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spk06: Good morning and welcome to the FNB Corporation third quarter 2023 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I'd now like to turn the conference over to Lisa Hajdu. Please go ahead.
spk03: Thank you. Good morning and welcome to our earnings call. This conference call of FMB Corporation and the report it filed with the Securities and Exchange Commission often contain forward-looking statements and non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. Reconciliations of GAAP to non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our presentation materials and in our earnings release. Please refer to these non-GAAP and forward-looking disclosures contained in our related materials, 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 Thursday, October 26th, and the webcast link will be posted to the About Us Investor Relations section of our corporate website. I will now turn the call over to Vince Dilley, Chairman, President, and CEO.
spk11: Thank you, and welcome to our third quarter earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer, and Gary Guerrero, our Chief Credit Officer. FMB reported third quarter net income available to common shareholders of $143 million, or 40 cents per diluted common share. This quarter's performance represents EPS growth of 3% in the quarter. Our results reflect the execution of FMB's long-term strategies geared towards risk management, client primacy, generating organic growth, and diversifying fee-based income. Our third quarter efficiency ratio equals 51.7% and is expected to remain in the upper quartile on a pure relative basis. In addition, operating leverage on a year-to-date basis is 8%. Tangible book value per share has increased 12.5% year-over-year to $9.02, despite the impact of higher interest rates. And return on tangible common equity was again at a solid level of 18.2%. As we have previously mentioned, SMB is well-positioned to steadily increase market share in this volatile environment, given the strength of our capital and liquidity position and adherence to our consistent and conservative underwriting guidelines. Total deposits ended the third quarter at $34.6 billion, a 2.3% increase from the second quarter, while maintaining a relatively stable mix of non-interest-bearing deposits at 31%. Our third quarter linked deposit growth once again outpaced the Federal Reserve H-8 deposit data, continuing a trend of quarterly outperformance versus the industry and demonstrating the strength of our granular deposit base and diversified geographic footprint, as well as our goal to be the primary bank for our clients. In fact, FDIC deposit market share data released in September revealed that FMV ranks in the top five in nearly 50% of the MSAs we operate in, and in the top three in nearly 30%. Despite the acceleration of deposit competition throughout the banking industry, FMV spot deposits have decreased less than a half percent since year-end 2022, demonstrating our trusted position as our customer's primary operating bank. Our deposit growth this quarter was effectively funded dollar-for-dollar by our 2.5% linked quarter growth in loans, which also meaningfully outperformed H-8 data. Commercial loan growth of 2.4% benefited from the highest level of quarterly production year-to-date, which was spread across the entire footprint. Since year-end 2022, we have achieved 6.3% spot loan growth while building our CET1 ratio to 10.2%. Tangible common equity to tangible asset ratio also continues to build, totaling 7.54% this quarter, even against the backdrop of higher rates. Additionally, our solid liquidity positions and better-than-peer funding costs provides balance sheet optionality and the ability to support our clients' capital needs. The loan-to-deposit ratio remains at a comfortable level of 92.9%. We also continue to invest in capabilities to gain market share and further outpace our competitors, particularly in the digital offerings we deliver for retail and business customers. Our award-winning eStore offers unique platforms driving a better customer experience and product penetration. Our most recent implementation, the eStore Common Application, creates a single universal account application for the majority of our consumer loan products and services, enabling customers to apply for multiple products simultaneously in a very streamlined manner. In a few months, we will add our consumer deposit products to the Common Application, which will facilitate faster customer onboarding across multiple products and should meaningfully accelerate the adoption of the common application. We will capitalize on our competitive advantage with our superior digital offering and the strength of our balance sheet to acquire and grow customer relationships across our seven-state footprint. During the quarter, we fully charged off the commercial industrial loan we mentioned in our second quarter earnings call. Gary will provide more information during his presentation. Absent that isolated charge-off, total net charge-offs would have been a modest seven basis points, and total delinquency stood at 63 basis points. Our growth strategies are balanced by a diligent focus on risk management. We closely monitor macroeconomic and market-specific trends to manage risk as part of our core credit philosophy, which has served us well in softer economic times. We remain steadfast in our approach to consistent underwriting and managing credit risk to maintain a balanced, well-positioned portfolio throughout economic cycles, enabling us to serve our customers through business cycles in ways our competitors cannot. I will now turn the call over to Gary to provide additional information on our credit performance.
spk01: Thank you, Vince, and good morning, everyone. We ended the quarter and year-to-date period with our asset quality metrics remaining at good levels. Total delinquency decreased 12 basis points in the quarter to end at 63 BIPs, and NPLs and Oreo decreased 10 basis points to end at a solid 36 BIPs. Criticized loans were down 18 basis points, with net charge-offs for the quarter and year-to-date of 47 and 26 basis points respectively. Excluding the isolated credit that Vince noted, net charge-offs for the quarter and year-to-date period were 7 and 12 basis points respectively. I'll conclude my remarks with an update on our credit risk management strategies and CRE portfolio. As previously disclosed in the second quarter earnings call, We placed a single $31.9 million CNI loan on non-accrual. Based on alleged fraud and upon later findings uncovered during our ongoing investigation, including subsequent bankruptcy filings by our borrower and its primary supplier, the outstanding balance was charged off. We will continue to monitor the bankruptcy process closely and aggressively pursue all opportunities to recover a portion of the charge off. Total provision expense for the quarter stood at $25.6 million, providing for loan growth and the previously mentioned charge off in excess of the $13 million specific reserve that we allocated to it at the prior quarter end. Our ending funded reserve decreased $12.1 million in the quarter and stands at $401 million, or a solid 1.25% of loans, reflecting our strong position relative to our peers. When including acquired unamortized loan discounts, our reserve stands at 1.39%, and our NPL coverage position remains strong at 394%, inclusive of the unamortized loan discounts. We remain committed to consistent underwriting and credit risk management to maintain a balanced, well-positioned portfolio throughout economic cycles and continue to perform full stress tests of the loan portfolio on a quarterly basis. We were pleased with the outcome of the result of the recent exercise, which confirms that our diversified loan portfolio enables us to withstand various economic downturn scenarios. Regarding the non-owner-occupied CRE portfolio, delinquency and NPLs remain very low at 31 and 20 basis points respectively, confirming that our consistent underwriting and strong sponsorship demonstrates the ability to perform in a rising rate environment. In closing, asset quality metrics ended the quarter at good levels and we continue to generate diversified loan growth in attractive markets. We closely monitor macroeconomic trends and the individual markets in our footprint, and we'll continue to manage risk aggressively as part of our core credit philosophy, which has served us well throughout various economic cycles. I will now turn the call over to Vince Calabrese, our Chief Financial Officer, for his remarks.
spk07: Thanks, Gary, and good morning. Today I will focus on the third quarter's financial results and offer guidance updates for the fourth quarter. Third quarter net income available to common shareholders totaled $143.3 million, or 40 cents per share, bringing year-to-date earnings per share to $1.18. The results include contributions from our commercial leasing team who originate renewable energy financing transactions as part of their business model and this quarter they closed a large solar deal with a related investment tax credit. Loans and leases ended the quarter at $32 billion, growing $796 million, or 2.5 percent, linked quarter, driven by the success of our strategy to grow high-quality loans across our diverse footprint. Commercial loan growth of $470 million, or 2.4 percent, was across our seven-state geography with notable contributions in the Pittsburgh, Mid-Atlantic, and North Carolina markets. Consumer loans ended the third quarter at $12 billion, a linked quarter increase of $326 million, or 2.8%, led by growth in residential mortgages. The investment portfolio remained flat at $7.1 billion, with a fairly even split between AFS and HTM. The duration of our securities portfolio at September 30th is 4.4, similar to last quarter. Total deposits ended September at $34.6 billion, with a healthy increase of $790 million linked quarter, or 2.3 percent, reflecting organic deposit growth and seasonal municipal deposit inflows. Our deposit gathering capabilities have continued to outperform the industry, as illustrated by the Federal Reserve H-8 deposit data where our deposit growth was nearly 220 basis points higher for the quarter and 320 basis points higher since year-end 2022. The deposit mix shift slowed modestly this quarter as customers moved into time deposits and interest-bearing demand deposits, which grew 458 million and 712 million, respectively, more than offsetting the decrease in non-interest-bearing deposits of 210 million. As time deposits have grown, we have intentionally kept the portfolio short with a weighted average maturity of 11 months so that when rates do fall, we will have the ability to reprice these balances downwards. As of September 30th, non-interest-bearing deposits comprise 31% of total deposits compared to 32% at June 30th and 34% at year-end. Given our granular, stable deposit base, we believe we will continue to outperform the industry with a favorable mix of noninterest-bearing deposits to total deposits, even in a higher-for-longer interest rate environment. The loans-to-deposit ratio remains at a comfortable level of 92.9%, flat with June 30th. Revenue totaled $408 million, driven by net interest income of $327 million, and growth in non-interest income, reflecting our diversified fee income strategy. The third quarter's net interest margin was 326, a decline of 11 basis points, moderating from the 19 basis point decline last quarter. The yield on earning assets increased 17 basis points to 511, reflecting higher yields on loans and investment securities. Total cost of funds increased 29 basis points to 193, as the cost of interest-bearing deposits increased 39 basis points to 236 and was partially offset by the contribution from non-interest-bearing deposits. We continue to actively manage our total deposit costs and ended the quarter at 175, bringing the cumulative deposit data to 31 percent. We are projecting cumulative data to end 2023 in the mid-30s. Turning to non-interest income and expense, Non-interest income totaled $81.6 million, a 2% increase from the second quarter as capital markets income increased $1.2 million led by international banking with solid contributions from swap fees, syndications, and debt capital markets income. Mortgage banking operations income decreased $1 million due to negative fair value marks given the sharp increase in mortgage rates during the third quarter that more than offset a 46 percent increase in total saleable mortgage production versus last quarter. Non-interest expense totaled 218 million, an increase of 6.2 million, or 3 percent, from last quarter. Net occupancy and equipment expense increased 3.5 million, largely due to the impact of technology investments in the inflationary macroeconomic environment. Marketing expenses increased 1.5 million, due to the timing of digital marketing campaigns, which helped drive deposit growth and acquire additional households. The efficiency ratio equaled a solid 51.7 percent, up slightly from 50 percent last quarter. For the first nine months of 2023, the efficiency ratio totaled 50.8 percent, compared to 54.7 percent for the same timeframe in 2022. While supporting the strong loan growth, our capital ratios remain robust through the quarter. Our TCE finished the quarter at 754, and when adjusting for health and maturity investment marks, would equal 6.7 percent. Our CET1 ratio at 10.2 percent is in line with peer median, and we remain well capitalized even when including the fair value marks in our AFS and HTM portfolios. Tangible book value per common share was $9.02 at September 30th, an increase of 23 cents per share from June 30th, largely from the higher level of retained earnings, more than offsetting the increased impact of AOCI, which reduced the current quarter-end tangible book value per common share by $1.06. On a year-over-year basis, tangible book value per common share increased a full dollar, or 12.5%. demonstrating our commitment to internal capital generation. Let's now look at the fourth quarter financial objectives, starting with the balance sheet. On a full year spot basis, we increased our previous guide for loans to grow mid to high single digits year over year as we take this time to invest in our capabilities to gain market share across our diverse geographic footprint. Total projected deposit balances are revised upward to end 2023 relatively flat to year-end 2022 spot balances. The fourth quarter net interest income is expected to be between 315 and 325 million, assuming no additional interest rate hikes for the rest of the year. Fourth quarter net interest income is expected to be around 80 million, which is similar to our guidance levels for the first three quarters of the year as we continue to benefit from our strategy of diversified fee-based businesses. Fourth quarter guidance for non-interest expense is expected to be between 215 and 220 million, driven by increased investment spend and the impact of the inflationary macroeconomic environment. Full-year provision guidance is revised to a tighter band of 70 to 80 million and will be dependent on net loan growth and charge-off activity in the fourth quarter. Lastly, the full-year effective tax rate should be between 17.5 and 18%, and the fourth quarter effective tax rate is expected to be between 17.8 and 18.2%, reflecting benefits of investment tax credits generated through the financing transactions of our commercial leasing business in the quarter. With that, I will turn the call back to Vince.
spk11: Once again, this quarter's financial performance was achieved through the dedicated efforts of all of our employees. The culture at F&B is rooted in teamwork and collaboration, to collectively reach our goals. FFB continues to earn national recognition for our inclusive culture based on independent feedback from our own team members. Building on the multiple awards we received earlier this year for innovation, leadership, and our family-friendly benefits and compensation programs, we also garnered additional national culture excellence honors, highlighting our commitment to diversity and employee appreciation, and wellness and development. We strongly believe having an outstanding culture with engaged employees results in superior performance and shareholder value appreciation. We are pleased with this quarter's results as we continue to outperform the industry reporting loan and deposit growth while adhering to our conservative risk management philosophy, all while strengthening our capital and liquidity position. Given the strength in our performance F&B is well prepared to meet the needs of our consumer and business clients with a broad array of products and services, a strong balance sheet, and a commitment to achieving success for all of our stakeholders. Thank you.
spk06: We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. to withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Daniel Tamayo from Raymond James. Please go ahead.
spk04: Good morning, guys. I'm wondering if you could talk a little bit about updated thoughts on when you think the margin might bottom and if you had any more details on what the month of September looked like from a margin perspective and yields, that kind of stuff.
spk10: Yeah, good morning, Danny. I guess a couple comments on that. You know, I think given everything industries withstood this year, clearly the peak was in the first quarter. If you look at our net interest income for the third quarter, you know, we only declined 2.6 million in the NIM compression, as I commented on, moderated to 11 after decreasing 19 basis points last quarter. The monthly decline in MIM has been averaging around three core basis points a month since May. So it's been coming down, but pretty steady within that range. Our outlook for the fourth quarter of the 315 to 325 doesn't have any rate increases, as I mentioned. But the decline in margin, kind of similar to what we saw in the third quarter, is kind of what's baked into our guidance.
spk04: Okay. That's helpful. I appreciate it. And then kind of moving over to loan growth, you know, I'm just curious, you know, how you're thinking about loan growth potentially next year if the economy does slow. You know, it's sustained at a pretty strong growth level here throughout the 2023, in particular Physicians First and the Residential Mortgage book. But just curious on kind of higher level thoughts about, the ability to sustain that kind of long growth?
spk11: Yeah, I think, first of all, I think that we're in a really strong position relative to many competitors, particularly many of the smaller banks who are struggling with capital and liquidity issues. So it puts us in a position where F&B can become, you know, we go on the offense, basically, and we're able to go after and we can support our clients' capital needs as we move through 2024. We didn't give guidance for 2024, so I can't really speak to specific numbers. But my expectation moving into next year is it's going to be choppy for everybody from a loan demand perspective. I think for us to be successful, we're going to have to stay very focused on maximizing or growing market share in the markets that we've moved into where there still continues to be good, solid growth in those markets from a GDP perspective. I think that's one thing that will help us. Secondarily, I think given the size span of the company today versus where we were years ago, we have multiple markets to pursue opportunities in. So I think going into 2024, depending on how the economy shakes out, it will be more challenging to find creditworthy borrowers that we would want to bank. In that environment, I think it's going to be more competitive. So I think having the right people spread across those areas would be a benefit to us versus somebody that's heavily concentrated in, say, Pennsylvania or Ohio. So I think all of that will play in our favor. I think we've also invested pretty heavily in certain platforms that will continue to drive fee income for us. So in addition to loan growth, we did perform pretty well from a fee income perspective, given the pressures that we were facing. But we've invested in our digital platform, which should help us in small business and with gathering deposits as we move into this quarter. And the common app is fully built out. We've invested pretty heavily in treasury management systems, you know, our payment processing capabilities and, you know, lockbox capability that we still offer clients has been upgraded in the last year or so. Capital markets, you know, we built out our ability to participate in bond offerings through our debt capital markets platform, and that continues to perform well. for us and enables us to move up market and participate in lower risk transactions and still meet the return thresholds that we have internally. So all of that will play well for us as we move into next year. So those are the reasons why I feel more confident about our performance this quarter and then into next quarter. But I will caution you, I think the macroeconomic environment will play a role you know, demand has to be there as well. So, and capital investment has to be occurring. Anyway, on the commercial side.
spk04: That's terrific, Keller. I appreciate all of that. I'll step back. Thanks, guys.
spk06: Okay. Thank you. The next question comes from Michael Aperto from KBW. Please go ahead.
spk09: Hey, good morning, guys. Thanks for taking my questions. I wanted to start on a comment you made, Vince, about making investments on the op-ed side and trying to take advantage of, you know, a lot of the posture of the industry. I was wondering if you guys are willing to kind of go a layer deeper on that. I mean, I think it's evident. and obvious from the financials that you guys are in a strong position here. So what type of investments are you looking at? What do you think could make the biggest difference as you look to the next 12 months here and obviously still have some growth opportunities in front of you and a lot of peers that probably have some opportunities but don't have the balance sheets to really kind of fully take advantage of them?
spk11: I'm sorry, you broke up a little bit. You're speaking specifically to digital investments. Is that your question?
spk09: Yeah. I mean, I imagine most of the things you're looking at are digital, but just more broadly, any, like, initiatives or kind of areas of investment that you guys are particularly focused on that you think could be, you know, pretty fruitful over the next 12 months in terms of kind of continuing growth and being able to take share while the industry is in a weaker position?
spk11: Well, first of all, I think it's a great question, and we've talked about this internally. There are two paths to go down as we move into next year. Let's face it, the banking industry in general is facing margin compression. Some banks are struggling to grow revenue. It's highly competitive from a depository perspective, so I certainly understand why there's a lot of caution moving into next year. But I think given our position, You know, we have strong capital. We're in a strong capital position. We have tremendous liquidity. We have made investments in de novo expansion in the retail space, which are coming online. You know, expense comes along with that. So we've already started to invest in those projects. And you'll see depreciation expense coming online with those. But, you know, we're at the point now where they should start to generate revenue or contribute to our effort, right? Because we launched a number of them at the beginning of this year or late last year. So we should be seeing some good success there. And those are principally at higher growth markets that are not feeling as much pain as some of the other more legacy markets that we're in from a growth perspective. So we're very optimistic about the performance there. We're also optimistic about our build-out of a common app that I spoke about. You can purchase multiple loan products on our platform today. By the end of this quarter, we'll be able to buy multiple loan products and multiple depository products with one application. And the training's going on in the field. We've been doing training on our systems and on our capabilities for some time. I think you're going to start to see that pay off. We also changed our model in the branches several years ago in the consumer bank. We started rolling out relationship bankers instead of having tellers and platform people, so more highly trained bankers in the branches. We're finally closing out the last region in terms of converting those folks over to this higher profile banking position, which should help with cross-sell and driving product sales in the branches beyond just doing transactions. And then we have bankers basically, you know, there are a number of bankers that are pulling back at other institutions. So, you know, I think we'll have opportunities to go after business that presents itself that, you know, we've been, for companies that we've been calling on for a long time in the commercial space. We've made investments in, so to be more specific, We've made investments in treasury management, which I think will assist us in becoming the primary client for middle market and larger companies. We've made investments in the digital platform to help us go after more share of wallet more quickly with clients by presenting them to the more efficient platforms to onboard clients. We've invested pretty heavily in our institutional capabilities from a capital market perspective, which is a different position with clients. So I think Really, we have a number of areas that we've worked on, and I think that we're definitely going to experience better-than-peer results because of it. That's my commentary. We also, by the way, built out our small business lending platform. We continue to focus on that. Our plan is to integrate merchant and treasury management services into a bundled similar to the Common App. So that is going to be worked on in the first quarter of next year. We have about 90,000 clients that are either depository or loan clients in the small business segment. So there's quite a bit. I think we have about 3% to 5% penetration with merchant in that space. So there's quite a bit of opportunity there from a fee income perspective, and we've been focusing on that moving into next year. Those are some of the strategic investments that we've made. And I do believe that at this time, it makes sense for this company to continue to pursue those investments and drive revenue growth during 2024. It might be more difficult for others to do that.
spk09: Yeah, no, that makes a lot of sense. That's a great flavor. Thank you for walking through all that. Just lastly for me, and then I'll step back and let someone else jump in. Just curious, more of a high-level question than a near-term question, but as you think about the franchise, the size, the growth projections, I imagine you guys have constant conversations with the board and the executive team around what the right level of capitalization is. And obviously, at the higher end of the spectrum on the asset side, there's a lot of conversations about capital. I'm just curious – Any updated thoughts around what you think kind of the right capital level for F&B is, like, over, you know, the next few years here? I mean, do you think it's a higher number than maybe what it was over the last 24 months? I mean, obviously, you don't have to get there right now, but just kind of curious what the conversation is internally around capital, just given everything that's happened, and as you think about, you know, taking care and continuing to grow the balance sheet, you know, moving forward.
spk11: Yeah, well, we cover capital. capital and liquidity in addition to the company in every board meeting that we have. So we have a pretty separate team where we go over various elements of our financial performance. We discuss the balance sheet in detail and, you know, strategies around maximizing returns. You know, that happens in every board meeting. And then we talk about what the investors expect and, you know, what the street expects and how we're performing relative to those expectations. I think capital is a topic that we've had on the table for a long time. I think given the AOCI impairment that you've seen, you know, impact others' capital positions, you know, we were viewed as having less capital because we actually operate with a lower risk profile within the commercial loan categories that we participate in and the consumer business as well. We're very conservative. If you look at where we are today, With CDT1 at 10%, our TCE ratio is 7.5% and growing. We feel pretty comfortable with where we are from a capital perspective. I understand that $100 billion and greater, you're going to see greater expectations from regulators for capital. But I think given where we are today, we're in one of the better positions we've been in in years. We have a very solid portfolio. We've spent a lot of time in energy. Gary's done a tremendous job de-risking that portfolio with the sale of regency, the sale of hospitality, the sale of adverse credits. We basically have done a lot. We've moved over a billion dollars off the balance sheet before the pandemic even occurred. So I think we're in a great position from a capital perspective. We feel comfortable where we are today, and we address it at every board meeting. And if you look at our returns on tangible common equity, we're upper quartile. So even with higher capital ratios, we're still at an 18% ROGCE. So, you know, pretty good solid performance and profitability. Great.
spk09: All right. Thank you, Vince. I appreciate you taking my question today.
spk11: One more thing on capital, by the way. You know, we've dividended out over a billion and a half dollars or, you know, through share repurchases or dividends. over a billion and a half dollars in capital deployment to shareholders as well. So, you know, I think, you know, when you think about the company in capital management, that's part of the discussions that we have with the board, just to throw that in there. So, you know, our shareholders have benefited from that distribution of capital immensely. And obviously, we have retained that capital. We have much higher capital ratios. You know, that's part of the equation. So we feel a We need to evaluate where we are every quarter. But anyway, sorry.
spk09: No, I appreciate all the color. Thank you, guys.
spk06: Thank you. Again, if you have a question, please press star, then 1. The next question comes from Manuel Navas from DA Davidson. Please go ahead.
spk08: Hey, good morning. I just wanted to follow up on the name. What are thoughts on where it could bottom next year? Just kind of updated there, and then I have a follow-up on deposits.
spk11: Yeah, I'm not sure that I, you know, I don't think we're guidance for next year. I'll let Vince answer the question. Go ahead, Vince.
spk10: I mean, you know, as far as we'll provide our thoughts when we provide guidance for next year in January, but You know, I mean, I think, as I mentioned, fourth quarter kind of coming down at a similar level to third quarter. And, I mean, you know, maybe first half of the year next year. But, again, we have to do our – we just started our budget process for next year. So, you know, I think there's still some movement down. Exactly when it bottoms is a hard thing to call for sure. But, you know, somewhere in the kind of middle of 24 would be kind of based on the way things are today. But they could change by the time we finalize our budget. and, you know, put out guidance in January. But the compression I talked about is clearly it's moderated. You know, if the fourth quarter comes down similar to the third quarter, the net interest income, as I mentioned earlier, only came down $3 million. So I think the sustainability of the net interest income is very important, right? And, you know, driving our efficiency ratio in the low 50s, that's a key part of it. So more to come in January as far as what level it actually might bottom at. But it's definitely moderated the compression, as I commented on.
spk08: I appreciate the color there. On deposits, the CD engine is definitely powerful. It's what customers are looking for. Do you have some breakdown on what you're seeing? Is that from new customers, current customers bringing over more funds? Can you just kind of talk through where you're winning there?
spk10: I think it's a combination of all of the above.
spk11: Part of the strategy is to persuade folks to bring additional dollars over. Some of the campaigns focus principally on that, the money market offering, some of the CD offerings that we have. I think we've had quite a bit of success bringing in new customers. So north of 50% of the new money that comes in is new customers. So it's better than 50-50, but it's worked. Let's put it that way. But I think the principal reason why we're successful and we've been able to manage the betas and the migration a little better really is because of the insight that we have within our customer base with the tools that we put into place with AI and our data scientists and the data hub that we have. You know, we were able to spend a lot of time analyzing behavior, and I think that's really helped us with pricing. And, you know, we've been a little more disciplined than others. I think if you look at our cost of funds, you know, on our margins a little better. So, you know, it kind of shows there. But I also believe that being the principal bank for consumers and businesses, as I said in my remarks, is critically important. And that requires a consistent investment in technology, management services, all the things that I mentioned earlier. So, you know, they both go hand in hand.
spk08: I appreciate that. Do you have a rough idea? Do you have a rough average rate on the new CDs, or what's your current best offer? And then just talk about the functionality in the Muni book briefly.
spk11: Vince, I don't know. I don't have those details at the tip of my fingers. Do you have that, Vince?
spk10: Yeah, I would say a couple things. The rates on the promotional CDs and money market rates have been right around 5, a little below or a little above. So, you know, we've had, as Vince said, with all the data analytics supporting it and the tools we have in place, you know, we've brought in, you know, close to $800 million in new money, really, since May through that. And that's kind of the overall balance sheet. And then the new need flows I've always talked about is $300 to $500 million is kind of the, you know, the range of what comes in. And, you know, during the most recent quarter, it's at the higher end of that and really kind of spread throughout the categories. It's A small amount is really in the DDA, and most of it's more in the money market and sweep accounts where that money flows through. And that peaks and troughs as you go through the year. It kind of builds through October, November, and then the first quarter is always the trough of that.
spk08: I appreciate that. And then just switching topics, switching gears for a second, what are kind of updated thoughts on buyback? You just had so much growth this quarter. Is that the main – kind of limiter there, and obviously that probably comes first, organic growth, but can you just kind of walk through where buyback fits in, given that CET1 is above your target?
spk10: Sure, I can comment on that. I mean, being at 10.2, so we're a little above our target. I think during the second quarter, when we were active, there were great opportunities to put some money to work there. And in the third quarter, with the growth we had, plus the timing of the special assessment, you know, there was an expectation that might happen in the third quarter. And just the uncertainty, we decided not to be active during the third quarter. You know, as always, we're committed to managing capital in a manner that's fully aligned with shareholders. So, you know, we're closely monitoring it. We may become active in the fourth quarter, but, you know, we want to really see how the overall environment plays out. But clearly there's room to do that. And, you know, with the dividend payout ratio that we've all worked really hard to get down to 30%, you know, we now have flexibility and a strong earnings generation that we have where this number will build. And we'll put it to work. Loan growth stays strong. You know, we'll use that to support the loan growth. That's always our kind of first and best use of the capital.
spk11: Hey, Vince, the other thing I wanted to mention is, you know, the tax credit transaction that we've closed this quarter. You know, some folks have asked, is that like a one-time event? No, we actually have a business that pursues tax credit transactions, particularly in the energy field. So we've done a number of them over the last few years. In the group, you know, there's a pipeline of tax credit transactions that we pursue. So sometimes it's lumpy because it takes time. to build out a solar field or, you know, it takes time to get certified and get that stuff up and running because they actually have to be delivering power, right, where you can start the whole process from a financial perspective. But, you know, it is a business that we have. It's in our corporate finance area and they've done a terrific job over the last few years. So I would expect that to continue as well into next year. because we've developed that expertise and we're confident that the people that we have doing that, Tim and his team, have done many of these and are very well positioned to keep pursuing opportunities. I would add that to the mix as well because it doesn't show up the same way from a profitability perspective because we book an asset that has a very low margin that ends up impacting margin and then we get a tax benefit and then you all say, well, why, you know, you're just winning on a tax benefit, but that's actually part of the profitability of the extension of the credit, just so everybody understands. So, you know, some folks have asked us about that, and I wanted to make sure we were clear that that's, you know, something that we pursue on an ongoing basis and will be additive to next year as well.
spk10: And it provides capital too, right? Yeah.
spk08: I appreciate that added color. Thank you.
spk06: All right. The next question comes from Frank Chiraldi from Piper Sandler. Please go ahead.
spk02: Good morning. Hey, guys. In terms of the guide for NII, you know, you mentioned no additional rate hikes. If we do get a November or December rate hike, I mean, I'm just wondering if that's meaningful anymore in terms of what that adds on an annualized basis to NII. And maybe if you could just talk a little bit about how you're managing the balance sheet sensitivity for the higher for longer rate outlook. Thanks. Yeah, I would say, you know, any... I'll let Vince answer that.
spk10: No, go ahead, Vince. Yeah, I mean, any rate movement, frankly, late in the quarter doesn't really do much for the fourth quarter. So there's not much benefit that we get there. And with where rates are, I mean, it's not that big of an impact even to next year. I mean, you know, if you look at our IRR position, you know, we've been kind of gradually moving towards neutral, you know, as each quarter has gone by, kind of naturally getting there. You know, when you look at when our IRR stats will be out in the queue, I mean, the plus 100 ramp to a minus 100 ramp is around 1%, 2%. So there's actually a benefit both ways because you have the rates on loans and investment securities we're putting on continue to be higher than the portfolio rates. So you kind of get benefits from that. But 25 basis points in the grand scheme of things, it's not going to do that much. And we'll bake it into the guidance in January when we give it out, but it's really not going to move the dial.
spk02: Okay. And then just thinking about the 4Q expense guide, you know, is the right way to think about that. You talked a lot about the investments being made. Should we think more about that as an acceleration of investments and potentially So there's a potential leg down and expense or given, you know, everything you guys are doing is that, um, just better to think about as, as, as, as one rate at this point.
spk10: Yeah. I don't know if you want to comment. Sure. I can comment on that. I mean, you know, as Vince talked about, we've continuously invested in the company, you know, that Frank been covering us for a long time. So. Um, it's been, it's part of how we run the company investing to generate future revenue. Um, and we've been able to do that maintaining, you know, very good efficiency ratio in the low fifties. So it's, it's just part of running the business and conversations we have internally are always, you know, focusing our, our CapEx spend where we can drive future revenue and investing in markets, right? We've added new markets to the de novo strategy through expanding our, our ATM strategy. going to Northern Virginia, Charleston, and markets that are very attractive. So that's also part of the investment is investing in those new markets, which then generates future revenue for us. I mean, the expenses in the fourth quarter, you know, it's always the end of the year can be a little lumpy or finishing up incentive plan accruals and those types of things that comes in. So, you know, when we do our guidance in January for next year, we'll have a cost savings target as we have every year. I mean, we've taken out 60 million or so in cost as we've grown and created the scale. So, you know, that's always part of how we run the company. And the initiatives that Vince talked about, the DeNovo's, the digital investments, the infrastructure to support that growth, you know, we focus on generating that positive operating leverage and having a low 50% efficiency ratio. So it's a, It's not easy, but it's a focus within the company, and I think investments have served us well. So it'll continue to be part of it. So there's not really a step function to it, Frank. It's a good question, but it's really just part of how we run the company.
spk02: Okay, great. And then just lastly, on the tax rate and the renewable energy transaction and totally get that's just part of the deal, that's just part of the economics or these tax credits that you get – Would you say that if I look at the 4Q23 guide, you know, it's a bit lower, I'd say, than your rate over the last several quarters, except for this 3Q. You know, is that, would you say that's kind of lumpy, too? Is there kind of more activity expected in 4Q? Or is that just, you know, has that business just ramped up to a degree where, you know, you could see that as potentially sustainable?
spk10: Yeah, the fourth quarter level, Frank, is really tied to the same solar deal that we just closed in the third quarter. The bulk of the tax credit gets recorded in the third quarter, and then there's carryover, kind of smoothing out the effective tax rate for the year that also benefits the fourth quarter. And that kind of completes it for this transaction. But as Vince said, there's a pipeline of transactions that we continue to go after, and we're The team is already working actively on others that could happen next year and into 2025. But the 4Q is really just tied to this transaction and kind of the smoothing of it into the fourth quarter.
spk02: Got it. Okay, that's helpful. Thank you. All right, thanks.
spk06: Again, as a reminder, if you have a question, please press star, then 1. Our next question comes from Brian Martin from Janning, Montgomery. Please go ahead.
spk05: Hey, good morning, guys. Just one for me on back to the margin just for a minute, Vince. I guess I appreciate the color on the abatement of the funding pressure here. But I guess as far as the DDAs go, I mean, I guess the contraction slowed a bit again this quarter. Just kind of wondering if you think we're nearing a bottom there, just how you're thinking about that in general, and maybe just an update on kind of where new loan production is coming on.
spk10: Yeah, I would say, I guess let me talk to... I don't know. Go ahead, Vince.
spk11: I don't know the answer, Vince. I want to answer which Vince Brian was asking. Go ahead.
spk10: Well, I can comment on the loans, and then maybe, Vince, if you want to talk about the strategy on non-interest bearing afterwards, that would probably be good. You know, the new loans that we made during the third quarter, they came on at $685, which was up from $637 in the second quarter, so... You know, the commercial loans came on in the sevens, and, you know, mortgages in the mid to high sixes during the third quarter, and those are kind of mid-sevens as we sit here today, just given where mortgage rates are. So, you know, 685, a pretty good level, and, you know, above overall portfolio yields, so you're getting that benefit coming through. I mean, the overall portfolio rate on a spot basis went up 15 basis points, you know, with that higher level of interest. made you know rates on the new loans that we made versus where the portfolio is and then we have a slide in the deck brian you're familiar with i mean the non-interest-bearing deposits has been a focus as long as i've been here and vince before me you know we've grown from 16 to i think we peaked at 34. um we were 26 kind of pre pre-sovet right and you know we're going to work hard to keep that number as high as we can and it's just part of everything we do, every week of pricing, every outcome meeting, every board meeting.
spk11: It's actually on page 13 in the investor deck. We comment on it frequently, but if you look, it goes to what I've been saying. Strategically, our goal was to drive up non-interest-bearing deposits. Basically, I know during the lower interest rate environment, People didn't value them as much. I used to talk about them all the time, talk about our performance here, and people didn't pay attention because back then the benefit, the FTP benefit wasn't that great. But today, you know, it really provides us with a pretty substantial buffer from a margin perspective. And if you go back to 2019, we were at 26% demand deposit, 31 and 20. You know, I mean, you then can see the surge coming in with stimulus, So, you know, we're feeling pretty good about where we are. We've focused on client primacy. Chris Chan's term, he has a trademark on that. He calls it client primacy. It's our internal strategy to make sure that we're the principal depository bank and disbursement bank for consumers and businesses. And again, you know, we continue to make investments in de novo branch locations to drive new households where we can be the disbursement bank on the consumer side. We've invested in digital. We've invested in TM products and services, like I said, the payment hub that we put in place and some of the other products that we just rolled out that help us establish ourselves as the principal depository bank. That's why these demand deposits don't move around that much, so relative to others. It's not just cash parts here. I mean, in many instances, those balances are being used to cover services. The balances have to remain to cover disbursements that go on, you know, throughout a month or a week. So, you know, it's pretty much embedded. So we're feeling pretty confident about our deposit mix here. That's not to say there wasn't pressure because when rates were lower, of course, you know, companies and individuals, including myself, were a little sloppy about leaving their money sitting in, demand deposits. So that's changed. I think the consumers expect and the businesses expect to invest those balances given the returns they can achieve today. So I think we've demonstrated here over a pretty long period of time that we are a very solid depository institution with heavy emphasis on low-cost funding sources. Anyway, I hope that helps you.
spk05: Yeah, no, that's helpful. It sounds like it still could go a bit lower, but it's still better than peer and holding up well. So, okay. And then maybe – go ahead.
spk11: I think we'll outperform the peers. I can't speak to where we're going to be in the future because who knows. If I could predict interest rates, I wouldn't be here. I'd be trading bonds. But I think that we're going to outperform because of our business model.
spk05: Gotcha. Okay. Makes sense. Maybe just one for Gary on the reserve. I mean, the reserve is down a touch this quarter. It's still a pretty healthy level, inclusive of the marks. But just kind of wondering how to think about the reserve in conjunction with, you know, the strength and credit.
spk01: Yeah, Brian. You know, in terms of the reserve, I mean, it's a constant focus from our perspective. You know, at 125 and 139 with the unamortized discounts, I mean, it's upper quartile strong compared to peers. We feel good about where it is and the position of the portfolio here entering the end of the year. So I would expect it to continue to track similarly as we go forward.
spk05: Okay, and remind me, Gary, I think there was a credit out there this quarter with some other banks with a SNCC portfolio. How big your SNCC portfolio is today?
spk01: Yeah, our SNCC portfolio today is $3 billion. Forty-plus percent of it is investment-grade, and essentially the balance of it is, you know, essentially right up against investment-grade. That portfolio has performed extremely well. It's extremely strong. Our focus, we don't buy paper. Our focus is really on customers that we know and customers in our market. That focus has really proven itself very well in that portfolio over a long period of time. We've generated significant deposits that Vince has referenced around that portfolio as well and continue to – it continues to perform exceptionally well. It's a very strong portfolio. Gotcha.
spk05: Okay.
spk11: You know, I hate to answer the question, though, because you can't compare every bank's syndicated loan portfolios. So, you know, on the buy side in particular, We're not a leverage finance player. We're buying participation if we participate in a deal because we think that we're going to get ancillary business. We're participating in bond economics. They're customers. One of the rules we have is that our bankers have to have a relationship with the company. They can't just rely on Bank of America or PNC to bring us into a deal. That's a different type of portfolio. than having a left-in portfolio that you just go out and buy leveraged transactions in for yield. So to Gary's point, you know, we have a big chunk of investment-grade credits in that syndication portfolio. And then also, we need a number of credits. We have a syndication effort that we worked out. So that would be included in that number where we're left-lead. So all that, you know, needs to be taken into consideration.
spk01: As Vince indicated, we're not in the leveraged finance business. We don't have a private equity business. It's really customers in our markets that we call on and have relationships with. It's been a very strong book of business for us.
spk05: Gotcha. I appreciate all the color there and then Maybe this last one was on the commercial and consumer pipeline. I know you're not giving any guidance on 24, but just kind of given the growth this quarter, just kind of want to see where the pipelines are at today relative to last quarter. Just, you know, how do you frame it?
spk11: We're coming off of a pretty good funding quarter. So typically what happens is the pipelines reset. I think we're down between, you know, 5% and 10% in most of the markets. I just looked at the statistics. rigorously. So I'd say down 5% to 10%, but still building. I think when you look at the portfolio overall, the dynamics of our commercial loan portfolio, one, I think that attrition has slowed dramatically because of the climate and rates, so that's going to help stabilize the balances. That's number one. Number two, I think demand for capital has slowed going into next year So that's part of why the pipelines have slowed or decreased a little bit. Particularly, I focus more on the 90-day pipeline, which is down about 4% or 5%. You know, that's what I tend to focus on because we look at it both ways, right? Total versus close in the short run. And, you know, I think it will build again going into next year. obviously depending on what happens with interest rates and the economy overall. But I'm pretty confident that there will be some build. And then the third thing I wanted to mention was that utilization rates have declined slightly, which is an indication that there's a pullback. So we're seeing in the commercial book a 1% to 2% decline in utilization rates. And, you know, to me, that's an indicator that the borrowers are kind of pulling back a little bit. Gotcha. And those pipelines – I hope that's helpful.
spk05: Yeah, the pipelines you're talking, you know, 4% to 5% lower are both for consumer and commercial, or is that just primarily commercial?
spk11: No, I'm sorry. I was speaking only to commercial. Consumer is – you know, the pipelines for consumer depends on which – If we want to talk mortgage, we have more mortgage than we need. We're basically becoming more competitive to push off the balance sheet. We're more competitive in the conforming space, which impacts margin a little bit. It gets it off the balance sheet. We've been very successful growing our consumer and mortgage-based business. So I'm not too worried about that. Small business has performed pretty well. The pipelines are up. You know, that Physicians First program and the emphasis on health care has kind of paid off for that group. We have some really good people that we brought on ahead of our small business lending area has a specific expertise in health care, which is why we're developing this product that I mentioned earlier in the call. The pipeline there looks pretty good. And I think we do have an opportunity moving into 24, as I said, in the small business segment, which falls under consumer, to grow that book of business. I mean, we have a boatload of small business customers across seven states. I mentioned 9,200,000 customers. So, you know, our small business pipeline at the most recent quarter was at record levels, and I would expect – us to continue to capitalize on that. I know it doesn't contribute as much to the total, but that should bode well for the retail consumer bank. But that, you know, that's where we are. I don't, you know, really, we're not anticipating issues with the mortgage or the mortgage is tougher, right, in the higher interest rate environment, but the majority of the loans that we're originating across a pretty broad footprint are purchase money loans. And we've invested pretty heavily in the platform recently, so we're pretty confident we can achieve better than peer results in the mortgage business like we have. And then that leads to home equity opportunities and other opportunities in the consumer segment. And with the application that we rolled out, we also think that'll help us in 24. So being able to open... you know, a depository account and apply for a home equity loan simultaneously will help us originate loans in the consumer space.
spk05: Gotcha. Okay. And the last one for me was just on the efficiency. It feels like, you know, given the comments about managing expenses and what we saw this quarter, that, you know, we should think of the low 50 efficiency ratio as kind of a sustainable level here going forward? Well,
spk11: We target, you know, we've always said we target 50 to 55%. That's, you know, that's what we hope to achieve. We want to stay, obviously, as low as possible, right, because we're all incented to keep expenses low here. It's part of our incentive program. So I think that, you know, we're going to be very diligent, but I also think that given our capital liquidity, our digital investment, what we have going on here, We need to stay focused on growing revenue as we move through this difficult time. We're capable of managing risk very effectively, and I think we're in a very strong position to grow as we move into 24. So on the revenue side, you know, I believe we'll have an opportunity to manage, you know, contribute to positive operating leverage with outside relative to the peers. So they're There's expense bills, but there's also revenue growth coming along with it. So that's kind of the strategy. It's been the strategy for a long time. I know there's periods where it's lumpy and people ask in a way, listen to your issues. You can see the results over a long period of time. We've been an outperformer relative to the peers for a decade, I believe. So anyway, that's where we are.
spk05: Perfect. Thanks for taking all the questions, guys.
spk11: Yep, thank you. Thanks, Craig.
spk06: This concludes our question and answer session. I would like to turn the conference back over to Vince DeLee for any closing remarks.
spk11: Well, I just, again, I'd like to thank everybody for the questions, you know, very detailed questions, very good questions. You know, so thank you for participating. I also would like to thank our employees again. You know, I say it every time, but, you know, you can't do this without great people. So I'm engaged in enthusiastic employees, no matter what faces them. You know, we come through at the end because we work together as a team. But thank you to the employees, and then thank you to the shareholders for continuing to have confidence in us. We will continue to deliver as we move through these choppy years here. So thank you. Take care, everybody.
spk06: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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