Q3 2024 WesBanco Inc Earnings Call
Speaker Change: Hello and welcome to the West Bank of 3rd quarter 2024 earnings conference call.
Speaker Change: All participants will be in listen-only mode. Should you need assistance? Please signal a conference specialist by pressing the star key, followed by zero on your telephone keypad.
Speaker Change: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad, and to withdraw your question, you may press star, then two. Please note, this event is being recorded.
Speaker Change: President and Beth de Relations. Please go ahead.
Beth: Thank you. Good afternoon and welcome to West Banco, Inc.'s third quarter 2024 earnings conference call.
Speaker Change: Leading the call today are Jeff Jackson, President and Chief Executive Officer, and Dan Weiss, Senior Executive Vice President and Chief Financial Officer.
Speaker Change: Today's call, an archive of which will be available on our website for one year contains forward-looking information.
Speaker Change: Cautionary statements about this 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 investor materials.
Speaker Change: I would now like to turn the call over to Jeff. Jeff?
Jeff Jackson: Thanks, John, and good afternoon.
Jeff Jackson: On today's call, we will review our strong third quarter 2024 results and provide an update on our operations and current outlook for the fourth quarter.
Jeff Jackson: Key takeaways from the call today are continued strong deposit and loan growth combined with solid credit quality.
Jeff Jackson: Our transformative acquisition of Premier Financial Corp. remains on track pending regulatory and shareholder approvals.
Jeff Jackson: Wasbenko marked strong momentum in the third quarter, driven by strategic actions that continue to strengthen our balance sheet.
Jeff Jackson: These include robust deposit and loan growth and the pay down of higher cost borrowings.
Jeff Jackson: and deposits by $750 million.
Jeff Jackson: reflecting the continued strength of our teams, markets, and strategies.
Jeff Jackson: [inaudible]
Jeff Jackson: For the quarter ending September 30, 2024, we reported net income excluding restructuring expenses available to common shareholders of $36.3 million and earnings per share of $0.56.
Jeff Jackson: We successfully raised $200 million of common equity during the quarter to position West Banco for future growth.
Jeff Jackson: Reflecting this capital raise and strong earnings, our tangible common equity ratio increased at least 132 basis points, quarter over quarter to 8.84 percent.
Jeff Jackson: The key story for the third quarter was our continued strong deposit and loan growth as sequential quarter deposit growth of 12% annualized was double annualized loan growth of 6%.
Jeff Jackson: Impressively, our total and commercial loan growth and deposit growth significantly outperformed the monthly H-8 data for all domestically chartered commercial banks.
Jeff Jackson: on both a year-over-year and quarter-over-quarter basis.
Jeff Jackson: On the deposit-gathering side, our recent Summer of One campaign
Jeff Jackson: We open more than 6,000 new consumer accounts, helping to drive our 12% annualized deposit growth.
Jeff Jackson: Additionally, our teams grew total deposits by 750 million or 6% during the last 12 months, reflecting their ongoing success and engaging current and prospective customers.
Jeff Jackson: On the loan side, third quarter loan growth was 10% year over year and 6% quarter over quarter annualized, again driven by our commercial and residential lending teams.
Jeff Jackson: Total commercial loans increased 12% year-over-year and 8% sequentially on an annualized basis, driven by commercial real estate.
Jeff Jackson: Our four newest loan production offices accounted for nearly 20% of the commercial loan growth year-to-date, led by our Nashville and Chattanooga, Tennessee offices.
Jeff Jackson: These are proof points of the success of our LPO strategy.
Jeff Jackson: Our commercial loan pipeline, as of September 30th, was approximately $830 million, up slightly from a year ago, but down from June 30th, as our teams converted the pipeline into another solid quarter of loan growth.
Jeff Jackson: Based on the current loan pipeline we expect solid loan growth during the fourth quarter as well.
Jeff Jackson: Since year-end 2021, we have achieved a strong compound annual loan growth rate of 9.4%.
Jeff Jackson: It's important to note that we achieved this impressive growth with roughly the same number of bankers thanks to our talented team's continued productivity gains and great recruiting.
Jeff Jackson: What makes this gross even more notable is our banker's success in delivering comprehensive relationship banking solutions, including deposits, ancillary products and services, and wealth management solutions.
Jeff Jackson: These relationship focused efforts position West Banco as a strong financial services partner, helping further our mission of fostering lasting prosperity for our customers and our organization.
Jeff Jackson: A great example of our relationship banking success occurred in August when a financial center manager observed that an existing client was having difficulty managing their line of credit and capital position.
Jeff Jackson: A team spanning retail, business, and commercial banking, along with Treasury, set out to work with the client, understanding their issues, educating them on options, and crafting a tailored solution.
Jeff Jackson: Our deep understanding of the client's needs and our personalized approach strengthened the client relationship and resulted in a winning solution for both the client and West Banco.
Jeff Jackson: Our underwriting and credit standards are a legacy of our company.
Jeff Jackson: and we are achieving our strong loan growth without sacrificing credit quality.
Jeff Jackson: Our non-performing assets decreased to 0.17% of total assets, which as can be seen in our supplemental earnings presentation, is less than half the level for all banks with asset size between 10 and 25 billion.
Jeff Jackson: Criticized and classified loans as a percent of total loans have remained in a consistent range for the last nine quarters.
Jeff Jackson: While total loans past due increased roughly 20 basis points during the third quarter to 0.44 of total loans, we expect these loans to be resolved by the end of the fourth quarter.
Jeff Jackson: Turning to our pending acquisition of Premier Financial.
Jeff Jackson: We have filed all necessary bank regulatory applications, as well as the initial filings with the SEC to schedule the shareholder meetings and remain on track for a first quarter closing, pending regulatory and shareholder approvals.
Jeff Jackson: Through this transformative acquisition, we expect to accelerate our positive momentum, Bilbo Vermeer's legacy of community engagement and support.
Jeff Jackson: and together bring the resources of a larger, stronger financial services organization to benefit all of our communities.
Jeff Jackson: Lastly, I am proud that West Banco has again been recognized for our success in building a workplace culture where purpose, belonging, and opportunity thrive.
Jeff Jackson: In August, we were named one of America's greatest workplaces for parents and families by Newsweek.
Jeff Jackson: We were one of just seven banks to receive a five-star rating.
Jeff Jackson: Newsweek's highest performance mark.
Jeff Jackson: By fostering a supportive and family-friendly workplace, we enhance the well-being of our team members and contribute to our broader vision of making every community we serve a better place for people and businesses to thrive.
Jeff Jackson: When our employees and our families thrive, so do our organization and communities.
Jeff Jackson: 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. Dan. Thanks, Jeff, and good afternoon.
Dan Weiss: For the quarter ending September 30, 2024, we reported gaps net income available to common shareholders of $34.7 million, or $0.54 per share.
Dan Weiss: And when excluding after-tax restructuring and merger-related expenses, net income was $36.3 million, or $0.56 per share, as compared to $34.8 million, or $0.59 per share in the prior year period.
Dan Weiss: Raise $200 million of common equity in support of future growth.
Dan Weiss: improved net interest income and effectively managed discretionary and personnel costs. All of this resulted in a seven cent increase in earnings per share over the length second quarter despite an increase in share count from the capital raise.
Speaker Change: As of September 30th, total assets of $18.5 billion included total portfolio loans of $12.5 billion and total securities of $3.4 billion. As Jeff mentioned, loan growth remained robust and was driven by our commercial and residential lending teams.
Speaker Change: With a strong pipeline, nearly 1 billion dollars in unfunded LCD commitments expected to fund over the next 12 to 18 months, and CRE payoffs at historically low levels, we continue to be optimistic about future loan growth.
Speaker Change: Commercial real estate payoffs totaled approximately 185 million dollars year to date as compared to an annual level in the 500 million dollar range in a more normal operating environment.
Speaker Change: Deposits of $13.8 billion, which were up 5.7% versus the prior year, and 12.1% annualized length quarter, reflected the success of our summer deposit retention and gathering campaigns.
Speaker Change: The composition of total deposits continues to experience mixed shift, but at a slower pace than experienced in prior quarters, as most deposits have already repriced upward.
Speaker Change: As is typical during a higher rate environment, we have experienced strong growth in CDs. However, when excluding them, we realized a positive growth of 2.2% year-over-year and 4.3% quarter-over-quarter annualized.
Speaker Change: Credit quality stability continues as key metrics have remained low from a historical perspective and within a consistent range through the last two plus years.
Speaker Change: The allowance for credit losses to total portfolio loans at the end of the quarter increased slightly to 1.13% of total loans primarily due to higher unemployment assumptions and other qualitative adjustments.
Speaker Change: The third quarter margin of 2.95% remained stable compared to the second quarter and reflected both higher loan yields and higher funding costs, while the year-to-date margin increased one basis point to 2.94% as compared to the second quarter.
Speaker Change: The margin also benefited from the payout of $300 million of federal home loan bank borrowings from deposit growth exceeding loan growth and the $200 million of equity raised during the third quarter.
Speaker Change: Of the $1.2 billion of federal home loan bank borrowings, approximately 75%, with an average rate of 5.2%, mature during the fourth quarter. And that should benefit our 2025 net interest margin as they reprice at lower rates.
Speaker Change: Total deposit funding costs, including non-interest bearing deposits for the third quarter of 2024, were 205 basis points, an increase of 10 basis points over the length of the quarter.
Speaker Change: Non-interest income in the third quarter totaled $29.6 million, a 4.1% decrease from the prior year period due to lower net swap fee and valuation income, which was driven by a negative fair value adjustment this year as compared to a gain last year.
Speaker Change: When excluding these adjustments, non-interest income would have increased 6% to $31.3 million.
Speaker Change: Trust fees and securities brokerage revenue increased a combined 1.1 million dollars year-over-year driven by record levels of assets under management of 6.1 billion and brokerage securities account values of 1.9 billion both of which rose from organic growth and market appreciation.
Speaker Change: We are focused on organic growth and efficiency gains to achieve positive operating leverage and managing our discretionary and personnel costs are a key component.
Speaker Change: Excluding restructuring and merger-related expenses, non-interest expense for the three months ended September 30, 2024 totaled $99.2 million, a 2% increase year-over-year, primarily due to increases in other operating expenses and equipment and software expenses.
Speaker Change: Other operating expenses increased 1.5 million dollars primarily due to higher costs and fees in support of loan growth and higher other miscellaneous expenses.
Speaker Change: And equipment and software expense increased $1 million, reflecting the impact of the prior year ATM upgrades, which, as we know, were phased in throughout the prior year.
Speaker Change: Salaries and wages decreased $500,000 compared to the prior year period due to lower staffing levels associated with efficiency improvements in the mortgage and branch staffing models, partially offset by normal compensation merited increases.
Speaker Change: Employee benefits decreased $400,000 due to lower health insurance costs driven by lower staffing levels compared to the prior year period.
Speaker Change: Turning to capital, we enhanced their capital structure on August 1st through successfully raising 200 million dollars of common equity in conjunction with the announcement of the pending acquisition of Premier Financial.
Speaker Change: Our already strong capital position benefited from the equity raise, strong earnings, and as a result we've demonstrated favorable tangible equity levels compared to our peers, while regulatory capital ratios have remained above the applicable well capitalized standards.
Speaker Change: Turning to our outlook for the fourth quarter and please note that we will provide our 2025 outlook during the January call. We are modeling two additional Fed rate cuts in November and December, which is not expected to have a significant impact on 2024 results due to timing, followed by four more cuts in 2025.
Speaker Change: We continue to model the fourth quarter's net interest margin to improve modestly in the upper $2.90s as our funding costs reprice down at a faster pace than our assets.
Speaker Change: We anticipate non-interest income and non-interest expense to remain relatively consistent with third quarter trends.
Speaker Change: And as previously disclosed, we successfully consolidated 11 branches in the nearby locations earlier this month to ensure optimal distribution to best serve our customers.
Speaker Change: The anticipated annual savings is approximately $4 million, the majority of which will be realized during 2025.
Speaker Change: And finally, the provision for credit losses will mostly be dependent upon loan growth, economic factors, and charge-offs, and our effective tax rate should be in the 17.5 percent range for the year.
Speaker Change: Operator, we're now ready to take questions. Would you please review the instructions?
Speaker Change: Thank you. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2.
Speaker Change: Please limit yourself to two questions and then you are welcome to return to the queue. At this time, we will pause momentarily to assemble our roster.
Speaker Change: Today's first question comes from Daniel Tamayo with Raymond James. Please go ahead.
Daniel Tamayo: Thank you.
Daniel Tamayo: Hi, sorry about that. Good afternoon everyone.
Daniel Tamayo: Maybe first, you know, on the margin as it relates to net interest income. You talked about a little bit of expansion in the fourth quarter up to the upper 290s. Maybe if you could just remind us, you know, you talked about the 2025 guidance coming out next quarter, but you're baking in four cuts. Just remind us what the impact from each one of those cuts may be.
Speaker Change: Yeah, Danny I can I can take that
Speaker Change: I would tell you that that's a long, complicated calculation that I could probably spend an hour or so talking through.
Speaker Change: I would say at a high level, just for the fourth quarter alone, if we think about the deposit growth that we experienced just here in the third quarter, and our ability to pay down federal home loan bank borrowings with those deposits, as well as the $200 million in capital that we raised,
Speaker Change: that that alone provides some margin improvement above the 2.95 percent reported here in the third quarter.
Speaker Change: And so, you know, if we really tried to boil things down, you know, that would probably be the primary driver, you know, today for, you know, that margin guidance in the fourth quarter.
Speaker Change: Thank you for watching!
Speaker Change: Okay, and then maybe I'm switching over to the credit side, so.
Speaker Change: The early stage numbers look good for you guys, NPLs.
Speaker Change: Down at a good number and you know, maybe a little bit of an increase in criticized and classified but not Not too much, but you know, it's been a couple of very strong quarters from a net charge-off perspective Forecasts or my forecasts were
Speaker Change: kind of well above where you guys have been coming in. Just curious, I guess on the near term, what you're able to see visibility-wise from a credit perspective, if things look relatively similar to what you've produced over the last couple of quarters.
Speaker Change: Yeah, sure.
Speaker Change: I'll take that one. I think that we're still seeing great credit quality. I would expect it to be somewhere in the range of where we've been over, you know, third quarter, second quarter, somewhere in that range between the two of them. But once again, we're not really seeing any issues out there.
Speaker Change: We, like others, you know, we have a one-off here and there, but those seem to be getting resolved. So we feel really good about where we're at with the credit quality, and I don't foresee any dramatic changes going forward.
Daniel Tamayo: Terrific, thanks Jeff. And then maybe just on the topic of the of the increase on the criticized classified side, just if you have any color on what type of loans those are comprised of that's driving that.
Speaker Change: Yeah, it's a broad swath of different
Speaker Change: industries and different CNI, CRE. There's not really one area I'd pinpoint and like I said we feel really good about where we're at and I think some of those will migrate over the next several quarters so there's not one area I can really pinpoint to say it's driving that but I feel very confident that
Speaker Change: It will continue to move in the right direction going forward.
Speaker Change: Thank you. The next question comes from Russell Gunther with Stevens. Please go ahead.
Speaker Change: Hey, good afternoon, guys.
Russell Gunther: I'd like to follow up on the...
Russell Gunther: Margin commentary, Dan, you provided. I appreciate the color there.
Russell Gunther: You mentioned the positive catalyst of the FHLB maturities in the fourth quarter as a benefit to the 25 NIM. So could you help us with where you'd expect that kind of core NIM to step up to early next year and then as we layer in the acquisition?
Russell Gunther: how you'd expect that pro-forma margin to shake out as we start the year.
Speaker Change: Yeah, so I'll try to dive here a little bit deeper into the margin for, you know,
Russell Gunther: for your question here, Russell. If we think about kind of funding sources, so, you know, over
Russell Gunther: The next
Russell Gunther: month, we have about $900 million in Federal Home Loan Bank borrowings at a weighted average rate of about 5.2 percent.
Russell Gunther: that will reprice. These are one month advances.
Russell Gunther: That will continue to provide benefit, you know, to our interest expense as we move forward.
Russell Gunther: We also have about $800 million in indexed insured cash sweep product that we'll reprice down. That reprices down immediately another $700 million to your private client money market accounts.
Russell Gunther: as well.
Russell Gunther: billion in interest bearing deposits that have repriced down a full 50 basis points and will also be very reactive to any future rate cuts. And as I said, we're anticipating a 25 basis point cut in November and December, and then basically one in each quarter in 2025.
Russell Gunther: and then kind of on top of that
Russell Gunther: We've got another $200 million in broker deposits.
Russell Gunther: at Fed Funds plus 20 basis points, also indexed and repricing immediately, they'll actually mature here at the end of the first quarter.
Russell Gunther: And then the other kind of big catalyst as we think kind of more into 2025 would be, we do have 1.3 billion dollars in CDs, which is.
Russell Gunther: And then if we look on the asset side for a moment.
Russell Gunther: As you know, and as you can see on slide 8 there,
Russell Gunther: About 75% of our commercial portfolio is variable rate, 25% is fixed.
Russell Gunther: Of that variable rate, the variable rate loans about two-thirds of that, or about $4.2 billion, reprices three months or less, every three months or less.
Russell Gunther: And that's currently a kind of a weighted average rate of 7.6%.
Russell Gunther: So, that $4.2 billion is roughly half of the commercial book, and then if we think about
Russell Gunther: kind of the adjustable rate which reprices really every kind of in that 40, 48 to 60 month time frame.
Russell Gunther: What would be coming up in the next 12 months to adjust would be about $300 million, and that would be repricing upward.
Russell Gunther: And then of the fixed rate, about 10% per year kind of matures, at least in the first year, early year. So that's $250 million roughly that would mature here in the next 12 months at 4.5%. So that also would reprice upward.
Russell Gunther: So, if we keep in mind with kind of the new loan growth that we're coming that's coming on it right around today, seven and a half to eight percent, you saw we're just under eight percent here in the in the third quarter.
Russell Gunther: And we're continuing to reinvest cash flows from securities back into securities. And those cash flows, you know, those yields are, you know,
Russell Gunther: coming off at 2.5% and we're coming on at 4.5%, so we're picking up, you know, 200 to 250 basis points.
Russell Gunther: and you there.
Russell Gunther: We do have, we do feel that we've got a lot of kind of positive momentum as we head into 2025. And I would tell you, if we're, if we're thinking, you know, what we're modeling would be kind of a similar increase.
Russell Gunther: today in NIM from 3rd quarter to 4th quarter as we might see in 4th quarter to 1st quarter.
Russell Gunther: And then if you're looking even deeper with the CDs maturing, by that time we would anticipate
Russell Gunther: four more cuts, four more 25 basis point cuts, so you'd be down 150 BIPs from the from the peak, we would anticipate there to be some more sizable margin benefit there in this kind of beginning in the second quarter of 2025.
Russell Gunther: And then if we layer on, on top of that the
Russell Gunther: The premier deal, of course, we talked last quarter about the margin benefit being right in that kind of 345 to 350 range we quoted in the slide deck 346
Speaker Change: You know, there can also be a few moving parts there, but generally speaking, you know, I would say that's still a pretty good estimate, that number still stands.
Speaker Change: Dan, I appreciate it. Very comprehensive. Thank you.
Speaker Change: And then just switching gears for my last question, the $4 million of savings to be realized from the branch consolidation, could you just give us a sense if any of that is spoken for in terms of franchise reinvestment or should all drop to the bottom line?
Speaker Change: And as a piece of that, you know, prior to layering in the deal, what do you think is a good kind of core expense growth rate for West Banco?
Speaker Change: Yeah, I would tell you that, well, first, we're always reinvesting, right? But generally speaking, I would tell you that that $4 million, which is about a million dollars a quarter, call it, should be more or less dropping to the bottom line.
Speaker Change: If we think about expense run rate kind of forward I would tell you and I said in my prepared remarks that
Speaker Change: You're not anticipating Much difference from what we reported here in the third quarter the one thing or a couple things I would tell you though that would be different from third quarter verse fourth quarter on expense run rate is
Speaker Change: For our salaries and wages, our hourly employees, their merit increases occur in August.
Speaker Change: And so we'll have a full quarter's worth of merit increases in the fourth quarter versus kind of having two thirds of that merit increase in the third quarter.
Speaker Change: Also health care can be very difficult to predict but I would say typically in that fourth quarter health care expenses
Speaker Change: are a bit higher just because employees have kind of burned through their deductibles
Speaker Change: the cost for any additional medical procedures.
Speaker Change: is, you know, is on the company.
Speaker Change: And then I would just tell you it's kind of some off-setting things, you know.
Speaker Change: That we had a pretty big marketing campaign as we talked about on our prepared commentary wouldn't expect marketing expense to be
Speaker Change: you know, quite as high as what we experienced in the third quarter. So some puts and takes, but I think
Speaker Change: Overall, pretty close to third quarter, maybe a little bit heavier.
Speaker Change: https://www.youtube.com or the link in the description below.
Russell Gunther: Really helpful. Thanks, Dan. Thank you guys for taking my questions. Thanks, Russell.
Speaker Change: Thank you. The next question comes from Katherine Kneeler with KBW. Please go ahead.
Katherine Kneeler: Thanks, good afternoon. Hey, good afternoon, Katherine. Just a small question, but on fees, I noticed that other income was down a little bit. What was the driver there and should we expect that to bounce back to that kind of five million dollar level we've seen the past few quarters?
Katherine Kneeler: Yeah, on non-interest income, the driver really was in swap fees. The valuation adjustment this quarter was a negative $1.7 million, compared to a positive $1.4 million in the third quarter of 2023.
Katherine Kneeler: So that swing is really what's causing probably, if you're looking year over year, or even quarter over quarter, late quarter for that matter, that's what's driving it. We don't expect...
Katherine Kneeler: that to occur here again in the fourth quarter but again that is that's pure valuation that's not necessarily you know indication of anything other than just movement in interest rates relative to where those you know back-to-back swaps were booked.
Speaker Change: That makes sense. I had that lumped together in others, so that makes sense. And then, back to the margin, the 370 to 380 NIM that you mentioned, I just wanted to confirm that that is where you were thinking that the pro forma margin goes at close.
Speaker Change: with Premier, including a credible yield? No. So kind of a second... Okay, go ahead. No, I'm not... I don't believe I quoted $370 to $380.
Speaker Change: Oh, I'm sorry, I'm sorry, I'm sorry, I'm sorry, 345 to 350 on this book.
Speaker Change: The $3.45 to $3.50 pro forma margin that you mentioned.
Speaker Change: that that what can you what exactly are you pointing to with that 345 350 comment
Speaker Change: Yeah, so that's what we're kind of, that's what we modeled, that was what we presented in our second quarter slide deck that kind of laid out the details of the deal.
Speaker Change: And that's how, that's kind of what we modeled based on, you know, the projections based on the loan accretion primarily with its loan accretion that was driving that. I don't know if you recall from second quarter, we did talk about the loan accretion being about $65 million.
Speaker Change: per year and one of the one of the things and so obviously that's playing into into that you know that that upsize kind of
Speaker Change: Morgan
Speaker Change: guys.
Speaker Change: Okay, guys, that's
Speaker Change: Thank you. Bye.
Speaker Change: is kind of a pro forma margin at close. And then is it fair as we kind of think about the trajectory and I know we're now I'm taking you past 2Q and that's the close of it. As we think about just conceptually your balance sheet. So you see a few bits of kind of core expansion the next few quarters, which makes sense given all the puts and takes you gave. Then we add Premier in and we're around 345, 350.
Speaker Change: And so that makes sense. And then as you move past that, if we still get some rate cuts in the back half of the year, is there a case for still expansion from there with things that you can do on the balance sheet? Or is it kind of you're stable for a while until rates kind of settle in?
Speaker Change: Yeah that's I mean I would say that that's tough tough to answer this four out.
Speaker Change: So, you know, I would say...
Speaker Change: Yeah, generally speaking though
Speaker Change: There are a lot of different scenarios that really can play out. I would say one of the things that we do have is the opportunity to kind of restructure the balance sheet as we talked about last quarter.
Speaker Change: And depending on the rate environment at the time of legal merge, we may, you know, take advantage of that. We did talk about, you know, potentially selling or exploring $100 million of CRE loans on their books and a couple hundred million in securities.
Speaker Change: You know, we'll certainly take the opportunity to...
Speaker Change: maximize, you know, long-term, you know, shareholder value as we get to liquid margin, but yeah, I'd probably be speaking, giving you an incorrect answer if I gave you anything.
Speaker Change: That's fair, and I wasn't trying to get you down to a number, just kind of trying to think directionally. Because the deal does...
Speaker Change: lessen your asset sensitivity and so conceptually I would think you should be in a position where you could still see
Speaker Change: some margin expansion. So I was just curious if there was anything you were kind of seeing that was in plain sight in the back half of next year. Yeah, now I mean generally speaking I would say in a downrate environment we
Speaker Change: We believe that both us and Premier are positioned to benefit even beyond kind of the forecast that we were using back in the second quarter which was basically a consensus estimate forecast.
Speaker Change: for 2025. So, I think that there is some upside there. Yeah, and the offsetting component, as you know, that accretion begins to run down some, you know, on a quarterly basis. It's not overly significant, though. You know, a couple basis points.
Speaker Change: Okay, got it. Perfect. And then maybe just one more on just the deal, just big picture with more rate cuts in our modeling now between now and close. Is there a big change that you expect with initial tangible book value dilution and accretion? How do you think about that give and take?
Speaker Change: Yeah that's a great question and it kind of goes back to the to the question your last question as well and that's kind of what I was thinking in terms of you know when we modeled the deal and when we priced the deal
Speaker Change: rather, the fair value of the loans. Yeah, we had about $65 million in accretion. That was calculating fair value based on kind of May 31st.
Speaker Change: You know, forward curve, if you will. So, if we think about, you know, where we are today, we know that there.
Speaker Change: certainly has been a more aggressive down rate environment than what it was back in you know May-June time frame and so I would anticipate to your point to see a little less TBV dilution.
Speaker Change: which is, you know, a positive and a little less accretion as a result.
Speaker Change: with the offset coming on the actual you know on the balance or on the income statement through higher yields.
Speaker Change: Thank you. The next question comes from Manuel Navas with D.A. Davidson. Please go ahead.
Manuel Navas: Hey, good afternoon.
Manuel Navas: You were considering managing to a CRE concentration ratio of just under 300% and potentially thinking about that in the context of your back half this year loan growth. Is that less of an issue with kind of the right trajectory?
Manuel Navas: since the May mark. Can you just kind of talk through how you're thinking about loan growth with that zero-reconstitution level in mind?
Speaker Change: Thank you.
Speaker Change: Yeah, I would tell you, you're on to it Manuel. Certainly with the rate environment being lower, that relieves some pressure from that 300% concentration ratio for sure.
Speaker Change: Yeah, I would agree. We talk about it all the time, and that is obviously a driver of the previous question as well, right, with the rates coming down.
Speaker Change: Where does the accretion dilution land, but it does provide relief for the 300% ratio. So yeah, to sum it up, it does make it easier. Yes.
Speaker Change: , , , , , , , , , , , , , ,
Speaker Change: is the strong deposit growth. Can you talk about it in terms of what regions were strongest? The one account that's really helping, but just kind of what regions and what's coming out of the commercial lenders?
Speaker Change: Yeah, sure. So, we're really excited about the tremendous deposit growth that we've shown. It's really coming across the entire footprint.
Speaker Change: The nice thing, and I think you've heard me talk about this, is a year ago we really started putting nice incentives for our commercial bankers.
Speaker Change: to grow deposits, and these are the fruits that we've basically seen from these type of programs. Along with our new consumer checking account, the West Bank 01 account, obviously we added about 6,800 accounts.
Speaker Change: with the new summer of one, and then we've seen tremendous commercial loan growth, I mean deposit growth.
Speaker Change: which is really driving a lot of this additional NIM help but it's all across the footprint and I would say it's kind of been a cultural change for us but it's one that's really we're really benefiting from.
Speaker Change: Is there any additional commentary on the talent pipeline or is kind of the focus more on PFC going forward? Can you just touch on where you are on talent across the footprint?
Speaker Change: Yes
Speaker Change: Yeah, so obviously a big attention to the Premier Acquisition and that's going really, really well. They've got a great amount of talent.
Speaker Change: at that bank, and we were very pleased working through that.
Speaker Change: But outside of that, we are still recruiting. As I've mentioned before, you know, we're still looking to add talent in National.
Speaker Change: We're also looking at Knoxville.
Speaker Change: and other potential LPOs, but those would be the two areas I would say we're definitely looking for additional talent, along with our existing markets. We are...
Speaker Change: looking at replacing a couple of market presidents.
Speaker Change: who have retired and working through that as well. So we're always out there trying to recruit and retain the best talent. And that's why we've seen such tremendous loan and deposit growth, is we have retooled our teams and changed a lot of things that have really turned on the growth for this company.
Speaker Change: and John Iannone. Thank you. Thank you.
Speaker Change: Thank you for the color. I'll step back into the queue.
Speaker Change: Thanks Manuel.
Speaker Change: Thank you. The next question comes from Carl Sheppard with RBC Capital Markets. Please go ahead.
Carl Sheppard: Hey, good afternoon, guys. Hey, good afternoon, Carl. Hey, Carl. Just to, this might touch on your last answer a little bit, but loan growth obviously is a good story for you guys. You keep outpacing the industry. Can you expand a little bit on your optimism and continuing to do that in the next year? And maybe some comments on the environment too, not just the new hires and production offices.
Carl Sheppard: Sure, sure. No, I think we're very optimistic on continuing loan growth.
Carl Sheppard: Once again, I think you've heard me say this, but we're doing about double the amount of loans with the same amount of people we had about three years ago, and a lot of that has been our talent management and recruitment.
Carl Sheppard: You know, our loan production offices, the expansion there is doing about 20% of the loan growth that we've had in loan production. I see the environment continuing to be pretty strong for us. I don't see it slowing down. I mean, I think with rates coming down, that gives people opportunities.
Carl Sheppard: It also provides refinance opportunities.
Carl Sheppard: And so when you combine that with our continued recruitment of great talented people and the way we go to market and the products we put out there and our local decision making and our company culture, I still foresee a very strong loan growth for us in the future. I think with the addition of Premier and pulling that company into our culture and in our sales
Carl Sheppard: models, I think it's just going to accelerate even more.
Speaker Change: Okay, that's helpful. And Dan, we've talked a lot about the margin. It seems like your balance sheet is positioned pretty well for a series of 25 basis point cuts, but I'm just curious, do you have any preference really where rates go or just how sensitive some of those assumptions are?
Dan Weiss: I would tell you that
Dan Weiss: Generally speaking, no. We are very much neutral as it relates to short-term asset and liability repricing.
Dan Weiss: So, whether we see 25 or 50
Dan Weiss: Over you know one of these
Dan Weiss: These meetings that's not going to be that's not going to have much of an impact Quite frankly, I think I think a 50 would would be more helpful than a 25 Slightly but not right we don't have that in our forecast
Dan Weiss: That would just be, you know, that would be the cherry on top.
Dan Weiss: and John Iannone. Thank you.
Speaker Change: Okay, and then maybe I'll slip one more in.
Speaker Change: You guys did the borrowing, repay down, the common equity offering this quarter. Anything you want to do ahead of near closing? I know there's a few actions depending on what rates are at that time, but anything between now and then you want to do to tinker with the balance sheet?
Speaker Change: There's nothing specifically that we have in mind. I mean we certainly have talked about some of the restructuring that we that we have planned for you know on a combined basis particularly like I said securities.
Speaker Change: some CRE loans.
Speaker Change: Yeah, we could, we do have 16% of our
Speaker Change: Security's portfolio is variable rate.
Speaker Change: You know, we've not talked deeply about this, but there could be, you know, if we really felt strongly that we're going to be in a long-term downrate environment, you know, that's an area that one, you know, could explore in terms of, you know, selling it basically at no gain or loss and locking in fixed rate for a longer term, but, you know, nothing specific at this point.
Speaker Change: Thanks, guys.
Speaker Change: Thanks.
Speaker Change: Thank you. Today's last question comes from Dave Bishop with Hoftie. Please go ahead.
Dave Bishop: Hey, good afternoon, gentlemen
Speaker Change: Hey, good afternoon Dave. Hey Dave.
Dave Bishop: Hey Jeff or Dan, probably more to Dan, you gave us some good color in terms of the anticipated maturation or expiration of some of the flood barrings and CEDs and the weighted average rates. Just curious what current market rates you think you could sort of roll those into currently?
Speaker Change: Is that on CD?
Speaker Change: CD's and the Flub Curve
Dan Weiss: Yeah, so right now, you know, FHLB is.
Speaker Change: We've got the $900 million and we're continuing to keep that in kind of one month advances.
Speaker Change: and that's running about 10 to 15 bases, points.
Speaker Change: above, you know, Fed funds.
Speaker Change: That would be the reinvestment rate I would tell you today, certainly to the extent that we can generate additional deposits.
Speaker Change: and pay down the FHLB sooner. That would certainly be desirable. We're not necessarily projecting that nor are we projecting the kind of deposit success.
Speaker Change: 12.1% annualized in the third quarter, in the fourth quarter, or anytime in the near future. We're very happy with that.
Speaker Change: Yeah, I would say the expectation there would be kind of Fed funds plus 10 or 15 basis points for FHLB. Those are repricing, like I said, every month. And then on the CD book, we have lowered those rates.
Speaker Change: quite substantially, about 75 basis points from where we were. At one point, we were as high as 5.25%. We came down to 4.75%. Today, we're right around 4%.
Speaker Change: I'm going to sit on the 7 months page.
Speaker Change: 4% of KSO, great.
Speaker Change: And then, you know, Jeff, you mentioned, obviously, the compensation revamp.
Speaker Change: You know driving some some really stellar deposit growth there On the incentive side I assume is that sort of fully baked into the incentive run rate Would there be any sort of fourth quarter catch-up in terms of like bonus accruals or such just curious how that impacts compensation maybe next quarter
Speaker Change: No, it wouldn't impact any sort of quarterly. What we did was we took the Commercial Banker Incentive Program and just rechanged some of the categories and what we pay for them. And so you may have heard me say last year we added deposits and so the amounts of the incentives would be the same and those are typically paid out in first quarter, accrued for obviously this year, but it wouldn't change any expense.
Speaker Change: expenses for us in the future quarters, it's already accounted for.
Dave Bishop: Okay, great. And then, you know, final question here, you know, Jeff, a lot of your peers, I guess, have been dealing with, it seems like pretty outsized payoffs, especially in commercial real estate this quarter. Just curious how you've been, you think you've been able to sidestep it and sounds like you've got a lot of sight to no large looming larger payoffs here in the fourth quarter, if I, if I read the TV's correct.
Jeff Jackson: Yeah, I would say you know we work with our customers very well. You're right We haven't seen a lot of large payoffs. I think fourth quarter we might see
Jeff Jackson: a little more than third quarter, slightly more, a few different payoffs, but no, we don't see any major large looming
Jeff Jackson: you know, momentous payoffs coming so far. We do talk to our customers all the time, and like I said, fourth quarter might be a little heavier than third quarter, but no, we keep a very close tab on that and feel very good about it.
Speaker Change: Great. Appreciate the color.
Dave Bishop: Thanks Dave. Thank you.
Speaker Change: This concludes our question and answer session. I would now like to turn the conference back over to Mr. Jeff Jackson for any closing remarks.
Jeff Jackson: Thank you. During the past quarter, we again achieved strong deposit and loan growth, while maintaining strong capital levels and credit quality.
Jeff Jackson: We are focused on organic growth and efficiency gains to achieve positive operating leverage and remain well positioned for future growth. Thank you for joining us today and we look forward to speaking with you in the near future at one of our upcoming investor events. Have a great day. Thank you.
Speaker Change: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
Speaker Change: [music]
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Speaker Change: John Iannone, Daniel Weiss, John Iannone, Daniel Weiss, John Iannone, Daniel Weiss, John Iannone, Daniel Weiss, John Iannone, Daniel Weiss, John Iannone, Daniel Weiss,