Q3 2023 First Bank Earnings Call

Yeah.

Ladies and gentlemen, thank you for standing by my name is Sharon and I will be accomplished operator today.

At this time I would like to welcome everyone to the first Bank F. RBA earnings call third quarter 2023 conference call.

All lines have been placed on mute to prevent any background noise.

After the Speakers' remarks, there will be a question and answer session.

I would like to ask a question. During this time simply Crestor followed by the number one on your telephone keypad.

If you would like to withdraw your question Press Star one again.

I would now like to turn the call over to Patrick Ryan President and CEO. Please go ahead.

Thank you I'd like to welcome everyone today to first bank's third quarter 2023 earnings call I'm joined today by Andrew Hibshman, Our Chief Financial Officer, Darlene Gillespie, our chief retail banking officer, and Peter Cahill, our Chief lending officer.

Before we begin however, Andrew will read the Safe Harbor statement.

The following discussion may contain forward looking statements concerning the financial condition results of operations and business of first bank.

Cautioned that such statements are subject to a number of uncertainties and actual results could differ materially and therefore, you should not place undue reliance on any forward looking statements we make.

We may not update any forward looking statements, we make today for future events or developments.

Information about risks and uncertainties are described under item one a risk factors in our annual report on Form 10-K for the year ended December 31, 2022 filed with the FDIC.

Back to you.

Great. Thanks, Andrew I'd like to start with some high level remarks, before we get some additional detail from Andrew Darlene and Peter.

Overall I think it's important to highlight we did close on the Malvern Bank merger during the quarter. We also finalized our facilities and systems integration projects, which overall has gone very well so far.

Numbers in our financial statements and releases include the impact of this transaction.

Given the significant noise in the numbers this quarter I'm going to focus my remarks on bigger picture items and the strategic impact of the merger.

Most importantly, as many of you know we added significant size and scale in our core south Eastern Pennsylvania market.

Half of our overall 26 branch locations in the greater Philadelphia market 10 of them in Pennsylvania, and three of them in Southern New Jersey.

And almost one third of our loans are sourced from the greater Philadelphia, and Southern New Jersey markets.

Second we made significant progress on what we call project scope.

We're we're reshaping our balance sheet.

As many of you saw in the release, we sold approximately $95 million in investment Securities. We sold another $100 million in residential mortgage loans.

We use these proceeds to pay off about $130 million in borrowings and we also what $68 million in broker deposits run off during the quarter.

The net result of these activities will drive better our away improved Roe.

And increased capital efficiency, while also freeing up contingent funding availability.

We continue to explore additional sculpting opportunity to shed noncore assets that had been mark to market through the acquisition.

This project should continue into 2024, as we used proceeds from Investor real estate loan payoffs and Paydowns to fund some of our newer C&I loan initiatives with the goals of improving capital efficiency getting more deposits per customer relationship and reducing our overall investor real estate concentration.

<unk>.

Our focus for the remainder of this year and into 2024 will be portfolio optimization and strong profit growth not overall balance sheet growth.

Furthermore, merger benefits are also have already started driving our core profitability higher.

When adding back one time merger related costs, we achieved the following results during the third quarter.

P. S. A 42 cents, which is a $1 68 annualized.

Our return on average assets of 1.13% adjusted return on tangible common equity of $13 two 3%.

Earnings run rate could be even higher than these adjusted figures because they do not include a full quarter of interest rate Mark accretion and the numbers. During Q3 also include some extra costs that will not continue into Q4.

Here's a brief summary of the merger accounting the final tangible book value per share dilution came in higher than originally anticipated at 15% versus our estimate in December of <unk>, 9%, but that change was entirely driven by the interest rate market environment, Hasnt and how that moves since December of 2022.

Tangible book value per share impact when adding back the interest rate marks was negligible.

I mean, it's not real but rather reduces the risk and uncertainty in terms of our ability to earn back that dilution that was recognized during the quarter.

Our projected earnings accretion moved much higher for the same reason a larger interest rate mark equates to more interest rate earnings accretion moving forward.

In summary integration, thus far has gone very well and we believe the economic benefits derived from establishing critical mass in the attractive markets of southeastern Pennsylvania, and the benefits from creating significant scale and cost savings will make this an excellent deal for our shareholders. These benefits will materialize in the form of really still.

Wrong earnings growth and capital appreciation as we head into 2024 at.

At this time I'd like to turn it over to Andrew to discuss our financial results in a little more detail.

Thanks, Pat for the three months ended September 32043, we recorded a net loss of $1 3 million or <unk> <unk> per diluted share.

<unk> merger related expenses, the initial credit loss expense on the Melbourne acquired loan portfolio and some other onetime items during the current quarter. Adjusted net income was $10 1 million or adjusted EPS of <unk> 42.

And then adjusted return on average assets of 1.13%.

The acquisition of Malvern closed on July 17th 2023, the combined stock and cash transaction was valued at approximately $129 7 million with Melbourne, providing $953 8 million in assets $747 7 million in loans and $671 9 million in deposits.

On the date of the acquisition.

During the third quarter as Pat mentioned, the sale of certain acquired investments in residential loans netted us approximately $165 million in cash, which allowed us to reposition our balance sheet to manage interest rate risk and boost efficiency.

That have impacted the loan sales loans increased by $581 1 million during the third quarter, primarily due to the Malvern acquisition, excluding the remaining balance of acquired Malvern loans, which was $626 million at the end of September loans declined by $442 million during the quarter.

Total deposits were up $567 6 million during the third quarter of 2023 also primarily due to the Malvern acquisition, excluding the $671 9 million in deposits acquired from Alberta deposit balances declined by $104 3 million. During the three months ended September 30 of 2023.

Climbed during the quarter was primarily due to the bank along with some higher cost brokered and noncore funding to leave but the overall industry wide deposit declines and competitive pricing pressures are also impacting our total deposit levels, primarily due to the benefits of the Malvern acquisition. Our net interest income improved from $3 two 8% in the second.

A 2023% to 336% in the third quarter of 2023 because of the Maverick acquisition closed in the second half of July our net interest income only included two months of acquisition accounting accretion, which added approximately $2 $7 million positive impact on net interest income.

Also the asset sales allowed for the reduction of certain higher cost deposits and borrowings, but most of this activity occurred later in the quarter deposit costs continued to move higher as market pressure persisted, but the weighted average rate on loans originated during the quarter also moved higher we believe that a full quarter of accretion income coupled.

With the balance sheet repositioning we have will have a positive impact on the margin in Q4, even despite the challenges related to deposit pricing conditions and the inverted yield curve.

Liquidity levels remained stable during the third quarter as we used the proceeds from the asset sales to pay off the $130 million.

<unk> borrowings that Pat mentioned.

Also allowed some higher cost deposit runoff, we have significant unused borrowing capacity and expect to enhance that contingent funding availability, even further in the fourth quarter.

As of September 32023, our allowance for credit losses to total loans increased to 142% from $1 two 5% at June 32023. The increase however was primarily due to the impact of specific reserves on certain acquired loans.

In the third quarter of 2023 total noninterest income declined primarily due to losses on our loan and investment sales, which were net against noninterest income on our income statement the.

The investment and loan sale losses were the result of the aforementioned sale of residential loans and investments that were acquired from Albert. These assets were marked at fair value at the time of acquisition, but saw some additional decline in value between the acquisition date and the ultimate sale date of the assets primarily due to continued interest rate movement.

Noninterest expenses were $23 5 million in Q3, 2023, or 16 $45 million excluding merger related expenses.

Non interest expenses, excluding merger related costs increased $2 7 million or 19, 5% from the prior quarter, primarily due to the new Malvern employees in locations annualized Q3, 2023 noninterest expenses, excluding merger related expenses were 183% of average assets compared to $1.

93% in the second quarter of 2023, we realized a number of immediate cost savings. After the Malvern acquisition and we are confident that we will hit our announced goals on cost savings as we head into 2024, we continue to believe that one of our strengths is our operating efficiency and believe the Malvern acquisition has provided us additional opportunities.

To improve our efficiency metrics.

Though we continue to operate in a difficult rate environment, the Malvern acquisition coupled.

Coupled with the balance sheet repositioning we executed during the quarter.

Positioned us to improve our core profitability metrics as we move towards 2024.

At this time I will turn it over to Darlene Gillespie, our chief retail banking officer for her remarks, Charlie Thank.

Thank you Andrew and good morning, everyone I'll start off by stating that there were no big surprises relative to deposit activity in the third quarter, while we have initiatives in place focused on retention and acquisition, we are not immune from the unprecedented shift in funding mix.

And pressure on funding costs.

Within the industry.

<unk> quarter in the second quarter, we reported strong deposit growth, primarily in our government and commercial portfolios.

In Q3, Bob deposits total deposits were up mostly due to the malware and acquisition as Andrew has mentioned, we experienced $104 3 million decline of which.

68 million was higher cost brokered and noncore deposits.

Continued to experience declines in our time deposit portfolio due to the rate environment. However, we anticipate some stabilization and potential growth with some of the offers we've recently launched in the market.

We experienced larger than normal outflows from some of our commercial clients that were filed for rate and our business purposes.

We know who these clients are in love imbalances may have declined they still remain customers of our bank.

Our cost of deposits increased 28 basis points in Q3 inclusive of the deposits, we onboarding from now burn, but its less than the increase we experienced.

The second quarter.

Again, a result of the rate environment. The overall, we're managing this metric by letting go of higher rate funding.

Our deposit mix continues to shift with non interest bearing moving into interest bearing vehicles and noninterest bearing funding remains a strategic focus as we build on expanding the relationships that our customers maintain with that.

As we move forward one of our key priorities is to continue to focus on deposit growth.

We remain steadfast with our strategic initiatives and this month, we launched a broad deposit campaign focused on driving growth as well as maintaining funds that are at risk because of the competitive landscape.

We're excited about our eight new branches from the Melbourne acquisition and the growth opportunities with expansion into the south eastern.

Part of.

The sales teams are engaging with our new customers.

Feedback has been very very positive.

So at this time I'll turn it over to Peter Cahill, our Chief lending officer for his remarks Peter.

Thanks Sterling.

As you just heard and read in our earnings release third quarter was a.

Does he wound for all areas of the bank and that includes.

The folks at lending.

You might recall that we had a very good first half of the year, where loans grew $100 million of were right on plan to meet our annual growth goal.

Despite the good results we were seeing signs then.

The impact of a slowing economy rising interest rates as well as our increased focus on growth in C&I lending and other loans where relationships include increased levels of deposits.

During the third quarter, we continue this focus while consolidating the malware loan portfolio into ours.

As Andrew mentioned, we sold a portfolio of residential mortgages and on boarded the remaining loans.

Going forward, we will derive a lot of synergies by holding that portfolio into our existing sales teams.

You can see in the schedules in the earnings release, the breakdown of the portfolio by loan type. Obviously these numbers are post.

Consolidation with Melbourne, so the percentages are impacted by the merger.

While we did experience some good organic growth in C&I during the quarter. Despite some payoffs there.

Absent the positive impact of the Malvern merger overall organic loan growth was negative in the quarter as Andrew mentioned.

We saw some loans, primarily investor real estate loans refinance out of the bank for lower <unk>.

Interest rates elsewhere.

And we sold a couple of loan participations with smaller community banks.

And we also saw a decline in loans of approximately $50 million.

Because the asset securing those loans were sold nearly 66% of this $50 million bucket.

Our non investor real estate loans, meaning they were mainly C&I and then a couple of cases businesses just got sold.

Completely out of our control.

Overall on the topic of oriented organic loan growth. We're pleased that the sales teams are holding firm on structure and interest rate swap pursuing relationship business.

Ni growth, where we find deeper relationships.

<unk>, 73% of new loans booked during the nine months ended $930 23.

Looking at our loan portfolio, while we continue to focus on relationship business our pipeline at September 30 stood at <unk>.

$212 million up from the June 30th level of $171 million.

This is a healthy increase and puts us back at about the same level.

As we were.

At the.

In the first quarter in fact, our average for the nine months has been $214 million. So we're right in line there.

And the number of loans in the pipeline Hasnt changed much either at September 30 was 209 compared to the average for the year of 208, So overall I'm happy with where the pipeline stands.

Regarding asset quality due to the consolidation with Malvern <unk>. There are a lot of moving pieces. The Andrews comments in the earnings release really lay out well, where we are overall I believe that we know the former Malvern portfolio very well.

And the pre Malvern first bank portfolio has not changed from an asset quality perspective.

So I see no areas of great concern from our combined banks credit quality to me seems in line with prior quarters.

Our objectives for the remainder of the year and into 2024 to complete the integration of the former Malvern bank portfolio and continuing to grow organically loans and deposits, where we can gain relationship business. In addition to our regional relationship management teams, our new asset based lending.

Roop has developed a nice pipeline.

Our SBA unit has also been busy building its business and our enhanced focus on our business Express product, which is for smaller business loans and deposits has been producing good results.

This concludes my comments for the third quarter and lending and I'll turn things back over now to Pat for final comments.

Thank you Peter or at this point I'd like to.

Turn things back to the operator to open things up for the Q&A session.

At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad we.

We will pause for just a moment to compile the Q&A roster.

Okay.

Your first question comes from the line of Justin <unk> with Piper Sandler.

Line is now open you May go ahead.

Okay.

Hey, good morning, guys.

Was wondering if you could maybe expand a bit on some of the efficiencies gained with the deal obviously real nice progress as telegraphed. It seems like there's maybe a bit more to come next quarter I wasn't sure if you're in a position to get a little more specific on how that May look and then maybe just more broadly speaking not necessarily specifics, but just.

Heading into 2024.

Yes so.

Obviously, it's a I would say, but theyre stages in merger integration and when we closed on the deal on July 17.

There were some folks who were not retained.

Starting at that point and then there was another group of people that we retained through the end of September to help with the systems and facility integration. So that kind of the stages of cost savings really reflect that process and then as you move forward.

Theres always some.

<unk> attrition that comes from folks that you thought might stay that.

Decided to move on our folks he thought you wanted to keep but when it doesn't work out so.

Things continue to evolve as we move forward, but.

Think on the people side, Andrew we've gotten the bulk of.

And what we expect there and.

We're continuing to realize savings in <unk>.

Other areas in terms of back office professional service and things like that so.

Cheryl: Ladies and gentlemen, thank you for standing by. My name is Cheryl, and I will be your conference operator today.

<unk> be some lingering expenses that.

We will need to incur in the fourth quarter, just to kind of finalize legacy Malvern expenses and onetime merger related things, but.

Unknown Executive: At this time, I would like to welcome everyone to the first bank F.R.B.A. Ernie's call third quarter 2023 conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question to answer session. If you would like to ask a question during this time, simply press star, follow by the number number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you.

I think we'll have a pretty good view of the run rate for Q1 when.

When we regroup.

On our next call, but Andrew anything you want to add there I think that's a good summary, there is probably going to be a little bit of continued noise in the fourth quarter as we wrap up some of the things that we need to wrap up and still there's still some some people and things that were we're figuring out, but yes, I mean, I think as we head into the first quarter.

Patrick Ryan: I will now like to turn the call over to Patrick Ryan, President and CEO. Please go ahead. Thank you. I'd like to welcome everyone today to first bank third quarter 2023 earnings call. I'm joined today by Andrew Hibshman, our chief financial officer, Darleen Gillespie, our chief retail banking officer, and Peter Cahill, our chief lending officer.

2024, all of that all of that quote unquote noise should should clear up and we should continue to see.

Some additional cost savings now as you head into the next year there'll be other things that impact expenses, obviously, so theres a lot going on especially with off with the size. We're at now, but we expect to continue to get some additional benefits, but we did.

Andrew Hibshman: Before we begin, however, Andrew will read the safe harbor statement. The following discussion may contain forward-looking statements concerning the financial condition, results of operations, and business of First Bank. We caution that such statements are subject to a number of uncertainties and actual results could differ materially, and therefore you should not place undue reliance on any forward-looking statements we make. We may not update any forward-looking statements we make today for future events or developments. Information about risks and uncertainties are described under item 1A risk factors in our annual report on 410K for the year end of December 31st, 2022, filed with the FDIC.

Get.

More upfront maybe than we even anticipated, but there is still I think at least a little bit more to come on the cost savings.

Okay got it I appreciate that and then just looking at the balance sheet repositioning in the quarter a lot was as expected and I think a big added benefit of doing the deal, but just curious if you could talk through maybe a bit more what continued opportunity could look like I know timing can be tough.

The pin down for sure, but maybe just in terms of magnitude compared to what we've already seen so far.

Yes, I would.

I wouldn't say from a magnitude perspective, there would be.

Patrick Ryan: Pat, back to you. Great. Thanks, Andrew.

Patrick Ryan: I'd like to start with some high-level remarks before we get some additional detail from Andrew, Darleen, and Peter. Overall, I think it's important to highlight we did close on the Malvern Bank merger during the quarter. We also finalized our facilities and systems integration projects, which overall have gone very well so far. The numbers in our financial statements and releases include the impact of this transaction.

Major additional sales along the lines you saw in the third quarter.

There may be some one off situations, where there may be some.

Non core assets that could be sold but again I wouldn't expect anything in the size and scale of what.

We realized in the third quarter and then.

Some of it is just more gradual guests and we're.

<unk> got loans that you might view as well.

Patrick Ryan: Given the significant noise in the numbers this quarter, I'm going to focus my remarks on bigger picture items and the strategic impact of the merger. Most importantly, as many of you know, we added significant size and scale in our core Southeast and Pennsylvania market. We now have half of our overall 26 branch locations in the Greater Philadelphia market, ten of them in Pennsylvania, and three of them in Southern New Jersey. And almost one-third of our loans are sourced from the Greater Philadelphia and Southern New Jersey markets.

Strategically necessary and you have negotiations around rate and structure and price that you might hold the line on a little stronger if youre not worried about the loan, leaving so I do think we'll see some situations where.

Some loans will mature or Rachel reset and we.

We might see some.

Continued payoffs and pay downs, particularly in the Investor real estate portfolio and.

Those are things that I expect will continue to happen as we move forward over the next couple of quarters, but I don't think it would be a big headline announcement as much as a gradual strategic transition out of some.

Patrick Ryan: Second, we make significant progress in what we call project sculpt where we're reshaping our balance sheet. As many as you saw in the release, we sold approximately 95 million in investment securities. We sold another 100 million in residential mortgage loans. We use these proceeds to pay off about 130 million in borrowings, and we also let 68 million in broker deposits run after in the quarter. The net results of these activities will drive better our way, improved our OE, and increased capital efficiency while also freeing up contingent funding availability.

Less relationship based Investor real estate.

Loans into more relationship driven higher deposit balance C&I loans.

Okay, so and combining that with some of the commentary on <unk>.

Some loan growth.

And just the size of the balance sheet.

What is the right way to think about it and I'm sure, it's sort of a moving target, but a flat balance sheet, our earth contraction, a more likely scenario just looking out over the next couple of quarters.

Patrick Ryan: We continue to explore additional sculpting opportunities to shed non-core assets that have been marked to market through the acquisition. This project should continue into 2024, as we use proceeds from investor real estate loan payoffs and paydowns to fund some of our newer CNI loan initiatives with the goals of improving capital efficiency, getting more deposits per customer relationship, and reducing our overall investor real estate concentrations.

Yeah listen I don't know right at the end of the day.

All about.

Adding the right types of customers and.

Transitioning out of potential non core non strategic assets, but.

If our team does an incredible job, which I hope they will and generating.

Patrick Ryan: Our focus for the remainder of this year and into 2024 will be portfolio optimization and strong profit growth, not overall balance growth. Furthermore, merger benefits have already started driving our core profitability higher.

Good new core deposit balances than we've got plenty of activity in the loan pipeline as Peter outlined two to.

To grow loans, a little bit over the next couple of quarters, but.

If the core deposit funding is harder to come by than I'd say, a flattish scenario, where we repositioned payoffs and paydowns into new loans.

Patrick Ryan: When adding back one time merger related costs, we achieve the following results during the third quarter. EPS of 42 cents, which is $1.68 annualized, a return on average assets of 1.13%, an adjusted return on tangible common equity of 13.23%. The current earnings run rate could be even higher than these adjusted figures because they do not include a full quarter of interest rate market creation, and the numbers drink Q3 also include some extra costs that will not continue into Q4.

It's probably more likely but.

I'm not overly concerned about whether it's flat or 5% growth, it's about doing the right kind of business and in this environment.

It can generate value without growing by.

Optimizing the portfolio, but that doesn't mean, we won't grow if there are good opportunities to add quality customers and relationships.

Patrick Ryan: Here's a brief summary of the merger account. The final tangible book value for share dilution came in higher than originally anticipated at 15% versus our estimate in December of 9%. But that changes entirely driven by the interest rate market environment and how that moves since December of 2022. The tangible book value for share impact when adding back the interest rate marks was negligible. That doesn't mean it's not real, but rather it reduces the risk and uncertainty in terms of our ability to earn back that dilution that was recognized during the quarter. Our projected earnings accretion moved much higher for the same reason, a larger interest rate market equates to more interest rate earnings accretion moving forward.

Okay understood and then one last one quickly for me just on the margin Andrew I'm not sure are you able to walk through just the purchase accounting impact.

<unk> quantifying if you can and then just perhaps.

What the thought is on how that trends moving forward.

Yes.

Yes, so I think in the remarks I mentioned.

The net impact of purchase accounting accretion was $2 7 million, but again that was because of the deal closed later in the month of July that was two months.

So you can kind of figure out what the monthly run rate now that runs down over time, but not.

Quickly so it all runs down gradually over time, but yes, I mean thats all those large interest rate marks that we are going so that's kind of the number that we saw in the second quarter based on our third quarter based on two months, you've got to figure out what the what the run rate will be kind of the trailing off over time.

Patrick Ryan: In summary, the integration thus far has run very well, and we believe the economic benefits derived from establishing critical mass and the attractive markets of southeastern Pennsylvania and the benefits from creating significant scale and cost savings will make this an excellent deal for our shareholders. These benefits will materialize in the form of really strong earnings growth and capital appreciation as we head into 2024.

Going forward, there's also some impact on <unk>.

Other areas not just the margin core deposit intangibles and things like that that get amortized back through expenses on the core deposit side. So there is some other impacts but those are more muted than the interest rate marks which is the number that I gave you there.

Andrew Hibshman: At this time, I'd like to turn it over to Andrew to discuss our financial results in a little more detail. Thanks, Pat. For three months ended September 30th, 2023, we recorded a net loss of 1.3 million or five cents per diluted share. Excluding virtual aid expenses, the initial credit loss expense on the Malvern acquired loan portfolio and some other one-time items during the current quarter, adjusted net income was 10.1 million or adjusted EPS of 42 cents and then adjusted return on average assets of 1.13%.

Okay, perfect apologies I missed that in the remarks I appreciate it guys I'll leave it there.

Alright, thanks, guys.

Your next question comes from the line of Longwall in Nevada.

Davidson. Your line is now open you May go ahead.

Hey.

Big picture I have your slide deck with.

The businesses that you're focusing on are there any businesses that you exited.

Andrew Hibshman: The acquisition of Malvern closed on July 17th, 2023, the combined stock and cash transaction was valued at approximately 129.7 million with Malvern providing 953.8 million in assets, 727.7 million in loans and 671.9 million in deposits on the date of the acquisition. During the third quarter, as Pat mentioned, the sale of certain acquired investments in residential loans netted as approximately $165 million in cash, which allowed us to reposition our balance sheet to manage interest rate risk and boost efficiency net of impact of the loan sales loans increased by 581.1 million during the third quarter, primarily due to the malburn acquisition, excluding the remaining balance of acquired malburn loans, which was 626 million at the end of September.

Fully.

And on that slide.

Yes.

No.

I mean.

We obviously saw a big chunk of residential mortgage loans that were legacy Malvern loan, but we haven't stopped making new residential consumer loans, but as you know it's never been.

A real big part of our business so.

Continuing to.

Make a consumer and residential loans, where there is a larger relationship involved and it makes sense, but.

Those are areas, where we've historically been been very selective and I think we will continue to be selective.

And then on the investment real side.

The real estate side, we're definitely not exiting that area, we're just looking to rebalance.

The portfolio as we move forward to.

Andrew Hibshman: However, loans declined by $442 million during the quarter. Total deposits were up 560 7.6 million during the third quarter of 2023, also primarily due to the malburn acquisition, excluding the $671.9 million in deposits acquired from malburn, deposits balanced declined by $104.3 million during the three months end of September 30, 2023. There's a climb during the quarter, which primarily due to the bank allowance of higher cost broker and non-core funding to leave, but the overall industry-wide deposits declines and competitive pricing pressures are also impacting our total deposit levels.

Breaking down.

Some of that real estate concentration as well as grow in some areas, where we think we can generate additional deposit balance.

Okay. That's helpful. In the past you've talked about some of the repositioning.

Opening up room for buybacks are those still on the table. It looks like it's mainly went to borrowings and the NIM is.

That should help the NIM and.

That is a very solid way to use the proceeds as well, but just wondering how you balance that.

Versus buyback.

Listen I think in the short run our focus over the next couple of quarters is it going to be replenishing capital obviously.

Andrew Hibshman: Primarily due to the benefits of the malburn acquisition, our net interest income improved from 3.28% in the second quarter of 2023 to 3.36% in the third quarter of 2023. Because the malburn acquisition closed in the second half of July, our net interest income only included two months of acquisition accounting accretion, which had an approximately $2.7 million positive impact on net interest income. Also, the asset sales allowed for the reduction of certain higher cost deposits and borrowings, but most of this activity occurred later in the quarter.

Acquisition bolstered the cash component in the Mark to market used up some of our excess capital I think we'd like to.

First replenish that but.

If down the road the buyback remains an attractive way to deploy excess capital. We would absolutely continue to look at it is I think we did that.

We did some buybacks early in the year.

As we as we sort of project out.

Andrew Hibshman: Deposit costs continued to move higher as market pressure persisted, but the weighted average rate on loans originated during the quarter also moved higher. We believe that a full quarter of accretion income coupled with the balance sheet repositioning we have will have a positive impact on the margin. Even despite the challenges related to deposit pricing conditions and the inverted yield curve. The liquidity levels remained stable during the third quarter as we used the proceeds from the asset sales to pay off $130 million in the FHLB borrowings that Pat mentioned, and it also allowed some higher cost deposits to run off.

With with flat to slight balance sheet growth and.

Significantly enhanced earnings.

We actually are going to be able to replenish capital quite quickly so.

I don't think we'll be on the sidelines for too long on the buyback.

In the short run I think the priority too.

Those capital ratios back up a little higher than where they are right now.

What is that medium term.

Target CET, one or what metric would you use.

Yes, I mean, we've got internal levels that we keep an eye on.

Andrew Hibshman: We have significant unused borrowing capacity and expect to enhance that contingent funding availability even further in the fourth quarter. As of September 30th, 2023 are allowance for credit losses to total loans increased to 1.42% from 1.25% at June 30th, 2023. The increase, however, was primarily due to the impact of specific reserves on certain acquired loans. In the third quarter of 2023 total non-interesting income declined, primary due to losses on loan and investment sales, which were net against non-interesting income on our income statement.

Our tier one risk based.

Is that 9% right now, which again is the level, where we're perfectly comfortable with but I think we'd want to see that a fair bit over nine before we started buying back stock. So there's that.

Not a magic number it depends on where the stock's trading in.

Other strategic initiatives underway, but I think at 9% we'd be focused on moving that number higher in the short run and then.

As we build up some additional buffers will will take a look and see where the stock's trading and if that's the right way to deploy.

Andrew Hibshman: The investment in loan sale losses were the result of the four mentioned sale of residential loans and investments that were acquired from Melbourne. These assets were marked a fair value at the time of acquisition, but saw some additional decline in value between the acquisition date and the ultimate sale date of the assets, primarily due to continued interest rate movement. Non-interest expenses were 23.5 million in Q3 2023 or 16.5 million excluding merger-related expenses.

Deploy any excess capital might we might have we will absolutely look at it.

Alright.

The growth the organic growth.

Took a step back.

But the pipeline is rebuilt deep.

Can you.

Do you see fourth quarter as Youre back to back to normal or is it still going to take a couple of quarters before.

Kind of the different loan and deposit channels are fully back up and running again.

Andrew Hibshman: 9 interest expenses, excluding merger related costs increased 2.7 million or 19.5% from the prior quarter, primarily due to the new malvern employees and locations, annualized Q3, 2023 9 interest expenses, excluding merger related expenses were 1.83% of average assets compared to 1.93% in the second quarter of 2023. We can continue to believe that one of our strengths is our operating efficiency and believe the malvern acquisition has provided us additional opportunities to improve our efficiency metrics.

Yeah again, I think the loan pipeline is as robust so theres no shortage of good quality loan opportunities out there.

At this point, we're focused on funding.

Finding the quality loans that we can fund with core deposit growth.

Darlene and her team as Peter and his teams are out there pounding the pavement everyday to.

To find new opportunities and look to grow those deposits I think we're doing a great job.

Wiring new customers. The challenges there continues to be some seepage out of the banking industry into money market funds et cetera. So.

Andrew Hibshman: Although we continue to operate in a difficult rate environment, the malvern acquisition coupled with the balance sheet repositioning we executed during the quarter has positioned us to improve our core profitability metrics as we move towards 2024.

Yes, sometimes youre, adding customers, but you're running in the wind a little bit and so it may not result in a lot of overall balance sheet growth, but that's going to be the driver and at this point, we don't need to force. It. We can we can drive strong earnings growth.

Darleen Gillespie: At this time, I'll turn it over to Darleen Gillespie, our chief retail banking officer for her remarks, Darleen. Thank you, Andrew, and good morning, everyone. I'll start off by stating that there were no big surprises relative to positive activity in the third quarter.

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The need for significant balance sheet growth again that doesn't mean, if we have good opportunities we won't continue to do that but.

The way, we've been able to reposition the balance sheet and the way we can manage attrition in payoffs and paydowns along with deposit growth will allow us to continue to add new business.

Darleen Gillespie: While we have initiatives in place focused on retention and acquisition, we're not immune from the unprecedented shift in funding mix and pressures on funding costs experienced within industry. The second quarter, in the second quarter route, we reported strong deposit growth primarily in our government and commercial portfolios. In Q3, while total deposits were up mostly due to the malvern acquisition, as Andrew has mentioned, we experienced a 104.3 million decline of which 68 million was higher cost, broker and non-core deposits.

Whether that translates into.

Modest growth or flat balance sheet time will tell but I don't view that as a huge variable in terms of us hitting our our goals on a financial performance perspective.

And Nick I would add is.

And I think Peter both mentioned typically right. After the deal closes there is some work out of loans, we're trying to work out of their problem loans and we're getting out of some sort.

Strategic on non strategic relationships, so that will obviously impact the net loan growth as well as we will see we will ultimately see some elevated payoffs and paydowns over the next couple of quarters.

Darleen Gillespie: We continued to experience declines in our time deposit portfolio due to the rate environment. However, we anticipate some stabilization and potential growth with some of the offers we've recently launched in the market. We experienced larger than normal outflows from some of our commercial clients that move funds for rate and or business purposes. We know who these clients are and while their balances may have declined, they still remain customers of our bank.

Hey, Doug.

It brings up kind of my next comment is.

That pipeline.

Can help <unk>.

Generation in the past the projection was about $200 million in growth just out of that pipeline.

Obviously, theres going to be something that's not going to be net fully.

Next year, but is that kind of the production you think you can generate.

Darleen Gillespie: Our cost of deposits increased between eight basis points in Q3, inclusive of the deposits we onboarded from malverns, but it's less than the increase we experienced in the second quarter. Again, a result of the rate environment, but overall, we're managing this metric by letting go of higher rate funding. Our deposit mix contains the shift with non-interest bearing moving into interest bearing vehicles, and non-interest bearing funding remains a strategic focus as we build on expanding the relationships that our customers maintain with us.

Even as soon as next year, just kind of some thoughts there.

Some of that production side, obviously, there is going to be continued runoff has continued.

Kind of keeping what you want to keep.

But do you feel comfortable with the production side being that that $200 million level or could it be a little bit higher.

Yes, I don't see it I don't see it being higher than $200 million. If I had to get this test can be less than 200 million not because theres not good loan opportunities out there, but just because.

As we see opportunities to reposition the balance sheet.

Darleen Gillespie: As we move forward, one of our key priorities is to continue to focus on deposit growth. We remain steadfast with our strategic initiatives, and this month, we launched a fall deposit campaign focused on driving growth as well as retaining funds that are at risk because of the competitive lands. We're excited about our eight new branches from the Malvern Acquisition and the growth opportunities with expansion into the South Eastern part of PA. The sales teams are engaging with our new customers and the feedback has been very, very positive.

We're not going to force it right. There's no. There's no reason in this inverted yield curve environment to be bought.

Growing money too.

Loans so.

We're going to do what we can based on our deposit growth initiatives.

The headwinds in that market mean that we don't have as much in core funding as we'd liked to fund all the good loan opportunities then.

We may end up growing less than that 200 number that we've done in the past, but it's not for lack of good loan opportunities. It's really just.

Dealing with the.

The rate environment, we're in and the funding markets.

Peter Cahill: So at this time, I'll turn it over to Peter Cahill, our chief lending officer for his remarks. Peter? The third and red earnings release, third quarter was a busy one for all areas of the bank and that includes the folks in lending. You might recall that we had a very good first half of the year where loans grew $100 million and we're right on plan to meet our annual growth goal despite the good results.

Okay and then.

What levels of attrition are you seeing on the deposit side and is that slowing is that progressing as expected just kind of some thoughts.

On.

All right.

From a retention.

Yes, I think we knew we were going to have some excess cash coming through the sales of securities and residential mortgage loans. So.

For a good part of the third quarter, we werent aggressively pricing deposits.

Peter Cahill: We were seeing signs then of the impact of the slowing economy rising interest rates as well as our increased focus on growth and C&I lending and other loans for relationships include increased levels of deposits. During the third quarter, we continue this focus while consolidating the Malvern loan portfolio into hours. As Andrew mentioned, we sold the portfolio of residential mortgages and onboarded the remaining loans. We think going forward will derive a lot of synergies by folding that portfolio into our existing sales teams.

It was a rate sensitive situation, we decided to let some of that money go and as you saw almost three quarters of the decline in deposits. During the quarter was a function of letting broker run off which is much more of a <unk>.

Turn it on turn it off site funding source so.

We've got a nice new deposit campaign going.

Got our group laser focused on.

Finding core deposits and we're seeing some initial good results from.

Peter Cahill: You can see in the schedules in the earnings release a breakdown of the portfolio by loan type. Obviously, these numbers are post consolidation with Malvern so the percentages are impacted by the merger. But we did experience some good organic growth in the C&I during the quarter despite some payoffs there. Absent the positive impact of the Malvern merger overall organic loan growth was negative in the quarter as Andrew mentioned. We saw some loans, primarily investor real estate loans, refinanced out of the banks for lower interest rates elsewhere.

From our current promotion so.

We'll return to deposit growth in Q4, Darlene anything you'd add there no I would just.

Based on your comments that yes, we have some great campaigns out in the market. We have a great sales team that is focused on expanded relationships.

And acquiring new customers and deposit so as long as we continue with that trajectory I think that.

We will continue to see positive deposit growth as we move into 2024.

And I just.

I appreciate that my last question is on the NIM outlook is the best way to kind of thinking about the NIM next quarter is taking that $2 7 million in adding an extra month because that was two months of accretion.

Peter Cahill: We sold a couple of loan participations to smaller community banks. We also saw the client in loans of approximately $50 million because the assets securing those loans were sold nearly 66% of this $50 million bucket were non investor real estate loans meaning they were mainly C&I and then a couple of cases businesses just got sold and was completely out of our control. Overall, on the topic of organic loan growth, we're pleased that the sales teams are holding firm on structure and interest rates while pursuing relationship business.

And that kind of going forward absent a little bit of growth.

Are there any other moving parts I should I should be thinking about near term debt.

Yeah.

The market environment.

Yes.

That's the right way to start the analysis and then you got to factor in where you think deposit costs are going is that what youre seeing on the loan side, we do things.

We're getting to a point, where the increase in loan yield is almost offsetting the increase on the deposit funding costs. So.

Peter Cahill: The C&I growth where we find deeper relationships total 73% of new loans booked during the nine months ending 930-23. Looking at our loan portfolio while we continue to focus on relationship business our pipeline at September 30 so that $212 million up from the June 30th level of $171 million. This is a healthy increase and puts us back at about the same level as we were at the end of the first quarter.

We hope to.

Being in a position where the net impact of those two variables is neutral from a margin standpoint, I'm not sure we'll be there in Q4, we hope to get there soon but.

Even with some of those headwinds.

Yes.

The math of the interest rate accretion and earn back the margins should be moving higher for sure.

Is there like opportunities for <unk>.

Security yield pick up is there are opportunities.

Peter Cahill: In fact, our average for the nine months has been $214 million so we're right in line, and the number of loans in the pipeline hasn't changed much either. It's September 30th. It was 209 compared to the average of the year of 208. The overall I'm happy with where the pipeline stands. Hopefully it will very well and the pre-malvern First Bank portfolio has not changed from an asset quality perspective. So I see no areas of great concern from the combined banks, credit quality to me seems aligned with prior quarters.

What are like new loan yields coming on I know that I know, it's more C&I that should be higher but what's in the pipeline does it until the kind of things that I can't quite see that that could.

The nice benefit to the NIM going forward.

Yes, I think anything we're doing that short term variable rate is getting priced.

Really anywhere between 8% to 10% so plenty of yield.

On the new production on the floating rate stuff I think the.

The term fixed rate stuff is now getting priced in that probably seven to seven 5% range and so.

So if the lineup.

A new incremental deposit dollar, which is probably coming in at close to 5% against.

A new fixed rate loan at seven and a half obviously thats only two and ask spread which would take care margin a bit but I'd say of the new loan production. We are doing right now two thirds or more is in the shorter term floating rate category. So.

Peter Cahill: Our objectives for the remainder of the year and into 2024 to complete the integration of the former Malbur back portfolio and continue to grow organically loans and deposits where we can gain relationship business. In addition to our regional relationship management teams, our new asset-based lending group has developed a nice pipeline, our SBA unit has also been busy building its business and our enhanced focus on our business express product which is for smaller business loans and deposits has been producing good results.

I think the.

The net benefit on the loan yield side, it's getting pretty close to matching what we're seeing in terms of the increase in the funding cost side.

Okay, I appreciate that color and would that.

Just to follow up briefly with that kind of give you the expectation is.

Thats bottoming out that you could see some expansion.

Patrick Ryan: This concludes my comments for the third quarter in lending and I'll turn things back over now to Pat for final comments. Pat. Thank you, Peter.

Second half next year.

Any.

Any kind of thoughts on the NIM trajectory.

Well again, I mean, just with the math from the earnings accretion and move higher significantly in the first half of the year.

Unknown Executive: At this point, I'd like to turn things back to the operator to open things up for the Q and A session. At this time, I would like to remind everyone in order to ask the question, press stars in the number one on your telephone keypad. We will pause for just a moment to compile the Q and A roster.

At some point that does slow down a little bit but.

The downside of larger interest rate marks upfront.

Tangible book value dilution.

This means there is more interest rate mark income to earn back in so you get the to.

To get the benefit of that quote unquote over a longer period of time so.

Justin Crowley: Your first question comes from the line of Justin Crowley with Piper Samler. Your line is now open, you may go ahead. Good morning, guys. I was wondering if it could maybe expand a bit on some of the efficiencies gained with the deal, obviously real nice progress as telegraphed. It seems like there's maybe a bit more to come next quarter. I wasn't sure if you're in a position to get a little more specific on how that may look and then maybe just more broadly speaking, not necessarily specific, but just heading into 2024.

I don't know Andrew we haven't finalized our budgets for 'twenty four and beyond so I don't think we're prepared to give any guidance beyond the next couple of quarters. At this point I mean, obviously there is there is it all contingent on what the rate environment looks like if it stays inverted like this for a long time and it will continue to put pressure on them.

If we get.

Some relief from the yield curve environment that will help.

But at that point is right I think over the next at least over the next few quarters.

Starting in the fourth quarter, we should see some improvement and then hopefully hopefully it stabilizes, but again, it's going to be very contingent on or rate environment.

Patrick Ryan: Yeah, so obviously, I should say honestly, but there are stages in murder and immigration, and when we closed on the deal on July 17th, there were some folks who were not retained starting at that point. And then there was another group of people that we retained through the end of September to help with the systems and facility integration, so the kind of the stages of cost savings really reflect that process. And then as you move forward, there's always some inevitable attrition that comes from folks that you thought might stay that decide to move on or folks you thought you wanted to keep, but let it doesn't work out.

A lot of things out of our control.

Thank you guys. Thank you I appreciate it.

Thank you Emmanuel.

Okay.

At this time there are no further questions.

I'd like to now turn the call back over.

So Patrick Ryan President and CEO.

Okay. Thank you very much we certainly appreciate folks dialing into the call today and we.

We'll look forward to providing additional updates.

When we do our fourth quarter update later in January thanks, everyone.

Yes.

Ladies and gentlemen that concludes today's call. Thank you all for joining you may now disconnect.

Patrick Ryan: So things continue to evolve as we move forward, but I think on the people side, Andrew, we've gotten the bulk of what we expect there, and we're continuing to realize savings in other areas in terms of back off as professional service and things like that. So there'll probably be some lingering expenses that will need to incur in the fourth quarter, just to kind of finalize legacy Malvern expenses and one time merger related things, but I think we'll have a pretty good view of the run rate for Q1 when we regroup, you know, on our next call, but anything you want to add there.

Yes.

Okay.

Yes.

Yes.

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Thank you.

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Patrick Ryan: I think that's a good summary. There's probably going to be a little bit of continued noise in the fourth quarter as we wrap up some of the things that we need to wrap up and still there's still some some some people and things that we're we're figuring out, but yeah, I mean, I think as we headed into into the first quarter of 2024 all that all that quote unquote noise should should clear up on and we should continue to see some some additional cost savings now.

Yes.

Yes.

Patrick Ryan: As you've been headed to the next year, there'll be other things that impact the expenses, obviously, so there's a lot going on, especially with off with the size we're at now, but we expect to continue to get some additional benefits, but we did I think get more upfront maybe than we even anticipated, but there is still I think at least a little bit more to come on the cost. Okay, I got it. Appreciate that.

Patrick Ryan: And then just looking at the balance sheet repositioning in the quarter, a lot was expected and I think a big added benefit of doing the deal, but just curious if you could talk through maybe a bit more what continued opportunity could look like. I know timing can be tough to pin down for sure, but maybe just in terms of magnitude compared to what we've already seen so far. Yeah, I wouldn't say from a magnitude perspective, there would be, you know, major additional sales along the lines you saw in the third quarter.

Patrick Ryan: There may be some one off situations where there may be some non-core assets that could be sold, but again, I wouldn't expect anything in the size and scale of what we realized in the third quarter. And then some of it is just more gradual, Justin, where, you know, you've got loans that you might view as, you know, not strategically necessary and you have negotiations around rate and structure and price that you might hold the line on a little stronger if you're not worried about the loan leaving.

Patrick Ryan: So I do think we'll see some situations where some loans will mature or rates will reset and we might see some, you know, continue payoffs and pay downs, particularly in their mental real estate portfolio. And, you know, those are things that I expect will continue to happen as we move forward over the next couple quarters, but I don't think it would be a big headline announcement as much as a gradual strategic transition out of the way. So we have some less relationship-based investor real estate loans into more relation driven higher deposit balance to your eye loans. Okay.

Patrick Ryan: So in combining that sort of with some of the commentary on some loan growth and just the size of the balance sheet is, you know, what is the right way to think about it? And I'm sure it's sort of a moving target, but, you know, a flat balance sheet or a contraction, you know, more likely scenario just looking out over the next couple of quarters. Yeah, listen, I don't know right at the end of the day, it's all about adding the right types of customers and transitioning out of, you know, potential non-core and on strategic assets.

Patrick Ryan: But, you know, if our team does an incredible job, which I hope they will, and generating good new core deposit balances, then we've got plenty of activity in the loan pipeline that's Peter outlined to grow loans a little bit over the next couple quarters. But if the core deposit funding is hard to come by, then I'd say a flatish scenario where, you know, we reposition payoffs and paydowns into new loans is probably more likely.

Patrick Ryan: But, you know, I'm not overly concerned about whether it's flat or 5% growth, it's about doing the right kind of business. And in this environment, we can generate value without growing by, you know, optimizing the portfolio, but that doesn't mean we won't grow if there are good opportunities to add quality customers in relation. Okay, understood.

Andrew Hibshman: And then just one last one quickly for me, just on the margin, Andrew, I'm not sure are you able to walk through just the purchase accounting impact impact and quantifying if you can, and then just perhaps, you know, what the thought is on how that trends moving forward. Yeah, so I think in the remarks, I mentioned the kind of net impact of purchase accounting accretion was 2.7 million. And again, that was because the deal closed later in the month of July, that was two months, so you can kind of figure out what the monthly run rate now that runs down over time, but not.

Andrew Hibshman: That quickly, so it will run down gradually over time, but yeah, I mean, that's all those large interest rate marks that we have going so that's kind of the number that we saw in the second quarter based, our third quarter based on two months, you can kind of figure out what the, what the run rate will be kind of then trailing off over time going forward. There's also some impact on some other areas, not just the margin, like core deposit and tangibles and things like that that get advertised back through expenses on the core deposit side.

Andrew Hibshman: So there is some other impacts, but those are more muted than the interest rate marks, which is the number that I gave you there. Okay, perfect. Apologies miss that in the remarks. I appreciate it guys. I'll leave it there. All right, thanks, Justin.

Manuel Navas: Your next question comes from a line of manual on the bus with DA Davidson. Your line is now open. You may go ahead. Hey, just a big picture. I have your slide deck with the businesses you're focusing on. Are there any businesses that you've exited fully that aren't on that slide? No, I mean, you know, we haven't pulled a big chunk of residential mortgage loans that will legacy Malvern loans. But we haven't stopped making new residential consumer loans, but as you know, it's never been a real big part of our business.

Manuel Navas: So, you know, continuing to make consumer residential loans where there's a larger relationship involves and it makes sense. But, you know, those are areas where we've historically been very selective and I think we'll continue to be selected. And then on the investor real estate side, we're definitely not exiting that area. We're just looking to rebalance the portfolio. We move forward to bring down some of that real estate concentration as well as grow some areas where we think we can generate additional deposit balance.

Manuel Navas: Okay, that's helpful. In the past, you talked about some of the repositioning opening up room for buybacks are those still on the table. It looks like it's mainly went to borrowings and the name is it that should help them and that's that is a very solid way to use the proceeds as well. But just wondering how you balance that versus buyback. Yeah, listen, I think in the short run, our focus over the next couple quarters is going to be replenishing capital, obviously the acquisition both with the cash component and the market used up some of our excess capital.

Manuel Navas: I think we'd like to first replenish that, but if down the road, the buyback remains an attractive way to deploy access capital. We would absolutely continue to look at it as I think, you know, we did we did some buybacks early in the year. As we sort of project out, you know, with with the flat, the slight balance sheet grows and and significantly enhanced earnings. We're actually going to be able to replenish capital quickly, so I don't think we'll be on the sidelines for too long on the buyback.

Manuel Navas: But in the short run, I think there's a priority to get those capital issues back up a little higher than where they are right now. What is that medium-term target on CT1 or what metric would you use? Yeah, I mean, we've got internal levels that we keep in eye on. Our pure one risk-based is that 9% right now, which again is the level we're perfectly comfortable with. But I think we'd want to see that, you know, a fair bit over 9 before we started buying back stock.

Manuel Navas: So there's not a magic number. It depends on, you know, where the stock trading and other strategic initiatives underway. But I think at 9%, we'd be focused on moving that number higher in the short run. And then, you know, as we build up some additional offers, we'll take a look and see where the stock is trading. And if that's the right way to deploy any excess capital might, we might have a little absolutely look at it.

Manuel Navas: The growth, the organic growth took a step back. But the pipeline has rebuilt. Do you see fourth quarter as you're back to normal? Or is it still going to take a couple quarters before kind of the different low end deposit channels are fully backed up and running again? Yeah, again, I think the low end pipeline is robust. So there's no shortage of quality loan opportunities out there. At this point, you know, we're focused on funding the quality loans that we can fund with core deposit growth.

Manuel Navas: And Tharleen and her team and Peter and his teams are out there, pound of the pavement every day to find new opportunities and look to grow those deposits. I think we're doing a great job acquiring new customers. The challenge is, you know, they're continuing to be some seepage out of the banking industry into, you know, money market, bond funds, et cetera. So, you know, sometimes you're adding customers, but you're running in the wind a little bit.

Manuel Navas: And so it may not result in a lot of overall bounty growth. But, you know, that's going to be the driver. And at this point, we don't need to force it. We can, we can drive strong earnings growth without the need for significant balance growth. Again, that doesn't mean if we have good opportunities, we won't continue to do that. But, you know, the way we've been able to reposition the balance sheet and the way we can manage attrition and pay off some pay downs along with deposit growth will allow us to continue to add new business, you know, whether that translates into, you know, modest growth or flat balance.

Manuel Navas: Now, she, you know, time will tell, but I don't view that as a huge variable in terms of us hitting our, our goals on a financial performance perspective. And Nick, I would add that as Pat and I think Peter both mentioned typically right after deal closes, there is some some workouts of loans. We're trying to work out of their problem loans and we're getting out of some strategic on non strategic relationships.

Manuel Navas: So, that will obviously impact the net loan growth as well as we'll see. We will ultimately see some elevated payoffs and pay downs. Hey, that brings up kind of my next comment is that that pipeline can help generate in the past, the projection was about 200 million in growth, just out of that pipeline. Obviously, there's going to be some that's not going to be net fully next year, but is that kind of the production you think you can generate.

Manuel Navas: Even as soon as next year, I just kind of some thoughts there in terms of that production side. Obviously, there's going to be a grown-off is going to continue kind of keeping what you want to keep, but do you feel comfortable with the production side being at that 200 million level, or could it be a little bit higher? Yeah, I don't see it. I don't see it being higher than 200 million.

Manuel Navas: I had a guess that this can be less than 200 million, not because there's not good loan opportunities out there, but just because as we, the opportunity to reposition the balance sheet, you know, we're not going to force it, right? There's no there's no reason in this inverted yield curve environment to be borrowing money to, you know, to fund loan. So we're going to do what we can based on our deposit growth initiative, and if the headwinds in that market mean that we don't have as much in core funding as we'd like to fund all the good loan opportunities, then, you know, we may end up growing less than that 200 number that we've done in the past, but it's not for lack of good loan opportunities.

Manuel Navas: It's really just dealing with the rate environment we're in and the funding market we're in. Okay, and then what levels of attrition are you seeing out of the positive side, and is that slowing? Is that progressing as expected? Just kind of some thoughts on on customer retention? Yeah, I think we knew we were going to have some extra cash coming through the sales of security and residents of mortgage loans. So for a good part of the third quarter, we weren't aggressively pricing deposits, and it was a rate set to the situation.

Manuel Navas: We just had to let some of that money go. And as you saw, you know, with three quarters of the decline in deposits during the quarter was a function of lending broker runoff, which, you know, is much more of a turn on, turn it off like funding source. So, you know, we've got a nice new deposit campaign going. We've got our group laser focused on finding core deposits and, you know, we're seeing some initial good results from our current promotion.

Manuel Navas: So, you know, I think we'll return to deposit growth in Q4, darling. Anything you'd add there? No, I would just give you a comment that if we have some great campaigns out in the market, we have a great sales team that is focused on expanding relationships and acquiring new customers and deposits. So as long as we continue with that trajectory, I think that will continue to see positive growth as we move it to 2020, for.

Manuel Navas: And I just, I appreciate that. My last question of a name outlook, is the best way to kind of think about the nm next quarters is taking that 2.7 million and adding an extra month? Because I was two months of accretion, add that kind of going forward adds some little bit of growth. Are there any other moving parts I should be thinking about on that new term name? Yeah, the market environment.

Manuel Navas: I mean, that's, that's the right way to start the analysis. And then you got a factor in where you think deposit costs are going and what you're seeing on the loan side. We do take, you know, we're getting to a point where the increase in loan yield is almost offsetting the increase under deposit funding cost. So, you know, we hope to see a position where the net impact of those two variables is neutral from a margin standpoint.

Manuel Navas: I'm not sure we'll be there in Q4. I hope to get there soon. But, you know, even with some of those headwinds, the, you know, just the mass of the interest rate, accretion, earn back, the margin should be moving higher for sure. Is there like opportunities for security yield pickup? Is there opportunities? What are like new loan yields coming on? I know it's more CNI that should be higher. What's in the pipeline?

Manuel Navas: Those are just the kind of things that I can't quite see that could be a nice benefit to the name going forward. Yeah, man. I think anything we're doing that short term variable rate, you know, was getting priced, you know, really anywhere between eight to 10%. So, plenty of yield on the new production, on the floating rate stuff. I think the term fixed rate stuff is, you know, now getting priced in the, you know, probably seven to seven and a half percent range.

Manuel Navas: And so, you know, if you line up a new incremental deposit dollar, which is, you know, probably coming in close to five percent against a new fixed rate loan at seven and a half. Obviously, that's only two and a half production we're doing right now. Two thirds or more is in the shorter term floating rate category. So, I think the net benefit on the loan yield side is getting pretty close to matching what we're seeing in terms of the increase on the funding cost side.

Manuel Navas: Okay, I appreciate that color. And would that, just to follow up briefly, would that kind of give you the expectation as that bottom, you know, that you could see some expansion in second half next year, or like what's any any kind of thoughts on the nymph trajectory? Well, again, I mean, just with the math and the earning of the creation, it's going to move higher significantly in the first half of the year.

Manuel Navas: You know, at some point, that does flow down a little bit, but, you know, the downside of larger interest rate marks up front and they, and the tangible book value delusion just means there's more interest rate mark income to earn back in. So you get to get the benefit of that quote unquote over a longer period of time. So We haven't finalized our budget for 24 and beyond, so I don't think we're prepared to give you guidance beyond the next couple quarters at this point.

Manuel Navas: Starting in the fourth quarter, we should see some improvement and then hopefully it's stabilized, but again, it's going to be very contingent on one great environment and a lot of things out of our control. Thank you, guys. Thank you. I appreciate it.

Unknown Executive: Thank you, Manuel. Thank you. At this time, there are no further questions.

Patrick Ryan: I'd like to now turn the call back over to Patrick Ryan, President and CEO. Okay, thank you very much. We certainly appreciate folks styling into the call today and we'll look forward to providing additional updates. When we do our fourth quarter update later in January, thanks everyone.

Unknown Executive: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.