Q3 2023 First Commonwealth Financial Corp Earnings Call
Ladies and gentlemen, thank you for standing by mine.
My name is Brent and I would like to welcome everyone to the first Commonwealth Financial Corporation third quarter 2023 earnings results release Conference call.
At this time all lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
If he would like to ask a question at that time simply press star followed by the number one on your telephone keypad.
I can try your question again press star one thank you.
It is now my pleasure to turn today's call over to Mr. Ryan Thomas Vice President of Finance and Investor Relations. Sir. Please go ahead.
Thank you Brent and good afternoon, everyone. Thank you for joining us today to discuss first Commonwealth Financial Corporation's third quarter financial results participating on today's call will be Mike price, President and CEO, Jim Rusky, Chief Financial Officer, Jane Gubins Bank, President and Chief revenue Officer, and Brian Carroll, Our chief credit.
The officer.
As a reminder, a copy of yesterday's earnings release can be accessed by logging onto F. C banking dot com and selecting the Investor Relations link at the top of the page. We've also included a slide presentation on our Investor Relations website with supplemental financial information that will be referenced during today's call.
Before we begin I need to caution listeners that this call will contain forward looking statements. Please refer to the forward looking statements disclaimer on page three of the slide presentation for a description of risks and uncertainties that could cause actual results to differ materially from those reflected in the forward looking statements.
Today's call will also include non-GAAP financial measures non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP.
A reconciliation of these measures can be found in the appendix of today's slide presentation with that I will turn the call over to Mike.
Hey, Thank you Ryan and good Matt Good afternoon, everyone.
For the third quarter of 2023, we are pleased to report core net income of $39 $6 million, which translates to <unk> 39 cents of earnings per share.
ROA of 138% and efficiency ratio of $53 four 2% the.
The NIM compressed nine basis points quarter to quarter to 376%.
Rate of deposit cost increases is slowly and we believe that the NIM will stabilize going into the end of the year and continue to hold up in 2024.
In a higher for longer environment, we believe that improvement in loan yields would likely outstrip growth in deposit cost.
Operating expenses were up $1 million from the prior quarter driven by cost associated with debit cards basically we had a one time recognition of $900000 in losses identified as part of the new automated system for processing debit card disputes.
In addition, we had a $600000 increase in FDIC insurance compared to last quarter due to the acquisition of centric and the associated deposit balances. This was somewhat offset by $1 $1 million and decreases in salaries and benefits due in part to lower hospital.
Station expenses.
Total loans grew $102 million in the quarter or 4.6% annualized our northern Ohio, and Pittsburgh regions led the way geographically.
From a line of business perspective, commercial banking and equipment finance were the key categories driving growth, we have metered loan growth commensurate with deposit growth each of the last three quarters. We have also strategically exited some non relationship borrowers end of period deposits grew.
<unk> $94 $8 million or four 2% annualized in the third quarter, which is just short of the loan growth in the quarter average deposits increased by two 1% from last quarter strong regional contributors included central Ohio and <unk>.
This led to the loan to deposit ratio rising slightly from 96, 4% to 96, 7% in the quarter.
We ended the quarter with solid credit metrics total delinquency was 25 basis points and nonperforming loans as a percentage of total loans were flat at 54 basis points.
<unk> coverage was a healthy 280%.
<unk> loans and classified loans, both improved net charge offs annualized as a percentage of average average loans were 4.4.
$4 million or 18 basis points.
<unk> of <unk>.
Which approximately $1 2 million was related to the centric acquisition.
Revision expense for the third quarter totaled $5 $9 million driven by loan growth and an additional $4 $1 million in specific reserves, reflecting an updated appraisal on a nonaccrual commercial loans the allowance for credit losses at quarter end totaled $134 three.
<unk> million dollars and the allowance as a percentage of loans was a healthy 151%, which screens well, we believe relative to our peers on the digital front.
The option of credit score manager a credit score manager tool and online banking has grown faster than expectations. Since <unk> launched in late April. We now have 30000 users taking advantage of this robust financial wellness tool. We believe has the best in class solution.
The focus on our digital account openings has yielded expected growth so far in 2023, especially for checking accounts with an increase of over 190% and openings compared to the same period last year.
We are now opening approximately one of every five accounts via the digital channel.
Versus in person and closing we build enough strong revenue engines and have sufficient risk appetite to grow constructively provided we fund the asset growth with organic deposit growth with that I'll turn it over to Jim Reske, Our CFO, Jim Thanks, Mike.
We have been able to produce solid deposit growth all year to fund our loan growth.
On a year to date basis, making no adjustments whatsoever for our centric acquisition loans have grown by $1 two 8 billion.
While deposits have grown by nearly the same amount $1 4 billion.
As a result, our loan to deposit ratio has been relatively stable in the mid Ninety's all year.
But that masks, our ability to grow our deposit base to fund our loan growth exclude.
Excluding the centric acquisition total loans have grown by $354 million year to date.
While period end deposits, excluding centric has grown by $597 million.
These deposits however came at a cost in the third quarter, we saw our cost of deposits increased by 28 basis points.
Our loan yields improved by only 21 basis points.
Deposit rotation from low yield categories to high higher cost deposit categories continued but at a slower rate than last quarter.
Fortunately the overall pace of deposit cost increases continue to slow in the third quarter average cost of funds increased 48 basis points in the second quarter, but only increased 32 basis points in the third quarter.
It's too early to call the peak on deposit costs, but loan yields keep coming up nicely as well.
New loans came on the books at an average rate of 743% in the third quarter up nicely from seven 1% in the second quarter and $6 six 1% in the first quarter.
The result, as Mike said was nine basis points of margin compression to 376%.
A level, which we still believe compares relatively well with peers.
Our initial outlook for next year continues to show margin stability.
So the range of potential outcomes is wider than usual due to the unpredictability of depositor behavior.
Our base case rate scenario culture, a fed funds rate of about 4% by the end of next year and this projection the NIM actually expanded until mid 'twenty four and then fall slightly in the second half ending 2024, right about where it is now hence NIM stability.
In a higher for longer rate scenario, you don't see that dip in the second half of 2024. So the NIM is marginally better by about five basis points.
These forecasts are highly dependent on assumptions regarding depositor behavior.
For example, we are fairly conservative assumptions around the continued rotation of customer deposits in 2024 from low cost categories into higher yielding loans higher costing one even in a falling rate environment.
So even in a falling rate environment, we assume that we will still have about 10% of the low cost deposits and rotate into higher cost categories in keeping with our experience in 2023.
And even with those assumptions the 2020 for NIM look stable by contrast.
And are higher for longer rate environment, we get the benefit of higher loan yields.
In part because of the variable rate loan portfolio does not reprice downwards, but in that scenario, we would expect more deposit rotation into higher cost free categories, which would offset some of the benefit of higher rates.
Fee income was little changed from last quarter.
Gain on sale premiums have been under pressure, but our wealth division did better.
We expect fee income to be little changed next quarter.
Next year, we are looking to grow SBA fee income to help offset slowing mortgage gain on sale income and the impact of lost interchange income due to the Durbin Amendment.
Noninterest expense was elevated in the second quarter in part due to cost associated with debit cards and related items as Mike described.
Our expected non interest expense is around 65% to $67 million next quarter. We think expense pressures will continue in 2024, So we're committed to keeping a lid on costs.
We repurchased approximately 260000 shares in the third quarter at a weighted average price of $12 36.
We slowed share repurchases somewhat late in the second quarter to conserve capital.
Tangible book value per share increased from $8 24 to 835 as retained earnings growth outstripped increased OCI.
Regulatory capital ratios improved slightly while the tangible common equity ratio remained unchanged.
And with that I will turn it back over to Mike.
Operator, now we will turn it over for questions.
Okay.
At this time I would like to remind everyone in order to ask a question press star followed by the number one on your telephone keypad to withdraw your question again.
<unk> one.
Your first question comes from the line of Daniel Tamayo with Raymond James Your line is open.
Good afternoon everybody.
Yes.
Maybe we start on I, just want to make sure I heard your guidance correctly here Jim on the on the margin.
The.
Yeah, I mean, just I guess I can tell you what I can say.
If the fed funds rate and about 4% in the year than the NIM is going to expand.
Sorry, yes expand during the year and then end the year around where it is now is there a contraction at the beginning of the year or is that.
Did I hear you know just expand and then.
Yeah.
Im sorry, I Didnt mean talk over you, but yes, you got it right. The first time, probably a little bit of expansion from now so you get some of the benefit of our loan portfolio of the rate increases that have happened this year year to date.
A positive replacement yields we've been experiencing so that helps me to give you a little bit of expansion.
But then rates if the fed funds rate falls that much by the end of next year.
There is pressure on the variable rate portfolio that brings the overall NIM down a bit so it trails off towards the end of next year.
Next year in that projection.
<unk> exactly where it is right now.
At 376.
Okay. So so.
Got the margin going up next quarter, essentially and then.
Fed dependent.
Kind of as we move into 2024.
Yes.
Big caveat that these are all projections and we could always be wrong there are forecast right.
The hard thing to forecast has been depositor behavior, which is one of the reasons I was trying to give a little more disclosure on some of the deposit behavior assumptions underlying underlying the projections.
That's right. So you got that right in that projection, we think kind of we think that the low point for the margin is actually this quarter.
On that note do you have.
What the margin was kind of in September.
September just curious how it progressed during the third quarter.
I don't but I'll get it for you before the end of the call.
Okay, all right sounds great.
And then.
The.
Just wondering I heard your comment on an expense pressure continuing in 2024, just curious if you could put a little finer point on kind of how youre thinking about that relative to maybe what you've done historically in terms of expense growth.
I'll start there Daniel and Great question.
Sure.
Just a week ago, we went through 30 operating plans for our regions lines of business and business support units and with resolve we will try to get those good point of operating leverage.
In next year's budget and that will include a combination of making the best assumptions, we can about what's going to happen in different optionality is for interest rates.
Really driving more cost out or not.
And you have enough turnover at a bank you don't have to announce risks and things like that but just in process coupled with process improvements that we just expect every line of business every business unit every region to get better every year to grow deposits to grow loans.
Create some operating leverage in their own respective budgets and we're about 50% through that process. So we.
We'll land the plane here in the next 30 days and that's the goal and if you look at our track record over the last.
11, or 12 years.
Pretty close are good at that and if we miss thats not by much.
Alright terrific, while I appreciate the color I'll step back.
Your next question comes from the line of Michael Perito with VW. Your line is open.
Hey, good afternoon, guys. Thanks for taking my questions.
Good to be with you.
I wanted to circle back on the margin conversation a little bit was curious if you guys could maybe give us a little incremental color in terms of like what the incremental spread is on your loan and deposit books today, so meaning like if.
Your blended commercial loan yield on new originations against kind of your incremental dollar of deposits where that spread is today and it would seem like based on your margin guidance that you guys feel a bit more confident about being able to maintain or grow that spread moving forward now, but but just curious if I'm interpreting that correctly.
And any detail there would be helpful.
Go ahead Sir.
I think you talked about.
New loan spreads like on corporate loans, I think are holding up very nicely.
In fact.
Our biggest category of growth as commercial variable and our spreads there.
On advances and really all in are well in excess of 8%.
Okay.
And on any incremental funding side.
Okay.
Roughly where are you guys kind of at today against that.
As a percent figure.
Yes.
Incremental funding is going to be driven by the.
Deposit specials, we have out right now, which is going to be between 4% and 5%.
<unk>.
TV special time deposit specials are at about 5% in money market specials are between four and four 5%.
Okay, Alright, so it sounds like then the incremental spread.
He is very supportive of kind of the margin.
I guess backing into your commentary Jim to the prior question about how you think this could be the bottom for the name of that.
Those facts would seem to be very supportive of that does that mean is that kind of the.
Buildup in terms of your projections.
Yes, I think that's right and just to be clear.
Figure micro starting other yield on some of the corporate categories with the overall yield and everything coming in at 743% in the quarter and your marginal cost of funds as Phil.
Four to five range that does kind of support the continued stability of the NAV.
Yeah.
We've we've pivoted.
We're supporting growth in categories quite frankly that have the best spreads and.
We are really believers in all of our businesses, but there's times, where in we pinch some of those businesses that have lower yields at this time.
We want to keep our producers looking forward, but.
We're putting on assets in the most attractive categories generally.
That's helpful. And then if we think of as we start can I realize you are not really providing 2024 guided full year, but as we think about the growth opportunities next year. It seems to me like it's kind of a balance between your appetite for growth and customers' appetite for taking credit right and so I mean.
On the one hand, it seems like your balance sheet is very well positioned if the spreads and the risk adjusted returns are within your comfort level, you guys have room to grow loans.
Net basis pretty.
Yes at least mid single digits next year without putting too much stress on really anything but I guess the flip side of that question is this do you think theres enough customer appetite with for example, corporate yields north of 8% to drive that type of production based on what Youre hearing and seeing today and would love just some color on kind of those two sides of the equation as we think about loan growth for for 2020.
For you guys.
We do I mean, we're not a market maker, we're a taker.
Most of the markets. We're in there is sufficient volume and opportunities out there for us to compete in.
We have a number of competitors, both small and large that either don't have the flexibility to desire.
To grow right now so that's where we're at it's a good position to be in and by the way that varies by geography, we have six markets.
Capital region, and Eastern PAA community, PAA, Pittsburgh, Northern Ohio, Central, Ohio, and Cincinnati and it does vary by geography, but we believe there is enough out there that.
Comfortably hit.
What are lower loan figures this year and next year than we've done the prior two years part of that is because we're pretty balanced and we have.
Great and then just.
Last question for me, obviously, the credit quality of.
Of your balance sheet remains pretty stable here.
But as we think about the third quarter, there's really been some not so savory data points from many credit card delinquencies auto delinquencies, obviously discover was pretty bearish on their earnings call. So how do you guys kind of approach to credit piece here I mean, obviously youre, calling your portfolio and stressing it and looking at it but but there are.
Starting to become somewhat obvious signs of deterioration, obviously that doesn't directly correlate to your loan book, but could have broader implications for the economy. If continue right. So just would love some updated thoughts around the current credit environment and.
Yes, I was just curious how you guys are kind of approaching that just given some of the data points, we've gotten in the last week or two.
Well we have.
Jane prevents myself, Brian tariff and others that have been through several cycles over 35 years, or so and each and.
This geography were in tends to do pretty well through cycles and has through did through the great financial crisis in certain categories.
We've really tightened.
And we're tough on credit across the board appropriately so.
<unk>.
There are we do feel there be some strain.
But.
Probably on things in retrospect that we knew we shouldnt per ton at the time, but we'll work through it and but we do think that there is enough demand out there and that credit will hold up relatively well.
Brian do you want to add any color to that.
Just said we have seen delinquencies in the consumer side kick up a couple of basis points as we look at and take it apart we know that our portfolio for indirect is up a few basis points, roughly 10 basis points quarter over quarter.
Our portfolio was well underwritten and you think about the strong FICO scores in that business around 744 weighted average do you think about the granularity in the portfolio. The deal size. We go to market strategy, we feel pretty comfortable that we can see what we have in our portfolio and address any increase in delinquencies.
Brian if I could add just kind of looking over your shoulder or delinquency reports.
This isn't the story is a little bit mixed overall consumer delinquencies are up both the categories, you mentioned that the somewhere down as well I think Ryan.
Yes, the HELOC category improved.
And we.
We think our portfolio is in good shape entering into this credit cycle.
Got it no I think that's very fair I. Appreciate you guys all sure pitching in there and provide some color. It's helpful. So thank you for taking my questions.
Thank you.
Your next question comes from the line of Carl Shepherd with RBC capital markets. Your line is open.
Hey, good afternoon guys.
Carl.
I wanted to pick up share on the deposit conversation Jim I appreciate all the help and the sensitivities in the forecasting but what are you guys hearing from the steel that gives you a little bit of confidence in our forecast and I know the comment was I think slowing deposit pressures, but if you had.
Give it your best shot when do you think deposit costs can peak, assuming the fed is done.
Yes, let me go right to the heart of your question on the deposit peak the projections, we have even in a falling rate environment. They drifted slowly upward.
The analogy.
Don't think its a good analogy, but it's when I came up with this is like a motorboat you shut off the engine that keeps drifting forward, even if the fed cuts rates.
Next year deposit overall deposit costs will continue to drift upward just because of this rotation phenomenon.
That we've been talking about that sort of been trying to track it understand it.
I think we've been very successful in getting new dollars in the door and growing our deposit base. Because you had mentioned in the lead off the lead up to my comments.
But it also replaces our own loan book and Thats going to continue next year. So so it doesn't and our projections even in a falling rate environment, we don't see a peak in kind of levels off towards the end of next year.
And then in a if rates stay higher for longer if rates don't change from here in that environment.
Deposit rates continue to drift upward, it's just that the loan rates ticked upward even at an even faster rate and so that's why it's better from a margin perspective for us.
I would just add and James on the phone I think her and the team have done a terrific job pivoting to deposits, bringing deposits in and as you recall, we got off to a late start simply because we had to France under $10 billion with Durbin and but once we got focused we've grown deposits pretty nicely.
From quarter to quarter and added a lot of new deposits Jane any color you want to add.
Only that we have seen.
The requests for deposit exceptions <expletive>.
Decline a bit.
Which tells us that competitors are slowing down.
A bit.
And our retention rate on the Cds that we have been growing again and our money.
Money market specials, the retention rates with very good so we feel good.
Can never have too many transaction accounts, but we feel good.
It's Jim again, if I could jump back in just because Jane mentioned it our CD retention rate has been really remarkable we retained about 80% of the Cds that mature now of that.
The ones that we retain.
We have seen.
60% of those will go to the rack rates southern price lower but about 40% will take the current special rate or the retention rate has been really strong it's really in our favor. Let me also just take a minute just to give you a little more color on that.
Pull deposit rotation concept that we've been talking about.
Because.
It really informs our projections for next year. So if I look at the low cost deposit categories really of noninterest bearing and savings those together were about $4 6 billion at the end of the first quarter and Thats a good starting point for us because we closed the centric acquisition in the first quarter.
Those two categories together fell to about $4 3 billion in the second quarter that was a five 8% decline in those categories.
But in the third quarter that fell to $4 2 billion and that was a three 6% decline in those categories.
So just at a macro level I mean, James giving you the color from the street.
The day to day.
Exceptions that we deal with customers in those interactions, but on a macro level and watching the numbers that I've seen them slow down that gives me a lot of confidence and even with that we still were fairly aggressive.
The assumption that it's going to continue next year.
And even with that we still get instability.
And one more thing I do have the month to month.
NIM.
<unk>.
From the.
The previous caller I think Danny you were asking July NIM was 383%, which is pretty consistent with the second quarter 385. In July was 383 August was $3 69, and September was up to $3 76.
So there you go.
Okay.
No I think that wasn't a lot of color around click the ask a follow up on deposits.
The strategic focus is growing deposits to fund loan growth right. We've talked a lot about the pricing pressures in that changing your location.
When you think about driving balanced growth in 2024.
It doesn't seem like it's going to be a CD special game. It seems like it's going to be more core relationship growth, but if you could just expand on those comments a little bit that'd be that'd be great. Thanks, Paul.
Jane you want to comment and latest software okay.
Right.
Well I think <unk> always going to have.
CD specials at least for the next couple of three years.
But.
As I said before I don't think.
<unk>.
The pace.
Or the.
The height of the specials is going to continue and we still have a very strong transaction account base and we've got a nice savings book, So I feel very good about our deposit positioning.
There's a good slide on slide 15, this is Mike sorry to interrupt thanks to that team.
Our average retail accounted for 11 granted our average deposit sizes 18.
You might move over three or four basis points that you are probably not our three or 400 basis points, but.
Perhaps not so inclined.
Over an additional 25 million. These are loyal customers in small communities or community called the bread basket of our company is $3 five billions of our deposits and.
This great clients deep relationships.
We do feel confident that we have a good depository and we just.
They could surprise us as Jim suggested but we feel like we're well positioned.
Okay. Thank you I'll step back.
Your next question comes from the line of.
Meanwhile, in Nava with da Davidson Your line is open.
Hey, good afternoon, what are you kind of assuming on that like loan yields repricing.
Kind of in a normal quarter with no hikes with no change in the fed funds rate do you have kind of a <unk>.
Standard loan yield increase.
I'll, just start where Jim might have mentioned it but our portfolio here in the last quarter was about 740 in terms yes.
Loan yields in that range from as high as in certain categories as high as well.
Well over eight and the two key categories of commercial and equipment finance.
In equipment finance is really running in the high seven and so those are those are key categories for us that there's good volume there.
And that volume doesn't evaporate and <unk>.
Given our indirect business is got up and almost 7% six six.
605, so just good progression by the team in terms of getting paid for our risk and it wherever they are out on the yield curve and.
So that's a nice position to start from Jim anything you want to add yes, Danielle and I would add so we keep giving you and we were giving you the new loan yields but the replacement yields.
The differential between the yield on what's coming on versus whats coming off has been expanding.
And that also gives us confidence in the margin so.
Second quarter that differential was 87 basis points, that's the new loans are coming on the books at seven 1% with them. There was 87 basis points higher than what was running off the books and the differential in the third quarter was 115 basis points.
Okay. Okay. Thanks.
That's helpful.
<unk>.
Okay.
As you're thinking about growth.
Fourth quarter integrate that into next year.
Where does the pipeline stand and has usually been a shift.
Towards more commercial at the back half of the year is that going to keep happening just kind of thought process on the mix of loan growth the back half of the year and into next year.
Pipelines are definitely lighter than therefore, a year or two ago.
The two years preceding this we grew in the low teens.
And so they are under.
Understandably, we do think the kind of guidance, we've given mid single digits from four to six is very achievable in a variety of ways and if anything we're kind of pension volume if the spread isn't right or it's not in the right category and at the same time, we kind of we cherish.
A couple of businesses right now.
We're pinching a little bit more just because of where.
Where the yields are at and.
And by Pinching, we mean, we're pricing those so that the new origination volume.
Fairly close to the run off volumes.
Loan portfolio size doesn't grow, but if prices upward, which doesn't create a capital or funding pressures such as increased yield and margin.
And on the consumer side that that story is playing out fairly nicely.
I guess mainly iron.
Yes, I'm thinking, particularly of auto I think we've spoken about that before but that's exactly what I'm thinking about and that creates a room when do you want to.
Which new growth that you want to fund and capitalized.
It gives you the ability to do that and in commercial lending.
Is.
Can you kind of give you an update on equipment finance that that's been a nice place.
Place of growth it seems like yields have kind of gotten even better high sevens.
Just the latest fair and it's obviously going from a small base, but the growth has been pretty nice.
I mean, that's.
It's now at the crew.
$46 $46 million this past quarter.
Like 35, actually and $46 million of new volume.
At seven.
769 in Gist.
We like the granularity of that we've even pinch that a bit a little bit in terms of the type of equipment finance that we're doing and.
And so and we just have a terrific team that we did a lift out a few years ago, and we're just pretty bullish on the business and in some of our commercial categories.
Just to just a shift I appreciate that just a shift for my last question can you talk a little bit about <unk>.
New deposit flows and how much are coming from.
Current customers, bringing more money or from gaining households.
Yes, so that relationship is actually something we've been watching this year. It's remained fairly stable. So when we give it for every $100 of new money that we get in.
From a deposit special.
50 is.
From our own book repricing upward.
So without a CD special and knew what Youre doing is moving from the existing savings account and experience into the new special CD specials or money market special.
The other 50 of nib and how that other 50, that's new about half is from our existing customer base.
So it is bringing more money to us which is great and the last 25 years, the real new money.
What's helped US there is a year ago, our cost of funds.
Deposits at this time last year, Jim was five basis.
Right and we had all but driven off CD customers correct and so I just think now that we hang rates, we have loyal customers and were getting they have most of their household with us, but the hot money that might have been somewhere else at a different bank I think.
And our customers are aggregating it with us how long that continues to play out the way. It is currently playing out not sure but.
And again, a lot of that is coming from our rural markets.
Okay, that's great.
Hey, do you want to catch up on the buyback how did that appetite change across the quarter.
So just from that the 10 year rising to where did you want to add a little more capital in.
Is that.
Does that lead me to think it could go up a little bit.
In terms of pace in the fourth quarter we.
Just actually I just change the cap on the price at which we're buying back the stock we were early in the quarter buying back at levels below $12 50, and towards the end I said its capital at $12.
We have a buyback and again any given they are trading at a $12 a share and that slowed that down a little bit probably so we keep some dry powder.
And so we really like to be able to call be able to.
To build capital levels will be in a position to call that if we want to.
By next June when we lose another 20% of tier two capital treatment.
I was thinking behind that.
Okay. That's helpful. Thank you. Thank you very much. Thank you guys. Thank you.
Thank you.
Your next question is from the line of Matthew Breese with Stephens, Inc. Your line is open.
Hey, good afternoon everybody.
Hey, Matt.
Jim in the press release, you noted that.
Because of some excess liquidity this quarter it impacted the NIM by eight basis points.
I was curious your thoughts on how much excess you are currently holding onto at period end, how long you intend to hold onto it and with some of the margin dynamics. You are talking about there is also some normalization of liquidity.
As assumptions.
Yes, its been about $250 million of excess liquidity, we took on retro Silicon Valley Bank failed in in the first quarter, we started to deploy some of that in the third quarter I think got it down to about $160 million of excess just excess cash.
So when I say excess cash that means we've borrowed money from the FHA, albeit we parked at the fed we're going to continue to be bought so.
When you what we've been experiencing is and deploying that cash into securities purchases and we're going to continue to do that.
Here for the rest of the year and into next year as well.
Okay. So maybe we should think put to work 40 ish million a quarter or is that a fair way to think about it.
About right.
A little more than that.
I think our securities portfolio for at least for last and last year, we were doing almost no purchases to let that run off so that we can redeploy into loan growth.
Thanks.
Profitable strategy, but it's gotten to a point, where it's a little small.
In terms of the.
A proportion of total assets compared to peers and said, we'd like to get the size of the securities for pulling off a bit. Okay that was actually on my list of questions were down to 11% securities to assets, but this quarter, obviously, a pop up close to 6% period to period.
Where would you ultimately like to be and over what timeframe.
We don't have a hard target, we just know it's got to get it bigger.
Here I think.
But not aggressively so I think in our last projections, we are projecting it to grow by another $100 million next year. So it's not we're not going to go.
No guns, a blazing in by half a billion dollars of securities next year, but we do want the portfolio to grow from where it is now.
Okay.
I think accretable yields represented 10 bps of the NIM this quarter.
Hard to model figure could you just give us the most recent forecast there how much of an impact every quarter you expect it to be on the NIM.
We think it's.
It's about 10 basis here at seven basis points.
Actually trying to make the point that accretable yield and the cash figures kind of offset each other we think it's probably going to be about seven basis points next quarter.
And.
Seven the slowly declining to five is that a good.
Estimation for 2024. It is I don't have the exact number or an escalation for you for two.
<unk> hundred 25, or 2024, yet ill get to that next quarter, but.
It is trading out so thats, probably a fair assumption.
On the credit front.
The one category.
I'm curious on is auto.
And some more recent headlines that I think it's subprime auto delinquencies are starting to hire.
And I wanted to know what your experience has been and if you see anything underneath the hood there that we.
We should be incorporating into our model higher charge offs delinquencies and things of that nature.
While we only do auto end market, we had good experience through the last credit cycle, and probably starting to hook a few more cars, but Brian what I can give them. The rest of the story, we have a prime business, we don't have subprime.
As I mentioned earlier delinquencies IRA.
From quarter end June 30 basis points to 40 basis points. This quarter, we're watching it closely we've got a very experienced leadership team in that business, they're managing the business well the underwritings tight and.
We're going to continue to watch it Matt. Thank you for your question.
Yes.
I also wanted to ask just just staying on the topic of credit.
What is the size of your syndicated if you have one loan portfolio. How is the credit performance there and how much of that if you have any is that a market.
Yes.
Yes go ahead.
The Snick book is $90 million, it's down significantly over the past several years and it's performing fine.
Okay.
And then I just wanted to touch on the specific reserves. This quarter. It was based on a reappraisal what was the credit was it a commercial commercial real estate or commercial credit and.
What were some of the primary factors that changed.
The appraisal enough, where you're adequately put some money aside.
Brian. Thank you for your question. So this is an office property in the eastern part of the state Central business District. The loan was originated in 2018 and the pandemic the property became a 100% vacant.
In 2021, we've put it on non accrual.
Our procedure is to get an annual appraisal.
And the appraisal value that came in most recently showed.
<unk> had a significant decrease in value. So we added a specific reserve of $4 $1 million.
So the appraisal year over year reflected a 100 basis point increase in the cap rate and as I mentioned earlier, the lease up assumptions from the appraiser that conclusion.
Take a fairly long period of time to lease the property.
It's why the value decrease I think we have just one additional nonaccrual borrower borrower that has an office property. They are paying as agreed to $2 million loan and we feel pretty good about that one.
Correct.
The loan where you put aside a specific reserve this quarter what was the total what's.
What's the total loan size and how much are you now covered for on our reserve.
Although upsized $12 $6 million in the third.
Pacific is 4 million one.
Okay.
I'm sorry.
Six one.
It's 4 million what is the specific reserve the loan.
Okay.
Okay.
Sorry for the pregnant pause Im just curious how much.
How confident are you in the $4 million reserve cover and potential loss content there.
We're as confident as the most recent appraisal which is one month old.
Continue to watch and monitor this should they buy tenants or should they have a desire to sell the building our special assets people, we'll update the numbers and then we'll post up on a quarterly basis okay.
Okay.
Last one for me is just around M&A, you still have a pretty strong multiple relative to the group and I'm curious.
If you are hearing more from your nearby peers that might not be in such a strong position there is more conversations.
Whole bank or fee income.
Thanks, Thats all my questions.
Yes, there's more whole bank and Theres definitely a lot more conversation than I would say in the last five years and.
We talked to everybody and.
And people in the past have come to us.
Times first and Thats the nice.
But we're a good partner quite frankly, and we tend to do right by the people that partner with us and they do well and we do well I think we have a slide in our investor deck that shows how we have grown organically and with small M&A generally a $1 billion or less and thats been very accretive to us over time and this would be ideal.
Transactions.
Kind of tongue in cheek, particularly a rural depository.
And so.
Just don't know.
We're not over aggressive, but we do talk to everybody in.
It would be a great way to continue to supplement.
We can grow the bank, we've just flat out can it just.
<unk> got to do it right and you got to do it with low cost funding and Jane is all over that trust.
So does that helpful.
Very helpful. Mike I appreciate it thank you for the time.
Thank you.
Again, if he would like to ask a question press Star followed button number one on your telephone keypad.
Your next question comes from Daniel Cardenas with Janney Montgomery Scott Your.
Your line is open.
Hey, Dan.
Hey, guys. Good afternoon, most of my questions have been asked and answered.
And I have a couple of modeling questions here for you guys.
What how should I think about your tax rate on a on a go forward basis I mean, it's been fairly consistent here.
Does that does that 20 ish.
Percent still kind of a good run rate it is about 22, but call. It 20.
Okay, and then Jim I missed I missed your comments.
Comments on fee income.
I guess I can't multi task can you maybe just kind of quickly go through those again yesterday and I can't multitask either by the way.
But the fee income is we think it's relatively stable theres enough next year of course, we have the durbin impact right. So that's going to affect fee income but.
We are looking at sources like at growing SBA income to help offset that.
Okay, Great. That's all I have for right now thanks guys.
Thanks, Dan.
There are no further questions at this time I will now turn the call back over to the CEO, Mr. Mike price.
We always appreciate your interest in our company and the opportunity to interact and hear what's on your mind. Thank you for your time today and.
<unk>.
Thank you.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.
[music].
Yes.
Okay.
Yes.
Okay.
[music].
Yes.
Okay.
Yes.
Yes.
Okay.