Oct 18, 2013
Executives
Cynthia Christopher - Manager, Investor Relations Vincent Delie - President and Chief Executive Officer Vincent Calabrese - Chief Financial Officer Gary Guerrieri - Chief Credit Officer
Analysts
Jason O'Donnell - Merion Capital Group Frank Schiraldi - Sandler O'Neill Tom Frick - FBR Capital David Darst - Guggenheim Securities Collyn Gilbert - Keefe, Bruyette & Woods Matthew Breese - Sterne, Agee Nate Middleton - FIG Partners Bob Ramsey - FBR Capital
Operator
Good day and welcome to the F.N.B. Corporation third quarter 2013 earnings conference call.
(Operator Instructions) And now I would like to turn the conference over to Cindy Christopher, Manager of Investor Relations for F.N.B. Corporation.
You may begin.
Cynthia Christopher
Thank you. Good morning and welcome to our third quarter earnings call.
Please note that this conference call of F.N.B. Corporation and the reports it files with the Securities and Exchange Commission often contain forward-looking statements.
Refer to the forward-looking statement disclosure contained in our earnings release, presentation materials and in our reports and registration statements filed with the Securities and Exchange Commission and available on our corporate website. A replay of this call will be available until October 25, and a transcript of this call and the webcast link will be posted to the shareholder and Investor Relation section of our website.
I will now turn the call over to Vince Delie, President and Chief Executive Officer.
Vincent Delie
Good morning and welcome to our earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer; and Gary Guerrieri, our Chief Credit Officer.
I will highlight our third quarter performance and discuss several strategic developments; Gary will review asset quality; and Vince will provide further detail on our financial results along with the expectations for the fourth quarter of 2013. Vince will then open the call up for any questions.
Let's begin by looking at the quarter's results. We generated operating net income of $32 million or $0.22 per diluted share.
This translates into a 112 basis point return on average tangible assets and over 18% return on average tangible equity. These profitability measures exceed peer results as shown on Slide 7 of the presentation.
A key profitability driver is our ability to deliver consistent loan and low cost deposit growth. We performed very well during the third quarter with annualized total loan growth of 9%.
Year-to-date commercial production is at record highs and we posted annualized commercial loan growth of 4%. Line utilization rates remains at all time lows and trended slightly down at the end of the third quarter.
While this impacts outstandings in the short-term, our strategy focused on establishing these client relationships will benefit F.N.B. in the future.
Consumer loan growth was very strong at 25% annualized, as we realized benefits from repositioning our delivery channel and expanded footprint, and increased seasonal demand. You'll recall that we have a branch optimization strategy designed to continuously reposition our resources.
This strategy has generated considerable cost savings through the consolidation of close to 50 locations since the start of 2012. We have chosen to reinvest a portion of these savings to enter higher growth markets through eight de-novo expansions.
These actions improve efficiency and deliver growth, supported by our proprietary sales management process and we are beginning to see tangible results from our efforts. Low cost transaction deposit growth continued at a rate of 7% annualized through very strong non-interest bearing deposit growth of $132 million or 28% annualized.
The majority of this growth is a direct result of obtaining new commercial clients as well as seasonal influences. Growth in these low cost balances strengthens the funding mix and contributed to improvement in the net interest margin.
We have achieved solid growth in loans and transaction deposits over a sustained period of time, and Slide 9 provides a view of this growth since 2010. Organic loan growth has averaged over 6% and average growth in transaction deposits has been nearly 9%.
These results are largely attributed to acquisition-related expansion and gaining scale in higher growth markets. Our acquisition strategy continues to progress well.
The Park View transaction closed on October 12, and we now have 29 locations in Eastern Ohio with 18 in the Greater Cleveland area and regional headquarters in downtown Cleveland. We are well prepared to execute our strategy.
The customer conversion went seamlessly and our team did an outstanding job. We have attracted and retained top talent in the markets and have an exceptional local leadership team on board.
Production goals are established and aligned with the expectations set in our modeling process, and our sales management system and culture is already solidly in place. In the Maryland market, we are hitting our exceeding production goals and the pipeline at quarter end is healthy.
We also recently secured space and signage rights for our regional headquarters in downtown Baltimore. This highly visible office building is located in the Inner Harbor and conveys our commitment to the area.
The BCSB transaction is targeted to close next February, and it will move us into the number 10 market position in the Baltimore MSA. The expansion efforts are progressing as planned and exceed our expectations in many instances.
The smaller scale of these recent acquisitions is lower risk. This is by design and allows us to strategically enter these markets, build a presence and significantly enhance our organic growth prospects.
Both markets compliment F.N.B.' s proven core competencies and we are pleased with the early stage results.
Given our growth, it was timely for F.N.B. to become a rated financial institution.
In early October, we secured an investment grade rating from Moody's, which provides enhanced access to capital markets and benefits efforts in the field. Our commercial bankers now have expanded capability to obtain the business of certain credit and large depository clients, requiring an investment grade rating.
This also distinguishes F.N.B. as one of the few rated financial institutions of our size.
Investment such as these, position the company for sustainable success and are occurring companywide. From mobile banking initiative that produce revenue growth and account acquisition to consistent investment in our risk management infrastructure, we are continuously balancing efficiency, growth and risk management.
Looking specifically at our risk management platform, cost associated with our infrastructure has increased over 50% during the last fiver years. These costs are embedded in our run rate expense levels and reflect our long-term commitment to a strong risk management culture.
With the significant investments we have already made, we are well-positioned to manage increased regulatory burden. In summary, we are very pleased with our operating results.
The quality of our earnings is strong and profitability drivers continue to demonstrate solid results. We have achieved a major strategic milestone with the establishment of F.N.B.
in three major markets, Pittsburgh, Cleveland and Baltimore. This positioning along with our existing foundation provides great potential and we are excited about the opportunities ahead of us.
With that, I will turn the call over to Gary, so he can share the quarter's asset quality results.
Gary Guerrieri
Thank you, Vince, and good morning, everyone. It was another very solid quarter from a credit perspective, with our overall performance metrics remaining at good consistent levels.
The third quarter's results include very low net charge-offs, a stable reserve position, slightly improved delinquency and continued positive movement in our very solid NPL plus OREO levels. I will focus my comments on the originated book, which we believe provides the clearest view of our core portfolio trends and will then briefly discuss our acquired portfolio.
Net charge-offs were very low at $5 million or 26 basis points annualized, reflecting solid performance for the quarter, remaining just below the year-to-date level of 27 basis points annualized. The originated provision for loan losses was up $900,000 over the prior quarter at $7.5 million due to strong loan growth, while our reserve positions remained stable at 1.34%.
Originated non-performing loans in OREO improved 10 basis points during the quarter to 1.49%, marked by lower non-accrual and OREO levels due to the resolution of some problem assets. Delinquency remained unchanged in the quarter at a very good level of 1.44%.
We are pleased with the current position of our originated portfolio and the further improvements we experienced during the third quarter, as it continues to trend as planned. Shifting now to our acquired loan portfolio.
We ended the quarter at $950 million in loans carried at fair value. This portfolio continues to perform slightly better than expected due to the curing and resolution of some delinquent accounts as well as improved future estimated cash flows.
The level of contractually past due accounts ended the period at $58 million, a $12 million decrease from the prior quarter. As a result of these positive loan quality trends, a small benefit was realized, as it relates to the acquired reserve.
Following the end of the quarter, we finalized the conversion of the Park View loan portfolio. Consistent with our strategy for acquired books, we have been closely monitoring it throughout the course of the entire due diligence process and are pleased with the day-one position of the portfolio relative to our initial estimates.
As we move into the final quarter of 2013, we continue to be very pleased with the overall credit quality performance and the solid position of our loan book at this point in the year. The portfolio demonstrated consistently good results and remains within our targeted ranges as anticipated, which we attribute to our strong banking team, sound credit delivery process and a rigorous approach to managing risk.
This balanced strategy has driven our positive credit results throughout the cycle. And as we grow both organically and through acquisitions, we will continue to manage our book in this manner.
I'd now like to turn the call over to Vince Calabrese, our Chief Financial Officer for his remarks.
Vincent Calabrese
Thanks, Gary. Good morning, everyone.
Third quarter operating results of $0.22 per share reflect strong balance sheet growth, a slightly expanded net interest margin and very good credit quality results. Revenue was maintained at a level consistent with the prior quarter, as solid growth in net interest income offset the $2.6 million Durbin impact.
Let's start with the balance sheet highlights on Slide 13. These results were strong and better than we expected, with linked-quarter loan growth of $200 million or 9.3% annualized, with growths in both the commercial and consumer portfolios contributing.
Market share gains continued to drive commercial results, as commercial line utilization remained at historical lows, as Vince discussed earlier. The consumer loan portfolios had strong growth of $172 million or 25.3% annualized.
The growth is predominantly in home equity installment products, originated across our branch network. Two-thirds of the third quarter's volume represents a first lien position.
Looking ahead to the fourth quarter, we expect to achieve continued solid organic loan growth results at an annualized rate in the mid-single digits. Funding trends were positive with continued strong growth in lower cost transaction account balances, offsetting a planned decline in current deposits.
The quarter benefited from new account acquisition and seasonally higher balances in business accounts. Growth in non-interest demand deposits was a primary contributor, with growth of $132 million or 27.5% annualized.
This further strengthened the funding mix with transaction deposits and customer repos comprising 78% of the total, improved from 74% a year ago. The team's ability to consistently bring in these lower cost deposits along with the loan relationships is an important contributor to maintaining our net interest margin.
We expect to see continued organic growth and transaction deposits and repos at a seasonally related lower growth rate than the third quarter. This combined with planned declines in current deposits is expected to produce flat-to-low single digit total deposit growth.
The third quarter net interest margin expanded 1 basis point to 3.64%. The margin benefited from the solid growth in loans and non-interest bearing deposits, a lower cost of funds and higher yields on the investment portfolio due to more favorable reinvestment rates and reduced premium amortization.
Our diligent [ph] asset processed and pricing strategies have served as well in managing the net interest margin to relatively stable position. With our success managing the margin through a combination of levers, reaffirm our guidance for full year net interest margin in the low-to-mid 3.60s, with some slight narrowing expected during the fourth quarter.
Looking now at non-interest income and expenses. Total non-interest income decreased $3.9 million, as expected, due to the $2.6 million Durbin related impact to debit card interchange revenue and a $1.6 million gain on extinguishment of debt that was recognized in the second quarter.
Excluding these items, non-interest income increased slightly with overall solid results from our other revenue streams. On a year-to-date basis, operating revenue grew 3.3% compared to the prior year period.
Non-interest expense, excluding merger costs, increased $1 million or 1.3% with lower occupancy and equipment and OREO cost, offset by higher personnel costs. The increase in personnel costs reflects higher accruals for incentives and performance based compensation tied to our financial results.
The impact of preemptive hiring for our expansion markets and some severance cost related for the consolidation of six locations. We expect to reinvest the cost savings generated from this year's consolidation efforts into planned de-novos and higher growth potential markets.
For the fourth quarter, we expect non-interest income to be in line with the current quarter. On the expense side, expectations are for non-interest expense to decline from third quarter levels.
These expectations are for core F.N.B. and do not include Park View.
As Gary discussed, asset quality was very good during the quarter, as results continue to favorably trend within our expectation. Provision for loan losses is expected to be in the $8 million range in the fourth quarter, slightly higher than the third quarter due to normal seasonal fluctuation.
These expectations would result in a full year provision for loan losses in line with the prior year level, which is slightly better than our original expectations. The effective rate for the quarter included a benefit of $1.4 million in tax credits, realized on the most recent tax return.
We expect the effective GAAP tax rate to return to a 28% to 29% range in the fourth quarter. Regulatory capital levels continue to exceed all well capitalized thresholds and estimated ratios are consistent with prior quarter levels.
The tangible equity ratio of 6.09% compared to 6.11%, reflecting the strong asset growth during the quarter. As Vince mentioned, we recently added Park View to F.N.B.
This transaction will add approximately $715 million in assets, $500 million in loans and $620 million in deposits. Given the size of the transaction, we expect it to be relatively neutral to earnings for the fourth quarter, exclusive of one-time merger costs.
In closing, I would like to join Vince, congratulating the team on successfully completing our third acquisition, integration and conversion since 2012. This is a core competency at F.N.B.
and we are very proud of the team we have in place to make these conversions happen and support our continued growth. This concludes our comments and I will now turn the call over to the operator for questions.
Operator
(Operator Instructions) And we'll take our first question from Jason O'Donnell with Merion Capital Group.
Jason O'Donnell - Merion Capital Group
On the expense front, how much if any of the linked-quarter incremental incentive and performance related compensation expense is non-recurring in nature?
Vincent Calabrese
Well, if you look at expenses, let me just comment on that for a minute. There was quite a bit of noise in the quarter.
The first thing I should say that the third quarter is one we typically take a hard look at our incentive and performance-based accruals to see where we stand relative to our performance nine months into the year. Given the very strong loan growth, better than what we had expected, we increased our accruals by close to $2 million to true-up the nine month period.
We also had some elevated medical claims for the quarter, which can be choppy. So on a combined basis, this added $2.5 million to the third quarter expenses.
I don't expect to record anywhere near that amount in the fourth quarter because, one, you'll just have three months worth of the expense. So it will be significantly lower than that kind of $2.5 million.
And then we also had just a couple of other comments on expenses for everyone. We also had about $0.5 million in cost related to hiring third-parties to help us with stress testing.
And we'll probably have another quarter of that and then that will drop off. And then as I mentioned in my remarks kind of the preemptive hiring in advance of the deals, but now that the deals are on board, you'll get the benefit of that by having the team hit the ground running.
So without the merger costs, I guess Jason just to kind of close that out, expenses would have been $82 million for the third quarter. And looking ahead to the fourth quarter, I expect that to be closer to $80 million without the merger costs.
Jason O'Donnell - Merion Capital Group
And then one more question, on the lending side, can you tell us where home equity line utilization is pacing or at least in the third quarter and what that trend has been?
Gary Guerrieri
Jason, that portfolio averages up a little north of 50%, in 55% to 60% range. So it does bounce back and forth a little bit, but that is typical from a line utilization standpoint.
The activity and volume in Q3 was heavier to the term loan side, so there was very good fundings on those terms loans naturally, right out of the gate.
Operator
And we'll take our next question from Frank Schiraldi with Sandler O'Neill.
Frank Schiraldi - Sandler O'Neill
Just a couple of quick questions. First, I wanted to ask about, it looks like you guys have had pretty good success in taking lenders and taking business from others, and growing organically as well as growing through acquisition.
And it doesn't sound like to me from your comments, Vince, you expect a lot of growing pains in the short-term on the expense side. Vince, you mentioned that sort of regulatory costs have been built-in and are somewhat behind you.
And I just wanted, if you could talk a little bit about 2014 and your expectations for efficiencies in 2014. Should we expect efficiency ratio to sort of hover around current levels or would you think directionally we could move up or down?
Vincent Delie
Well, I can't really comment on '14. We'll be giving guidance on '14 later in the year, in January.
So I can't give you any detailed information. But the point of mentioning the investment in our risk management systems, a number of equity analysts and institutional investors have asked us, what the consequences of moving above $10 billion means for us.
And we've repeatedly told those folks that we've made considerable investments all along the way in our risk management system and we actually conducted a study to make sure that we have kept pace with the growth. And when we look back at it, it was kind of remarkable that there was a 50% increase in a number of areas that are directly related to the regulatory environment.
And I think we've made that investment. And on a go-forward basis, we're very well prepared at this stage in the game to cope with the regulatory climate as we move into '14 and '15.
So that was the point in mentioning that. There has been no degrading of our culture and we're very focused on risk management.
It's evident in the performance of our portfolio. As Gary mentioned, the credit metrics are exceptional.
So we're still focused on it. From an overall efficiency standpoint, we also mentioned, we consolidated 50 branches.
I think in the last two years, we've consolidated 50 branches. So our efficiency in terms of directly relating it to the efficiency ratio, sure, we would expect to continue to improve over time, as we reap the full benefits of repositioning in the higher growth markets and taking out lower performing retail branch location.
So our expectation is that we would continue to improve over time and that's the reason for the strategies that we laid out.
Frank Schiraldi - Sandler O'Neill
Is there a goal for the efficiency ratio over time, a longer-term goal or has one not been disclosed?
Vincent Delie
We've talked about it before. I'll let Vince comment on it.
Vincent Calabrese
And we've talked about over a longer-term, getting closer to 55% as a goal, once we have all the acquisitions kind of fully in gear and fully contributing to the company. As you know, we are very disciplined in expense control.
We always have been as a company. We've mentioned in the prior call, we've had some initiatives, the branch initiatives, something we've talked about; vendor management, we really kind of ramped up our vendor management program; things like process reengineering, so that we continue to grow; taking a look at how we move things through our processes is something we'll take a look at.
Vincent Delie
Frank, as I look around, I am very impressed with what this company has done. I mean the headwinds in every year it's been something major, FDIC premiums, elevated Durbin, rising regulatory cost.
I think we've done a great job managing our expenses and growing through that and managing integration of acquisitions to give us scale to cope with it. So I would expect over time, if we're not throwing another curve, we should be able to perform exceptionally well.
Frank Schiraldi - Sandler O'Neill
And just switching gears to M&A, just wanted to see if you could remind us on your ability and willingness to do additional deals. And then how you're thinking about geographies at this point?
Is it more fill out the geographies you're in or possibly additional new geographies?
Vincent Delie
We've gotten through, as Vince mentioned. We've integrated three.
We have one small deal left in February and that's gone exceptionally well. And because of the Annapolis deal, we already have a great leadership team in place there.
So integration of that particular acquisition should be a little smoother because of what we've already built. So we really don't have a lot on our plate.
I would say, we continue to look for opportunities that will enhance shareholder value. We continue to look for situations, where we can take cost out and benefit from being in higher growth markets.
Our strategy from an M&A standpoint, we repeatedly told you and others that our strategy is centered around positioning the company to benefit from organic growth opportunities. We don't just attach the banks that we buy, we essentially deploy our model and drive growth.
So I would say, we would be open to looking for opportunities that provide either expense takeout or growth opportunities that match our organic growth profile.
Operator
And we'll take our next question from Bob Ramsey with FBR Capital.
Tom Frick - FBR Capital
This is actually Tom Frick. I just have one kind of overall kind of strategy question.
You mentioned that you closed about 50 branches in the last two years, but you're also looking to de-novo in some of your newer footprints. How do your new branches look different from your old branches from a square footage or FTE standpoint?
Vincent Delie
Well, the new branches are smaller than some of the older branches. They are more streamlined.
We have deployed technology in the new branches that doesn't exist in some of our older locations that aren't as productive. So adding cash dispensers and advanced ATM machines that have remote capture embedded in them.
All of those features have been rolled out in the new locations. And some of the new locations that we've rolled out, we've gone to teller pods, so that there is more interaction with the client.
So I would say that the strategy has been to shrink the size of square footage, to move into areas where we more thoughtfully considered the growth potential or to basically fill in a gap in the delivery channel. We've been very deliberate in where we've gone and I think that we've really evolved the model.
So it's smaller, there is more technology deployed and the people that are sitting within the locations are geared more towards. They have more of a sales orientation than they do processing transaction.
Tom Frick - FBR Capital
And then, I kind of wanted to switch gears and talk about, you mentioned how NIM was helped by lower premium amortization and higher reinvestment rates. I'm just curious on the reinvestment piece, what are you currently reinvesting at this quarter?
And what are you buying?
Vincent Calabrese
When you look at our investment portfolio, we continue to cash flow about $100 million a quarter. And those securities are coming off at about 2.05 and we're reinvesting it at 2.15 right now, duration about 3.5 to 4, really just buying plane de-novo securities.
We don't buy anything exotic, but importantly we're now reinvesting higher than what's rolling off, where few quarters ago it was 50 basis points the other way, so we're actually picking up 10 basis points based on reinvestment today. If I could comment on the margin little bit.
So overall, obviously we're very pleased with what happened there. The key drivers there to reiterate strong loan growth, strong DDA growth and the reinvestment of securities, premium amortization, we really had no accretable yields benefit this quarter.
So that wasn't part of the margin. And accretable yields lumpy from quarter-to-quarter, but really was virtually no benefit there.
So really, it was just the strong growth and the balance sheet mix that we were able to bring on.
Vincent Delie
It's a reaffirmation of the strategy we've deployed in the yield and the folks have done a great job of pursuing demand deposits. That's really helped us lower our costs.
So that's a big part of the margin improvement.
Tom Frick - FBR Capital
And then just kind of one final question. We've seen a lot of companies actually see FDIC insurance expense come down a little bit.
Yours was slightly higher quarter-over-quarter, and you cited kind of revised assessment methodology. I was wondering if you could go into any more detail about that.
Vincent Calabrese
This is our first year being over $10 billion. And there is some new line items we've added and the call reports using for the calculation now so, kind of you netted it altogether and most recent invoice we have we had was about $0.5 million higher than what we were booking in the prior quarter.
So it's probably a good run rate as we go forward, where we work for the third quarter. I don't expect that to keep going up.
And then as they roll forward, with all the various elements of that, things roll off, new things come on, and so nothing disturbing there. Just kind of, I think part of us now being over $10 billion and getting used to the new approach.
Operator
And we'll take our next question come David Darst with Guggenheim Securities.
David Darst
With the home equity growth, is that a product or something you are trying to manage or kind of move some clients maybe refying them out the residential portfolio into the home equity?
Guggenheim Securities
With the home equity growth, is that a product or something you are trying to manage or kind of move some clients maybe refying them out the residential portfolio into the home equity?
Vincent Delie
It's probably a function of a bunch of different factors to be truthful. In the growth first of all, it was across the entire company.
It was more pronounced in the Pittsburgh area because we have a little more density in that market, but it was fairly consistent across the footprint. I think a couple of things are driving that, first of all, if you recall there was a little surge in interest rates, so that spurred people to action.
So we had fairly attractive 10-year fixed rate product out there. People wanted to refinance into it and take advantage of it before rates kicked up.
The second factor is the prepayment speed in those portfolios have slowed, so the production levels that you're getting have added more to the balance that you're seeing in the growth percentages. And the other aspect of it is and we've talked about this repeatedly with a number of you folks, we put a fairly robust sales management system in place where we track activity daily.
So managing the production process in the field has improved tenfold over the last three years here. So we're getting more of our share of the market than we were getting in the past.
And that's all of those factors are baked into the growth portfolio. There is a lot of first mortgage activity going on.
Gary, I don't know if you have the statistics on these portfolios.
Gary Guerrieri
For the quarter, it was two-thirds of the volume and that's not atypical for our portfolio. When you look at the activity that we've had and reported to you in the past, it has always been a significant piece of our business.
On the whole, it's slightly under that two-thirds level today, with some of the acquisitions that we brought on, but that continues to be a major piece of our home equity book.
Vincent Delie
Low loan-to-value, fairly short tenure average life, it's below nine years on the new production, so its good solid business.
David Darst
Can you share with us the yield that originated those out?
Guggenheim Securities
Can you share with us the yield that originated those out?
Gary Guerrieri
I don't have the yield at my fingertips on a weighted average basis, so I don't have that for you.
David Darst
And then with the PVF acquisition, mortgage gain on sales is a large part of their fee income. Can you maybe give us an expectation of, obviously the environment will bring that down, but also strategically are you doing anything differently with their mortgage banking operations?
Guggenheim Securities
And then with the PVF acquisition, mortgage gain on sales is a large part of their fee income. Can you maybe give us an expectation of, obviously the environment will bring that down, but also strategically are you doing anything differently with their mortgage banking operations?
Vincent Delie
We have changed their operation. Their operation was run slightly differently then ours, but for the most part what I see going forward for us is actually an enhancement through our mortgage banking operation.
And we've done very little in terms of originations across our footprints. And as I mentioned, we're now in three major MSAs with 7 million people just in those three metro markets.
It's over 3 million households. And last year, we did $380 million in originations in our mortgage company.
So I would tell you that the good news is there is quite a bit of business to go after in terms of purchase money in those three markets. And we're gradually investing in our mortgage banking operation to take advantage of that.
So we're not coming off of huge years of gain on sale. We had relatively small compared to our total net income, so there is a lot of potential for us in that business.
Vincent Delie
When we modeled Park View, we had a substantial reduction in the mortgage gains that we put in our model relative to where they were running. So that's kind of already baked into our run rate, I mean our guidance that we have given.
David Darst
But strategically you're still going to leave that platform in place and we'll see a ramp up in the gain on sale and it will be skewed to the Ohio market, is that correct?
Guggenheim Securities
But strategically you're still going to leave that platform in place and we'll see a ramp up in the gain on sale and it will be skewed to the Ohio market, is that correct?
Vincent Delie
I'm not sure that that's correct. I think that as we build out our capability you should be seeing lift across all three of those major metro markets, not just in Cleveland.
So we have a lot more we can do in Pittsburg, just on the purchase money side. I mean there is a lot to do, so I would say we will leverage our mortgage loan originators across our entire delivery channel.
Operator
And we'll take our next question from Collyn Gilbert with Keefe, Bruyette & Woods.
Collyn Gilbert - Keefe, Bruyette & Woods
Just a quick follow-up on the mortgage discussion. Vince, you had said that you had lowered your expectations on PVSC coming into the F.N.B.
fold. Can you give a little bit more color as to how much, I mean if I'm looking at a right number, it looks like they had about $2.5 million of mortgage banking fees in the second quarter.
And I didn't know if we could cut that by like 50% or just trying think about to quantify how you scale back your expectations?
Vincent Calabrese
My retroaction is we cut it by about 50% or even a little bit more to understand.
Vincent Delie
And we did not anticipate as to sustaining that level, particularly given where rents were headed at the time, so we cut it back significantly.
Vincent Calabrese
And I would say, Collyn, too that overall, when baked into that number, given its relative size and where it's coming in, we expect it to be neutral to earnings for the quarter for us.
Collyn Gilbert - Keefe, Bruyette & Woods
And then just following up on the home equity discussion, so the bulk of the production that you guys are doing now, is that loans or lines?
Gary Guerrieri
The bulk of the production in Q3, Collyn, were term loans.
Collyn Gilbert - Keefe, Bruyette & Woods
But you said it's unlike like 10-year duration?
Gary Guerrieri
On average life on those portfolios are eight to nine years. They are bouncing around eight to nine years.
Collyn Gilbert - Keefe, Bruyette & Woods
Just one other question, Vince, on the provision, I know you had said $8 million kind of we're thinking about for the fourth quarter. How are you thinking about that in terms of net charge off trends, and I guess tying that into the reserve.
I mean, are you at the point where you'll probably keep that reserves steady at 1.25?
Gary Guerrieri
Collyn, our reserve has been directionally consistent with the performance of the portfolio. And as you can see, it has gradually trended down over the last couple of years to today's levels, which have slumps, continued chunk, continued slight reductions in that reserve level.
We'll continue to manage the portfolio in that way. And depending upon the performance of the portfolio, adjustments will be made accordingly.
Collyn Gilbert - Keefe, Bruyette & Woods
And then I guess just one, sort of bigger picture here, sort of a strategic question, Vince. You guys have done such a tremendous job of growing organically, acquisitively, and while you're certainly building capital internally, how are you thinking about sort of your capital buckets and your overall capital structure going forward?
I mean, would you balance the growth such that you wouldn't necessarily need to come back to the market to raise more capital or would you be more opportunistic in adding to the capital structure as growth comes your way?
Vincent Calabrese
I would say just to comment on capital, Collyn, overall I mean the investment thesis that we've utilized for many years now is in still in place. We've managed capital efficiently in the past.
We're going to manage capital efficiently under Basel III. The levels if you do some kind of preliminary calculations on where ratios would be, we're very comfortable with where the levels are.
So in the capital stack that we have today, with the rules the way they are, the capital stack is fine. So we're very comfortable with where we are from overall capital position.
Collyn Gilbert - Keefe, Bruyette & Woods
So is there a certain metric that you're managing to more than another, I mean is it Tier 1 common? I presume it's not TCE or is it?
I mean could you continue to take that down, even below 6%.
Vincent Calabrese
I wouldn't want to be below 6% on that. I mean we look at that the leverage ratio is obviously key one.
And we like the level that we're at, we're comfortable at. If you go a little bit lower, but not much lower than that, I mean 8% is kind of a level that I wouldn't want to be below, the TCE at 6%.
We don't have a hard and fast number that we're managing. I mean we just look at the overall balance sheet growth and it's the levels that we have kind of baked into our guidelines, that the actual levels reflect that.
Vincent Delie
I would say if you look back, Collyn, historically at the performance of the portfolio from a risk perspective and our historical capital levels, we are actually higher than we have been historically. And I would say that our desire to manage capital efficiently is going to continue into the future.
So I think we're in a good place and we've done a good job of managing through the cycle. And because of our low risk profile, our capital ratios are clearly enough to support our growth and the risk profile of the portfolio.
Vincent Calabrese
And I guess that just a one point to add to that is as we've talked about we've done several acquisitions here over the last couple of years and each time we do those, you need to get both the Fed and the OCC to approve that. And they've been very comfortable with the way we mange capital and we've never had to make a change because of them.
To Vince's point, in the past we used to run lower, but we've adjusted that over the last few years and are very comfortable where we are.
Operator
And we'll take our next question from Matthew Breese with Sterne, Agee.
Matthew Breese - Sterne, Agee
For the fourth quarter with Park View, did your margin guidance assume any accretable income?
Vincent Calabrese
Park View's margin coming in is really 3.25% or so and relative to the size of us it really doesn't move the dial. So out of the gate, you're going to have just kind of normal accretion that would be booked.
So no, I'm not expecting any significant changes. I mean usually that stuff will come over time if you have positive or negative events that you have to kind of work through.
So really pretty neutral to the overall margin for the quarter.
Matthew Breese - Sterne, Agee
The total and core margin in low 3.60s for the fourth quarter?
Vincent Calabrese
Yes.
Matthew Breese - Sterne, Agee
And then beyond Park View, with BCSB right around the corner, I am assuming it's the same very little impact to the overall margin trend?
Vincent Calabrese
Yes. Their margin is comparable.
So, yes.
Matthew Breese - Sterne, Agee
And then kind of stepping back and back to the M&A discussion, is it fair to assume that you guys are where you want to be as far as acquisitions go in Ohio and Baltimore or would you consider adding on in those markets if the right deal came along?
Vincent Delie
Well, obviously I think there is a lot to do in the markets that we're in, so we continue to grow. Our plan is not to sit at number 10 in Baltimore.
We want to grow our market share either organically or through acquisition. The same is true in Cleveland.
Pittsburgh, there are opportunities I think down the road, maybe to do something, to help take cost out in market deals. I don't think we need to do anything to enhance the delivery channel or the team that we have.
I think both are great. I can tell you that we'll look at opportunities provided that there is good EPS accretion in the first year that we get IRRs that are attractive to us, well above our cost to capital.
And we're moving in the markets that we think we can grow organically at a rate faster than our legacy markets. That's the criteria we use.
Matthew Breese - Sterne, Agee
And how would you characterize deal flow over the last three to six months? Has it picked up or slowdown or just overall color would be great.
Vincent Delie
We had record production levels in a number of areas in the third quarter. So the pipelines going into the third quarter were very, very good.
We're seeing good early indications coming out of Maryland. On the first day after our close in Cleveland, and we have some great activity going on.
It's surprising actually on the consumer and small business side. So I am very optimistic about where we're headed.
Having said that as you move pipelines, there is a lot of seasonality in our business and as you come off of high percentage growth quarters, you'd deplete your pipelines. You have to rebuild it again.
And I think we're well-positioned to do that.
Matthew Breese - Sterne, Agee
I guess I was talking more about from M&A standpoint?
Vincent Delie
I'm sorry, I thought you said production-wise. M&A, we consistently look at opportunities and we're very, very selective.
So I would say that the number of opportunities that we did have come across the desk has been fairly steady for the last four years to be truthful.
Operator
And we'll take our next question from Nate Middleton with FIG Partners.
Nate Middleton - FIG Partners
Just wanted to kind of continue on the M&A talk, just asking what you're seeing out there as far as pricing and how it's changed, if it has changed over the last 12 months, what you guys are seeing?
Vincent Delie
I haven't seen much of a change in pricing to be honest with you. I think it's been fairly consistent.
There's been only a couple of deals announced that would give you a good indication, particularly in the markets that we're in. So I don't anticipate major changes in pricing.
I think it's been so choppy, the economy, what's going on with the government, all the regulations, there's quantitative easing, they're going to stop. I mean it's been so choppy, I don't know that there is a lot of clarity.
So I think that creates a situation where everything kind of stays the same to be driven.
Vincent Calabrese
And the deal flow has been low.
Vincent Delie
There's not a ton going on.
Operator
And we'll take our next question from Frank Schiraldi with Sandler O'Neill.
Frank Schiraldi
Just had a couple of follow-ups. I wanted to ask about fee income.
Vince, I think you had mentioned in your guidance that fee income levels were expected to stay sort of steady in 4Q. In the past, you've talked about revenue offsets to Durbin.
I think you've mentioned that that could start showing up in the fourth quarter. I just wondered if there could be some upside to that number, given some potential revenue offsets or if that's something maybe we could see in the beginning of next year?
Sandler O'Neill
Just had a couple of follow-ups. I wanted to ask about fee income.
Vince, I think you had mentioned in your guidance that fee income levels were expected to stay sort of steady in 4Q. In the past, you've talked about revenue offsets to Durbin.
I think you've mentioned that that could start showing up in the fourth quarter. I just wondered if there could be some upside to that number, given some potential revenue offsets or if that's something maybe we could see in the beginning of next year?
Vincent Calabrese
I would say that guidance that I gave is has kind of that baked in. I mean there has been some things we've done with restructuring or checking accounts, which has given us some benefit.
I think we continue to monitor the competitive environment as far as what others are doing. And part of how we're offsetting Durbin is by the growth that we've had in the loan portfolio and bringing in the demand deposits.
And as Vince referred to the headwinds earlier here, there were some significant headwinds coming into the year and some times use all of them in different ways and into our planning.
Vincent Delie
Our brokerage and wealth business have performed exceptionally well year-over-year, Frank. So some of that's already baked into numbers, some of that was related to adding personnel in those areas in the past, who are now producing, so we're just seeing it there.
Vincent Calabrese
I would add two factors, as you know some of the larger banks are talking more and more about rationalizing the retail banking side. And we're not going to be a leader in this, so we're closely monitoring what others are doing.
If there is opportunity, we'll obviously do that. But I think Vince's point on the non-banking affiliates has really started to contribute more than they were and that helps a lot.
Frank Schiraldi
So the revenue offsets that you were talking about were more broad based. And then just a tougher question on Regency Finance, I know it's just a small piece of the pie.
But just wondering, I think you've expanded that geography a bit over the last couple of years and is that helpful to the growth, is that subtractive, does it not move in the needle? And how do you think about that business in the bigger scheme of things?
Sandler O'Neill
So the revenue offsets that you were talking about were more broad based. And then just a tougher question on Regency Finance, I know it's just a small piece of the pie.
But just wondering, I think you've expanded that geography a bit over the last couple of years and is that helpful to the growth, is that subtractive, does it not move in the needle? And how do you think about that business in the bigger scheme of things?
Vincent Delie
That business is a highly profitable business. It's not very scalable.
The portfolio really hasn't grown that much over time and actually their net income has shrunk relative to the total company's net income. I mean it performed well, but we've grown at a faster rate, at much faster rate than they have, the total company price.
It's a highly profitable business that isn't easily integrated into the rest of the bank and as long as they produce returns like they produced, it's attractive for us, we continue to invest modestly into it.
Vincent Calabrese
And, Frank, I would say that the geographic expansion we've had has been a function of really good managers that have come to us from other companies. Our guys have networks and if you find some opportunities in a market with some really good people, you kind of can build a strategy around that.
So the growth in that portfolio has come out of that expansion. Relative to the size of the company, as you said, it's not significant, but it's nice growth for them.
Operator
And we'll take our next question from Nate Middleton with FIG Partners.
Nate Middleton - FIG Partners
Can you give a little color on how you are offsetting the impact from that?
Vincent Calabrese
Well, it's a combination of things. I mean, I think as I mentioned the strong loan growth that we've had obviously contributes net interest income growth and the loan growth has been better than what we had kind of initially planned.
We've had commented on expense initiatives that we've had the branch optimization strategy is ongoing and we consolidated six offices this year. So that contributes.
The vendor management is another place that we've had a more robust of a program this year than we've had in the past that's contributing. So there's no silver bullet.
Vincent Delie
Nate, we had a plan going into this year that had about 25 line items on it to help overcome that headwind. And it ranged, as Vince said, from additional growth in certain portfolios to better execution from a cross-sell perspective with [ph] wealth shop and investment in wealth to expense initiatives related to vendor management, and putting vendor management systems in place to eat out efficiency to consolidation of branches.
And we in a prior period, we told everybody, we took the action preemptively on 20 branches. We accelerated the ready program to help cope with what was coming.
So that was built into our this year's performance. So it's not a silver bullet.
There were a number of initiatives and I am very pleased with where we are, given that that issue is now behind us.
Operator
And we'll take our next question from Bob Ramsey with FBR Capital.
Bob Ramsey - FBR Capital
Just one follow-up. How much of that direct installment loan growth came from Regency Finance this quarter?
Vincent Delie
That would be minor. Very small.
Gary Guerrieri
It was less than $3 million.
Operator
And there are no further questions at this time. I'd like to turn it back to our speakers for any additional or closing remark.
Vincent Calabrese
I had one other comment that I did mention earlier. I want to clarify, our treatment for the income taxes for the quarter, there's been some different views on what was there.
As I mentioned in my remarks, we had $1.4 million in tax credit that was realized related to a student housing project. The impact of that to earnings for the quarter was $0.01.
It was $0.02, if you relate it to our total shares that are outstanding. So beyond that we had some minor tax returns true-up that we booked.
If you took those items out, our effective tax rate would have been 28% to 24%. So it's only a $0.01 of difference.
And then as I mentioned, we had additional incentive accruals of $2.5 million that we booked altogether. So I just wanted to clarify that, so that people had a kind of clear understanding on that.
And we would thank everyone for participating.
Vincent Delie
Thank you for participating. We appreciate you showing in interest and this was a great call with a lot of good questions.
So thank you very much. Take care.
Operator
And this concludes today's conference. Thank you for your participation.