Q3 2022 FNB Corp Earnings Call
Yeah.
Good morning, everyone and welcome to the F N B Corporation third quarter 2022 earnings Conference call.
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Please also note today's event is being recorded.
At this time I'd like to turn the floor over to Lisa Constantine manager of Investor Relations Ma'am you may begin.
Thank you good morning, and welcome to our earnings call. This conference call of F. N. B Corporation annual report filed with the Securities and Exchange Commission I think contains forward looking statements non-GAAP financial measures.
<unk> 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 operating measures.
Most directly comparable GAAP financial measures are included in our presentation materials.
In our earnings release, please refer to these non-GAAP and forward looking statement disclosures contained in our related materials reports and registration statements filed with Securities and Exchange Commission and available on our corporate website.
A replay of this call will be available until Wednesday October 26, 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 <unk>, Chairman President and CEO .
Thank you and welcome to our third quarter earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer, and Gary Guerrieri, Our Chief Credit Officer.
F&B third quarter operating earnings per share.
39.
Increasing 26% on a linked quarter basis.
The success of this quarter was highlighted by record revenue high quality loan and deposit growth digital technology enhancements.
<unk> positive credit quality performance.
We were also pleased to receive all regulatory approvals for our pending merger with <unk> Bank.
We anticipate the merger to close and convert in December of this year.
We are looking forward to welcoming Union bank employees and clients to F&B. We are confident that they will benefit from our deep product suite and robust digital tools.
Revenue totaled $380 million led by 17% growth in net interest income driven by solid loan growth favorable deposit mix.
The asset sensitive position of our balance sheet.
Our fee based businesses contributed to over 82 million once again, demonstrating the importance of our long term strategy of building a diversified sources.
Record revenues, coupled with well managed expenses led to our historically low efficiency ratio of 49% as well as double digit positive operating leverage for the third quarter.
As we plan for 2023.
Keenly focused on risk management expense control diversification of revenue and continuing to generate positive operating leverage.
F&B again delivered double digit annualized linked quarter loan growth with total loans ending at nearly $28 5 billion.
Consumer loans grew $547 million, driven by adjustable rate and physicians first mortgage loans.
Physicians first mortgage product continued its success and accounted for 39% of the linked quarter growth as we leverage the investments in the store with the digital physicians first offline.
Commercial loans increased $189 million.
With annualized growth of 9% and 2% in C&I and CRE irrespective.
While growth was spread across the entire FNB footprint, Cleveland and North Carolina markets contributed the largest increases.
Deposits increased 413 million linked quarter or four 9% in mice.
We ended the quarter with noninterest bearing deposits accounting for 35% of total deposits and.
And Union Bank will enhance our overall position by contributing a higher proportion of noninterest bearing deposits.
Another area of continued success this quarter was with our digital channels, where E store visits increased to over 120% year over year in September .
And monthly visits averaged over 37000.
We continue to expand our digital offerings for both our retail and business customers.
As we launch E store online deposit applications for multiple business deposit products beginning in November .
Next year, we will introduce enhancements to our mobile application, including real time, alerting capability and an update to our hard guard debit card control service.
It features enhance our customer's ability to manage their account balances.
Lastly, it is important to highlight the strong position of F&B balance sheet time, when leading indicators point to potential economic softness.
Our credit culture has been consistent.
Maintaining uniform underwriting standards through all parts of the economic cycle.
That same credit culture served us well during the great recession, when our loss rates meaningfully outperformed our peers.
The credit team monitors the portfolio not only through typical historical analysis, but also uses perspective trends in analytics to identify any emerging risks.
We also run various stress test during their comprehensive reviews to evaluate our risk management systems and portfolio performance.
Further mitigating risk and supporting our growth strategy is the geographic diversity of our footprint.
Our presence in seven states and the district of Columbia provides F&B access to high growth metropolitan areas and a variety of high quality opportunities.
Our numerous markets allow F&B to meet our growth objectives, while still adhering to our conservative underwriting standards.
This key risk management objective has been an important driver for our expansion strategy as well as our unique business model.
We continue to prudently manage our capital levels.
As of last quarter, our CET one.
TCE and reserve coverage ratios all ranked at or above peer median.
It is too early to know this quarter's results for our peer set we expect that we will continue to maintain capital and reserve coverage ratios at or above the knee once again, demonstrating our solid position in the banking industry.
F&B is well positioned for.
For a potential economic slowdown with conservative management of our diversified loan portfolio and the strength of our reserve coverage and capital ratios I.
I will now turn the call over to Gary to provide additional detail of our asset Paul.
Thank you Vince and good morning, everyone.
We had a solid third quarter and with our credit portfolio favorably positioned following stable performance on both a quarter to date and year to date basis.
Our key credit metrics, and then September with delinquency remaining at very favorable level, while we saw further reductions in nonperforming and classified credits.
Additionally, net charge offs remain low and continue to track well following two consecutive quarters of very favorable results.
I would like to cover the GAAP asset quality highlights for the quarter and then I'll provide a brief update on the upcoming UV Bancorp acquisition scheduled to close in Q4.
Finally, I'll offer some color around the macroeconomic environment and the steps, we're taking to proactively manage risk in our credit book to better position to us as we look to the quarters ahead.
Let's now review our third quarter results.
Total delinquency ended September at 59 basis points remaining nearly flat compared to last quarter's historically low level up only one basis point.
The increase was driven by early stage past is tied to the runoff of the Triple C credits still in process.
Non accrual levels improved by nearly $5 million on a linked quarter basis, with Npls and Oreo down three bps ending September at a solid 32 basis points, which reflects the tireless efforts of our workout teams to aggressively address and resolved problem assets.
Net charge offs for the quarter totaled $2 8 million or four basis points annualized with year to date net charge offs through nine months of $4 3 million or two bps.
Funded provision expense totaled $10 $1 million.
Up $3 million linked quarter to support strong loan growth as well as some model build tied to updated macroeconomic factors and a continued decline in forecasted prepayment speeds.
Our reserve at the end of September totaled $385 million or 134% down one basis point versus the prior quarter as credit quality results remain favorable.
Our NPL coverage position further strengthened to 440%.
Now turning to the UV Bancorp acquisition that is scheduled to close in the fourth quarter. We remain on track with our established conversion process and we continue to closely track and monitor the loan portfolio and its credit performance through legal day one.
We do not anticipate any material impact to our corporate credit metrics or loan risk profile as the portfolio remains in line with our expectations from due diligence.
As we welcome the team from <unk>, we look forward to deepening our relationships with a unique customer base and the product offerings available to meet their banking and lending needs.
Let's now switch gears and discuss the evolving macroeconomic environment, specifically some of the measures we've taken to manage credit risk and position our book moving forward.
As I've shared in the past our credit philosophy is to take a holistic approach beginning with consistent and prudent underwriting across the footprint and throughout economic cycles.
As we continue to execute on our loan growth strategies, and our lending pipelines convert we actively monitor our concentrations of credit and asset mix on a continuous basis to maintain a diverse and balanced loan book.
Within our desired loan risk profile.
With the ongoing investments we've made in our credit systems and expansion of our risk and analytics, we can make strategic data driven decisions to better manage and mitigate risk in the book.
Furthermore, our bankers remain in close contact with our customers to us.
Understand the challenges and headwinds they face.
Owing us to identify signs of stress, resulting from ongoing elevated inflation rising interest rates and the standing labor supply chain and energy related challenges across various industries and markets.
These factors are carefully analyzed and address the underwriting as macroeconomic and market specific conditions continue to evolve with our core credit philosophy remaining front and center.
Closing, we are very pleased with the continued strength consistency and favorable positioning of our credit portfolio. Following a successful third quarter.
As we look to finalize the <unk> Bancorp acquisition in the months ahead and close out the year strong we remain vigilant of the evolving macroeconomic conditions and we will continue to proactively and aggressively manage our credit portfolio each and every day.
As we look ahead.
<unk> committed to our consistent approach to underwriting which has proven itself well throughout prior economics.
I will now turn the call over to Vince Calabrese, our Chief financial Officer for his remarks.
Thanks, Gary Good morning, everyone.
Today, I will focus on the third quarter's financial results and offer guidance for the remainder of the year.
Third quarter net income available to common shareholders totaled a record $135 5 million or <unk> 38 per share.
After adjusting for $2 1 million of merger related expenses net income reached $137 2 million or <unk> 39 per share.
The growth in the balance sheet, driven by loans and investment securities that were largely funded through deposit growth for our assets to $43 billion at period end.
Investment Securities totaled $7 2 billion with a fairly even split between <unk> and HTM.
During the quarter, we largely reinvested our securities cash flows which was around $100 million per month, while staying in the three five to four and a half duration area.
Period end total loans increased $736 million linked quarter or 10, 4% annualized.
<unk>, an increase of $547 million and consumer loans and $189 million in commercial loans and leases.
Commercial loans saw another quarter of healthy production.
With year to date activity seven 5% higher than the same period in 2021.
With such strong production. The 90 day pipeline has softened a bit relative to last quarter.
Consumer loan growth was driven by strong organic residential mortgage activity across our footprint with particularly strong growth in the Carolinas mid Atlantic regions.
<unk> first mortgage program accounted for $141 million or 39% the increase in the mortgage balance on a linked quarter basis.
Indirect auto lending increased 10, 5% linked quarter as we saw more seasonal activity in that space as well as an increased supply of vehicles.
Indirect book is predominantly higher quality prime paper.
Total deposits ended the quarter at $33 9 billion, an increase of $413 million linked quarter or four 9% annualized.
The deposit mix continues to be favorable with noninterest bearing deposits comprising 35% total deposits at quarter end.
Long term debt increased $347 million following the August 2022 issuance of $350 million in three year senior notes.
To use the net proceeds from the offering for general corporate purposes, which includes the extinguishment of debt.
On the income statement net interest income totaled a record $297 1 million, an increase of $43 4 million or 17, 1%.
I think growth in average, earning assets and benefits from the higher interest rate environment as our net interest margin increased 43 basis points to 319.
Managing deposit costs continues to be an ongoing focus.
While the cost of interest bearing deposits increased 29 basis points from last quarter.
And fairly low at 57 basis points.
In terms of deposit beta as year to date, we have a cumulative beta of 12, 5% of total deposits.
As the fed continues to increase rates creates competitive pressure on deposit pricing.
And we are currently anticipating our deposit costs will increase in the fourth quarter, bringing the total 2022 cumulative deposit beta was around 20%.
Turning to noninterest income and expense.
Noninterest income totaled $82 5 million, a slight increase from last quarter.
Capital markets income increased 12% linked quarter.
$9 6 million with solid contributions from syndications international banking and swap fees.
Service charges increased $1 3 million linked quarter, largely due to growth in Treasury management services interchange fees and higher customer activity.
Mortgage banking operations income decreased $1 million at sold mortgage volume declined $111 2 million or 34, 2% as consumer preferences shifted to adjustable rate mortgages, we are holding on balance sheet.
On an operating basis noninterest expense increased $2 2 million or one 2% compared to the prior quarter, excluding merger related expenses of $2 1 million $2 8 million in the third and second quarters of 2022, respectively.
Salaries and employee benefits increased $2 8 million, reflecting reduced vacancy rates and higher production and performance related incentives.
Marketing decreased $1 4 billion due to the timing of digital advertising and campaigns for our physicians first program in the prior quarter.
Overall, the efficiency ratio came down to a record 49, 4% a significant.
Improvement compared to the second quarter ratio of 55, 2%.
In the year ago quarter as result of 55, 4%.
Tangible book value per common share was $8 <unk> at September 30, a decrease of <unk> <unk> per share from June 30.
This change reflected the impact of the OCI, reducing the current quarter's tangible book value per share by $1 eight.
Compared to 72 at the end of the quarter, which was largely mitigated by the higher level of earnings for the quarter.
Increased unrealized losses in the <unk> portfolio due to rising interest rates will accrete back into capital over time.
<unk> mature or prepay.
Lastly, as Vince mentioned, we are expecting that you'd be bancorp acquisition to close and convert in December of this year.
Our balance sheet continues to trend within our expectations and we are excited to add their low cost deposit base and a higher rate environment.
Now, let's turn to guidance, which excludes the announced to be Bancorp acquisition.
We increased our full year guidance for loans to mid teens growth.
Underlying organic growth in the high single to low double digits on a year over year spot basis.
Total deposits are projected to grow mid to high single digits on a year over year spot basis.
Full year net interest income is expected to be between 110 and 1.11 billion.
With the fourth quarter between $315 million $325 million.
Our guidance currently assumes 125 basis points of rate increases for the fourth quarter.
We are increasing noninterest income to be between $317 million and $322 million with the fourth quarter in the mid to high $70 million area.
Our revised full year noninterest income guidance is due to higher than projected third quarter income.
Full year guidance for noninterest expense was only revised should provide a tighter range of $768 million to $773 million on an operating basis.
While maintaining our previous guide of $190 million to $195 million for the fourth quarter.
This does not include the one time expenses associated with acquisitions and branch consolidations.
Full year provision guidance was also revised to a tighter range of $25 million to $35 million, which does not include the initial $19 1 million of provision related to Howard and is dependent on net loan growth and macroeconomic factors during the fourth quarter.
Lastly, the effective tax rate should be between 20, and 21% for the fourth quarter, which does not assume any investment tax credit activity in the quarter.
With that I will turn the call back to Vince.
Thank you Vince.
We are pleased with this quarter's record revenue and earnings per share.
As well as our loan and deposit growth and our current level of noninterest bearing deposits.
Our asset quality continues to perform favorably with low delinquency rate of 59 basis points and only four basis points of net charge offs.
We continue to stay focused on changes to the economic environment and remain confident in our ability to manage through potentially challenging macroeconomic conditions.
Our F&B employees have performed admirably throughout uncertain times, and I know that they will remain dedicated to fulfilling our commitment to all of our stakeholders.
Them I extend my sincere gratitude for their collective efforts are what drives our performance.
I look forward to working alongside our dedicated team.
We closed out 2022.
Ladies and gentlemen, with that we will begin our question and answer session.
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Our first question today comes from Jared Shaw from Wells Fargo Securities. Please go ahead with your question.
Hey, guys good morning.
Hey, Jerry arent there.
I guess, maybe just starting on.
Asset sensitivity in the outlook for the as we go into 'twenty three any thoughts on starting to moderate that that asset sensitivity.
With the.
UV deal coming on like you said, that's going to add even more DDA, how should we be thinking about whats.
Whats youre doing in terms of portfolio decisions so to potentially.
Falling rates as we build out our models here.
Yes.
Couple of things Jared I mean over the course of 2022.
Various strategies.
Our exposure to downtown rates as you look ahead.
We've reduced our cash position.
The asset duration in the loan side to mortgage and Securities books, plus we've executed about $1 billion or so and receive fixed swaps to protect us on the downside.
The midst of kind of looking at potential other opportunities.
Well put some more derivatives.
Holly.
Protect us from downside movement in rates next year, that's expected so.
It has happened organically outside of that $1 billion and I think.
The way we are positioned today, there's still a good amount of benefit to come from the expected movement in rates as we get into the fourth quarter and then into next year.
We will capture that obviously in the guidance for 'twenty, three but there's still upside to the margin into the net interest income as you look into the fourth quarter for sure given the overall asset sensitive position of the balance sheet and I would just say again to that overtime.
Kind of foregone, some short term earnings to kind of position the balance sheet. So that we would get that benefit from rising rates. When it ultimately did come we've stayed short in our investment portfolio.
We have consistently had a 50 50 split between NFS and HTM, which helps on the Aoc and ask that everybody is experiencing right now so I think some of those tactics that we've taken in the past and strategies are benefiting you sit here today and as we look ahead from here.
Okay. Thanks, and then on the deposits.
Great data performance this quarter.
Could you give us an update anything that we should think about with the deposit growth. This quarter is there any seasonality there that could roll off.
What where spot rates at the end of the quarter and as we look forward what do you think.
But through the cycle beta could be on the on the overall blended deposit base with UBS.
Yes, I would say a couple of things I mean, we do have seasonality in our municipal business that we have every year and kind of swings I'd say $3 million to $500 million. As you go kind of peak to trough go through the year and that's still builds through October into November so that kind of normal seasonality there, but on top of that we can.
Continue to have good success, adding new accounts on the retail side as well as on the commercial side with the markets. We're in we continue to win.
Not just lending side, but also bringing in the operating accounts. So that's clearly a benefit to the overall deposit.
We've consistently had and our DDA is now continuing to build over time, there's been a focus there is a new slide that we added look back from 2009 forward, 16% up to 35, and it's been continuously moving up.
It's a big focus in the company sure.
As far as the betas I mean look.
The banking system is still there we still have 1 billion eight in excess cash on our balance sheet.
Others were starting to see more pressure on deposit rates as the fed continues to move.
At this point has been very limited movement of our retail deposit rates, but definitely more frequent conversations with meaningful business clients.
We've been making adjustments, particularly for those that have a full relationship with us.
We have not lost any client, which is important I think the commercial customers municipal customers, having conversations with us arent, just closing accounts and move them somewhere else. So I think it speaks to the relationships that people have.
It's up over time.
We have a new slide that we added in there I mean, so far cumulative beta.
Total deposits was at 12 and a half at the end of September our forecast is to be around 20%.
Total deposits at the end of the year.
Okay.
Great and then I guess, just finally for me on the expense side.
As we as we look into 223.
Any more update on sort of the hiring pace of hiring in the D. C. Northern Virginia area is that going to be.
An area of continued growth and then potentially even Richmond is that hiring you did down there.
Yes.
Our hiring in D. C has been underway. So we don't expect.
Particular bump.
In that area.
There are several locations retail locations that are coming from months could be a little bit of an expense pick up but its not significant relative.
So the total base.
When you look at expenses overall, we've been engaged in a multi year expense takeout exercise so we.
Targeted certain levels and then we achieved.
Lee.
Three years.
We expect to continue to stay focused on it.
There is some opportunity within our expense base to continue to do.
To manage expenses down in the face of inflation. So we can offset some of the.
Natural increases that we're going to see.
I think from an occupancy or vacancy perspective, they can see.
Has been reasonable for us.
Culture at the company is such that I think.
Our employees are.
Generally happy and.
Our committed to the company we have made taken some actions to increase salaries here and there and continue to take care of the employees as we move along so we werent caught off guard.
If you recall, we had significant increases in the retail space over the last five years or so.
And salary expense to retain those people.
With commercial banking upgrades.
We've reassessed throughout time so.
Our vacancy rate has been within historical ranges. So it's on the upper end.
We've been historically.
Oracle ranges, so not really an outlier.
Now I hope that helps we didn't give guidance for next year on expenses I'll turn it back over to Vince If you want to add something.
Yes, no I would just add to vince's point over the last four years, including this year, we had $70 million of cost savings that we've realized.
Louis is a focus every year as far as coming up with what that target should be and it really comes out of just continuing to renegotiate with vendors optimizing space throughout the footprint as well as a variety of process improvement initiatives. It's just kind of ongoing so we've always had that disciplined focus.
We will continue to have that and as you can see from the guidance. This year that has been consistent at that 190 to $1 95, and managing expenses within that band.
I will continue to be a focus for us and creates the positive operating leverage that's in the double digits that we were able to generate this quarter.
We will continue to be the very good levels coming quarters here.
Great. Thanks, Thanks for taking the questions.
Thank you.
Our next question comes from Daniel Tamayo from Raymond James. Please go ahead with your question.
Thanks, guys good morning.
Maybe just following up on the on the margin discussion.
You gave a lot of color on deposit betas and expectations there but.
Yes.
If I could just get your thoughts I guess on.
Maybe where the margin may peak.
In relation to when we get the last rate hikes in <unk>.
So kind of your thoughts around what happens once that once we get the peak margin, if we get a decline or stabilization or maybe another floating up thanks.
Yes, I would just say that as I commented on minutes ago, I mean, there's still upside in the margin from here.
With the continued fed actions.
Our team.
Across the board on a very nice job managing the deposit costs on the retail and commercial and municipal side. So that's very much a focus for us.
Kevin.
The excess cash we have on the balance sheet and just kind of operating the company have a very active process every week through our pricing committee to kind of optimize where those rates should be.
So I mean, when I when we give guidance for next year, obviously, we'll give you a kind of our outlook for the full year as well as the quarterly path, but I think there's still upside there's definitely more upside from here on the margin and net interest income and then as I said earlier, we've taken some action to protect us for when rates do come down.
So theres still plenty of upside, but put some protection in place to help with that when it happens and none of us know for sure exactly when that can happen.
And I should comment too that the guidance has an additional 125 basis points and rate hikes as we mentioned on that slide in the fourth quarter, that's what's kind of baked into our outlook.
Okay.
Shifting gears here then over to credit quality, obviously, that's been really strong.
For you so far things are looking very clean in the numbers.
Your comments very very.
Positive based on what's available now, but where.
Where are you kind of most concerned or or looking at most closely in terms of.
The loan books, given what we're expecting here going into the next cycle.
Yes, Daniel.
One of the.
<unk> focuses of our theme today is on the economic sense to do.
Areas and we feel that those are the small business portfolio.
As well as the indirect portfolio on the consumer side.
Those those books of business have continued to perform really well delinquency flat quarter over quarter and both of them.
<unk>.
Charge offs did tick up a little bit.
Car prices coming down and the indirect book.
As expected, but those are the those are the areas of <unk>.
Focus.
One moment.
And like I said, we're pleased we're pleased with how they've held up to this point.
And we expect them to perform well even though.
There are headwinds.
In those areas.
We've also been underwriting.
We've been stressing.
Interest rate sensitivity by Gary within the commercial real estate portfolio.
Across the C&I book as well.
Pretty aggressive with our with our interest rate stresses.
We're underwriting.
CRE transactions today.
North of 7%.
And then we're stressing it from there. So we've got some we've got some pretty heavy stresses built into the front side of the underwriting equation.
The oversight and management of the book and the stress that we place on those portfolios.
We've said this before on other calls I mean, Gary stated it in the prepared comments.
We manage credit risk consistently through cycles.
We don't go crazy during the good times and loosen structure.
We don't tighten in a crazy way during the bad times.
Conservative underwriting upfront.
Better Ltvs, if you look at the consumer book, the credit scores and the Ltvs are very solid.
I would say in most cases.
The average the average there is in the high.
So <unk> so basically what that does is it protect your downside as you move through the cycle and when others are returning capital and shrinking their balance sheet. It gives us an opportunity to selectively grow our balance sheet and that happened throughout the last cycle, we reported multiple quarters.
Loan growth when the industry was shrinking and our credit performance was pretty darn good so.
I'm very confident in our team I know we have there is there is a lot of.
<unk>.
Uncertainty moving forward.
Naive to it we monitor portfolios prospectively, we do all kinds of things from an analytics perspective and stressing.
Active and we're very active.
At Radian, our credits accurately and quickly so what youre seeing from US is as close to real time as we can get it.
So I think things are pretty good today, we're looking forward.
Gary's team as being.
Very cautious as we move forward.
Terrific I appreciate all that color.
And then kind of a just a related follow up on reserves.
How much would you say the qualitative side is impacting the level of where you are right now in reserves.
Thinking through.
Now.
Changes in macro forecasts could impact reserves going forward. Thanks.
<unk>.
The qualitative piece of.
The reserve today, Daniel was right at about 25%.
We would expect that to move down slightly.
As we go forward.
And some of the other quantitative models take effect.
During the quarter.
As I mentioned.
March.
The loan growth that is really took some provision expense.
Pretty good chunk of it.
We did see slower prepayment speeds, which are naturally extending the lives of some of those portfolios.
And naturally the impact.
Vision, there from a seasonal standpoint.
Economic forecasts have seen some softening, but these are quantitative models and our models.
Around CRE and housing variables, so that did take a little bit of provision expense as well that all said those builds were on that side of the equation we're primarily.
Offset by improvements in credit quality.
<unk>.
Ultimately drew the reserve down one basis point at 134 as mentioned so.
All told.
Credit quality.
<unk> continues to be the driver of the loan growth is going to drive that.
Our reserve position relative to our peer group is still very positive very favorable and I attribute that to.
Great Nation.
Staying on top of the credits, making sure we're understanding where where we are from a risk perspective and a gradation.
Gary do you want to.
No I would I would agree with that.
We viewed the pandemic.
Not something that was finite and totally ending so we were a little cautious around that.
I go back to.
Year, and a half back when.
When we were really starting to get worried about the inflationary signs, but we were seeing.
Back in early 'twenty one.
And we.
We felt that it was appropriate to be prudent.
Reserve as opposed to releasing large chunks of it.
So we managed to I think appropriately and accordingly.
And we're pleased with the strength of it to the.
That's great color. Thanks for all that that's all for me I appreciate it.
Thank you Ben.
Our next question comes from Casey Haire from Jefferies. Please go ahead with your question.
Yes, thanks, good morning, guys.
Yes.
A question for Vince C.
So the noninterest bearing deposit.
<unk>.
Mix has been very strong.
Just wondering.
Hi.
Is that 35% level sustainable from here or are you factoring in some attrition.
Uh huh.
And your 20% Q beta through the end of the year.
This is Vince.
We focused on that historically to grow that position I mean, if you go back I think if you look at the chart.
You can see the deposit mix has shifted very favorably that's been an effort a multiyear effort.
Okay.
That type of change.
Changes are built into our DNA and we basically have incentive people to focus more on low cost deposit gathering.
They work pretty diligently strategically to secure treasury management relationships, so that 35% were hoping.
Is sticky having said that I mean I'm sure as you move forward in a rising rate environment. There is pressure on noninterest bearing deposits. So it's reflected in the deposit beta side.
Vince.
I don't know if you have any other details you want them.
Yes.
Okay.
The other thing I will add Casey as our small acquisition is also additive.
Right because their deposit mix is also favorable even higher percentage of demand deposits higher than ours, I guess, 40% 40.
<unk> you had an announcement out accordingly.
So it's going to be additive.
From that standpoint, as we move into.
Period.
It integrates.
Okay understood and then.
On the cash position.
I think you mentioned in excess of $1 billion eight.
What is sort of like the bare minimum that you want to run that.
Just a reminder, there.
So we get a sense as to when that does run low.
Europe is a little bit more.
The use of wholesale borrowings becomes more prevalent.
Okay. So thats really what we would consider excess cash that billion eight we have a certain core level of cash.
Cash on the balance sheet that you would typically see but that.
That I referenced is truly the excess cash so that can go down to zero.
Okay, alright, so decent cushion from here.
And then just lastly on the loan pipeline.
Obviously, a strong result here it sounds like the pipeline is a little bit softer just.
I'm just wondering if there's any any little more color on.
Any verticals or is it just just a little bit lighter off tomorrow.
A strong production quarter and then.
So the indirect auto has had very nice.
Very nice growth over the last two quarters is that seasonal in nature or is that going to slow down or is that momentum going to continue.
Well I'll answer the question first question.
About the overall pipeline I'll, let you in.
Correct order it is still reports up through through Derrick.
But the pipelines in general they were fairly robust leading into the last two quarters actually.
And we've been able to produce some pretty significant loan growth as we close out those transactions.
Pipeline is practice, which is pretty natural.
A point in the cycle, where you typically don't see a surge.
Commercial borrowing requests.
Seasonal period basically from a cyclical perspective, I wouldn't expect to see a surge in demand, particularly in the C&I book as we move towards the end of the year.
I think those pipelines will refill I mean, theyre not terribly well.
Were there.
At a decent level, they've just been reduced because of all the stuff. We closed in the 90 day bucket. So my hope is that we're able to go out given the size of our footprint. The fact that we have.
Currently significant share across seven states in the district of Columbia, I would expect us to be able to go out and continue to generate high quality, earning assets.
That goes for both consumer and commercial and I know that our regional presidents, while they face very.
A significant amount of competition quarter after quarter, and we're very optimistic about their ability to execute in the markets that theyre in.
Gary I don't know if you want to comment on.
Indirect auto yes sure. Thanks.
The second and third quarters are seasonally high period for us.
So we do we do normally see that type of spike in volume.
During the middle part of the year.
<unk> really been focused over the last month month, and a half couple of months.
Enhancing our margins in that business.
I would expect as we move through Q4 here that we will see lower volumes there.
And we're focused as always on high quality paper.
So I would I would expect that to seasonally dip.
For those couple of reasons as well as our focus on enhancing gross margins.
Okay understood.
Just sorry, one last more housekeeping question the tax rate.
Guide is up a little bit 'twenty to 'twenty to 'twenty.
21% is this.
The level, we should assume carry in 'twenty three.
But.
I was gonna say at all it will always be dependent on the level of investment tax credit activity that we execute.
Yeah.
We will continue to be active.
Those types of transactions, but.
What we see any activity in the fourth quarter. So thats why were up and what I would say that normalized 'twenty to 'twenty, one absent those types of transactions.
<unk> 'twenty to 'twenty, one with a benefit from <unk>.
Got it.
Some.
Taxes and its transactions.
Yes, we expect there are some that we had teed up in the fourth quarter that we expect to happen next year, so that will create some benefits that accurate.
Pretty clean right.
Understood. Thank you.
Alright, Thanks education.
Thank you.
Our next question comes from Michael Perito from <unk>. Please go ahead with your question.
Hey, good morning, everyone. Thanks for taking my question.
Accordingly.
I wanted to ask two.
First if you could.
So maybe if you could give us a quick refresher on the physician's first mortgage program kind of the structure of that.
The type of use case.
Just a little bit of a pressure is as it's clearly seen some some nice growth recently for you guys. Just wondering if you could give us a rundown on kind of how that product works generally.
Well, we had we started with a mortgage product it had.
A more advantageous LTV.
<unk>.
Basically the basic premise of it for physicians.
Our medical professionals doctors.
Starting out.
<unk> are loaded with student loan debt.
So we made some adjustments to the underwriting that product consist of physicians in securing their homes.
We migrated it from a purely physical.
Origination process to a digital origination process and we bundle a series of other products.
Medical practice loan.
As a small business loan.
The student loan refinance.
Product with the depository product and then the first mortgage product and we call that our physicians first bundle, it's on our digital E store.
As our.
Our E Commerce website that we set up.
I referenced it in the prepared comments.
And then we use that platform.
With our originators to go after physicians will.
And that portfolio has performed extraordinarily well over time its grown nicely.
Gary I don't have my comment on some of them.
Got it.
The delinquencies in that portfolio were very near zero.
High FICO scores very solid debt to income ratios I mean, it's a high quality book of business.
Uh huh.
We continued to see good opportunities there the bundling of the programs and the opportunities in small business practice.
Lending business I think are ahead of us.
As well as some of the student loan.
So we expect that to continue to bear fruit.
We move move forward with that program.
Does that place competitively do you guys see it.
Sorry go ahead.
Go ahead and ask you I was going to say.
Competitively do you guys feel like that there is a little bit of an edge.
You guys have here a lot of other banks in this space are focused on this nature or is there room for you guys can do you kind of take some market share.
Well there are other banks focus on this niche I mean, just about every competitor we have offers a similar mortgage product.
The difference is.
The way, we organize our approach to gathering those clients, we use data analytics, we use our digital tools the E store.
Mike.
We said in our prepared comments, we had 37000 customers visit our site. So we've created traffic on our web site, which translates into the ability to promote certain products and services and then when we engage in digital advertising and traditional advertising methodology, we can direct them to our portal.
So when you look at it.
Physicians versus E store page for example.
It grew.
Two 900 visits per month.
Zero. So we just stood that up not that long ago, a couple of quarters ago, So that supported the growth year.
Year over year of 18, 2% in that category in terms of views on that site, so and it supports the overall views.
When we use that tool that digital tool, we're creating traffic that enables customers to look for solutions and then we're applying in some instances our analytics tools.
To present products to customers as they visit the site.
No.
But the physicians first package the mortgage package in the shopping cart and then the other items pop up and they say people that purchased this product typically look at these other products. So it's led to.
More views and ease of marketing and a higher visibility right. So we're attributing some of our success too.
Obviously the people matter.
Some of our success is directly attributable to our digital strategy and the E store concept that we've developed.
Got it.
Helpful.
Yes, no it is.
Very thorough and then <unk>.
There's always a month now look at our website just to keep that in perspective, I mean, that's 900 physicians, we would normally see most likely so.
It helps build awareness and.
Yes supports our brand.
And then just.
Lastly, an unrelated just on the.
The capital markets fees, which were.
Pretty solid in the quarter is it reasonable to think that in the current environment. There is room for that to kind.
Kind of continue to be elevated with rates moving in some of the economic uncertainty and everything that I've seen little extra engagement from the commercial quite there.
Lovely electric color there if you don't mind.
It's a great question I mean, I think we're a little bit of an anomaly right because we have a pretty broad offering for our size. So we have a debt capital markets group that participates in bond economics.
They support our large corporate calling activity or our large corporate bankers, we have syndication effort. It's outsized I think for a bank our size in fact, our syndications revenue has doubled more than doubled more than doubled.
Over the last year. So it's a sizable contributor we do hedging we throw international into the mix because we do some hedging.
For international clients, that's grown nicely.
The derivatives business as a core business for the company, that's more volatile because of the changes in interest rates.
Demand from a loan perspective, they both at both impacts.
That area, but we have a very strong team.
<unk> had great success structuring products for clients to protect them in both up and down interest rate cycles.
So sure I mean, I'm I'm bullish on our capital markets platform in general over the long term I believe there is significant upside over the long term in the short run youre going to see variability, it's lumpy because of the changes in rates, but.
I think capital markets is very early debt capital markets as early syndications as is.
Still upside there.
Even though we performed extraordinarily well this year, there's upside there's always an opportunity in the U S.
The debt capital markets area because of the activity that goes on with our larger.
<unk> in terms of the issuance of debt bonds.
Debt pro rata debt bonds.
Bond debt.
And then as we've grown as a company.
Our credit appetite in terms of full grown in order for us to compete more effectively against larger competitors.
And to hold our own against some of the regional players that we compete with day in and day out we built out our syndication capability.
Very strong corporate bank.
There are terrific corporate bankers across the company I have been in the business for 35 years I can tell you competed against everybody.
Over the last.
Three decades, we have a very strong team, so theyre knowledge and capability will lead to growth in capital markets. The stronger your bankers are more opportunities you have in that space and that's why over the long haul I'm very optimistic about that area.
Economic headwinds.
Yeah, no that makes sense and it's good to see the momentum. This year. Thank you guys for taking my question.
Yes. Thank you.
Got it.
Our next question comes from Brandon King from <unk> Securities. Please go ahead with your question.
Thank you good morning.
Right.
Yes, I'd just add I just had one question really on loan yields I was just curious what the.
The loan yield was for new loans in the month. This month of October and also wanted to know if you can give us color on what you're seeing from a loan spread.
Dynamic are you seeing.
More competitive pressures or are you actually seeing an expansion in loan spreads given kind of what you've been able to price out there in the market.
That can comment on the <unk> and then maybe ask carrier comment on spreads.
Loans.
New loans made during the third quarter came on at a yield of 438.
It was up significantly from 353 in the second quarter.
And if you look at kind of the overall spot portfolio rate. It increased 87 basis points to 453, after increasing 46 basis points in the second quarter decreased 66. So.
New rates, where they are coming on as you would expect significantly higher which bodes well for.
My comments earlier about kind of the margin as you get into the fourth quarter and continue building net interest income there.
In terms of in terms of the spreads.
We're seeing them strengthen.
So we're seeing some benefit pretty much across the board.
The high quality papers is naturally.
Bringing bringing very very low rates in terms of.
The strength of investment grade credits, but that has also moved up.
So I would tell you that everything's up.
On the 25 basis points upwards of 50 basis points.
From a spread standpoint, depending upon asset class.
Not a yield chaser by the way.
We focused principally on credit quality.
So we'd like to do even though some transactions may be more thinly priced.
The ability to.
Reduced results through cycles.
As directly hinged on how credit worthy those borrowers are going so.
While we try to put a.
Benefits from higher yields in certain asset classes across a broader spectrum of lending. So we have a portfolio.
As of late dairy many of that C&I credits that we brought in were larger right.
Our credit worthy and the credit spreads on those deals are thinner.
So anyway, just thought I'd bring that up that's in the C&I book in the consumer book again.
Tend to chase higher quality borrowers.
That's going to impact your overall.
Credit spreads in our perception of threats in other words, we're not out there doing hi.
High risk.
Private equity deals with <unk>.
Significant leverage right that's.
Where you will find the best deal that's not in our portfolio.
Got it Brandon further comment to your question. So the 438 that I mentioned, that's the rate for new loans for the entire.
Third quarter, if we look at the month of September .
Loans came on at a 494 relative to the 438 average for the quarter. So that's kind of.
<unk> been responsive to your question about kind of more current so that's where we ended the quarter with September .
Got it got it thanks for thanks for taking my question.
Alright. Thank you. Thank you.
Yes.
Our next question comes from Manuel Natus from da Davidson <unk> Company. Please go ahead with your question.
Hey, good morning, I think most of my questions have been answered but just.
Can you.
Describe any differences you're seeing in terms of loan pricing and deposit pricing.
Regionally.
You talked a little bit about loan growth Cleveland being pretty strongly but just kind of can it continue that way.
With loans and deposits.
In terms of pricing competition.
Yes, we're in some pretty intense markets our core markets are actually extraordinarily competitive people think it's the opposite but Cleveland Pittsburgh.
Even Baltimore are.
Very competitive market I mean, Cleveland has always been.
A tougher market to price.
As you move into the southeast while there are more competitors there tends to be more activity.
So it kind of buffers the competitive environment slightly.
But.
If you look overall the variations are not that great, but there are variations.
So.
I just pointed them out, but I think that goes for both loans and deposits.
As you look at the state of Pennsylvania, where we compete as you move across the state into Philadelphia credit spreads tend to narrow as you get closer to Philadelphia, because it is more competitive.
And even more competitive in that area.
Once you cross into central into.
Philadelphia market, the commercial pricing becomes a little thinner.
From a depository perspective, it's the same.
Type of thing, but we're really focused as a company.
On gathering demand deposits. This is a very strong deposit franchise is evident in the results you can see it in the trend that we've presented our objective here is to be the principal operating bank for our clients, we're not out buying deposits to fund our operations. So what that means is the.
<unk> bankers are out.
Theyre selling Treasury management services.
Getting the principal disbursement accounts. So we have balances that are typically used to pay for services are sitting for liquidity.
The purposes for the company and demand deposit accounts and then on the consumer side.
We strive to be the principal bank with the consumer.
No.
That's how you are able to maintain.
Pricing and produce better betas and all the things.
Leveraging our data science and lead generation.
It's all tied together.
Anyway.
Hope that answers your question.
No I appreciate that thank you.
Okay. Thanks.
And our next question comes from Brian Martin from Janney Montgomery. Please go ahead with your question.
Hey, good morning, guys. Thanks for taking the question.
Maybe just one follow up on that.
On the on the loan yields I think Vince you said it was a 494 yield in the month of September can you I guess give a little color on just the commercial yields outside of whether it's for the quarter just for the month on an <unk>.
New production is coming on.
I don't have that handy that level of granularity I can tell you I don't think we have that at our fingertips, but when you look at the deals that are coming in.
<unk> a middle market commercial deal is anywhere from about 75% to $2 50.
Credit spreads.
That's it.
So what Brian that's been fairly consistent so if you want to convert that to a fixed rate yield not to look at the yield curve.
We focus on credit spreads.
That's your base and kind of manage the groups that way.
First is looking at an outright yield they may book at fixed rate loan and they may do a variable or adjustable rate loans.
Kind of keying in on that credit spread.
I would say credit spreads have broadened slightly across the board I don't know what you don't know.
Like I said.
Of the 50 basis points and some asset.
And then that new origination the reason it's difficult to put your finger on what the yields would be in the commercial book is because we run the broad spectrum of market from small business up to large corporate so if we book a large corporate deal a lot more plus a buck 50 or about 25.
Your spread right. So it's going to go to <unk>.
Reduce the yield in that quarter, but we look at it more broadly.
Portfolio perspective.
To manage it that way.
And that helps us manage that.
As well.
I can't give you any more than that I hope to accomplish with it but we're expecting credit spreads to continue to broaden as we move through a difficult period in the cycle.
Got you no. That's helpful. And then maybe just the reinvestment rates for securities today, where are they at I.
I guess weather for the quarter for September just kind of how you're thinking about next quarter.
Yes, I would say just make a few comments on that.
The reinvestment rates averaged $3 83 for the quarter.
For the third quarter was up from 327 last quarter.
190 in the first quarter breakout.
Rates Havent moved up so the 383 compares to a roll off rate of 204. So.
So that kind of gives you a reference point there the duration of what we best friend during the quarter was we're still in that kind of 442 level.
The kind of if we look at where we're investing today.
You need to take advantage of the market yields.
We've been investing at about $4 80.
So far in October , but the duration, just a little bit south of four.
Gotcha Okay.
Thats helpful. So alright, perfect and then just how about.
Maybe just one for Gary on the commercial real estate concentration levels. Just is there any areas you guys are staying away from lending today.
Given maybe an increased focus here from the regulatory side on commercial real estate or just.
Just any thoughts on if you're staying away from anything today, and just kind of where the current concentration levels are.
Yes.
We've been extremely cautious for.
I would say the last year and a half a couple of years.
And beyond even in.
The retail space.
So we're doing very little volume.
Retail CRE.
We do we do occasionally come across to a very strong transaction with long term leases credit tenants and those type of those type of underwritings.
We'll continue to pick our spots there.
The other spaces the office space.
Over overly cautious there I mean, it's been it's been a space.
But we.
<unk> very early on in the pandemic as one that's going to have an elongated tail.
Around.
Potential risk in that space So again.
Similar as the retail we'll find the odd transaction that is long term leased two of extremely strong credit type of tenant.
And we'll move forward with a transaction like that but very very little we have very little hospitality portfolios time, yes, the hospital or the way we don't we havent made a hospitality loan in five or six years I don't think.
And all of my time in banking I would.
This portfolio as it sits at a very good position moving into the cycle that we're in and I give that credit to Gary and his team they've been at.
Obviously, you want to grow the book do you want to grow revenue, but.
When we're in choppy waters like this which is one of the best places to be right you've addressed risk within the portfolio. We're very conservative what Gary didn't say is we don't have a lot of urban large office buildings. We don't we have we have office buildings, but they are largely smaller suburban building.
And have an experience the same level of vacancy so.
Think that.
We're very well positioned.
Obviously, everybody is going to be facing in the industry.
A slowdown next year, if it occurs and.
If we perform the way we have through other cycles will be in really good shape. So.
We have the same team so.
We're able to manage through this more effectively and outperform others.
Okay.
I don't know thank you I don't know if you have any other questions.
Yeah.
I think that answers most of the real estate side, just elect to just general questions. Just on the your outlook on the loan growth side, I know youre not giving much outlook for 'twenty three but just are you seeing more caution it sounds like youre seeing more caution among the commercial customers.
Obviously based on where we are in the cycle.
Just economically but is that how we should kind of think about at least as we look at 'twenty three.
What we would expect.
You get a little bit deeper in this quarter and share more next quarter, but is that kind of the trends you're seeing among the customers today on the commercial I think <expletive>.
The clients you got to remember, we've all gone through a pretty significant turbulent time with the pandemic, it's pretty shocking.
People a lot of clients. So I think that they are thinking about things more conservatively as we move into this cycle.
Obviously, the economic headwinds are real inflation is real the supply chain disruptions real.
I think our commercial customer base appears to be pretty realistic.
Revenue expectations moving into next year, which ultimately translates into fixed charge coverage and performance on our loan so I'm hopeful that on the commercial side the customer base that we have we're relying on those management teams to get us through just like we are shareholders rely on us.
To get them through so I think we've very strong customer base with very prudent customers think about their business. They manage leverage appropriately and that will get them through a difficult time on the consumer side the consumers appear to be in pretty good shape.
<unk>.
There's there's obviously stressors out there from an economic perspective, but globally. When we looked at the performance of the portfolio delinquency rates low charge off rates are low.
I know those are lagging indicators and then if we look at cash positions within the consumer segment themselves that they appear to still be.
Fairly healthy, even though I would expect that to deplete over time with inflation.
<unk>.
But inflationary pressure on other things, but I think we're in a very good position moving in to this next cycle and we're very cautious.
So I don't know how else to leave it so I may come across that way, it's because we are cautious.
In terms of pipelines that we manage our pipelines.
Fairly rigorously.
We do credit reviews upfront.
<unk>.
That's really going to be.
Contingent upon what's going on from an economic perspective.
And over time, all other capital providers are impacted.
It's kind of tough to predict where the pipelines are going to fail.
But I feel pretty good about where we are today and.
The pipelines are or have softened, but a lot of it has to do with transitioning deal flow.
And they're still at reasonable levels.
Into next year, So we'll see what happens just just an additional note Brian .
Just this within the last week I've been pulled into three new transactions.
All of them are extremely strong. So you know the pipelines can build rather quickly.
Based on some of the some of the transactions that we're able to look at these days.
No.
I was very pleased with.
Those three discussions and they are all moving forward.
Gotcha.
Telephone just the last one for me was just on capital.
Any changes in the outlook, just kind of maybe where the capital levels ended in fourth quarter just.
Post the Union deal and just how you're thinking about the buyback and just managing the capital levels today.
Yes, no change in our strategy there.
<unk> to target <unk> ratio of around 10%.
The 98 estimated for this quarter is up 97 as you saw on the slides.
The strong earnings more than supported the asset growth for the quarter. The dividend payout ratio is at a very attractive level.
We would expect to bill CE tier one ratio of 10% in the near term and then gradually build that ratio in.
23, just given kind of higher earnings generation levels.
From that the asset sensitive positioning regarding the buybacks. It's still the same philosophy, Brian I mean, our first and best use of capital is organic loan growth. So the level of buybacks will be dependent on that we did not buyback any shares this quarter.
But we will be opportunistic as we go forward.
Given we still think there is significant value in a relative to the peers. We've made outperformed this year significantly in recent periods and we think there's still room for that to expand relative to the peers. So so we will be opportunistic but the overall philosophy is still the same.
Gotcha, Okay, I know someone asked earlier, but just you.
You talked about the positive operating leverage even with efficiency ratio being below 50% today is that kind of an achievable is that a kind of a sustainable level kind of given the outlook for what youre seeing with the margin is still trending higher here as you kind of look over the next couple of quarters.
I would just say I mean for the fourth quarter, we will give guidance in January for next year.
I mentioned there is still upside in the net interest income it's baked into our guidance and we will continue to manage expenses diligently as we always have so.
There is still upside.
Upside to that ratio or improvements that ratio next quarter and then next year.
That one.
Guidance.
Great.
Gotcha, Okay. Thank you for taking the questions guys.
Alright, Thank you Ryan.
Yes.
Yes.
And ladies and gentlemen, with that we've reached the end of today's question and answer session and at this time I would like to turn the floor back over to Vince to Lee for any closing remarks.
First of all I'd like to thank our team.
Was an exceptional quarter, but it's been a series of exceptional quarters, so that doesn't happen without a lot of hard work focus.
No.
Really appreciate what our team has done all of our employees really stepped up very proud to work here.
And the results.
Right. So thank you and thank you Gary and your team for keeping us.
Moving along here in deploying capital through a cycle I think that's going to be very positive.
We've shown that there is tremendous amount of positive momentum the business model is working and we're looking forward to continuing to drive results for our shareholders. So thank you.
And look forward to our next call take care everybody.
Ladies and gentlemen, with that we'll be concluding today's conference call. We do thank you for joining you may now disconnect your lines.