Q3 2023 WesBanco Inc Earnings Call
[music].
Good afternoon, and welcome to the West Bancorp third quarter 2023 earnings Conference call, all participants will be in listen only mode.
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After todays presentation, there will be an opportunity to ask questions.
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Please note this event is being recorded.
I would now like to turn the conference over to John Ionone Senior Vice President of Investor Relations. Please go ahead.
Thank you good afternoon, and welcome to Wesbanco, Inc. Third quarter 2023 earnings Conference call.
Leading the call today are Jeff Jackson, President and Chief Executive Officer, and Dan White, Executive Vice President and Chief Financial Officer.
Today's call an archive of which will be available on our website for one year.
Forward looking information.
Statements about its information and reconciliations of non-GAAP measures are included in our earnings related materials issued yesterday afternoon.
As well as our other SEC filings and battery materials.
These materials are available on the Investor Relations section of our website Wesbanco Dot com.
All statements speak only as of October 26, 2023.
West Bank undertakes no obligation to update them.
I would now turn the call over to Jeff Jeff.
Thanks, John and good afternoon.
On today's call, we will review our results for the third quarter of 2023 and provide an update of our operations and current 2023 outlook.
Key takeaways from the call today are.
Solid financial performance with deposit and loan growth and stable fee income trends.
Maintained strong capital levels and key credit quality measures, which have remained at low levels and favorable to peer bank averages.
We remain focused on disciplined expense management and generating positive operating leverage while continuing to invest in attractive long term growth prospects.
For the third quarter of 2023, we returned deposit balances to year end 2022 levels and delivered another quarter of year over year loan growth of 10%.
While maintaining strong credit quality metrics.
Our solid financial results for the quarter reflect the strength of our franchise and the competitiveness of our growth strategies and teams in the current environment.
For the quarter ending September 30th 2023, we reported net income of $35 million.
Or 59 cents per share and pretax pre provision income of 51 million.
When excluding after tax merger and restructuring charges.
Our capital position continues to provide financial and operational flexibility as demonstrated by our C. T E T one ratio of 11%.
The key story for the third quarter was the continuation of solid deposit and loan growth, while maintaining our strong credit standards.
Our key credit quality measures continue to remain at relatively low levels and favorable to all banks with assets between 10 and 25 billion.
Further total loans past due criticized and classified loans nonperforming loans and nonperforming assets as percentages.
The loan portfolio and total assets have remained low from a historical perspective and within consistent range.
Over the last several quarters.
As we mentioned last quarter, both our commercial and retail teams have and continue to make concerted efforts to help us grow deposit levels.
These strong efforts are demonstrated by September 30th deposit levels, increasing one 8% quarter over quarter to $13 1 billion.
In fact, our deposits are now back to our year end 2022 level.
A remarkable achievement considering the turmoil across the banking industry earlier this year.
Furthermore, our commercial bankers continue to work diligently on deepening our commercial relationships with focus on loan swaps in deposits.
Due to their efforts, we saw a slight uptick in the percentage of commercial deposits as a percentage of our total deposits during the quarter.
As an example, a customer in one of our legacy West Virginia markets recently grew its banking relationship with us significantly.
Thanks to our focus on building long term relationships versus simply executing transactions.
This customer began with us in 2016, as a small benefit business entity and over the next few years grew substantially.
Our trusted partnership with this customer has grown to an eight figure deposit relationship.
I am proud of the hard work of all our teams as they help our customers meet their financial goals.
We reported total loan growth during the third quarter of 10% year over year, and 7% quarter over quarter annualized driven by our commercial and residential lending teams.
Despite the industry headwinds are right sized residential teams continue to find new home purchase and construction loan opportunities.
Total commercial loan growth increased 8% year over year, and 6% sequentially annualized.
Which continues to be driven by our strong lending teams in loan production offices.
I am really excited about our newest L. P O in Chattanooga as they have hit the ground running and are bringing in a number of new C&I relationships.
Our commercial loan pipeline as of October 16th was approximately 860 million.
A 4% increase from the level of September 30th as our teams continue to find business opportunities to replenish the pipeline that has been driving our strong loan growth.
As I mentioned, our four loan production offices are performing very well and are now contributing approximately 25% to the commercial pipeline.
In just three months, our Chattanooga L. P O is already 8% of the pipeline.
Further the growth opportunities of our loan production office and lender hiring initiatives, we expect to continue to improve as they gain additional traction and with a loan to deposit ratio of 87%, we have ample lending capacity to continue to support our customers.
We continue to make important growth oriented strategic investments to build upon our successful commercial hiring an L. P O initiatives.
And which supplement our focus on managing costs.
During the summer.
We introduced our new Wesbanco, one account, which has a set of comprehensive features and tools designed to help our customers through their financial journey with features and digital banking tools to help them reach their financial goals.
I am pleased to say that we have seen great adoption by both existing and new customers.
In addition to our renewed focus on commercial loan swaps, we have been transforming our treasury management business to more.
Of a sales oriented organization, while equipping it with new products that will enhance our customer relationships.
And the next couple of months, we will be rolling out our integrated receivables and payables and purchase card products for our commercial customers.
While we provide more details on the 2020 for revenue expectations. During our January call. We expect these new fee revenue streams to quickly become meaningful from both a more comprehensive customer relationship and bottomline profitability perspectives.
These are examples of our commitment to innovation and investments that serve our customers better and drive sustainable growth.
I firmly believe in the long term growth prospects, we are building for our customers communities employees and shareholders.
I would now like to turn the call over to Dan Weiss, our CFO for an update on our third quarter financial results and current outlook for the fourth quarter of 2023, Dan.
Thanks, Jeff and good afternoon, our third quarter results continue to demonstrate the strength of our franchise and successful execution of our strategic initiatives, reflecting both solid loan and deposit growth as well as strong capital levels and credit quality.
For the quarter ending September 30th 2023, we reported GAAP net income available to common shareholders of $34 3 million or 59 per share and $116 5 million or $1 96 per share year to date.
Net income available to common shareholders, excluding after tax restructuring and merger related expenses for the year to date period was $119 5 million or $2.01 per diluted share as compared to $133 7 million or $2 21 per diluted share in the prior year period.
The primary driver in reported results year over year reflects the impact of the higher interest rate environment and the recording of a provision expense this year as compared to a provision release in the prior year period.
Total assets of $17 3 billion as of September 30th included total portfolio loans of $11 3 billion and securities of $3 4 billion.
Total portfolio loans grew nearly 8% year to date annualized reflecting the strength of our markets and lending teams combined with our strategic lending initiatives.
In addition, roughly 53% of the year to date loan growth was funded through reductions in the securities portfolio, which totaled $19, 7% of total assets at the end of the quarter.
Commercial real estate loan pay offs returned to a more historical quarterly level during the third quarter totaling approximately $94 million, while C&I line utilization as of the end of the quarter declined 490 basis points year over year to 31%.
Residential mortgage originations, which were down 30% year over year totaled approximately $165 million in the third quarter with roughly 55% of the originations sold into the secondary market.
The third quarter total deposits increased sequentially to a level consistent with year end 2022, reflecting the deposit gathering efforts by our retail and commercial teams combined was $64 million of additional broker deposits. We continued to experience some shift in the mix of our deposits with noninterest.
Bearing demand deposits down two 7% from the second quarter. However, total demand deposits and noninterest bearing deposits represented 57% and 32% of total deposits, respectively, which remained consistent with the ranges and averages since December of 2019.
Furthermore, we utilized our deposit growth to pay down higher cost federal home loan bank borrowings, which decreased $255 million sequentially to $1 $1 billion.
The net interest margin of three point of 3% for the third quarter decreased 15 basis points sequentially, primarily due to higher funding costs from increasing deposit costs.
And continued remix from noninterest bearing deposits into higher tiered money market and certificate of deposit accounts, partially offset by the deployment of excess cash into higher yielding loans and the pay down of higher cost wholesale borrowings.
Total deposit funding costs, including noninterest bearing deposits for the third quarter.
136 basis points, an increase of 33 basis points quarter over quarter, and 119 basis points year over year, representing a beta of 40% on the 300 basis point increase in the fed funds rates since late September of 2022.
Our third quarter loan yield of 5.46% is up 121 basis points year over year also representing a 40% beta as we continue to originate new commercial loans, yielding in the high 7% range as can be seen on slide five of the supplemental earnings presentation.
Since commercial swap fees have become a material component of our fee income. We're now detailing these fees in a new income statement line item titled net swap fee in valuation income, which includes both new swap fees and fair market value adjustments on existing swaps.
For the third quarter of 2023, noninterest income of $30 9 million decreased $1 $4 million year over year due to a $1 5 million dollar gain on the sale of an underlying equity investments held by West Bank a community development Corporation in the prior year period.
Excluding this prior year gain on sale.
Noninterest income would have increased 4% year over year, primarily reflecting the strength in commercial swap fees.
Operating expenses continued to reflect nationwide deflationary pressures as well as long term growth investments, including previously completed elements of our strategic loan production office and lender hiring initiatives, excluding restructuring and merger related expenses noninterest expense for the three months ended September 30th 22.
'twenty three totaled $97 3 million, which increased due to higher salaries and wages benefits equipment and software expense and FDIC insurance.
Salaries and wages were higher due to midyear merit increases employee benefits expense increased primarily from rising health care costs equipment and software was up from the continuation of our ATM upgrade project. While other expenses included a one time $800000 credit from our payment processing business.
Our capital position has remained strong as demonstrated by regulatory ratios are above the applicable well capitalized standards and favorable tangible equity levels compare to peers.
Our tangible common equity to tangible assets as of September 32023 was $7, two 6% up four basis points year over year or 633% when including held to maturity unrealized losses as shown on slide seven.
We continue to believe that we're well positioned for any operating environment as we actively manage our liquidity risk to ensure adequate funds to meet changes in loan demand unexpected outflows in deposits and other borrowings as well as take advantage of market opportunities as they arise.
We will provide our 2024 outlook during our January earnings call, but regarding our current outlook for the remainder of 2023, we are modeling fed funds to remain unchanged at five 5% with a couple of rate cuts in the back half of 'twenty 'twenty four rift.
Reflecting the current operating environment of higher funding costs, and some deposit mix shift into higher yielding deposit products. We continue to model some contraction in the fourth quarter net interest margin, but at a lesser rate than the last couple of quarters before beginning to stabilize in 2024.
Trust fees and securities brokerage revenue should continue to benefit modestly from organic growth and will be impacted by equity.
Income market trends.
Electronic banking fees and service charges on deposit will remain in a similar range as the last few quarters and they're subject to overall consumer spending behaviors.
Mortgage banking will reflect seasonality and be impacted by industry wide lower production trends in the current residential lending environment.
New commercial swap fee income, which is up more than 150% year to date is still on track to reach approximately $8 million for the year.
Our efforts to enhance our Treasury management services continue to progress well, we anticipate rolling out new products, such as integrated payables and receivables and related cards in the coming months, providing a lift to 'twenty 'twenty four fee income.
We continue to focus on disciplined expense management to drive positive operating leverage while also making appropriate growth oriented investments in support of long term sustainable revenue growth and shareholder return.
In support of this we've been reviewing a number of initiatives, including an ongoing efficiency review of our retail network to optimize branch level staffing and reallocate resources into additional revenue generating hires that should benefit 2024 during.
During the past quarter, plus we've also made efforts to rightsize, our residential lending operations to better align with industry wide mortgage lending expectations.
Considering the expected higher for longer rate environment, we've reduced the overall staffing of this business with an annual expense savings of approximately $3 million, which should begin to be reflected in the run rate during the fourth quarter.
While software and equipment will come in higher due to the upgrade of another 50 Atms placed into service here in the third quarter. Most other expenses should remain in similar ranges to the third quarter. After also adding back the $800000 onetime credits in other operating expenses.
The provision for credit losses under Cecil will depend upon changes to the macroeconomic forecast in qualitative factors as well as the various credit quality metrics, including potential charge offs criticized and classified loan balances delinquencies changes in prepayment speeds and future loan growth.
And lastly, we currently anticipate our full year effective tax rate to be between 17 and 18% subject to.
<unk> and tax regulations and taxable income levels.
Operator, we are now ready to take questions would you. Please review the instructions.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble the roster.
Operator: Please note this event is being recorded.
John Iannone: I would now like to turn the conference over to John Iannone senior vice president of investor relations. Please go ahead. Thank you.
And our first question comes from Casey Whitman of Piper Sandler. Please go ahead.
Jeffrey Jackson: Good afternoon and welcome to WesBanco Inc's third quarter 2023 Arning's conference call.
Jeffrey Jackson: Leading the call today are Jeff Jackson, president and chief executive officer and Dan Weiss, executive vice president and chief financial officer. Today's call an archive of which will be available on our website for one year contains full looking information. Cost area statements about this information and reconciliation of non-gap measures are included in our earnings related materials issued yesterday afternoon, as well as our other SEC filing and veteran materials.
Hey, good afternoon.
Good afternoon afternoon Casey.
Maybe I'll start just given the success you've had with the L. P. O you have longer term plans to open others and sort of what are some of the markets that might make sense for you to deploy that strategy.
Yes, we were really proud of our success in the <unk> Oh I would say, we're still looking to fill in more in Tennessee, we still have room to grow our Nashville L. P O.
Other cities in East, Tennessee are very attractive to US and then I would also say, Virginia as well I think that would be a natural progression from our <unk>.
Jeffrey Jackson: These materials are available on the investor relations section of our website was bank.com. All statements speak only as of October 26, 2023. And West Bank will undertake some obligation to update them.
Acquisition roll on.
Mhm any particular markets in Virginia that we're interested in us.
I wouldn't say northern Virginia.
You know probably our top market and then we've looked at Richmond before and that potentially could be one down the road.
Jeffrey Jackson: I would now like to kind of call over to Jeff Jeff. Thanks John and good afternoon on today's call we will review our results for the third quarter of 2023 and provide an update of our operations and current 2023 outlook. Key takeaways from the call today are solid financial performance with deposit and loan growth and stable fee income trends. Maintain strong capital levels and key credit quality measures which have remained at low levels and favorable to peer bank averages.
Okay. Thank you.
And then last one for me just unpacking that margin guide you just gave.
Like hopefully will bottom in the fourth quarter, and then maybe stabilize I guess, Mike My question would be.
But what would it take to start to see the margin grind higher do we need rates to go down do we just need time sort of what's your bigger picture thoughts on that.
Yeah.
Yeah Casey.
So I would say.
As I mentioned in kind of my prepared commentary.
Jeffrey Jackson: We remain focused on disciplined expense management and generating positive operating leverage while continuing to invest in attractive long term growth prospects. For the third quarter of 2023, we return deposit balances to year end 2022 levels and delivered another quarter of year over year loan growth at 10%. While maintaining strong credit quality metrics, our solid financial results for the quarter reflect the strength of our franchise and the competitiveness of our growth strategies and teams in the current environment. For the quarter ending September 30, 2023, we reported net income of 35 million or 59 cents per share and pre-tax pre-provision income of 51 million.
We certainly do expect some slight.
Margin contraction here in the fourth quarter.
Probably at about half.
Half of what we experienced here in between second quarter and third quarter of 15 basis points.
So half of that roughly here in the in the fourth quarter.
And then relatively you know given our rate outlook rate.
The rate cuts.
Occurring in kind of back half of the year.
It really probably does gen.
Generally speaking.
Modeling fairly flat margin for the next couple of quarters thereafter, and the rate cuts really are kind of the spark probably that would that would begin to to where we would begin to see that positive upward momentum in an end market.
Jeffrey Jackson: When excluding aftertax merger and restructuring charts. Our capital position continues to provide financial and operational flexibility as demonstrated by our CTE-T1 ratio of 11%. The key story for the third quarter was the continuation of solid deposit and loan growth while maintaining our strong credit standards. Our key credit quality measures continue to remain at relatively low levels and favorable to all banks with assets between 10 and 25 billion. Further, total loans pass due, criticize and classified loans, non-performing loans and non-performing assets as percentages of the loan portfolio and total assets have remained low from a historical perspective and within consistent range over the last several quarters.
Okay.
Thank you I'll, let someone else jump on.
The next question comes from Daniel Tamayo of Raymond James. Please go ahead.
Hey, good afternoon guys.
Having some audio issues just want to make sure you guys can you hear me okay.
Yeah. Good afternoon, Daniela, we can hear you hi, Dan great.
I'm just.
Kind of continuing on the margin.
But just looking specifically at the Cds that are on the book there.
There are still relatively low cost just wondering if you can give us an idea of when those mature over the next few quarters.
Yeah, Danny so generally speaking.
A large portion about half of the CD book was put on really.
Jeffrey Jackson: As we mentioned last quarter, both our commercial and retail teams have and continue to make concerted efforts to help us grow deposit levels. These strong efforts are demonstrated by September 30th, deposit levels increasing 1.8%, quarter over quarter to 13.1 billion. In fact, our deposits are now back to our year end 2022 level. A remarkable achievement, considering the turmoil across the banking industry earlier this year. Furthermore, our commercial bankers continue to work diligently on deepening our commercial relationships with focus on loan swaps and deposits.
Over the last couple three quarters and a lot of that came on it with that four 5% a.
Seven month CD special so are we.
We do expect for a.
Quite a bit of that to turn here over you know call. It more early in the probably more early in the first quarter and expect it to turn at the St at a similar rate so.
Just looking for example over the next year, we are we.
We know that about 80% of the CD book will turn.
And that that turn the turnover is at.
Jeffrey Jackson: Due to their efforts, we saw a slight uptick in the percentage of commercial deposits as a percentage of our total deposits during the quarter. As an example, a customer in one of our legacy West Virginia markets recently grew its banking relationship with us significantly. Thanks to our focus on building long-term relationships versus simply executing transactions. This customer began with us in 2016 as a small business entity and over the next few years grew substantially.
That break right around 288, so 2.88%.
Is the current yield and would expect at least in the near term for us to keep that.
Seven month, CD special with that four 5% rate and generally would expect for customers to move into and to stay in that product.
Okay, Alright, that's very helpful very helpful. Thank you.
And then.
Does your does your guidance on the margin I assume any incremental.
Jeffrey Jackson: Our trusted partnership with this customer has grown to an eight-figure deposit relationship. I am proud of the hard work of all our teams as they help our customers meet their financial goals. We reported total loan growth during the third quarter of 10% year over year and 7% quarter over quarter annualized, driven by our commercial and residential lending teams. Despite the industry headwinds, our right-sized residential teams continue to find new home purchase and construction loan opportunities.
The change in the level of borrowings you have or just how are you thinking about that.
Yeah, So boring I would say wholesale borrowings are relatively flat.
As you know, we we do have about $260 million and brokered deposits.
And expect that for the most part to roll off through kind of late spring.
But anticipate about $50 million of that to roll off here.
In the fourth quarter I would say is as part of that kind of margin outlook or at least what were modeling and I mentioned this on our last call as well in the second quarter.
Jeffrey Jackson: Total commercial loan growth increased 8% year over year and 6% sequentially annualized, which continues to be driven by our strong lending teams and loan production offices. I am really excited about our newest LPO in Chattanooga as they have hit the ground running and are bringing in a number of new CNI relationships. Our commercial loan pipeline as of October 16th was approximately 860 million. A 4% increase from the level of September 30th as our teams continue to find business opportunities to replenish the pipeline that has been driving our strong loan growth.
Second quarter, we experienced about $200 million in.
Non interest bearing.
Deposit remix into interest bearing this quarter, we saw about $115 million a remax. So that's yeah I've got round numbers call it about half.
And so were based on based on those facts were kind of making a similar.
Our assumption that we would expect about half of the 115 million call. It.
To remix into out of noninterest bearing or out of noninterest bearing and into interest bearing so that's part of the equation and then as you saw quite a bit of lift there in our CD book that was a little heavier than what we were projecting but yeah. We were we're still projecting there to be some lift in Cds as well.
Jeffrey Jackson: As I mentioned, our four loan production offices are performing very well and are now contributing approximately 25% to the commercial pipeline. In just three months, our Chattanooga LPO is already 8% of the pipeline. Further, the growth opportunities of our loan production office and lender hiring initiatives we expect to continue to improve as they gain additional traction. And with the loan-to-deposit ratio of 87%, we have ample lending capacity to continue to support our customers.
L a but again, probably I would call it about half of the growth in Cds that we experienced from second quarter to third quarter.
To be experienced here in the fourth quarter, Yeah. I would just also add as you saw we had pretty good success growing our deposits.
Jeffrey Jackson: We continue to make important growth, oriented strategic investments to build upon our successful commercial hiring and LPO initiatives and which supplement our focus on managing costs. During this summer, we introduced our new WesBanco One account which has a set of comprehensive features and tools designed to help our customers through their financial journey with features and digital banking tools to help them reach their financial goals. I am pleased to say that we have seen great adoption by both existing and new customers.
Funding our loan growth along with as you know, we get about $100 million a quarter off our securities. So I would think going forward. We all the brokerage deposits would just run off I don't see a need for us to be in that market.
Okay and I was just looking at the the $1 2 billion of F. H L. B.
That as you'd imagine that that's mostly staying on the balance sheet.
Yeah, that's what we would model today, but.
Jeffrey Jackson: In addition to our renewed focus on commercial loan swaps, we have been transforming our Treasury management business to more of a sales-oriented organization while equipping it with new products that will enhance our customer relationships. In the next couple of months, we will be rolling out our integrated receivables and payables and purchase card products for our commercial customers. While we provide more details on the 2024 revenue expectations during our January call, we expect these new fee revenue streams to quickly become meaningful from both a more comprehensive customer relationship and bottom line profitability perspectives. These are examples of our commitment to innovation and investments that serve our customers better and drive sustainable growth.
I think we've talked in the past we do have.
Deposit campaign on the commercial side that's.
It'll be kind of dependent on the success of our deposit growth here over the next quarter or two.
And loan growth, depending on deposit loan growth that could.
Probably down.
Okay, alright, thanks for the question or for the answers guys I appreciate it.
The next question comes from Manuel Nevada of D. A Davidson. Please go ahead.
Yes, good afternoon.
Hey, good afternoon Manuel.
Roughly you know what has been the list at your commercial lenders kind of since the incentive structure is good change for deposit growth.
Jeffrey Jackson: I firmly believe in the long-term growth prospects we are building for our customers, communities, employees, and shareholders.
I know you brought it up as a percentage of the whole the whole deposit book, but you kind of look at it at commercial deposits grew a bit but can you do to kind of look at it just for the lenders themselves.
Daniel Weiss: I would now like to turn the call over to Dan Weiss, RCFO, for an update on our third quarter financial results and current outlook for the fourth quarter of 2023. Dan. Thanks, Jeff, and good afternoon. Our third quarter results continue to demonstrate the strength of our franchise and successful execution of our strategic initiatives, reflecting both solid loan and deposit growth, as well as strong capital levels and credit quality. For the quarter-ending September 30th, 2023, we reported GAP net income available to common shareholders of $34.3 million, or $0.59 per share, and $116.5 million are $1.96 per share year to date.
We.
We do I'm trying to understand can you restate that question I'm, sorry, I didn't exactly understand what youre asking.
How much of how much of the commercial how much of the deposit growth had come just specifically from the commercial lenders themselves.
And that's I think changed incentive structure this year.
And not just this quarter, but just this year how much of the deposit growth come from that alone.
Yeah, I would say I would say Dan well approximately.
Approximately 75% of deposit growth has come from.
The commercial side.
Daniel Weiss: Net income available to common shareholders, excluding after-tax restructuring and murder-related expenses for the year-to-date period, was $119.5 million, or $2.01 per deluded share, as compared to $133.7 million, or $2.21 per deluded share in the prior year period. The primary driver and reported results year over year reflects the impact of the higher-interferring environment, and the recording of a provision expense this year, as compared to a provision release in the prior year period.
Particularly those that money market product.
Yeah.
It's been incredibly successful.
As we said that changing incentives because we haven't had in our history of our bank.
It was really made a big difference and we are also you know really started monitoring it and really talking about it throughout the company.
And really have a big deposit campaign going on right now.
Moving in the right positive direction. So we really feel good about growing deposits going forward as we showed this quarter and once again that would eliminate us for broker deposits and can really help us on the NIM going forward.
Daniel Weiss: Total assets of 17.3 billion as of September 30th included total portfolio loans of 11.3 billion and securities of 3.4 billion. Total portfolio loans grew nearly 8% year-date annualized, reflecting the strength of our markets and lending teams combined with our strategic lending initiatives. In addition, roughly 53% of the year-to-date loan growth was funded through reductions in the securities portfolio, which totaled 19.7% of total assets at the end of the quarter. Marshall Real Estate loan payoffs returned to a more historical quarterly level during the third quarter, totaling approximately $94 million, while CNI line utilization as of the end of this point year-to-31%.
Would you say that deposit growth you kind of hinted at it could you say that deposit growth would be a wildcard that could improve.
Improve your margin outlook.
Absolutely it could yes.
Once again it depends on the loan production, we have loan growth, but yes. So that as you saw this quarter, we paid down some of our <unk> borrowings because of it so that could could continue.
Okay, and then the loan growth that youre getting in the pipeline, it's nice and.
Strong.
How sensitive are you to kind of.
Macro conditions there.
Do you feel like you are just gaining market share and still being selective anyways.
I feel like we're gaining market share, but we're still maintaining our conservative credit standards, we have not changed any credit standards. We have always been conservative related to that and so for us. It's really about how we've got a lot of new people new commercial lenders that are bringing in they are solid credit customers and so that's what we're seeing and then plus.
Daniel Weiss: Residential mortgage originations, which were down 30% year-over-year, totaled approximately $165 million in the third quarter, with roughly 55% of the originations sold into the secondary market. The third quarter total deposits increased sequentially to a level consistent with year-end 2022, reflecting the deposit gathering efforts by our retail and commercial teams, combined with $64 million of additional broker deposits. We continued to experience some shift in the mix for deposits with non-interest bearing demand deposits down 2.7% from the second quarter.
With the expansion of our new markets.
Where we're getting the growth we have not changed any credit standards. We are still being obviously extremely careful as it relates to hospitality and office.
So.
A lot of it is coming through C&I new relationships.
Okay I appreciate it I'll step back into the queue.
The next question comes from Russell Gunther of Stephens. Please go ahead.
Daniel Weiss: However, total demand deposits and non-interest bearing deposits represented 57% and 32% of total deposits respectively, which remained consistent with the ranges and averages since December of 2019. Furthermore, we utilized our deposit grows to pay down higher cost federal home loan bank bargains, which decreased $255 million sequentially to $1.1 billion. The net interest margin of 3.03% for the third quarter decreased 15 basis points sequentially, primarily due to higher funding costs from increasing deposit costs, and continued remix from non-interest bearing deposits into higher tiered money market and certificate of deposit accounts, partially offset by the deployment of excess cash into higher yielding loans and the pay down of higher cost wholesale borrowings.
Hey, good afternoon guys.
Hey, good afternoon, Russell Hey, Russell.
I wanted to follow up on the expense conversation Dan I appreciate the puts and takes it sounds like we are.
In the year in a pretty similar place from a quarterly perspective.
We finished this quarter thinking about the one time credit bringing in the cost saves from the mortgage rationalization and then I think I heard you guys mentioned you know continued.
But also some further rationalization. So I think we've talked about a core growth rate on expenses and are in the low single digits in the past.
Is that the right way to think about it going forward as you balance.
Efficiencies and further investment.
Yeah, Russell, what I, what I would say is I think low to mid single digits.
Daniel Weiss: Total deposit funding costs, including non-interest bearing deposits for the third quarter, were 136 basis points, an increase of 33 basis points quarter over quarter, and 119 basis points year over year representing a beta of 40% on the 300 basis point increase in the Fed funds rate since late September of 2022. Our third quarter loan yield of 5.46% is up 121 basis points year over year, also representing a 40% beta as we continue to originate new commercial loans yielding in the high 7% range as can be seen on slide 5 of the supplemental earnings presentation.
Is the right way to think about it I mean, we're going to continue to invest.
And you know if if that investment are resulting in a slightly heavier expense, but results in a better return on equity ROI.
We would probably do that all day, but but more specifically if we can kind of zero in a little bit more in on fourth quarter.
And think about where we landed here in the third quarter.
Ah 97 $3 million, if I were to kind of use that as a jumping off point for fourth quarter.
I would I would add back the $800000 kind of onetime credit that ran through other operating expenses.
Daniel Weiss: Since commercial swap fees have become a material component of our fee income, we're now detailing these fees in a new income statement line item titled NetSwap fee and valuation income, which includes both new swap fees and fair market value adjustments on existing swap.
A number of puts and takes as you put it as you mentioned there in in the salaries line item.
We do have the the midyear merit increases for the hourly folks that.
Daniel Weiss: Forbes. For the third quarter of 2023, non-interested income of $30.9 million decreased $1.4 million year-over-year due to a $1.5 million gain on the sale of an underlying equity investment held by WesBanco Community Development Corporation in the prior year period. Excluding this prior year gain on sale, non-interested income would have increased half the percent year-over-year, primarily reflecting the strength in commercial swap fees. Operating expenses continue to reflect nationwide inflationary pressures, as well as long-term growth investments, including previously completed elements of our strategic loan production office and lender hiring initiatives.
Haven't yet fully been baked in for the full third quarter those go into effect in August so.
So it will have some uptick there just naturally.
But as I mentioned in the prepared remarks, we do have some offsets there. So generally speaking what would expect salaries to be pretty pretty flat.
But then we do it as I mentioned, the kind of we're investing in a you know a whole entirely new ATM fleet.
We put 50 into service and in the a and the third quarter and we've got 33 more that we're putting in place here in the fourth quarter. So we would anticipate kind of that software and equipment expenses to be up maybe.
Daniel Weiss: Excluding restructuring and merger-related expenses, non-interested expense for the three-month-cented September 30th, 2023 totaled $97.3 million, which increased due to higher salaries and wages, benefits, equipment and software expense, and FDIC insurance. Salaries and wages were higher due to mid-year merit increases. Employee benefits expense increased primarily from rising health care costs. Equipment and software was up from the continuation of our ATM upgrade project, while other expenses included a one-time $800,000 credit from our payment processing business.
Around $400000 as it you know if you.
If you're using.
If you're building off of third quarter. So call. It 400000, there and then the 800000, adding back the $800000 credit.
I would think of that as you know, adding $1 $2 million or so to the to the third quarter run rate.
Okay.
Just a follow up to that would be should I be thinking about expense savings from the mortgage vertical is hit in that fourth quarter or is that more of a 'twenty four impact.
Yeah, that's that's fourth quarter, yeah, Okay, and thats in that Okay. That's in your overall commentary. Thank you for the clarification.
Daniel Weiss: Our capital position has remained strong as demonstrated by regulatory ratios. There are both the applicable well-capitalized standards and favorable tangible equity levels compared to peers. Our tangible common equity to tangible assets, as of September 30th, 2023, was 7.26 percent, up four basis points year-over-year, or 6.33 percent, when including health and maturity unrealized losses, as shown on slide 7. We continue to believe that we're well positioned for any operating environment as we actively manage our liquidity risk to ensure adequate funds to meet changes in loan demand, unexpected outflows and deposits and other barrings, as well as take advantage of market opportunities as they arise.
Then just a final question for me would be the criticized classified uptick.
I know year over year pretty unchanged and all other leading credit indicators were still very benign, but any color you could share there.
The migration this quarter.
Sure. It was a few projects CRE projects different industries different areas.
That just takes into the C&C. Once again, we remain in very good shape better than our peers and feel really good obviously that fluctuates quarter to quarter, so but it was just.
A few transactions.
Yeah.
Daniel Weiss: We'll provide our 2024 outlook during our January earnings call, but regarding our current outlook for the remainder of 2023, we are modeling Fed funds to remain unchanged at 5.5 percent with a couple of rate cuts in the back half of 2024. Reflecting the current operating environment of higher funding costs and some deposit mixed chest into higher yielding deposit products, we continue to model some contraction in the fourth quarter, net interest margin, but at a lesser rate than the last couple of quarters before beginning to stabilize in 2024.
Yep.
I would say almost the outlier would've been the first and second quarter coming in at only at right around one 6% of total loans.
I Gotcha, alright, guys. Thank you both I appreciate it.
Thanks Ross.
The next question comes from Dave Bishop of Hefty Group. Please go ahead.
Yeah, good afternoon gentlemen.
Hey, good afternoon, Dave.
In terms of.
Going back to loan growth.
The year over year.
Daniel Weiss: Trust fees and securities broker's revenue should continue to benefit modestly from organic growth and will be impacted by equity and fixed income market trends. Electronic banking fees and service charges on deposit will remain in a similar range as the last few quarters and their subject to overall consumer spending behaviors. Mortgage banking will reflect seasonality and be impacted by industry-wide lower production trends in the current residential lending environment. New commercial swap fee income, which is up more than 150 percent year to date, is still on track to reach approximately $8 million for the year.
In that double digit range, 10% that ticked down this quarter.
Six six and change do you think mid single digits is sort of the new environment. The new norm in terms of what the market gives you even with.
Some of the lift out or do you think you can still gain so that high single digit maybe low double digit growth rate.
We always target mid to upper single digit.
I think one of the things if you look at we had a higher number of payoffs in third quarter than we did in the second quarter.
So I think we would have been very similar loan growth had we not had the higher payoffs I do believe that adding all the new talent, we have increase in the <unk> I think it does give us some momentum so that that kind of mid upper single digit growth.
Daniel Weiss: Our efforts to enhance our Treasury Management Services continue to progress well. We anticipate rolling out new products such as integrated payables and receivables and related cards in the coming months, providing a lift to 2024, the income. We continue to focus on disciplined expense management to drive positive operating leverage while also making appropriate growth oriented investments in support of long-term sustainable revenue growth and shareholder return. In support of this, we've been reviewing a number of initiatives including an ongoing efficiency review of our retail network to optimize branch level staffing and reallocate resources into additional revenue generating hires that should benefit 2024.
But you know, it's an interesting environment today and.
I'm not going to commit to either either number but that's kind of what we target is mid to upper and we feel really good where we sit today.
Got it and then final question from me great job in terms of growing the swap fees. Just curious maybe where you think those can where you can take those two things on an absolute level or a percent of our total fee income.
Sure, Yes I.
I think I told you last year, we did $4 million in swap fees.
I think we are on target as we've said before to double that this year.
Think we can continue to grow it as we grow our.
Lenders and continuing to train up our lenders on swaps.
Daniel Weiss: During the past quarter plus, we've also made efforts to write size our residential lending operations to better align with industry-wide mortgage lending expectations. Considering the expected higher for longer rate environment, we've reduced the overall staffing of this business with an annual expense savings of approximately $3 million, which should begin to be reflected in the run rate during the fourth quarter. While software and equipment will come in higher due to the upgrade of another 50 ATMs placed into service here in the third quarter, most other expenses should remain in similar ranges to the third quarter after also adding back the $800,000 one-time credit in other operating expenses.
We are obviously targeting a total.
<unk> as a percentage of revenue.
I'd love to get to 30% as we've said obviously, that's a long term goal, but we feel like this is one of the many avenues, we have to get there.
Yeah, and I would just add in.
This this quarter.
Swap fees, including fair value adjustments coming in at $3 8 million that was pretty.
Pretty remarkable certainly exceeded.
Some expectations, there, but just just want to point out that.
One $3 million there is a fair market value adjustment and typically that's something that you know tough to model and not something that we do model typically so we obviously saw a 75 basis point kind of a rate increase from second quarter third quarter, and five and 10 year and that's what really drove the.
Daniel Weiss: The provision for credit losses under Cecil will depend upon changes to the macroeconomic forecast and qualitative factors, as well as various credit quality metrics, including potential charge offs, criticized and classified loan balances, delinquencies, changes in pre-payment speeds and future loan growth.
$1 3 million dollar a positive fair value adjustment.
So you know as we look forward into the fourth quarter and beyond.
Daniel Weiss: And lastly, we currently anticipate our full year effective tax rate to be between 17 and 18 percent subject to changes in tax regulations and taxable income levels.
That may or may not be there.
In future quarters.
Great I appreciate.
Great color.
Operator: Operator, we are now ready to take questions. Would you please review the instructions?
The next question comes from Karl Shepard of RBC capital markets. Please go ahead.
Operator: We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. Please limit yourself to one question and one follow-up. If you have further questions, you may re-enter the question queue.
Hey, good afternoon.
They have now.
I wanted to follow up on some of the commentary in the Treasury products you guys sound like you're pretty bullish maybe about the tea revenue opportunity. There next year, but curious are you are you assuming any deposit or funding finished goods from from rolling those out and kind of across your lender base.
Yes, we are very bullish about the treasury management products.
Starting to roll them out in fourth quarter.
Operator: At this time, we will pause them materially to assemble the roster.
We expect to see.
Nice benefit in next year in 2024, but that's one of the reasons, we're rolling them out and with our focus on C&I lending are we.
We do believe that that's going to drive some nice deposit growth for US. We've also as I believe I mentioned really retooled, our treasury team turning them more into a sales function.
Casey Whitman: And our first question comes from Casey Whitman of Piper Sandler. Please go ahead. Hey, good afternoon. Hey, good afternoon, Casey. Good afternoon, Casey. Hi.
Before I think it was a little bit more of a support function and so we've kind of reorganized that and so we do believe that that should give us some nice deposit lift next year.
Jeffrey Jackson: And maybe I started just, you know, given the success you've had with the LPO's, do you have longer-term plans to open others and sort of what are some of the markets that might make sense for you to deploy that strategy? Yes, we're really proud of our success in the LPO's. I would say we're still looking to fill in more in Tennessee. We still have room to grow our national LPO. Other cities in East Tennessee are very attractive to us.
Okay, and then as a follow up we've talked about loan growth a little bit, but I'm just curious if you could parse out.
What the contribution you expect from some of the newer lenders and L. P O as it.
Is that.
What's driving the loan growth or is it really broader than that thank you.
Jeffrey Jackson: And then I would also say Virginia as well. I think that would be a natural progression from our acquisition role one. Any particular markets in Virginia that would interest you the most? I would say Northern Virginia, being probably our top market, and then we've looked at Richmond before, and that potentially could be one down the road. Okay, thank you.
I think it's broader than that I do believe the L. P. O is as I mentioned, our 25% of the current pipeline. So I do believe they will drive more of the growth, but I believe it's.
The whole company right. So we've seen nice CRE growth through that group.
<unk> and other areas other markets are driving nice loan growth as well, but I do believe the <unk> those are kind of an accelerant to our to our loan growth and should contribute pretty solidly next year.
Casey Whitman: And last one for me, unpacking that margin guide you just gave, sounded like hopefully we'll bottom in the fourth quarter and then maybe stabilize. I guess my question would be, what would it take to start to see the margin grind higher? Do we need rates to go down? Do we just need time? So what's your bigger picture thoughts on that? Yeah, Casey. So I would say, you know, as I mentioned in kind of my prepared commentary, we certainly do expect some slight margin contraction here in the fourth quarter.
Okay. Thank you for the help.
The next question comes from Daniel Cardenas of Janney Montgomery Scott. Please go ahead.
Hey, guys good afternoon.
Yeah, good afternoon afternoon.
So I noticed your securities portfolio has kind of been declining here over the last several quarters.
Casey Whitman: Probably at about half of what we experienced here in between second quarter and third quarter of 15 basis points. So half of that roughly here in the fourth quarter. And then relatively, you know, given our rate outlook, rate cuts occurring in kind of back half of the year, it really probably does. Generally speaking, modeling fairly flat margin for the next couple of quarters thereafter, and the rate cuts really are kind of the spark, probably, that would begin to where we begin to see that positive upward momentum in margin. Okay. Thank you.
Just wanted to get a sense of what kind of maturities, we can see here in Q4.
And how are those proceeds going to be put to work now that your securities to asset number at some 20%.
Casey Whitman: I'll let someone else jump on.
Yeah, Great question, Dan So.
And Jeff kind of alluded to this earlier that we expect and we've been seeing the securities portfolio kick off about $100 million per quarter.
And I would say that's probably.
50, 50% maturity, 50% just amortizing securities.
Cash flows for principal and interest payments.
But yeah, we've obviously had held a little heavier securities portfolio in the past, particularly as we had quite a bit of stimulus deposits come in.
And generally a little heavier than our peers.
But today in this environment.
We are we are looking at you know holding securities longer term.
Daniel Tamayo: The next question comes from Daniel Tamayo of Raymond James. Please go ahead. Hey, good afternoon, guys. I'm having some audio issues. I just want to make sure you guys can hear me. Okay. Yeah, good afternoon, Daniel. We can hear you. How you doing? Great.
In the high teens as a percentage of total assets, so somewhere between in that 17% to 19% range as kind of our longer term target that provides us plenty of liquidity.
Daniel Weiss: Just kind of continuing on the margin, but just looking specifically at the CDs that are on the book that have still relatively low cost. Just wondering if you can give us an idea of when those mature over the next few quarters. Yeah, Danny. So generally speaking, a large portion, about half of the CD book was put on really over the last couple, you know, three quarters. And a lot of that came on with the, you know, that four and a half percent, seven month CD special.
Daniel Weiss: So we do expect for quite a bit of that to turn here over, you know, call it more early in the, probably more early in the first quarter and expected to turn at the same at a similar rate. So it just looking, for example, over the next year, we, we know that about 80% of the CD book will turn. And that, that turn, the turnover is at rate, right around 288. So 2.88% is the current yield and would expect at least in the near term for us to keep that seven month CD special at that four and a half percent rate and generally would expect for customers to move into and to stay in that product.
But also provides us the opportunity to reinvest in higher yielding loans. So.
Today I would say.
We're going to continue to work the portfolio down.
Daniel Tamayo: Okay, all right, that's very helpful, thank you.
Towards that towards that target and basically we're reinvesting each quarter $100 million, that's yielding two 5% into homes that are yielding 8% plus so we like that we'd like that math as well.
Okay.
And then if.
If you can remind me in the loan portfolio.
Do you have any snick exposure.
We do not know we will not participate in any snakes that I'm aware of.
Okay I'll step back right now thank you.
The last question is a follow up from Manuel novice of D. A Davidson. Please go ahead.
Hey, I just wanted to follow up on what.
Wondering what the story was the one hospitality loan.
I had a specific reserve created two it just wanted to hear a little bit more about that one.
Sure sure. It's a it's a long we've had on the books for a while it.
Hospitality in downtown Baltimore near the Inner Harbor and it has really struggled to Covid. We've added obviously reserve for but we had it appraised will come in right near the end of the quarter that.
Daniel Weiss: And then, does your guidance on the margin assume any incremental change in the level of borrowings you have? Or just how are you thinking about that? Yeah, so borrowings, I would say wholesale borrowings are relatively flat. As you know, we do have about 200 160 million in broker deposits and expect that for the most part to roll off through kind of late spring, but anticipate about 50 million of that to roll off here in the fourth quarter.
That to us to take an additional reserve on it about $2 $8 million.
We are working with the borrower.
They are committed to the project, but at this point that was what increased.
Our reserve this quarter.
Okay.
The total loan at.
At this point and what's the total reserve on it.
Yeah. Most 12, yeah low balance was $12 million net of reserve is not.
Okay.
Thank you guys.
Thanks for the follow up.
Thanks.
Daniel Weiss: I would say as part of that kind of margin outlook or at least what we're modeling. And I mentioned this on our last fall as well. And the second quarter, second quarter we experienced about 200 million dollars in the non-intersparing deposit remix into interest bearing this quarter, we saw about 115 million remakes. So that's, you know, I've found numbers, we call it about half. And so we're based on based on those facts, we're kind of making a similar, you know, assumption that we would expect about half of the 115 million call it to remix into out of knowledge.
This concludes our question and answer session I would like to turn the conference back over to Jeff Jackson for any closing remarks.
Daniel Weiss: Out of non-intersparing and into interest bearing, so that's part of the equation. And then, as you saw quite a bit of lift there in our CD book, that was a little heavier than what we were projecting, but, you know, we're still projecting there to be some lift in CDs as well. But again, probably I would call it about half of the growth in CDs that we experienced from second quarter to third quarter to be experienced here in the fourth quarter.
Thank you for joining us today during the third quarter, we generated solid deposit and loan growth.
And maintained strong capital levels and credit quality.
We remain well capitalized with solid liquidity and a strong balance sheet with capacity to fund loan growth and focused on strengthening our diversified earnings stream for long term success with new capabilities and strategies.
We look forward to speaking with you in the near future at one of our upcoming investor events at least have a good day. Thank you.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
Okay.
Yeah.
[music].
Daniel Weiss: Yeah, I would just also add, as you saw, we had pretty good success growing our deposits and funding our loan growth along with, as you know, we get about 100 million dollars a quarter off our securities. So I would think going forward, we, all the broker's deposits would just run off. I don't see a need for us to be in that market. Okay, and I was just looking at the 1.2 billion of the FHLB, that is, you'd imagine that that's mostly staying on the balance sheet.
Hum.
[music].
Daniel Weiss: Yeah, that's what we would model today, but I think we've talked in the past. We do have a deposit campaign on the commercial side that's, you know, it'll be kind of dependent on the success of our deposit growth here. It'll be the next quarter to hand loan growth, depending on the deposit loan growth that can show probably down.
Daniel Tamayo: Okay. All right. Thanks for the question. For the answers, guys, appreciate it.
Yes.
[music].
Manuel Navas: The next question comes from Manuel Navas of DA Davidson. Please go ahead. Hey, good afternoon. Hey, good afternoon, Manuel. Roughly, you know, what has been the risk at your commercial lenders, kind of a sentient center structure has been changed for deposit growth? I know you brought it up as a percent for the whole deposit book, but you kind of look at it that commercial deposits grew a bit, but do you kind of look at it just for the lenders themselves?
Manuel Navas: Yes. We do. I'm trying to understand. Can you restate that question? I'm sorry. I didn't exactly understand what you're asking. So just how much of how much of the commercial, how much of the deposit growth has come just specifically from the commercial lenders themselves and that's, I think you changed incentive structure this year. And not just this quarter, but just this year, how much of the deposit growth come from them alone?
Manuel Navas: Yeah, I would say they will. Approximately 75% of the deposit growth has come from the commercial side, particularly that that market product has been incredibly successful. Yeah, and as we said, that change in incentives as we hadn't had in our history of our bank, it's really made a big difference. And we've also really started monitoring it and really talking about it throughout the company. And really have a big deposit campaign going on right now that's moving in the right positive direction.
Manuel Navas: So we really feel good about growing deposits going forward as we showed this quarter. And once again, that would eliminate us for broker deposits and could really help us on the end going forward. Would you say that deposit growth that you kind of hinted at it? Could you say that deposit growth would be a wild card that could improve your margin outlook? Absolutely. It could. Well, if you had depends on the loan production, we have a loan growth.
Manuel Navas: But yes, so that as you saw this quarter, we paid down some of our FHLB bars because of it. So that could continue. Okay, and the loan growth that you're getting and the pipeline is nice and strong. How sensitive are you to kind of macro conditions there, or do you feel like you're just getting market share and still being selective anyways? I feel like we're getting market share, but we're still maintaining our conservative credit standards.
Manuel Navas: We have not changed any credit standards. We are always being conservative related to that. And so for us, it's really about higher. We've got a lot of new people, new commercial lenders that are bringing in their solid credit customers. And so that's what we're seeing and then plus with the expansion of our new markets. That's where we're getting the growth. We have not changed any credit standards. We're still being obviously extremely careful as it relates to hospitality and office. And so a lot of it's coming through CNI new relationships.
Jeffrey Jackson: Okay, I appreciate I'll step back into the queue.
Russell Gunther: The next question comes from Russell Gunther of Stevens. Please go ahead. Hey, good afternoon, guys. Hey, good afternoon, Russell. Hey, Russell. I wanted to follow up on the expense conversations and I appreciate the puts and takes. It sounds like we end the year in a pretty similar place from a quarterly perspective as we finished this quarter, thinking about the one time credit, bringing in the cost days from the mortgage rationalization. And then I think I heard you guys mentioned, you know, continue investment, but also some further rationalization.
Russell Gunther: So I think we've talked about a core growth rate on expenses in the low single digits in the past. Is that the right way to think about it going forward as you balance efficiencies and further investment? Yeah, Russell, what I would say is I think low to mid-single digits is the right way to think about it. I mean, we're going to continue to invest, and if that investment results in a slightly heavier expense but results in a better return on equity or ROI, we would probably do that all day.
Russell Gunther: But more specifically, if we kind of zero in a little bit more in on fourth quarter and think about where we landed here in the third quarter at $97.3 million, if I were to kind of use that as a jumping off point for fourth quarter, I would add back the $800,000 kind of one-time credit. That ran through other operating expenses. A number of puts and takes, as you mentioned there in the salaries line item, we do have the mid-year merit increases for the hourly folks that haven't yet fully been baked in for the fourth quarter that's going to affect in August.
Russell Gunther: So we'll have some uptick there, just naturally. But as I mentioned in the prepared remarks, we do have some offsets there. So generally speaking, we would expect salaries to be pretty flat. But then we do, as I mentioned, we're investing in a whole entirely new ATM fleet. We put 50 into service in the third quarter. And we've got 33 more that we're putting in to place here in the fourth quarter. So would anticipate kind of that software and equipment expense to be up maybe around $400,000, if you're building off of third quarter.
Russell Gunther: So call it 400,000 there. And then at $800,000, adding back to $800,000 credit, I would think of that as adding $1.2 million or so to the third quarter run rate. Okay, I guess just the follow-up to that would be, should I be thinking about expense saving from the mortgage vertical is hitting that fourth quarter, is that more of a 24 impact? Yeah, that's that's fourth quarter. Yeah, okay. And that's in that.
Russell Gunther: Okay, that's in your overall commentary. Thank you for the clarification. And then just the final question for me would be the criticized classified uptick. I know you're over year pretty unchanged and all other leading credit indicators were still very benign. But any color you could share there on the migration this quarter. Sure, it was a few projects, CRE projects, different industries, different areas that just ticked into the CNC. Once again, we remain in very good shape better than our peers and feel really good.
Russell Gunther: Obviously it fluctuates quarter to quarter. So when it was just a few transactions. Yeah, I would say, I would say almost the outlier would have been the first and second quarter coming in and only read around 1.6% of total loans. I got you. All right, I thank you both. I appreciate it. Thanks for us.
Dave Bishop: The next question comes from Dave Bishop of Hoverty Group. Please go ahead. Yeah, good afternoon gentlemen. Hey, good afternoon Dave. In terms of going back to loan growth, obviously year over year, you know, in that double digit range, 10% that, you know, tick down this quarter, I think six, six and change. Do you think mid single digits to sort of the new environment, the new norm in terms of what the market gives you even with some of the liftouts you think you can domain so that high single digit, maybe low double digit growth rate.
Dave Bishop: We always target mid up or single digit. I think one of the things, if you look at, we had a higher number of payoffs in third quarter than we did in second quarter. So I think we would have been very similar loan growth that we not had the higher payoffs. I do believe that adding all the new talent we have, increasing the LTOs, I think does give us some momentum to get that kind of mid upper single digit growth.
Dave Bishop: But, you know, it's an interesting environment today. And, you know, I'm not going to commit to either, either number, but that's kind of what we target as mid upper and we feel really good where we said today. Got it.
Jeffrey Jackson: And then I found a question for me, you know, great job in terms of growing the swap fees. Just curious, maybe where you think those can, where you can take those two, maybe on an absolute level or a percent of the full fee income.
Daniel Weiss: Thanks. Sure. Yes. I think I told you last year we did four million in swap fees. I think we're on target as we said before to double it this year. I think we can continue to grow it as we grow our lenders and continue to train up our lenders on swaps. We are obviously targeting a total fee as a percentage of revenue. Love to get to 30% as we've said, obviously that's a long term goal, but we feel like this is one of the many avenues we have to get there.
Daniel Weiss: Yeah, and I would just add, you know, this quarter was swap fees, including fair value adjustments coming in at $3.8 million. That was pretty remarkable. It certainly exceeded some expectations there, but just want to point out that $1.3 million there is a fair market value adjustment. Typically that's something that, you know, tough to model and not something that we do model typically. We obviously saw a 75 basis point kind of rate increase from second quarter to third quarter in five and ten year. That's what really drove the $1.3 million positive fair value adjustment. So, you know, as we look forward into fourth quarter and beyond, you know, that may or may not be there in your future quarters.
Daniel Weiss: Great, appreciate the color.
Jeffrey Jackson: The next question comes from Karl Shepard of RBC, Capital Markets. Please go ahead. Hey, good afternoon. I wanted to follow up on some of the commentary and the Treasury products. You guys felt like you're pretty bullish maybe about the P revenue opportunity there next year, but curious, are you assuming any deposit or funding benefits from rolling those out and kind of across your database? Yes, we are very bullish about the Treasury management products.
Jeffrey Jackson: We're just starting to roll them out before the court. We expect to see a nice benefit in next year in 2024, but that's one of the reasons we're rolling them out. And with our focus on C&I lending, we do believe that that's going to drive some nice deposit growth for us. We've also, as I believe I mentioned, really retooled our Treasury team, turning them more into a sales function before I think it was a little bit more by support function. And so we've kind of reorganized that.
Jeffrey Jackson: And so we do believe that that should give us some nice deposit left next year. Okay. And then as a follow-up, we talked about long growth a little bit, but I'm just curious if you could parse out what the contribution you expect from some of the newer lenders and LPO's is, is that what's driving a long growth, or is it really broader than that? Thank you. I think it's broader than that.
Jeffrey Jackson: I do believe the LPO's, as I mentioned, are 25% of the current pipeline. So I do believe they will drive more of the growth. But I believe it's the whole company, right? So we've seen nice CRE growth through that group and other areas, other markets are driving nice long growth as well. But I do believe the LPO's are kind of an accelerant to our long growth and should contribute pretty solidly next year. Okay.
Daniel Cardenas: Thank you for the help.
Daniel Weiss: The next question comes from Daniel Cardenas of Janie Montgomery Scott. Please go ahead. Hey guys, good afternoon. So notice in your securities portfolio has kind of been declining here over the last several quarters. Just wanted to get a sense of what kind of maturity we can see here in Q4 and how are those pros seems going to be put to work now that your securities, the asset number is 20%. Yeah. Great question, Dan.
Daniel Weiss: So, and Jeff kind of alluded to this earlier that we expect. And we've been seeing the scarce portfolio kickoff about $100 million per quarter. And I would say that's probably, you know, 50, 50% maturity, 50% just amortizing securities. Cash flows from, you know, principal and interest payments. But, you know, we've obviously had held a little heavier securities portfolio in the past, particularly as we had quite a bit of stimulus deposits come in.
Daniel Weiss: And generally a little heavier than our peers. But today, you know, in this environment,[inaudible] We are looking at holding securities, longer term in the high teens as a percentage of total assets. So somewhere between in that 17 to 19 percent range is kind of our longer term target. That provides us plenty of liquidity but also provides us an opportunity to reinvest in higher yielding loans. So today I would say we're going to continue to work the portfolio down towards that target.
Daniel Weiss: And basically we're reinvesting each quarter a hundred million dollars that's yielding two and a half percent into loans that are yielding eight percent plus. So we'd like that math as well. And then if you can remind me in the loan portfolio, do you have any snake exposure? We do not participate in any snakes that I'm aware of. Okay, I'll step back for right now.
Daniel Cardenas: Thank you.
Manuel Navas: The last question is a follow up from Manuel Navas of DA Davidson, please go ahead. Hey, I just wanted to follow up on what wonder what the story was with the one hospitality loan that had a specific reserve created to it. Just wanted to hear a little bit more about that one. Sure, sure. It's a little we've had all the books for a while. It's a hospitality and downtown Baltimore near the inner harbor.
Manuel Navas: And it has really struggled to COVID. We've had it obviously reserved for, but we had a cradle come in right near the end of the quarter that created us to take an additional reserve on about $2.8 million. We are working with the borrower. They are committed to the project, but at this point that was what increased our reserve this quarter. What's the total loan at this at this point and what's the total reserve on it? Yeah, low balance was 12 million net of reserve is nine. Okay, thank you guys. Thanks for the follow up. Thanks.
Operator: This concludes our question and answer session.
Jeffrey Jackson: I would like to turn the conference back over to Jeff Jackson for closing remarks. Thank you for joining us today. During the third quarter, we generated solid deposit and loan growth and maintain strong capital levels and credit quality. We remain well capitalized with solid liquidity and a strong balance sheet with capacity to fund loan growth and focused on strengthening our diversified earning streams for long term success with new capabilities and strategies.
Jeffrey Jackson: We look forward to speaking with you in the near future at one of our upcoming investor events. Please have a good day. Thank you.
Operator: The conference was now concluded.
Operator: Thank you for attending today's presentation and you may now disconnect.
Operator: David Bishop, Catherine Mealor, Russell Gunther, John David Bishop, Catherine Mealor, Russell Gunther, John Iannone, David Bishop, Catherine Mealor, Russell Gunther, John Iannone, David Bishop, Catherine Mealor, Russell Gunther, John Iannone, David Bishop,