have $76 million of repurchases remaining in our current authorization.
Since we started our initial buyback program in 2011, we have bought back about 11% of outstanding shares at a $9.42 volume-weighted average price. We will continue to deploy capital smartly.
I'll now turn the call over to BJ for more financial details about the quarter, and then I'll be back for some closing comments. BJ?
William C. Losch
Thanks, Bryan. Good morning, everybody, thanks for joining us.
I'll start on Slide 7. In the third quarter, net income available to common shareholders was $45 million or $0.19 a share.
I'm pleased with the core performance we saw in the quarter like Bryan is. Overall, earnings were impacted by a few notable items as well, which I'll discuss on the next slide.
So if you turn to Slide 8, in the third quarter, we continued our efforts to wind down our Non-Strategic portfolio with loan sales. We finalized the sale of about $315 million of UPB held-for-sale loans and booked approximately $40 million of pretax gain on those sales, which will show up in the mortgage banking income line.
As Bryan mentioned, our year-to-date loan sales out of the Non-Strategic portfolio have resulted in pretax gains totaling almost $50 million (sic) [$40 million]. We have been able to manage down this portfolio to our advantage, and we'll continue to look for opportunities to accelerate the wind down of the Non-Strategic portfolio in an appropriate fashion.
We also had a $50 million pretax expense related to legal matters reflected in the addition to the litigation reserve. And additionally, we booked a $15 million pretax gains related to insurance recoveries associated with the previous legal settlement.
These 2 items had a $35 million net negative impact in our litigation and regulatory matters line in other expense. Segment highlights are on Slide 9, and I'll go over the details of the Regional Banking Capital Markets businesses on the next few slides.
So if you turn to Slide 10, taking a look at the Regional Bank. Our Regional Bank showed particularly strong performance, contributing $51 million in net income in the third quarter, up 9% from the second.
Linked quarter, our net interest income in the bank was up 3%, driven largely by higher loan balances. Noninterest income declined 3%, linked quarter, but recall that 2Q '14 included a positive $3 million impact related to some VISA incentives.
Deposit transaction fees were up 2%. Brokerage and trust fees were down from second quarter seasonally higher levels.
Expenses were up 2% due to technology investments and an increase in professional fees. Loan loss provision was $2 million in 3Q '14 compared to $8 million in the second.
Annualized charge-offs in the bank are at 19 basis points, very strong. Pretax income, again, was up 9% linked quarter.
Turning to Regional Bank balance sheet trends on Slide 11. Linked quarter, our average loan growth was 4% for the second consecutive quarter.
Our focus on specialty lending areas, expansion markets and our bankers' calling efforts continue to pay off. Average Commercial Real Estate loans were up 9% linked quarter, driven by customers funding up existing commitments, opportunities in the REIT sector and growth in our Mid-Atlantic, Middle Tennessee and Southeast markets.
Loans to mortgage companies, one of our most economically profitable businesses, increased nearly 30% linked quarter due to the strong home purchasing we saw in the summer season. Private Client and Wealth Management loans grew 4% linked quarter, and growth areas in our markets included Mid-Atlantic, which was up 16% link.
And Middle Tennessee where loans increased 3%. We're booking loans appropriately and largely within our risk-adjusted return on capital guidelines by staying disciplined on pricing and underwriting, while borrowers' sentiment has improved somewhat, customers do remain cautious and we're still facing tough competition for loans.
While we generally see a seasonal slowdown in loan bookings in the fourth quarter, our pipelines remain very solid. Moving to capital markets on Slide 12.
Pretax income was $5 million in the business in 3Q compared to 2Q '14 pretax income of $50 million, which included a $47 million expense recovery. Linked quarter, fixed income average daily revenues remains relatively steady with the second quarter at $644,000, reflecting continued muted customer activity due to tough market conditions from low rates and low volatility.
The FTN fixed income business continues to be a strong source of fee income for us, and we see latent opportunity for improved profitability and contribution to achieving our bonefish targets as market conditions improve. The platform is a highly variable one from an expense and capacity perspective.
And we continue to be prepared to take advantage of improved markets once they materialize. Turning to Slide 13, the consolidated balance sheet margin trends.
Average total assets remained stable at $24 billion. Linked quarter, our consolidated net interest margin was flat at 2.97%.
Higher loan balances and lower deposit costs offset the pressure on loan yields. Looking ahead to the fourth quarter, we expect our consolidated margin to be more towards the 2.90% level, plus or minus, a few basis points.
Much of the reason for this anticipated 4Q decline in the margin is a high-class problem to have, deposit inflows. Our margin assumptions are based on an anticipated seasonal end of year increase in deposit inflows, and the closing of our branch acquisition of 13 branches across Tennessee from BofA, which funded today.
Subsequently, we expect to hold higher levels of cash at the Fed in the fourth quarter, which will impact the margin. And in addition, the loan sales and seasonally lower loans to mortgage companies will impact the NIM as well.
Fundamentally, however, our NIM remained solid in a challenging interest rate environment. Our balance sheet remains highly asset sensitive.
In a 200 basis point rise scenario, our net interest income would increase roughly 10%. And on the liability side, we expect overall deposit Betas of about 40% to 45% in an up 200 basis point scenario.
Moving to expenses on Slide 14. Since 3Q '11, our run rate of consolidated annualized expense, excluding litigation accruals and recoveries and the GSE repurchase provisions has declined 20%.
Compared to peers who have seen an uptick in expense, we've decreased our cost base significantly. We've lowered cost by reducing our branches, streamlining our structure and processes and winding down our Non-Strategic portfolio.
At the same time, we've continued to invest in technology, products and people to help us take advantage of growth opportunities, improve our processes to leverage our infrastructure and serve our customers more effectively and efficiently. We will continue working to reduce our expense base by further improving process, decreasing legacy-related costs and reducing our corporate real estate footprint.
Turning to asset quality overview on Slide 15. Our charge-offs were down, as we've seen continued stable performance and positive grade migration.
We also had a $3.4 million commercial recovery in the third quarter. Linked quarter, you see our nonperforming assets decrease 24% to $257 million and commercial nonperforming loans were down 11%.
We sold about $60 million of nonperforming loans in the third quarter. Our loan loss reserve decreased 2% as well.
Wrapping up on Slides 16 and 17. Slide 16 shows our current progress towards bonefish targets.
And on Slide 17, you can see that we've put ranges on the opportunities that we see at an incremental profitability. We see a lot of growth, economic profit opportunity and upside to our business.
We're managing the entire organization to our bonefish goals. And we believe the continued efficiencies, growth opportunities with new markets and products, economic profit improvement, capital deployment, increased capital markets activity and a rise in interest rates will get us to our long-term return targets from 15% to 20%.
With that, I'll turn it back over to Bryan.
D. Bryan Jordan
Thank you, BJ. We will continue to work diligently in a disciplined manner to achieve these key priorities: further strengthening our balance sheet, enhancing productivity and efficiency and winding down our Non-Strategic businesses.
With our focus on improving economic profit, I'm very confident that we will make progress towards the reaching our bonefish targets and further building franchise over the foreseeable future. Thank you to our First Horizon employees for all that you do to build our business and serve our customers every day.
And with that, Amy, we'll now stop and take questions.
Operator
[Operator Instructions] Our first question comes from Steven Alexopoulos of JPMorgan.
Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division
Maybe to start, could you guys give some color on the nature of the $50 million add to litigation reserve in the quarter?
D. Bryan Jordan
This is Bryan. Unfortunately, we can't go into a whole lot of detail.
It's very clear that we set up $50 million in these legal reserves. We have a number of things that are active and in progress.
And because they are, it wouldn't be appropriate for us to go into details regarding them.
Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division
Okay, got you. Bryan, given the recent increase in market volatility, have you guys seen any pickup in ADR so for in the quarter?
I know you said the outlook is flat for the quarter. But wondering why you're not expecting a bit of an increase given what we're seeing just in the markets?
D. Bryan Jordan
Well, it has been very -- it's been stable with this volatility and rates going down, actually is somewhat negative and as they come back up, you see a little bit of a benefit. There's really been more selling than there has been buying in this environment.
If you go back and you look at the third quarter as a whole, we were very encouraged. There were a couple weeks in the early part of September, where average daily volumes were very, very strong.
The volatility is driving -- volatility and average daily volumes as you'd expect. But given what we think is happening in interest rate markets for the next several quarters, we think it's likely to be in this area.
And so we're not optimistic that we'll see a significant increase. We're always hopeful that we'll get it, but we don't believe at this point, that it's likely to occur in the third -- fourth quarter or the early part of 2015.
Steven A. Alexopoulos - JP Morgan Chase & Co, Research Division
Okay. And maybe just a final question, from a high level, if we look at the Regional Bank pretax, pre-provision income is basically flat year-over-year.
Capital markets are below the low end of the range. I know you stepped up buybacks in the quarter, your focus on expenses.
But are there any other initiatives you're contemplating to move the needle a bit more at least over the intermediate term?
D. Bryan Jordan
Yes. This is Bryan.
The -- I've said in my closing comments, I'm very, very confident in our ability to enhance value and improve profitability with the balance sheet that we have today and the opportunities that are in front of us. We've talked a lot, and you'll recall, even in our Investor Day last fall, we were talking about how we were disaggregating the organization and understanding the drivers of profitability, and we continue to do a lot of work.
And as we look into the last part of this year and into the next couple of years, we still see a tremendous amount of opportunity for us to capitalize on opportunities in our marketplace, to do a better job of winning business and getting more efficient in the way that we do it, both on a revenue and an expense side of the business. So we're very, very optimistic that in sort of continued sideways interest rate environment for the next several quarters, there is still opportunity for us to improve our profitability, just focusing on these opportunities we have in the existing balance sheet.
Operator
The next question comes from Ebrahim Poonawala for Merrill Lynch.
Ebrahim H. Poonawala - BofA Merrill Lynch, Research Division
So I guess, Bryan, first question, just in terms of Capital Markets, the investments we've been making on the muni and public finance side. Do you need a pickup in ADR for those investments to start paying off?
Or is that somewhat independent with some of those bankers who've been on board now start generating revenue in business even in the absence of major pickup in ADR?
D. Bryan Jordan
Yes. Those are investments that, one, should have some short-term impact.
And clearly, the extent that we grow that platform and we grow our ability to participate in deals in the bigger markets and as well as bring people onto the platform that will help ADR. But we also look at those as long-term investments that will allow us to build out the product set.
And over the long term have a more positive impact on ADR by broadening the product suite. And broadening the product offering we can bring to our customer base, as well as to the issuer community.
So we see it having some modest short-term impact, but long-term, we see it as a big investment for the future of the business and the product set.
Ebrahim H. Poonawala - BofA Merrill Lynch, Research Division
Understood. And then the second question, and BJ, you talked about looking for strategies to sort of expedite the sort of wind down of the Non-Strategic portfolio.
I guess when you look out there, what is the biggest impediment in terms of being able to sort of sell larger chunks over the next few quarters? Is it just buyer appetite, or the cost of funding for the buyer, which is still sort of making the economics not that attractive for a buyer relative to you -- given the banks funding base?
William C. Losch
Sure. No, I think given what we've seen the last 2 quarters with the 2 loan sales that we did make out of the portfolio that the buyer appetite is pretty strong.
On both of those sales, we had dozens, literally dozens, of bidders on each, and the bids were obviously very strong. So we are pretty pleased with the execution there and that gives us a little more confidence that maybe there's some more opportunity to sell down, more of the Non-Strategic portfolio as appropriate.
Now these 2 happen to be out of the existing held-for-sale portfolios that are currently marked. So it's a little bit more liquid, if you will, and easier to do.
But we continue to look for shareholder-friendly and economically profitable opportunities to manage down the Non-Strategic portfolio. And I'm pretty optimistic that we might be able to do that.
Operator
Next question comes from Paul Miller from FBR.
Thomas LeTrent - FBR Capital Markets & Co., Research Division
This is actually Tom LeTrent on behalf of Paul. It was nice to see the good growth in Middle Tennessee and the Mid-Atlantic.
Can you sort of remind me how big those areas are currently? And what you want them to become over time?
William C. Losch
Sure. Mid-Atlantic is probably about $700 million or so in deposits -- excuse me, in loans outstanding.
And maybe $250 million or so in deposits. So we've been in those markets and building out those markets over the last 10 years.
So it's a pretty meaningful book of business today. And as you saw, linked quarter growth there was pretty strong.
In terms of our Texas markets, they're still in their infancy stage. We just did those up, I believe, we have 4 or 5 existing employees there, and they've been building out more of the infrastructure.
Now we have had really good pipelines and have closed some deals. But those are still very, very small.
But we do expect them to provide meaningful growth opportunities, profitable ones over the next several years.
Thomas LeTrent - FBR Capital Markets & Co., Research Division
Okay. That's helpful.
And one last question. The tax rates were a jump between 23%, 28% for the last 1.5 years or so.
Is 28% sort of the normalized rate that we should use for you guys? Or how should I think about that?
William C. Losch
Yes. I would say, assume 28% to 30%.
This quarter was positively impacted by some low-income housing partnerships credits that we received in the quarter. So they should smooth out over the next quarter to year.
So I'd use, 28% to 30% as appropriate.
Operator
The next question comes from Christopher Marinac at FIG Partners.
Christopher William Marinac - FIG Partners, LLC, Research Division
BJ or Bryan, I was curious on your thought about a flat or flatter yield curve, and the impact of that just kind of looking at Slide 13 again.
William C. Losch
Yes. So it's BJ, Chris.
Certainly, it does not help as much as a steeper curve. But from the banking business perspective and our assets to be on the balance sheet, since a lot of our floating rate loans are tied to short rates not longer, we can still get much of that asset sensitivity benefit.
Now if we're buying in the securities portfolio, it's a little bit harder. A flatter yield curve is certainly not conducive to better FTN business.
But on balance and on net for our company, it's a positive, if short rates rise, even if the longer end of the curve is flatter.
Christopher William Marinac - FIG Partners, LLC, Research Division
Okay. And then, I guess, just in general, will we see this figure at the 200 basis point, kind of creep up further.
It seems like it has in recent quarters just as it's -- as we've looked at each -- this chart each quarter.
William C. Losch
I'd say, Chris, it's actually -- I think, I have to go back, but it's been relatively stable in this $63 million, $64 million NII impact. A year ago, it was actually around $70 million, $71 million and it's come down modestly.
But it's been in this range for the last couple of quarters.
Operator
The next question comes from Kevin Fitzsimmons at Hovde Group.
Kevin Fitzsimmons - Hovde Group, LLC, Research Division
Just a few quick questions. Can you comment on the outlook for the pace of buybacks.
Since specifically in relation to what happened the past year, as you were approaching stress tests. And I know, there was a lot more significant questions on the legacy issues back then.
So I just -- looking to clarify, is there any risk of having to dial back those buybacks as you approach the next formal stress test?
D. Bryan Jordan
Kevin, this is Bryan. I don't think -- we're going to be opportunistic and we're not locked in to any given pattern.
We, as I mentioned and I think BJ reiterated, we bought back $24 million this quarter and I would expect it -- that something in that range maybe a little more, maybe a little less depending on what the opportunities are in the next quarter. But in all likelihood, we expect to see that buyback continue as, one, we optimize our capital base and, two, as we continue to generate strong earnings.
We expect to repatriate excess capital to our shareholder base and do it in a shareholder-friendly fashion. So we will be opportunistic.
Kevin Fitzsimmons - Hovde Group, LLC, Research Division
Okay. And just one follow-up on the -- your guidance on the margin.
BJ, you specifically addressed this next quarter, but it seems like it's a phenomenon of the deposit inflow that's coming in and a few other issues. But looking further out beyond that if we're still in this rate environment, getting into early '15.
Would you guess that the margin would return to where it was in the third quarter? Or is it going to be somewhere in between?
William C. Losch
Sure. So if we're looking forward to 2015, I think we're going to stay in roughly this range.
I would hope between 2.85% and 2.95% that we bounced around. And if you look on one of our slides we had in the deck, we had the last several quarters of our margin.
And it's been relatively stable in that range. So I would expect that to continue even without rate rises.
Now, of course, if rates do rise, we believe we'll be above that. But I think that range of 2.85% to 2.95% is appropriate to think about.
Kevin Fitzsimmons - Hovde Group, LLC, Research Division
But BJ, is there any like real important driver that puts you either at the low end or the high end of that range?
William C. Losch
Well, sure, I think, the same impacts that we would have in the fourth quarter are going to impact the margin going into 2015, I talked about. We do expect pretty strong deposit inflows.
We actually got the wire this morning to close our branch acquisition, so that adds excess funds that we'll have to put the work. So those are high-class problems to have.
Those things are good. Loans to mortgage companies are going to fluctuate, and we have 4.75% yields in that business.
Any fluctuation there can have an outsized and meaningful impact on the margin, so that's certainly going to be an impact. Trading inventories in our Capital Markets business, higher levels of inventory are going to cause lower margins.
It doesn't necessarily mean that it's bad business. We're going to make the income off of that dealer inventory, but it could certainly impact the margin.
So it's the same types of things that we've seen. And again, I think that, that range should be what we're targeting over the next several quarters.
D. Bryan Jordan
Kevin, this is Bryan to piggyback on BJ's comments. We don't manage to a margin number per se.
As BJ pointed out, it's been very stable. What we're really focused on is acquiring and building long-term profitable relationships.
And so if we take on more deposits that can have an impact, but we see that as very value accretive. If we book additional loans or we see fluctuations in our mortgage warehouse, those are all byproducts of it.
But we're very focused on managing the overall profitability and managing it for the long-term, and the margin really just sort of falls out. So as BJ talks about the range, we're not managing to a certain number in that.
We're trying to make the right decisions for the business and build a franchise for the long-term and manage that overall level of profitability.
Operator
The next question comes from Jennifer Demba SunTrust Robinson Humphrey.
Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division
Question about the infrastructure investments that you think you are going to be needing to make in the next -- call it 2 or 3 years. Could you just talk -- give us some more color about what you think you probably still need to do there?
And specifically, what may be related to cybersecurity if you can isolate that?
D. Bryan Jordan
Yes. Jennifer, this is Bryan.
The -- most of the investments that we will make will still be in customer-facing systems or close to customer facing systems. For example, our Commercial Lending platform.
For example, our customer-facing mobile banking platforms, things of that nature that drive treasury management products, things of that nature. We are spending marginally more money on cybersecurity.
I would say that, that has been an investment that we have been ramping up over time. We spend a lot of time focused on it.
Now we'll also continue to build out the capabilities around infrastructure in Houston, the mid-Atlantic franchise and even our Middle Tennessee franchise. But in the context of overall numbers, as we've commented a couple of different ways, we brought expenses down while making a lot of investments.
We expect to bring expenses down another $20 million to $50 million. Some of that will be reinvested, but we would expect our expense base to continue to decline, while we make these investments.
Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division
That's helpful. One more follow-up, on the cybersecurity issue.
Bryan, do you get the sense that First Horizon is on the front end of that rather than in the middle. Because it sounds like just based on some of the calls we've heard so far that, that seems to be in a more of an emerging area of investment.
D. Bryan Jordan
I don't know how to characterize it vis-à-vis others. So I don't really know how to answer front, middle or back.
It is an issue that Bruce Livesay and our technology team have spent a lot of time on. Steven Jones who manages that for us, we spent a lot of time working through these issues.
We have made substantial investment in the infrastructure. But as you can see from the headlines that come up that the threats are coming from a lot of different places.
And so we're always cautious that we don't know what we don't know and that we need to remain vigilant. We stay involved in FS-ISAC and other organizations that help in the sharing of information.
We follow what's going on in the marketplace. And then we work with our regulators and governmental agencies to stay on the front-end of what's happening in the marketplace.
So although I can't characterize it front, middle or back, I think we've made a substantial investment, and I think we'll continue to invest there. But I don't think it will be a huge incremental investment for us.
Operator
Our next question comes from Emlen Harmon at Jefferies.
Emlen B. Harmon - Jefferies LLC, Research Division
I understand you guys don't want to provide too much detail on the litigation reserve. I would just be helpful to understand if that's for some of the kind of existing issues that you guys disclosed in your filings or whether that's something new that you're putting up the reserve for?
D. Bryan Jordan
No, Emlen, this is Bryan. You're right, we don't want to go into the details.
But it is safe to assume that it's related to existing matters that we have disclosed in previous Qs and Ks.
Emlen B. Harmon - Jefferies LLC, Research Division
Got it. And then just one other, going back to Non-Strategic asset sales.
Could you help us, BJ? You noted already that the held-for-sale portfolio was obviously marked.
Would just be kind of curious in terms of differences between what was in that held-for-sale book and sold. And kind of what's in your Non-Strategic consumer real estate book?
And how those assets comp?
William C. Losch
Sure. So what we sold out of the held-for-sale were largely loans that we had repurchased, when we were doing the Fannie, Freddie mortgage repurchases, right?
So if there was a loan to be repurchased, we bought it back, we marked it, and then we managed it. And so those were mostly, well, they were all firsts -- a mix of performing, modified and reperforming and nonperforming.
So that is going to be a little bit different from what we have remaining in the Non-Strategic portfolio, which consists of home equity lines of credit. Some installment loans that are still outstanding, TRUPs, of which we have a portfolio.
So they are going to be a little bit different. And certainly, those are held to maturity versus these being held-for-sale, hence, being more liquid.
But to the extent that we can find opportunities to make economically attractive deals on those, we will certainly look at that.
Operator
The next question comes from John Pancari at Evercore.
Stephen M. Moss - Evercore Partners Inc., Research Division
Actually, Steve Moss here for John. Circling back on to the Non-Strategic loan sales here in this quarter.
Was the marked balance around $200 million for the loans you sold this quarter?
William C. Losch
Let's see, trying to do it in my head it. Yes, about $200 million.
Stephen M. Moss - Evercore Partners Inc., Research Division
Okay. And judging by what I see on the balance sheet, there's probably about $120 million left in terms of nonstrategic loans held for sale?
William C. Losch
Yes. There's about $150 million, I believe -- $120 million of it is student loans that are government guaranteed.
So basically, at par, they're not going to fluctuate much on a marked basis, and the other $30 million will fluctuate.
Stephen M. Moss - Evercore Partners Inc., Research Division
Okay. And then one more thing with regard to loan yields this quarter.
Commercial loan yield came down 8 basis points, quarter-over-quarter, perhaps a bit more than I would have expected, given the increase in average balances for mortgage warehouse. Just kind of wondering, where you're seeing the competition and where the new money yields are coming in.
Susan L. Springfield
I'll be glad to take that. This is Susan.
We are -- obviously, competition is fierce for new loans. We have seen positive grade migration both in terms of existing clients, as well as new business that we're bringing on.
We're bringing on very high quality business. And so from a risk-adjusted return, often the spread on those loans obviously is lower.
But we remain disciplined in terms of the pricing and underwriting.
D. Bryan Jordan
Steve, this is Bryan. I'm -- we've talked a lot about competition for a while, and I think just reading whatever I've read over the last few days, I think people are still talking about it.
It's still a very competitive environment out there. And I continue to be extraordinarily pleased with the work that our bankers are doing, day-in, day-out to maintain discipline in terms of pricing, to grow relationships, to make strong calling efforts and to build the overall franchise value of the organization for the long term.
So it is competitive environment, and it is one that you're going to see spreads be moved up or down by a number of different factors, whether it's higher -- lower risk borrowers and by necessary -- by necessity lower spreads or various things of that nature. But I am very, very pleased with the work that our bankers are doing.
And it's not something I think that we've commented on before, but the other thing that I'm kind of excited about is the fourth quarter tends to be a little seasonally slower in a lot of ways in terms of lending volume. Our pipelines going into fourth quarter continue to be very strong.
So we're optimistic about the fruits of their effort as we move into the last part of this year.
Operator
Our next question comes from Kevin Barker of Compass Point.
Kevin Barker - Compass Point Research & Trading, LLC, Research Division
Could you talk about your -- the HELOC bids that you're seeing out there, given that remains the biggest portion of your Non-Strategic portfolio? And what other efforts you can look at in selling parts of your HELOC portfolio, given there are quite a bit of payment shocks that are occurring over the next couple of years?
D. Bryan Jordan
Yes. This is Bryan.
We haven't had any significant or any real effort to market the HELOC portfolio. We are not emotionally attached.
So in the event that we find the right kind of opportunity, we would certainly pursue it. We've been dealing with the credit aspects of payment shock, our folks going into repayment, and Susan can pick up on this.
This is an aged portfolio. We basically wrote a 5/15 or a 10/10 contract.
And I think the last loans that went into it basically were in 2007. So we've seen and we've got a lot of experience in managing the transition from the revolving period to the payment period.
And we've had reasonably good success in terms of our proactive efforts. So I don't -- and one last point, the credit quality updated in the appendix in the supplemental slides, is we updated credit quality, we refreshed FICA scores and we report the trends on credit quality.
And credit quality continues to remain very high. So it's been a good performing portfolio.
We don't see that the transition from revolving to payment to be a huge issue. Susan?
Susan L. Springfield
Yes, I'll add to that. We've actually seen the last 5 quarters, where the annualized charge-off rate on HELOCs that have entered the repayment period come down.
So we're very pleased with that. We believe that due to a couple of factors.
One, we do have a more proactive approach that we put in place about a year ago, a more proactive where we talk to borrowers via online statements, messaging that they have an upcoming -- they're ending their draw period, will be entering repayment. And we now reach out to them 9 months in advance and touch them several times as they're nearing the end of draw.
So we believe that, that more proactive approach is improving the charge-off rate there, as families have an opportunity to adjust their budget. The other thing, and we've done a lot of analysis on the payment shock.
The average payment shock in our HELOC portfolio is about $470 when they go from draw into repayment. And if you just look at the minimum payment compared to what the new payment would be for under -- let's say, go into repayment, it's about 250%.
But based on what our borrowers are paying during the draw period, they're paying more than that minimum payment and that reduces that shock to about 150%. So we do, as Bryan mentioned, a lot of analysis here, and we're very pleased the FICA scores continue to remain very, very strong.
Kevin Barker - Compass Point Research & Trading, LLC, Research Division
So when I compare second quarter to the third quarter, the increase in delinquencies and from on the 30-day delinquency level for the HELOC portfolio, would you consider that more seasonal? Or is that just a temporary blip that you're seeing, not something related to the payment shocks?
Susan L. Springfield
Yes, we will see some seasonality in terms of HELOC delinquency. And occasionally, you can have some larger loans that will cause an increase and it's not representative of really a portfolio change.
Operator
At this time, we show no further questions. Would you like to make any closing comments?
D. Bryan Jordan
Yes, thank you, Amy. Thank you all for joining the call this morning.
Please let Aarti or any of us know if any have any further questions. We appreciate your interest, and I hope you all have a great weekend.
Thank you.
Operator
The conference has now concluded. Thank you for attending today's presentation.
You may now disconnect.