Capital Bank Financials' CEO Discusses Q3 2013 Results - Earnings Call Transcript

Oct.17.13 | About: Capital Bank (CBF)

Capital Bank Financial Corp. (NASDAQ:CBF)

Q3 2013 Results Earnings Call

October 17, 2013 10:00 AM ET

Executives

Ken Posner - Chief of Investment Analytics and Investor Relations Executive

Gene Taylor - Chairman and CEO

Chris Marshall - Chief Financial Officer

Bruce Singletary - Chief Risk Officer

Jack Partagas - Chief Accounting Officer

Analysts

Brady Gaile - KBW

Paul Miller - FBR

Blair Brantley - BB&T Capital Markets

Matthew Keating - Barclays

Operator

Please standby, we’re about to begin.

Ken Posner

Thank you, Alan, and good morning, everyone. I’m Ken Posner, Chief of Investment Analytics and Investor Relations Executive for Capital Bank Financial Corp. And I’d like to welcome you to our Third Quarter 2013 Conference Call. Today’s call is being recorded. Please see the press release for instructions on accessing the replay.

During today’s call we will discuss certain non-GAAP financial measures. You will find a reconciliation of those measures to the GAAP results in today’s new release and slide deck. You can find the slide deck by going to the Investors page of our website www.capitalbank-us.com and following the link to the third quarter earnings conference call.

As a reminder, this conference call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding Capital Bank’s expected operating and financial performance.

Any statements made during this call that are not statements of historical facts maybe deemed to be forward-looking statements the words, belief, anticipate, plan, expect and similar expressions are intended to identify forward-looking statements.

We caution that forward-looking statements maybe effected by risk factors including those set forth in Capital Bank Financial Corp.’s filings with the SEC and in this morning’s new release, and consequently actual operations and results may differ materially from the forward-looking statements. The company undertakes no obligation to update publicly any forward-looking statements.

At this time for opening remarks, I’ll turn the call over to the company’s Chairman and Chief Executive Officer, Gene Taylor.

Gene Taylor

Good morning. Thanks for being with us today for our third quarter 2013 conference call. In addition to Ken Posner, I’m here this morning with our Chief Financial Officer, Chris Marshall; our Chief Risk Officer, Bruce Singletary; and our Chief Accounting Officer, Jack Partagas. We’ll make some remarks about third quarter results and then we’ll take your questions.

Slide three lays out our goals. We are working to generate double-digit return on tangible common equity and we have two levers to pull to get there, improved ROA and deploying of excess capital.

I will skip slides four and five, which explain a little bit of the Capital Bank story and go straight to our third highlights on slide six. We reported net income of $11.4 million or $0.22 per diluted share. On a core basis which we track internally as a measure the company’s earnings power, this translates into $12.7 million or $0.24 per diluted share, which is up 49% year-over-year.

I am very pleased to report that our core ROA improved to 0.76% in the third quarter and this too is up significantly from 0.56% in the third quarter of 2012. This improvement in profitability is indicative of an enormous amount of work on the part of the management, employees of Capital Bank and I am very grateful for their efforts. I am also pleased to point out that our tangible book value increased to $18.33 per share.

Due to our expectation the strong credit performance from the Southern legacy loan portfolio, we re-estimated the day one loan mark. As we analyze and validated loan underwriting and credit quality characteristics, we decided to adjust our initial credit loss assumptions. Chris will give you more details on this in a moment. I will just emphasis that we are very careful when we perform due diligence on loan portfolios.

Our biggest accomplishment in the third quarter was the origination of $291 million of new loans. As you know, the third quarter is seasonally slow for us and in fact this quarter we had several large transactions slip into the fourth quarter due to customer timing issues.

As a result, originations were slightly down from the second quarter. However, when you look at where we were a year ago, this quarter’s originations are up 68%, which is an enormous improvement. We expect strong origination momentum to continue into the fourth quarter.

Unfortunately, strong originations don’t translate into net loan growth, during the third quarter the loan portfolio shrunk by $122 million which is disappointing, but we are pleased with the quality of customer we are attracting.

What happened in the quarter is that we got hit with the spike in payouts and paydowns in our commercial portfolio. Some of this is just variability associated with large borrowers who drew down funds end of second quarter and paid down their loans in the third quarter.

Some of that is intensifying competition. We had credit refinance away from us in favor of tenure or loan growth, fixed rate loans with unattracted spreads and/or loose credit terms.

In commercial real estate, we are seeing conduit lenders offer premier financing for large projects for limited personal recourse, which is not a transaction structure appropriate for bank balance sheet in our view.

We are confident in our ability to drive strong originations and net portfolio growth remains the company’s top priority. However, while we are going to complete aggressively to originate and retain our loans, we are not going to take on imprudent levels of interest rate or credit risk. I have been in banking for 40 years and I have seen what happens when bank cut corner on quality as each of you have.

And now, I’ll turn it over to Chris.

Chris Marshall

Thanks Gene. Good morning everyone. Before I go through our results for the quarter, let me add to Gene’s comments regarding the re-estimation of our day one marks for the Southern Community loan portfolio, which impacts both the balance sheet and our income statement.

As you know, purchase accounting permits us to refine our day one fair value estimates within a year of a transaction. And therefore we carefully analyze all the data that existed as of our actual acquisition date. And that analysis has resulted in a more accurate estimate of the fair value of our acquired loans.

You will see the impact of the re-estimation on Slide 7. On the balance sheet, you will notice that as of June 30, the re-estimation increased the tangible book value by $14 million. That increase results from a $41 million improvement in the carrying value of the Southern Community loan portfolio, partially offset by higher accrual for CVR payments, which you will see under other liabilities and a smaller reduction in our deferred tax asset.

As a reminder, we won’t make any cash payments on the Southern Community CVR until after October 1, 2017 and to the extent that we experience any unexpected losses in this portfolio, this CVR accrual will be reduced.

With regard to the income statement, the re-estimation has a modest negative impact which totals about $1.5 million over the past two quarters. As you may recall last quarter, we increased the accretion flowing through interest incomes reflect favorable results to Southern Community. As a result of the re-estimation, much of that accretion increases now reflected in the higher day one value of the loans and thus no longer flows through interest income.

I wanted to cover the re-estimation before turning to the financial summary on Page 8 because you’ve noticed changes in our historical results for fourth quarter 2012 through last quarter. And I want you to be aware of those changes and understand the reason. And to those of you who build and maintained models which -- lot of you we apologize for the extra work this creates. And if you have any detailed questions on the re-estimation, Ken and I will be glad to follow-up with you after the call.

So with the re-estimation completed, our third quarter results should be a solid baseline from which to project future quarters and with that in mind, let’s turn to Slide 8 and review the quarter.

As Gene mentioned, our core net income was $12.7 million or $0.24 per share. And this trade lets into a core return on assets of 76 basis points which is a significant improvement from the 56 basis points we recorded a year ago and 61 basis points we saw last quarter.

We’re very pleased with the consistent progress. We’re making improved returns and we view this quarter’s results as further proof that our business plan and our strategies are working.

Our core income excludes non-core items that summed to approximately $1.3 million after-tax or about $0.02 a share. And to summarize those non-core adjustments include $700,000 of non-cash equity compensation related to our original founder’s grants and a $1.6 million reduction in the value over DTA, resulting from changes in future tax rates that were enacted into law during the quarter, offset by $800,000 reversal of CVR expense and a $300,000 gain related to the redemption of some trust preferred securities.

You find details on these adjustments including both pre-tax and after-tax amounts in the appendix. Now, let me take a minute and give you a high level of summary of our third quarter income statement.

Our net interest income was flat sequentially as expansion in the NIM was offset by decline in earning assets. Our non-interest income grew by $2 million sequentially, largely driven by a few miscellaneous gains in recoveries and I’m going to discuss that further in a few minutes.

The provision was down $3.5 million sequentially, largely driven by the lack of impairment in our acquired loan portfolios. And finally core non-interest expense rose by $1.8 million due to elevated OREO write-downs while other expenses were largely flat.

So given this overview, let’s move into greater detail starting with Slide 9 which covers new loan production. As Gene mentioned, we’re very pleased with third quarter originations which totaled $291 million. As you know, the third quarter was seasonally slow for us and originations were down slightly from last quarter’s record level. They are about $12 million but they were up 68% year-over-year, which reflects an enormous amount of work in the part of our lenders and our team needs in credit, loan operations and elsewhere throughout the organization.

Carolina has produced great results with a $180 million in new loans this quarter, up from $52 million a year ago. Florida’s production was down sequentially and as Gene mentioned, we had two large deals that were delayed due to customer timing issues. However, one of those loans is already closed and funded and other one is on track to close very shortly.

Tennessee has stabilized although at a level that’s well below its potential. As we discussed last quarter, we feel great about the new leadership we have in place there and we’re confident that Tennessee originations will grow going forward.

While in the quarter, commercial lending was up 23% year-over-year to $128 million. Consumer lending which has largely just over eight mortgages was even stronger with third quarter production of $102 million, up 72% from a year ago. And CRE volumes were up -- although off of a very low base in the quarter largely due to a large transaction involving a very highly rated tenant.

Now, let’s turn to Slide 10, and talk a little bit about the biggest challenge in the quarter, which was loan portfolio growth. Our loan portfolio declined as Gene said by $122 million during the quarter, which was disappointing. But as Gene mentioned this quarter, we lost business due to competitors offering long-term fixed rate loans and easier credit terms for commercial real estate credits. And we took advantage of that strong competition to reduce our exposure to some borrowers whose credit we were starting to question.

However, we also lost some good credits and where we could -- really not in good conscious matched the aggressive terms that the competition offer. In particular, I would remind you that we do virtually no fixed rate commercial loans beyond five years and we view that by doing so and taking on the interest rate risk that would be associated with that is just unacceptable in this environment.

As Gene discussed, loan portfolio growth remains a top priority for the company and we feel very good about origination momentum going into the fourth quarter. Our first priority is to maintain our responsible credit standards and our conservative interest rate risk position.

Our special assets teams continued to collect and foreclosed upon legacy problem loans. During the quarter, collections and foreclosures on problem loans totaled $76 million and we are happy to see those loans go but their resolutions obviously remain a drag on growth.

Net of new inflows and including REO activity, total special assets balances declined by $75 million in the quarter and you will hear from Bruce about that in just a few minutes.

Turning to deposits on Slide 11, you can see that we’ve continuingly enjoyed lower funding costs, as we make very significant improvements in the quality of our deposit base. During the third quarter, deposit cost fell by 5 basis points, largely due to the continued run-off of legacy high cost CDs which had rates well above market. This is a continuation of what we saw during the previous quarters.

Core deposit balances were flat during the quarter. Despite the seasonal reductions, we would normally see in the Florida markets. As we look back on year, we haven’t got a lot of overall growth but we have made very significant improvement in our mix and our costs. Core deposits now stand at 70% of our total deposits, up from 63% a year ago.

In the third quarter, checking balances grew by $42 million, offsetting a runoff in money markets. Our retail teammates are doing a great job. They are intensely focused on selling checking accounts and you can see that their efforts have been yielding positive results this year.

Net growth did dip a little bit in September, following the realignment of the regional management of our consumer team in Tennessee, but we think that realignment is going to strengthen our results going forward.

Turning to Slide 12, let’s take a quick look at our NIM, which expanded by 13 basis points from 432 in the second quarter to 445 in the third, and there were a lot of drivers of the NIM expansion including the improvement in deposit cost I just mentioned as well as a pick-up in securities yields and the benefit of paying off $8 million in high-cost trust preferreds.

At the same time, you will see that loan yields held steady quarter-over-quarter at just over 5.9%, even though we are originating new loans at a weighted average rate of around 4%. The reason loan yields were steady was that we booked an additional $1.3 million in accretion on the legacy portfolio during the quarter, reflecting higher than expected collections on deficiency notes.

And we are pleased with the credit performance in our loan portfolio and happy to see an increase in our tangible book value from the Southern Community reestimation, as well as yield increases following through the margin from some of our older required portfolio. However, as you know this accretion will diminish over time as the legacy portfolio gradually pays off where it is collected. That’s why I would like to remind you that we do expect the NIM to contract going forward by about 10 basis points a quarter, as legacy loans with higher yields runoff and replace with newly originated loans with lower yields.

Slide 13 addresses core non-interest income. If you look past the FDIC indemnification line which we think of is an offset to our legacy credit expenses, core fee revenues improved by $1.4 million sequentially and $3 million year-over-year.

If you look at the year-over-year comparisons, you can see that we are making modest but steady progress in deposit service charges, in debit card fees as well as in wealth management income. Not surprisingly, our mortgage fees were off somewhere during the quarter as we originated $41 million in secondary loans, down from $58 million in the second quarter and gain on sale margins compressed slightly.

And we remain optimistic about mortgage revenues over the longer term because of the strong housing fundamentals in our footprint and as we said previously, we’re continuing to staff of our mortgage unit to fully service our branch network. Having said that and given where interest rates now stand, we would expect to see more pressure on mortgage revenues in the fourth quarter.

Our other income was up sequentially by $1.6 million, I don’t want to caution you that there were some miscellaneous gains and recoveries here, that while we consider part of our core income, you probably would not to fully -- want to fully project these levels in your run rate for future quarters.

Now for example, this quarter we had gain from a legacy CRA-related investment in a small business investment corporation that went through an IPO and we recorded a gain as a result of that.

We also successfully settled several legal matters and we have always treated these types of items as part of our core run rate, but I am highlighting them because this quarter the results are more significant than they usually are.

Slide 14 shows you the trend in our core noninterest expense which as you know is a very important focus for us. Year-to-date, total expenses are down 15%, largely as a function of lower non-core adjustments and an initial reduction in legacy credit expenses.

Excluding non-core adjustments REO expense, the underlying core expenses have been largely flat as we continue to invest in hiring new revenue generators while at the same time improving the efficiency of our back office.

I’ll point to slide 15 in passing which gives you some information on our liquidity and capital, suffices to say that we have ample liquidity and very strong capital base. Our liquidity remains concentrated in highly liquid low-risk investments of which 82% consisted of agency-backed -- agency mortgaged backed securities, CMOs and cash.

At September 30th, the modified duration of our portfolio was 3.7 years and during the quarter we repurchased 600,000 shares of our stock at weighted average price of $21.50 and I point out that this leaves us $87 million under our recently announced stock repurchase authorization.

And finally, I am pointing out to you that at the end of the quarter our consolidated Tier 1 leverage ratio was an extremely strong 14.5%.

So with that, let me turn it over to Bruce Singletary, our Chief Risk Officer to discuss credit trends.

Bruce Singletary

Thanks Chris. If you turn to slide 16, you can see that our originated portfolio performing well as to the very low of 5 basis points and only 1.3% the originated portfolio is criticized or classified. Non-accruals were 50 basis points, up 35 -- up from 35 basis points the second quarter but down from 80 basis points in quarter one.

Slide 17 gives you an update on our progress in resolving special asset portfolio. Net reductions were somewhat lower this quarter at $75 million following an outside reduction of $132 million last quarter.

Our level of activity really hasn’t changed but the pace of resolutions can be lumpy from quarter-to-quarter due to time in our larger transactions. Year-to-date, reductions have totaled $306 million, as we have reduced special assets from $1.1 billion to $780 million, that’s an annualized rate of 37%. We continue to be very pleased with this pace of progress.

As a result of our special asset resolutions, non-performing loans fell to 5.9% of total loans from 6.7% in prior quarter. Your inflows into non-performing status were $27 million. This is the lowest level in the past five quarters.

REO sales were $18 million in third quarter, which contributed to a $13 million decline in REO balances. Our sales were down a little from second quarter as plenty of activity in the markets. At quarter end we had 65 properties under contract totaling $25 million.

Turning to slide 18, legacy credit expenses declined $2 million in the third quarter or 17%. You can see the favorable long-term trend and year-over-year comparisons which is down 36%.

During the third quarter, we benefited from a recovery and start having a cost provision in the legacy loan portfolio. As you know, we re-estimate the cash flows of these loans each quarter and due to improvement in expected cash flows we had a small reversal in provision. Although expense remained to near term, $7.5 million, up sequentially by $1.3 million.

During the quarter we had a $1.8 million write-down on specialty used facility both on the contract with closing scheduled for fourth quarter. This property happens to be an ethanol plant which is a one of the trend in our portfolio. Otherwise, we continue to experience write-downs on large legacy non-urban land and lots, just as we have for several quarters. But the amounts have been tailing off. As property markets stabilize I expect our REO write-downs decline in the coming quarters.

I’ll now turn the call over to Gene for his concluding remarks.

Gene Taylor

Thanks Bruce. As I mentioned earlier, I was pleased that we reported a higher level of ROA of 0.76% this quarter up from 0.56% a year ago. Getting to a minimal 1% ROA continues to be a very important target for Capital Bank.

Overtime we will drive down legacy credit expenses but we also have to continue with low interest rates and competitive pricing. That’s why generating net loan portfolio growth is company’s number one priority followed by continued improvement in deposit costs, higher fee income and an appropriate management of expenses.

We showed progress in a number of metrics this quarter with the exceptional loan growth but we are taking steps to better identify and manage paydown risks, as well as continue to invest in our sales force in order to turn the corner on loan growth as soon as we can.

On a normal level of capital the 1% ROA would give us a low double-digit return on tangible equity. In fact, on a normal level of capital 0.76 ROA we reported this quarter would get -- almost get us to a 10% return on tangible equity. At present as you know, our ROE is dampened by significant excess capital.

Overtime, we will deploy this capital in a powerful and disciplined manner through either acquisitions or by returning it to investors. Our best guess is that what we have done we will do some of each. As we improve returns and deploy excess capital, we believe we would generate attractive return for our investors which should in turn lead to higher stock price.

Ken Posner

Thanks, Gene. This completes our prepared remarks this morning and now I will ask Alan to open the floor for your questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) We will take our first question from Erika Najarian with Bank of America Merrill Lynch.

Unidentified Analyst

Good morning, guys. This is Abraham on behalf of Erika.

Gene Taylor

Good morning.

Unidentified Analyst

So I appreciate the color that you provided in terms of loan originations and sort of moving pieces in and out this quarter. I guess going back to your comment Gene, obviously it seems like achieving net loan growth is key to sort of hitting that 1% ROE target? And just wanted to see if what your sense is when we get there given that what you talked about in terms of the competitive landscape that’s unlikely to change in the near-term. Just wondering where you see sort of the portfolio bottoming out both in terms of balances and in terms of the timing of when we get there?

Gene Taylor

Thanks for your question. My take on it is, is that, based on what we have done the previous four quarters, we are going to be able to generate the loan originations. So I would share with everyone that from a credit standpoint, Bruce is personally involved from a pricing standpoint, Chris is personally involved and obviously, I am involved deeply and looking at every pay-off that we have in making the decision do we want to compete or do we want to retain.

And as we mature the company and go beyond the seven acquisitions that we put together here, Chris, Bruce and I are very, very confident that we have improved the quality of the portfolio dramatically and that the clients we currently have are the ones we want and we don’t work hard on a competitive basis to retain the good credits and continue the positive trend you’ve seen in origination.

So as we do that at some point those two things cross that we don’t have the loan offer despite that we sell this quarter and that we in fact generate through loan growth. And by the way that’s a sign of a high performing company and that’s what we want to be and that’s our goal.

And here any one on our team that doesn’t understand that but we did remain disciplined during the quarter when we saw some very strong competitive pricing, we were able to say look, we don’t have to do this today, we’re very disciplined. We can stay the course we’re going to be a very good company. We’re going to perform well. Let first this go and we will get to next transaction that gives us the yield and the credit quality we’re looking for. That’s exactly what we are doing.

Unidentified Analyst

Got it. Thanks. And I just had one follow-up question in terms of, Chris talked about the $87 million remaining in buyback authorization. I am just wondering if you could share in terms of how quickly you anticipate further executing on these buybacks and what your sense is in terms of the M&A landscape right now and potential for deal, sort of, I know it’s hard to say when something may happen but just in terms of the activity you’ve seen. Where do you read that relative to the likelihood of that versus sort of accelerating buybacks?

Chris Marshall

Yeah. Hi. Abraham, this is Chris and thank you for the question. I don’t really think we should comment further on the buyback authorization. We announced the $100 million and we’re going to use that also on a very disciplined way but what you’ve seen us -- you’ve seen what we’ve done in our prior authorization and you should expect us to be just as disciplined going forward.

With regard to M&A, we’ve told you in the past that we are very focused on M&A. We remain extremely focused on M&A. What it does, it really do only good, we try to predict exactly when a transaction will occur, when we feel very bullish about the environment and the availability of targets. And our level of engagement is just as strong as it all attachment so. We probably shouldn’t say anymore on M&A at this point other than it is a very important part of our company and we are -- we remain extremely focused and involved in that activity.

Unidentified Analyst

Got it. Thank you very much for taking my questions.

Operator

And next we’ll go to Brady Gaile with KBW.

Brady Gaile - KBW

Hey, good morning guys.

Gene Taylor

Hey, good morning Brad.

Brady Gaile - KBW

So maybe to ask a question about net loan growth little differently, do you expect to grow net allowance in 4Q or do you think it’s going to be a 2014 switch?

Bruce Singletary

Brad, I think, I’d reiterate what Gene said. We feel extremely confident about our originations going into the fourth quarter. I think we should stay on that point.

Brady Gaile - KBW

That’s fine.

Bruce Singletary

I had to get -- but you find a point on it, but the momentum we’ve got is very significant and that was the significant transaction that slipped in fourth quarter make us feel very, very good about our origination this quarter.

Brady Gaile - KBW

Okay. And then a couple of accounting questions, you mentioned that the loan accretion was up $1.3 million from the prior quarter. What was the total amount of positive impact from loan accretion just in 3Q? It was up 1.3 million to what level?

Chris Marshall

You’re saying just a purchase accounting accretion.

Brady Gaile - KBW

That’s right.

Chris Marshall

Jack, would you address that?

Jack Partagas

I don’t have that number in front of me. Brady I have to -- I think we’ll follow up to you after the call.

Brady Gaile - KBW

Okay. Maybe to ask a differently if the margin was about 4.5%, do you have any idea what the core margin would be without that accretion?

Chris Marshall

Yeah. We’ve got about 94 basis points in overall purchase accounting in a margin. I think that’s exact numbers. It’s 445 this quarter. The ex-purchase accounting would be 354 and that’s the reason we’re forecasting. I’ll remind everyone we’ve been forecasting contraction in the margin now for three quarters and we’ve been pleasantly surprised by a lot of offsetting factors.

But we do expect that the margin will eventually contract and it will contract at a rate of about 10 basis points a quarter that may not happen while in the fourth quarter in May, June, but we do expect that to incur over time. The 94 basis points should burn it off over about a three-year period.

Brady Gaile - KBW

Okay. And then the burden from the accretion of the FDICIA. I think it was down if you look first half of the year, it was averaging around $1.5 million per quarter. It’s down to only $0.5 million in 3Q. Is that -- should we expect that to kind of remain at that lower level or will that potentially kind of balance around up and down?

Chris Marshall

It will bounce around. We had -- we generally expected this to be around a $1 million but it is lumpier item. And I wouldn’t expect it to be right at the million every quarter but over time it should be. I’d also remind you that FDIC loan just in general are smaller and smaller piece of our overall portfolio. I think they’re down about 7% of our total loan. So it is shrinking but I think a $1 million is a better number to build in to your malls.

Brady Gaile - KBW

Okay. Then lastly a quick one for Gene. Gene, what’s the number one hold up with M&A, is it pricing, is it regulatory or what’s the number one thing that prevent you all from doing a deal?

Gene Taylor

As Chris mentioned earlier, we’re very focused. I don’t get into the specific of any event other that just say you can remain confident but along with originating loans and growth portfolio and improving our ROAA, we understand that we have to deploy capital or return it and that’s our total focus.

Brady Gaile - KBW

Okay. Thank you.

Operator

And next we’ll go to Paul Miller with FBR.

Paul Miller - FBR

Yeah. Thank you very much. I think the loan growth question has been answered dozen times. I know in the past, I mean -- how many teams have you brought on and you continue to drive that as one of the areas where you can drive loan growth. Could you bring on more teams this quarter, is there still pretty good teams and in your footprint to bring over to the franchise?

Gene Taylor

Yeah, so Paul, what we answered then is we don’t typically bring teams, we bring individuals. And what we want to do there is bring people that can fit in to our culture. We’ve not really bought on core teams of people but we certainly have been hiring. And we continue that in the third quarter and we’ve already hired two new people in the fourth quarter to supplement what we are doing.

So I am excited about the people we have because they fit Bruce’s credit culture, which is an important part of being able to succeed going forward. So the new people are contributing and they helped contribute to this growth that we’re seeing our challenge as you will know is just when confront it with accepting returns dramatically below what our standards are, our -- except in credit risk that is different than what we would like to have, we have to pass on some things and that’s been the bigger issue but I have no doubt there is a plenty of business out there for us to get in the fourth quarter and in the next year and that we will with continued focus make progress toward this goal with net loan growth.

Paul Miller - FBR

And then what areas are you must bullish on to get loan growth and your footprint, is it Florida, is it Tennessee, what your graphic areas are you most bullish about?

Chris Marshall

Paul, this is Chris. We’ve seen incredible growth in the Carolinas. So we feel great about those markets but over time as we said we love -- and Florida has produced great C&I and we’ve seen some CRE growth. And we expect to see that continue. But Tennessee in the long term we think is a market where our performance is going to pick up significantly.

We love the national market. We love the Eastern Tennessee markets that were very established in and that’s where we have added a lot of people in the last two quarters and we feel very good about them. So we’re fortunate to be in some very strong markets and I guess, that’s how we summarize our expectations.

Paul Miller - FBR

And one last question, when you do bring on this individuals, how long does it take for them to start to add value to the franchise?

Gene Taylor

Generally, about six months to see them get to a normalized level and everyone is a little bit different. It really is a function on their customer’s timing of more than the individual person. But we have seen that performance pick up significantly in about six months.

Paul Miller - FBR

Hey guys. Thank you very much.

Operator

(Operators Instruction) We’ll next go to Blair Brantley with BB&T Capital Markets.

Blair Brantley - BB&T Capital Markets

Good morning everyone. I had a question on OREO. I thought you said there was $38 million under contract last quarter. At the end of the quarter, you said only $18 million was sold?

Gene Taylor

That is correct.

Blair Brantley - BB&T Capital Markets

Can you just kind of give some more color about what you are seeing within that area in terms of trying to get sales done and valuation and things like that because obviously cost are still pretty high?

Gene Taylor

Yeah. The activity is very good. I will say we did have one large transaction to sell out, the largest transaction that we had. Of the 38, that was scheduled to close the last week in September. And it did not close and at this point, I don’t expect it to close.

Blair Brantley - BB&T Capital Markets

Okay. But can you give any more color in terms of kind of marks or how much things have been written down because obviously costs are still staying pretty high there?

Gene Taylor

Yeah. So the biggest category we have would be land and lots I’ve mentioned in past. And we have written down that portfolio by 63%. So we have taken significant write-downs and fortunately we have got it at current price value minus disposition cost.

Blair Brantley - BB&T Capital Markets

Okay. And in terms of covered OREO, how much is left there?

Gene Taylor

I don’t have that number. I can find it and get back to you but I can’t tell you of the top, how much is -- of that OREO is covered. If it’s smaller portion, I would tell you that.

Blair Brantley - BB&T Capital Markets

Okay. And then just a final question, on the margin, Chris, you said that, that 1.3, is that one time in nature or is that -- was it a bigger fee that’s going to sell?

Chris Marshall

No, it’s not one time in nature. That was due to collection of the efficiency not sleazier things that are little bit hard to predict. And we will expect to see some level of that collection going forward but I wouldn’t try to predict the number quarter to quarter.

Blair Brantley - BB&T Capital Markets

Okay.

Chris Marshall

I would Blair -- I’m sorry if I could just go back and say one thing in terms of covered loan and Bruce said it is the smaller number. I would point out we also have some CVR accruals which are not which you meant by FDIC coverage. But to the extent, I’d remind you that with the accrual both at the Green Bank portfolio as well as the accrual that we have now booked for the Southern Community accrual. To the extent, we do have unexpected losses for those accruals will offset a lot of that expense.

Blair Brantley - BB&T Capital Markets

Okay. So just to be clear that 10 basis point are kind of core compression that is ex any of -- are these other kind of adjustments like we had during the quarter?

Chris Marshall

That’s correct. And it’s also assuming a stable interest rate environment. If rate stay exactly where they are and over time, we would expect to see purchase accounting burn off and again that’s over roughly three years and it’s still a 94 basis points. So that’s where we get to 10 basis points a quarter.

Blair Brantley - BB&T Capital Markets

Did that assume any other benefit on the funding side, or is that just keeping that status quo as well?

Gene Taylor

It’s keeping its status quo.

Blair Brantley - BB&T Capital Markets

Okay. Do you think there is any burn for improvement on the funding side?

Gene Taylor

We do see continued improvement whether at lower level of a burn off in CDs, which has been a significant trend for us. We will continue but there is an end to that and we are approaching that end. And I wouldn’t give you a specific quarter-by-quarter forecast, but it will be at a lower level going toward.

Blair Brantley - BB&T Capital Markets

Okay. Thank you very much.

Bruce Singletary

Hey, this is Bruce Singletary. To follow-up on your question, the covered OREO is $29 million.

Blair Brantley - BB&T Capital Markets

Great. Thank you.

Operator

And we will take our final question from Matthew Keating with Barclays.

Matthew Keating - Barclays

Yeah. Thank you, good morning. It’s certainly encouraging to see the improvement in your operating ROAA this quarter. Certainly, you already committed to that 1% operating ROAA goal over time. I think in the past you may have put some timeframe around that. Do you still think that’s something that’s achievable sort of towards the end of 2014? Thanks.

Gene Taylor

Hi. I think, we’ll see a significant improvement next year, Matt. In fact, we are going to our planning process now. I think our 81% is more like a two-year goal than a one-year goal and I think that’s consistent that what we’ve said in the past.

Matthew Keating - Barclays

Fair enough. And then, I guess on the tax rate, obviously there was some statutory rate changes which led to that the $1.6 million tax issue I guess this quarter. But if you think about going forward, what do you look for as to a normalized tax rate maybe in the fourth quarter and looking out to 2014?

Gene Taylor

So normalize tax rate for us is 38% and that’s what we model and we would guide you to model. The statutory rate that we saw in this quarter is a very unusual thing, but the one thing I would caution you that would the tax rate. In fact, we would expect to see from quarter-to-quarter, or at least at some point in feature is that is changes in the CVR accrual and that will affect the tax rate. But absent that, 38% is a good number for you to use.

Matthew Keating-Barclays

Got you. And just finally, I know you don’t want to put your fund to point on, on M&A prospects. But certainly, at September, you did talk about been disappointed if you weren’t able to announce another transaction by the end of this year. Has anything changed on that front?

Gene Taylor

No. Nothing’s changed. We are just as engaged as we are. But let just leave it at that. We thought we don’t want to say too much more about that, other than it is a very important activity for us.

Matthew Keating-Barclays

Understood. Thank you.

Operator

And that concludes today’s question-and-answer session. Mr. Taylor, I would like to turn the conference back to you for any additional remarks.

Gene Taylor

Thanks, Alan and thanks to everyone for making time to be with us today and for your questions. If you have further questions, don’t hesitate to call Ken or Chris and we look forward to talking to you next quarter.

Operator

And that does conclude today’s call. We thank everyone again for their participation.

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