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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the Community Bank System Third Quarter 2018 Earnings Conference Call.
Please note that this presentation contains forward-looking statements within the provisions of the Private Securities Litigation Reform Act of 1995 that are based on current expectations, estimates, and projections about the industry, markets, and economic environments in which the company operates. Such statements involve risks and uncertainties that could cause actual results to differ materially from the results discussed in these statements. These risks are detailed in the company’s annual report and Form 10-K filed with the Securities and Exchange Commission.
Today’s call presenters are Mark Tryniski, President and Chief Executive Officer; and Joseph Sutaris, Executive Vice President and Chief Financial Officer.
Gentlemen, you may begin.
Thank you, Melissa. Good morning, everyone and thank you for joining our Q3 conference call. Third quarter results were generally quite solid. Year-over-year operating EPS, which excludes the impact of acquisition expenses and securities gains and losses was up over 17%. We’re very happy with these results, as both periods include the impact of the NRS and Merchants transactions in the first half of 2017 and reflect the positive benefit of a lower tax rate and strong organic execution across the company.
Compared to this year’s Q2, operating EPS was down $0.05, all of which was attributable to the $3.4 million impact of Durbin on our interchange revenue which began this quarter. Supporting our results this quarter were very strong fee and fund growth, lower credit costs and well managed operating expenses. We delivered loan growth across the board as well with which we’re satisfied but we’re hoping for a bit more strength. Our deposit base remains solid with average balances declining over the quarter, attributable entirely to public funds as seasonally expected.
Average non-public deposits were up for the quarter and our funding costs are growing slowly, but betas are well contained. Looking forward, we have significant revenue and earnings momentum, reasonable credit demand, a solid funding base and we continue to accrete capital at a substantial pace. A strategic focus for 2019 will be on capital allocation to ensure the continuation of above average shareholder returns with below average balance sheet and operating risk.
Joe?
Thank you, Mark and good morning, everyone. As Mark noted, the third quarter of 2018 was another solid operating quarter for us. We recorded net income of $43.1 million and fully diluted earnings per share of $0.83. This is up $0.15 per share or 22.1% over the same quarter in 2017. On a linked quarter basis, net income decreased $1.5 million or 3.3% and fully diluted earnings per share decreased $0.03 or 3.5%.
An increase in our non-banking fee revenues and a decrease in operating expenses were offset by a decrease in net interest income, lower banking related non-interest revenues due to a $3.4 million or $0.05 per share Durbin related reduction in debit interchange fees and higher income tax expense. Return on tangible equity for the third quarter 2018 was 19.06%. Asset quality remains strong and we continue to capitalize on our strong core deposit franchise.
I’ll provide additional color on the company’s earnings performance in a few minutes, but will start up with a brief comments about our balance sheet and asset quality. We closed the third quarter of 2018 with total assets of $10.66 billion. This was up $26.5 million or 0.2% from the end of the second quarter of 2018, but down $86.6 million or 0.8% from the end of the fourth quarter of 2017 due entirely to a $133 million decrease in investment security balances this year.
Average earning assets for the third quarter of 2018 were $9.33 billion, which was down $122.2 million or 1.3% when compared to the linked second quarter of 2018. Average total loans were up $39.1 million or 0.6% for the quarter, while average total investments were down $161.3 million or 5% including a $143.9 million decrease in cash equivalents due to a seasonal outflow of municipal deposits.
Ending loans at September 30, 2018 were up $62.9 million or 1% from the end of the second quarter and up $44.1 million or 0.7% year-to-date. During the third quarter, outstanding balances in our business lending, consumer mortgage, consumer indirect and consumer direct portfolios increased while home equity balances were down slightly. The business lending portfolio increased $19 million or 0.8% during the quarter and the consumer loan portfolios were up $43.9 million or 1.1% consistent with seasonal expectations.
Total deposits decreased $142.2 million or 1.7% between September 30, 2017 and September 30, 2018, some of our large commercial and municipal deposits opted to sweep a portion of their depository funds to an off balance sheet money market mutual fund sweep vehicle we offer through a third party arrangement. Checking and savings account balances were up 114.6 million and sweep balances were up 102 million between periods. Checking and savings accounts represent 67.4% of our total deposits at September 30, 2018 versus 65.1% one year prior.
Total borrowings and repurchase agreements decreased $62.6 million or 14.3% between September 30, 2017 and September 30, 2018. This is excluding $24.9 million reduction in the company’s trust preferred debt. Shareholders’ equity increased $75.1 million or 4.7% between the periods due largely to an increase in retained earnings.
As of September 30, 2018, our investment portfolio stood at $2.95 billion. The portfolio is largely comprised of treasury securities, agency mortgage backed securities and municipal securities. The effective duration of the portfolio was 3.5 years at the end of the third quarter. The third quarter tax equivalent yield on the investment portfolio, including cash equivalents was 2.54%. Principal cash flows from the existing investment securities portfolio are expected to total 49 million for the fourth quarter of 2018, 179 million for 2019 and 772 million in 2020.
We anticipate reinvesting and potentially pre-investing a portion of these anticipated cash flows in similar types of securities during 2019, but at higher yields. Our asset quality remains strong. At the end of the third quarter of 2018, non-performing loans comprised of both legacy and acquired loans totaled $24.9 million or 0.40% of total loans. This is 7 basis points lower than the ratio we reported at the end of the linked quarter of 2018 and 3 basis points higher than the ratio reported at the end of the third quarter of 2017. Our reserves for loan losses represent 0.80% of total loans outstanding and 0.96% of legacy loans outstanding.
Our reserves remain adequate and exceed the most recent trailing four quarters of charge-offs by a multiple of 4. We recorded $2.2 million in the provision for loan losses during the third quarter of 2018 versus $2.3 million in the third quarter of 2017. The allowance for loan losses to non-performing loans was 201% at September 30, 2018. This compares to 169% at the end of the linked second quarter and 205% at the end of the third quarter of 2017. We recorded net charge-offs of $1.7 million or 11 basis points annualized on the loan portfolio during the third quarter of 2018 versus $1.8 million in net charge-offs or 11 basis points annualized during the third quarter of 2017.
Year to date net charge-offs totaled $5.8 million or 12 basis points. We do not currently have any commercial OREO properties and the internal loan risk ratings portends stable asset quality. Our capital levels in the third quarter of 2018 continue to be very strong. The tier 1 leverage ratio was 10.72% at the end of the quarter, over two times the well capitalized regulatory standard. The tangible equity to net tangible assets ended the quarter at solid 9.13%. This is up from 9% at the end of the second quarter of 2018 and 8.61% at the end of 2017.
Shifting to the income statement, net income increased $7.9 million and fully diluted earnings per share increased $0.15 or 22.1% between the third quarter of 2017 and the third quarter of 2018. We recorded net income of $43.1 million or earnings per share of $0.83 in the third quarter of 2018 versus 35.2 million to net income, earnings per share of $0.68 in the third quarter of 2017.
During the third quarter of 2018, the company recovered $0.8 million of vendor contract termination charges that were recorded in acquisition expenses during the second quarter of 2017 and $0.7 million in net unrealized gains on the company’s equity securities portfolio and $0.3 million loss on debt extinguishment. Excluding these items, third quarter 2018 fully diluted earnings per share was $0.81 as compared to $0.69 per share in the third quarter of 2017, resulting in a $0.12 per share or 17.4% increase between the periods on an operating basis.
On a linked quarter basis, the fully diluted earnings per share decreased $0.03 or 3.5% or $0.05 on an operating basis from $0.86 per share to $0.81 per share. As mentioned earlier, Durbin related debit interchange price controls negatively impacted third quarter 2018 earnings by $0.05 per share. In addition, second quarter 2018 earnings were favorably impacted by $0.04 per share due to the receipt of the company’s federal reserve bank semi-annual dividend payment, higher levels of income tax benefits related to stock option exercise and acquired and period loan recoveries.
Net interest margin for the third quarter of 2018 was 3.71%. This compares to 3.64% in the third quarter of 2017, a 7 basis point increase between the comparable quarters. The average yield on earning assets increased 10 basis points between comparable annual quarters from 3.81% in the third quarter of 2017 to 3.91% in the third quarter of 2018, while the company’s total cost of funds increased 3 basis points from 18 basis points to 21 basis points over the same period. The company’s total cost of funds and total cost of deposits of 13 basis points remains among the best in the industry.
On a linked quarter basis, net interest margin decreased 2 basis points from 3.73% in the second quarter of 2018 to 3.71% in the third quarter of 2018. However, net interest margin in the second quarter was favorably impacted by four basis points through the receipt of the company’s Federal Reserve Bank semi-annual dividend and $0.5 million of additional acquired impaired loan recoveries. Excluding these items, core net interest margin increased 2 basis points on a linked quarter basis. Although we faced competitive pressure on loan pricing, our new loan origination rates are generally seeing the rates on maturing and amortizing loans.
Although we believe the company’s funding cost will rise in the fourth quarter of 2018, we also believe that our proactive and disciplined approach to managing funding costs continue to have a positive effect on margin results. In spite of 25 [ph] basis point increases in the target Fed fund’s rate since the fourth quarter of 2015 as well as a general increase in market interest rates, our cost of deposits has remained between 10 and 13 basis points for 11 consecutive quarters.
We recorded $55.8 million in non-interest revenues during the third quarter of 2018. This represents a $2.9 million or 5.4% increase over the third quarter of 2017. The increase in non-interest revenues was due to organic revenue growth in our employee benefit services business as well as the acquired and organic growth in our wealth management and insurance businesses.
Revenues in our employee benefits services business was up $2.5 million or 12% and revenues in our wealth management and insurance businesses was also up $2.5 million or 19.8%. The significant increases in these lines of business was partially offset by lower banking segment non-interest revenues. Deposit service fees decreased $2.3 million or 12.4% due to Durbin amendment debit interchange price restrictions.
On a comparative year to date basis, non-interest revenues were up $21.4 million or 14.4%. Consistent with the first two quarters of 2018 and full year 2017 results, non-interest revenues contributed approximately 40% of the company’s total operating revenues in the third quarter. Total operating expenses for the third quarter of 2018 were $85.2 million. This compares to $83.8 million in total operating expenses recorded in the third quarter of 2017.
The increase is primarily reflective of merit and incentive based increase in salaries and employee benefits and increased occupancy and equipment expense offset by a decrease in amortization of intangibles assets. Excluding acquisition expenses, operating expenses increased $2.9 million or 3.4% compared to the third quarter of 2017. Excluding the aforementioned recovery of vendor contract termination charges, operating expenses were flat to the linked quarter $86.1 million.
On a comparative year-to-date basis, operating expenses, excluding acquisition expenses were up $23.4 million or 10% due largely to the acquisitions of Northeast Retirement Services in the first quarter of 2017 and Merchants Bancshares in the second quarter of 2017. Our effective tax rate in the third quarter of 2018 was 21% versus 31.2% in the third quarter of 2017.
The net reduction in the effective tax rate between the periods is primarily due to the passage of the Tax Cuts and Jobs Act signed into law in the fourth quarter of 2017, which lowered corporate tax rates from 35% to 21%. The effective tax rate was up 1.3% from 18.7% in the second quarter of 2018 due to lower levels of stock option exercise activity in the third quarter of 2018 and a related reduction in income tax expense.
Excluding equity plan activities, we expect our effective tax rate to be in the range of 21.5% to 22% for the fourth quarter of 2018. We anticipate fourth quarter net interest margin would be similar to the second and third quarters in the low to mid-370s. Although we anticipate some loan yield lift on approximately $900 million of variable rate loans, we also expect to face re-pricing pressure on our non-maturity deposit portfolios and overnight repurchase agreement instruments totaling approximately $8 billion.
Although we will continue to take a measured approach with respect to deposit pricing, retention and growth, it is unlike that we would be able to maintain a single digit deposit beta during 2019. From an asset quality perspective, we do not see any major headwinds on the horizon.
In summary, we believe the company remains very well positioned from both a capital and operational perspective for the remainder of 2018 and beyond. And as Mark mentioned, we look forward to continue to execute on earnings improvement opportunities for the remainder of 2018 and into 2019.
I'll now turn it back to Melissa to open the lines for questions.
[Operator Instructions] And our first question will come from Alex Twerdahl with Sandler O'Neill.
First I just want to drill in, Mark, in your prepared remarks, you made a comment about capital allocation being a focus in 2019. Does that imply anything changing from the way you go to the managing capital all along?
No. I mean, we will continue to be disciplined as we always have and I think the point I was just trying to make is, if you look at our capital levels right now, which I think we’re at an all-time high and I made this comment a couple of times back in, I guess, it was 2016 where our capital levels were growing past where we need them to be. And we have talked about focusing on capital deployment. That was prior to the Merchants and NRS transactions. Now, we’re 18 months out from those or so and we're continuing to accrete capital at a substantial pace.
We continue to raise our dividend, significant increase this year. With an ROA of 160 something, even after the dividend increases with lower organic growth, you're accreting capital quickly. So our tier 1 tangible levels push 11%, which is I think higher than where we need to be on a sustainable basis, given the lower risk profile of our balance sheet and our operating model.
So it was just referenced generally, Alex, to the need to ensure that we continue to create high levels of shareholder returns and it’s, to me, incumbent upon us as management to allocate that capital efficiently and effectively because if it is just sitting there and we don't need it, in terms of capitalizing our business, we need to provide a return on that capital and we're at a level now where the capital is continuing to accrete. It’s growing rapidly and so I think the point I was just looking out into 2019, we need to be mindful of how we're going to get a return on that capital for the benefit of our shareholders, but it certainly doesn't apply anything different than what we've ever done, which is -- raise the dividend, do high value disciplined transactions that can be accretive to earnings and dividend capacity.
If you look at, we've got significant maturities coming over the next 24 months in the investment portfolio, given where rates are and may be going, is there an opportunity there to layer in some utilization of that capital in the securities markets? There may be. I don't know that we're there yet, but it's possible that we get there and that's also an opportunity. There's always M&A, but we will continue to be, as we have in the past, judicious and disciplined on identifying kind of for us, lower risk, higher value transactions where there is an asymmetric risk reward profile.
And then the securities that matured in the third quarter there were coming off a higher yields. When you – Joe, you gave the sort of breakdown of security maturities over the next quarter and the next year, are the results coming off at higher yields than where you'd be able to put them on today and kind of what -- to what tune would -- what would be the magnitude of the difference?
Yeah. They’re generally coming off at lower net effective yields and you would have the opportunity to put them back on. The difference is about 50 basis points from the maturing rate to the opportunities that we would see as a comparable security. There also might be some opportunities to pick up a few additional basis points, if we were to go, for example, into some agency-backed, mortgage-backed securities with similar average lives and durations. So, the maturing rate is effectively lower than the opportunity rates we see at the markets.
And as Mark noted, if rates -- market rates drift up a little bit further, those opportunities will be improved.
Okay. So the maturities in the third quarter was just a bullet and that’s kind of a one-time higher yielding maturity that's not indicative of what the rest of the portfolio looks like?
Correct.
Okay. And then just final question for me, it looks like salaries and benefits are down about 1 million bucks sequentially, is that due to lower headcount or just lower healthcare expenses, lower claimant -- claims on the insurance or anything like that. Can you just talk about that a little bit?
Yeah. Alex, I think you're absolutely correct. It is due to lower benefits expense, particularly our [indiscernible] experience on our healthcare expenses. We also had some higher levels of incentive based comp -- compensation in the second quarter. And we have not had any significant acquisitions to increase the FTEs in the salaries and payroll in the third quarter. So, it’s just of course discipline around new hires and the like.
Our next question will come from Erik Zwick with Boenning & Scattergood.
Just a quick follow-up on the investment securities portfolio. Given that balances had declined for, I guess, about five quarters now, but given kind of the comments and the earlier discussion from Alex’s question, should we expect that the balance should stay flat at this level or should start to grow kind of commensurate with what total balance sheet growth or how should we think about that?
Yeah. I think, Eric, the – a flat projection is a reasonable projection at least for the next quarter. As Mark mentioned, we may see some opportunities to invest or what we’ve been potentially calling, pre-invest some of those, maturities that are out in 2020, in the 2019 fiscal year. So we potentially could see that investment securities portfolio drift up a bit in 2019 and it also would optimize our capital position as well, if we were to grow that portfolio. So, flat for the fourth quarter is a reasonable expectation and drift off in 2019 I think is a reasonable expectation.
Yeah. I would agree unless there is a change in market rates and we clearly are at inflection point where we feel it’s an opportunistic time to layer into the market for whatever reason. We don’t think we’re there yet, but given the continued upward movement in rates, it's certainly possible that that happens in the fourth quarter as well.
That's helpful. And then switching gears a little bit, understandably, a big focus on deposit pricing and competition in the industry today. I guess I'm curious about kind of the impact of the rising rates that you're seeing in loan origination yields. It sounds like you're starting to see some, maybe some better yield out there in the market. Could you provide any kind of colors or numbers around what you're seeing maybe for C&I loans and investor CRE.
Yeah. Right now, Eric, at least in this quarter, we saw what I would say is a nice uptick in origination yields versus what the all-in portfolio yield is. So for the quarter anyway, again, one quarter is certainly a function of what kind of loans you're putting out and renewing, but that differential in the third quarter was about 40 points. So I think it was similar for the auto business and the mortgage. So, we are seeing at least right now, a little bit of a differential between what's going on in the overall portfolio yield, which hopefully is helpful.
I think over the last four quarters I recall, our loan yields are up about 20 basis points, so we would hope that that trend continues, because as Joe said, we do expect that we will continue to have upward pressure on deposit pricing. So, but as long as we can kind of get it on both sides, I think we can manage that well in terms of the margin.
And then just one last question on the net interest margin in the third quarter, that the press release indicated there was no impaired kind of loan accretion recorded in the quarter. Does that include both scheduled and accelerated?
They are included -- in the second quarter, we had some accelerated impaired loan accretion and there was a modest amount of scheduled -- modest in the neighborhood of about 100,000 or so. So most of that is in the second quarter, it was due to a recovery and we effectively did not have a similar outcome in the third quarter.
Our next question will come from Russell Gunther with D.A. Davidson.
Just focusing on the loan growth going forward, did you guys give us just a general sense of where the commercial pipeline stands today versus maybe where you were coming into the quarter? And then perhaps just touch on where you'd expect some of the geographic contributors to come from as we look ahead.
Sure. The pipeline as it stands at the end of the third quarter is more than 30% higher than where it was at the end of the second quarter, which is good. So, the pipeline is pretty strong, although interestingly, not the last handful of years and it never used to be like this, but the fourth quarter in commercial was always light and what we almost always had kind of net run-off in that portfolio for the fourth quarter. That's kind of changed in the last few years. I'm not suggesting this year, it's going to change back, but the pipeline is up nicely from second to third quarter, which is good. So if recent history holds, we’ll have a fair Q4 on the commercial side.
The mortgage pipeline is lower, which you would expect, given the seasonality of that business, particularly for us. It’s also lower than where it was this quarter last year. So, the mortgage business is a little bit slower. I mean, it's always kind of within a certain range other than you get to kind of fourth quarter and first quarter where it’s really very little activity. But the pipeline, even with that said is a little bit lower than it was in the prior year’s similar quarter. My understanding is that there's not enough inventory out there. There's more demand than inventory.
So, but still it’s not bad. It’s always – it’s kind of at a continued – the mortgage pipeline seems to always run between 80 something million and 120 million, all year long, it just kind of ebbs and flows between that. So, I think we're doing okay. Clearly, on the auto lending and indirect paper side, the third and fourth quarter are slower and we're starting to see a little bit of that right now, although I think we did have about $30 million of growth in that portfolio in the third quarter, which was actually a little bit of a surprise, but a little stronger than what we expected I think there.
Thanks, Mark. I appreciate the color.
Yeah. No. I didn’t answer the other part of your question. I apologize, which was geographic. Actually, all year long, we've seen a fair bit of strength across the marketplace. Upstate New York has been good. Northern New York has been good. Pennsylvania has been strong, we're still in New England, fight not an above average level of payoffs, most related to business sales, they’re not bank changes, but we're getting some traction there. I think we actually had an increase in commercial in New England in the third quarter as well. So coming from across the footprint really, which has been good. It’s typically more discrete pockets of growth than that. We don't usually kind of see it as broad based as it is right now, which is great. Hopefully, it continues.
And then last one for me, I heard you guys loud and clear that the kind of capital management priority list hasn't changed. Maybe focusing in just on depository deals and where your appetite stands today and whether there are any particular geographies that you're focused on at this point?
Sure. I don't know that we need to do a depository or asset transaction. We have plenty of, if you look at the loan to deposit ratio, actually, I think, we'd be more inclined to do a credit oriented transaction, which I would suggest Merchants was last year. They also had a really nice low cost core deposit base.
One of the challenges for us honestly as we look at modeling M&A opportunities is just our funding costs are so good and so low that when you model another transaction with funding costs that are 40 or 50 or 60 basis points, we don't really like the dilution of the metrics, which does feel like we need to do something like that. We thought ultimately it was the right thing to do for our shareholders, but that’s one of the challenges.
I think, we -- right now, we're not looking to do deposit, we’re not looking to do a lot -- we're not looking to do any deal other than a high value, lower risk kind of transaction that can help us accrete earnings and cash flows on a sustainable basis going forward. So that will continue to be the model.
Next, we’ll take a question from Collyn Gilbert with KBW.
Just wanted to start off, just to clarify a couple of things. One is on the accretion comment, Joe, so it's been running kind of 2 million or so consistently each quarter, is that what you're expecting in the fourth quarter as well?
Yes. Collyn, it could be down slightly a couple of hundred thousand dollars would be a projection for the fourth quarter in terms of the non-impaired loan accretion and the impaired loan accretion is a very modest number from quarter to quarter. But, it does affect margin in a positive sense from [indiscernible] which happened in the second quarter. So, your run rare, that 1.8 million to 2 million is I think a reasonable expectation for next quarter, for the fourth quarter.
And then just to walk through again, if you don't mind, just reconciling the muni exposure on the loan side and then on the deposit side, it just seems kind of a little bit more challenging to kind of discern some of those trends quarter-to-quarter, because I think you -- I think seasonally, I have loan, muni loan paydowns in the second quarter, which I would have thought would have reversed a little bit this quarter. Anyway, if you could just walk through some of those balances and remind us again of how those trends flow through.
Sure. Regarding the muni loan portfolio, let me start on the loan side, the portfolio has a or I should say our borrowers in New England have a fiscal cycle that ends on June 30, begins on July 1. And we have one year instruments that represent about $40 million and those instruments are typically paid down late in the second quarter and then renew in the third quarter and assuming that we have good retention on those, they renew at about the same levels. So $40 million goes back on in the third quarter. So that's really the most significant component of seasonality with respect to the municipal loans.
Sorry, I don't mean to interrupt, Joe but just on that point, so then did you see those 40 million renew in the third quarter as you anticipated?
Yes. We did. And we also had a – just a very modest increase in just other municipal loans. So, but very modest, so that did occur. With respect to the deposit side, and I will include repurchase agreements, because a significant amount of our repurchase agreement balances are with municipalities. And a lion's share of our municipal deposits and repurchase agreements are still in New York State and there's tax collection cycles that hit effectively in the fourth quarter, so tax bills go out in September, they’re collected in the October timeframe and we typically get a lift in the fourth quarter, as our taxpayers pay the municipalities.
So, it comes out of the pocket of the individual tax payers and businesses. These are property or excuse me, school taxes and net-net, we wind up typically in a increased overall deposit position as our municipal deposits increase in the fourth quarter. They then begin to level off throughout the -- through the end of the fourth quarter and then in the first quarter, also in New York State, we have a property tax collection cycle and we see a boost again in the first quarter and that can be $100 million to $200 million as reasonable range. And then also, when we hit the end of the second quarter, so June 30, we do begin to see a little bit of a drift or a decrease in some of our education funding balances, particularly in our New England market and so we see a little bit of a drift down in the third quarter or municipal footings.
And you can see that actually, you can see that actually if you look at, I think it's on the tables, but the average public funds for the quarter were down substantially, but the end of year was up. And on the non-public funds, the average was up, but the ending was down. So that dynamic, as Joe said about, your customers take it and they give it to municipalities, you can kind of see that playing out between the quarters.
And just the – if it is in the table, I apologize. The muni deposit and repos, the bulk of that, the balance is what?
So depending on the time of year in the cycle, we sit on between 1.1 billion and 1.4 billion in total deposits and repurchase agreements. The repurchase agreement book is a subset of that number, ranges from about 200 million to 300 million, depending on the time of year in the cycle. The remaining balances in deposits and the lion's share of that is in operating type and money market accounts. We have a very, very small municipal CD book as we sit here today.
And then just going to the NIM discussion, if you look in the press release, kind of the components of the NIM or at least on the asset yield side speaking to that, we're all down, I mean, loan yield was down slightly, but yet the earning asset yield was kind of flat. I'm just trying to understand what's going on there? Why that is?
Well, we had, on the loan side, effectively, the yields for the quarter were relatively flat. We do have -- we're seeing new rate go on at -- higher rates than the maturing rates, but it just takes a little while for that to increase, but we also have the, I’ll call it, the negative effect on the overall yield because we didn’t have the accretion related to the non-impaired or excuse me, to the impaired loans in the third quarter that we had in the second quarter. So, if we were to extract that impaired loan accretion, we would have saw a net increase in the effective yield on loans.
Of how many -- was that, I thought that was a small amount, but now, I mean, how many basis points of yield?
Yeah. It’s a couple of basis points, Collyn.
Okay. And then the drop in the cash and the investment yield, again seems a little bit more meaningful, then why you were still able to keep the earning asset yield flat?
Yes. In the second quarter of 2018, we had an elevated level of cash equivalents due to higher levels of municipal deposits. As they drift down, our overnight Fed fund’s position is reduced, so we actually wind up in a bar position on some points in the third quarter. But what they did is it dragged down the effective yield on a blended basis. Yes, as we saw, less monies available for [indiscernible].
Okay. So I guess maybe the short of it is just that the cash component and the securities component is just not significant enough to -- the drop in those two yields is just offset by the more stable loan yield? Anyway, I can – it’s all right, we can discuss this later on and pick up after the call. Okay. And then just going back to the NIM, so at 371, it seems like that's pretty much a clean number this quarter. And then in the fourth quarter, you'll get the FRB dividend, which is it -- are you still anticipating about a $450,000 dividend.
Yes. That's a reasonable expectation from the fourth quarter.
Okay. I think that was all I had. Thank you. One question, just on the loan book, what's the duration on the loan book right now?
We have to get back to you. I’m not sure exactly. Certainly, we have the components of that. I think the, I’m not going to even speculate, and we’ll circle back with you on that.
Our next question will come from Brody Preston with Piper Jaffray.
I just wanted to, I guess, maybe go back on the loan book. I know in the past and we've talked about $900 million of the portfolio as variable rate. I just wanted to confirm this amount and ask what index this is tied to.
Yes, Brody. That number is a good proxy for the variable rate loan portfolio. I don't have the mix in front of me, but there is -- there are prime based instruments and LIBOR based instruments and a few other indices in that variable rate portfolio. But we can get back to you with respect to the breakdown.
And then I guess – yeah, go ahead.
It’s safe to say the majority of it, more of it is prime based than LIBOR.
And I guess I just wanted to circle back to your comments on the deposit beta. I think you guys have something like a 1% deposit beta and you said you don't expect something similar to continue. But this quarter, I think it was closer to 7% and so I just wanted to get an idea if that was going to be sort of your new run rate moving forward or if you thought it would continue to move incrementally.
Brody, I would think incrementally higher is the safer path to take. We were pretty -- very disciplined and happened to supplant through 8 increases in the target Fed fund’s rate. Obviously, some point or year three of those rate increases, we're going to see competitive pressures around deposits, probably likely in all markets, we're seeing that already. And we're seeing also some larger customers look for higher yielding instruments. So, the expectation would be that would be a little bit higher, looking out into 2019, in terms of our deposit beta that we have been and certainly in ’17 and ’18.
[indiscernible]. Some of it is a function of when the timing -- when the rate increases are, are you talking about cumulative positive beta or quarter over quarter deposit beta and just, I mean, I think our focus is really on optimizing the balance between cost of funds and deposit retention and that's what -- that's what we focus on as opposed to some targets around beta, which is, it means less. It’s kind of a computational effort that doesn’t mean nothing, but day-to-day, it’s about, what are the strategies we’re using out with our people in the field who are customer facing folks, what tools do we give them, what training, what do we give them so that they can optimize that balance between cost of funds and deposit retention. I think so far, we've done probably a little better than what I expected we would. But in terms of some estimate of a deposit beta going forward, I just know that we will continue to do our best and be proactive in trying to manage well that both of those objectives, which is low cost of funds and deposit retention.
Just circling back to loan growth, I think, Mark, you gave sort of some comments earlier about the pipeline. I think it is better today than where it was at the start of 3Q, but it's lower than where it was in prior years. So, I guess I wanted to firm up maybe sort of your expectation for fourth quarter loan growth.
Yeah. Just to clarify, Brody, the comment about lower the prior years, that was mortgage, not commercial. Commercial is actually higher by actually quite a bit. So commercial pipeline is higher than it was last year and the year before and the year before that. It is also up from second quarter, third quarter, but it was the mortgage pipeline specifically I was commenting on relative to, it’s less in the third quarter of ’18 than it was in the third quarter of ’17, not by a lot, but it is less.
Okay. So it sounds like if everything sort of sets, then we could see loan growth continue to accelerate maybe marginally.
Yeah. We don’t like to use the word acceleration, we talk about loan growth. It's just not in our market, that's never been our experience, we don't try to manage to anything where we would use the word acceleration. Growth is good, modest disciplined growth is good. Acceleration is not good in our markets. I mean if you're growing too fast, in our markets, you're probably doing things that you're going to regret at some point in the future. So, if we can grow the loan book overall 2% to 4% a year, I know that it doesn't sound like much and other banks or other markets, where they look at double digits, those are not our markets.
That's not, we don't have that opportunity. And if we can grow 2% to 4% along with operational discipline, non-interest income growth, high value M&A, I mean, that’s how we – that’s the strategy in terms of how you get to a double digit shareholder return over time, so it's not very exciting and we don't use the word acceleration, but we'll do our best to continue the modest loan growth that we had this quarter.
Second quarter was disappointing, it should have been better, but we had talked about that in terms of the number of early payoffs in that quarter, which we didn't have for the same degree this quarter, which was helpful. But the pipeline, as I said, is pretty good. It heads into the fourth quarter and the last few years, the fourth quarter has been good. Now, when I say good, again, this isn’t -- we're talking about the modest growth here. But if the fourth quarter is higher than the third quarter and commercial will be happy with that.
And then I guess maybe just going back to the fee income side of the equation, employee services especially continues to at least exceed our expectations within our model and I wanted to get an idea as to, is it exceeding your expectations and what can we expect from that group moving forward? Is it a $25 million run rate sort of what you expect?
Well, we would expect that it would continue to grow. And 25 million a quarter is about the run rate on that right now. So, it’s the NRS transaction continues to grow at a double digit pace itself. The other elements of the benefits business also continue to grow, not at the same pace. So, all in, the benefits business continues to be very good. The wealth management business also very good. Insurance business, improving. The revenue growth has been okay. The margins growth has not. So I think we need to do a better job there. But the, all in, those businesses continue to grow revenues faster than expenses, which is the plan and I think looking for the markets, for the benefits business continue, I think it continues to be. Wealth management continues to be strong. We have a lot of momentum there. So, and we're focused on improving the margin characteristics of the insurance business. So I think looking ahead 2019, we expect would be also a reasonable growth year for those non-banking businesses.
And last one for me, I think last quarter, we had talked about maybe on the non-interest income, M&A front, the private equity firms have been pretty aggressive in these markets. I just want to know if that’s a debate at all.
We haven't really had the opportunity to experience that first hand in the last quarter or so. So I can't speak from actual experience recently directly, but from what I understand broadly, that continues to be the case. And I know specifically when I see other transactions and the pricing of those transactions that are kind of in our space, if you will, the non-banking space and you look at what the EBITDA and cash flow and revenue multiples of those deals are, there are levels that we would be unlikely to participate at. So from what I understand in the market, that’s still the case.
And that does conclude our question-and-answer session at this time. I'd like to turn the conference back over to management for any additional or closing remarks.
Thank you, Melissa. No additional comments. Appreciate you all participating and we will talk again in January. Thank you.
That does conclude our conference for today. Thank you for your participation.