F.N.B. Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 19, 2023

There are 11 speakers on the call.

Operator

Good morning, and welcome to the FNB Corporation Third Quarter 2023 Earnings Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Lisa Haidu.

Operator

Please go ahead.

Speaker 1

Thank you. Good morning and welcome to our earnings call. This conference call of FMB Corporation and the report it files with the Securities and Exchange Commission opt to contain forward looking statements and non GAAP financial measures. Non GAAP financial measures should be viewed in addition to and not as an GAAP financial measures are included in our presentation materials and in our earnings release. Please refer to these non GAAP and forward looking disclosures contained in our related materials, reports and registration statements filed with the Securities and Exchange Commission and available on our corporate website.

Speaker 1

A replay of this call will be available until Thursday, October 26, and the webcast link will be posted to the About Us Investor Relations section of our corporate website. I will now turn the call over to Vince Sile, Chairman, President and CEO.

Speaker 2

Thank you, and welcome to our Q3 earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer and Barry Guerrieri, our Chief Credit Officer. FMB reported 3rd quarter net income available Performance represents EPS growth of 3% in the quarter. Our results reflect the execution of FMB's long term strategies geared towards risk management, client primacy, generating organic growth and diversifying fee based income. Our 3rd quarter efficiency ratio equaled 51.7% and is expected to remain in the upper quartile on a peer relative basis.

Speaker 2

In addition, operating leverage on a year to date basis is 8%. Tangible book value per share has increased 12.5% year over year to $9.02 despite the impact of higher industry and return on tangible common equity was again at a solid level of 18.2%. As we have previously mentioned, SMB is well positioned to steadily increase market share in this volatile environment Given the strength of our capital and liquidity position and adherence to our consistent and conservative underwriting guidelines, All deposits ended the 3rd quarter at $34,600,000,000 a 2.3% increase from the 2nd quarter, while maintaining a relatively stable mix of non interest bearing deposits of 31%. Our 3rd quarter linked deposit growth once again outpaced the Federal Reserve H8 deposit data, continuing a trend with quarterly outperformance as well as our goal to be the primary bank for our clients. In fact, FDIC deposit market share data released in September revealed that FMB ranks in the top 5 in nearly 50% of the MSAs we operate in and in the top 3 in nearly 30%.

Speaker 2

Despite the acceleration of deposit competition throughout the banking industry, FNB spot deposits have decreased less than 0.5% since year end 2022, demonstrating our trusted position as our customers' primary operating mix. Our deposit growth this quarter was effectively funded dollar for dollar by our 2.5% linked quarter growth in loans, which also meaningfully Commercial loan growth of 2.4% benefited from the highest level of quarterly production year to date, which was spread across the entire footprint. Since year end 2022, we have achieved 6.3% spot loan growth, while building our CET1 ratio to 10.2%. Tangible common equity to tangible asset ratio also continues to build totaling 7.54% this quarter, even against the backdrop of higher rates. Additionally, Our solid liquidity position and better than peer funding costs provides balance sheet optionality and the ability to support our clients' capital needs.

Speaker 2

The loan to deposit ratio remains at a comfortable level of 92.9%. We also continue to invest in capabilities to gain market share and further outpace our competitors, particularly in the digital offerings we Our award winning e store offers unique platform driving a better customer experience in product penetration. Our most recent implementation, the eStore common application Creates a single universal account application for the majority of our consumer loan products and services, enabling customers to apply for multiple products simultaneously in a very streamlined manner, in a few months, we will add our consumer deposit products to the common application, which will facilitate faster customer onboarding across multiple products and should meaningfully accelerate the adoption of the common application. We will capitalize on our competitive advantage with our superior digital offering and the strength of our balance sheet to acquire and grow customer relationships and shifts across our 7 state footprint. During the quarter, we fully charged off the commercial industrial loan We mentioned in our Q2 earnings call.

Speaker 2

Gary will provide more information during his presentation. Absent that isolated charge off, Total net charge offs would have been a modest 7 basis points and total delinquency stood at 63 basis points. Our growth strategies are balanced by a diligent focus on risk management. We closely monitor macroeconomic and market specific trends to manage risk as part of our core credit philosophy, which has served us well in softer economic times. We remain steadfast in our approach to enabling us to serve our customers through business cycles in ways our competitors cannot.

Speaker 2

I will now turn the call over to Gary to provide additional information on our credit performance.

Speaker 3

Thank you, Vince, and good morning, everyone. We ended the quarter year to date period with our asset quality metrics remaining at good levels. Total delinquency decreased 12 basis points in the quarter to end at 63 bps and NPLs and OREO decreased 10 basis points to end at a solid 36 for 47 basis points and 26 basis points, respectively. Excluding the isolated credit that Vince noted, Net charge offs for the quarter year to date period were 7 12 basis points, respectively. I'll conclude my remarks with an update on our credit risk management strategies and CRE portfolio.

Speaker 3

As previously disclosed in the Q2 earnings call, we placed a single $31,900,000 C and I loan on non accrual. Based on alleged fraud and upon later findings uncovered during our ongoing investigation, including subsequent bankruptcy filings by our borrower and its primary supplier, the outstanding balance was charged off. We will continue to monitor the bankruptcy process closely and aggressively pursue all opportunities to recover a portion of the charge off. Total provision expense for the quarter stood at $25,600,000 providing for loan growth and the previously mentioned And we will now begin the question and answer session. Our ending funded reserve decreased $12,100,000 in the quarter and stands at $401,000,000 or a solid one 0.25 percent of loans, reflecting our strong position relative to our peers.

Speaker 3

When including acquired unamortized loan Our reserve stands at 1.39% and our NPL coverage position remains strong at 394%, inclusive of the unamortized loan discounts. We remain committed to consistent underwriting and credit risk management to maintain a balanced, well positioned portfolio throughout economic cycles And continue to perform full stress tests of the loan portfolio on a quarterly basis. We were pleased with the outcome of the result of the recent exercise, which confirms that our diversified loan portfolio enables us to withstand various economic downturn scenarios. Regarding the non owner occupied CRE portfolio, Delinquency and NPLs remain very low at 31 20 basis points In closing, asset quality metrics ended the quarter at good levels and we continue to generate We closely monitor macroeconomic trends and the individual markets in our footprint and we'll continue to manage risk aggressively as part of our core credit philosophy, which has served us well throughout various economic cycles. I will now turn the call over to Vince Calabrese, our Chief Financial Officer, for his remarks.

Speaker 4

Thanks, Carrie, and good morning. Today, I will focus on the 3rd quarter's financial results and offer guidance updates for the 4th quarter. 3rd quarter net income available to common shareholders totaled $143,300,000 or $0.40 per share, bringing year to date earnings per share to $1.18 The results include contributions from our commercial leasing team To originate renewable energy financing transactions as part of their business model, in this quarter they closed a large solar deal with a related investment tax credit. Loans and leases ended the quarter at $32,000,000,000 growing $796,000,000 or 2.5 percent linked quarter, Driven by the success of our strategy to grow high quality loans across our diverse footprint. Commercial loan growth of $470,000,000 2.4% was across our 7 state geography with notable contributions in the Pittsburgh, Mid Atlantic and North Carolina markets.

Speaker 4

Consumer loans ended the 3rd quarter at $12,000,000,000 a linked quarter increase of $326,000,000 or 2.8 percent led by growth in residential mortgages. The investment portfolio remained flat at $7,100,000,000 with a fairly even split between AFS and HTM. The duration of our securities portfolio at September 30 is 4.4, similar to last quarter. Total deposits ended September at $34,600,000,000 with a healthy increase of $790,000,000 Quarter or 2.3 percent, reflecting organic deposit growth and seasonal municipal deposit inflows. Our deposit gathering capabilities have continued to outperform the industry as illustrated by the Federal Reserve H8 deposit data, Our deposit growth was nearly 220 basis points higher for the quarter and 320 basis points higher since year end 2022.

Speaker 4

The deposit mix shift slowed modestly this quarter as customers moved into time deposits and interest bearing demand deposits, Which grew $458,000,000 $712,000,000 respectively, more than offsetting the decrease in non interest bearing deposits of $210,000,000 As time deposits have grown, we have intentionally kept the portfolio short with a weighted average maturity of 11 months. So then when rates do fall, we will have the ability to reprice these balances downwards. As of September non interest bearing deposits comprised 31% of total deposits compared to 32% at June 30 and 34% at year end. Given our granular stable deposit base, we believe we will continue to outperform the industry with a favorable mix of non interest bearing deposits to total deposits even in a higher for longer interest rate environment. The loan to deposit ratio remains at a comfortable level of 92.9%, flat with June 30.

Speaker 4

Revenue totaled $408,000,000 driven by net interest income of $327,000,000 and growth in non interest income reflecting our diversified The 3rd quarter's net interest margin was 3.26%, a decline of 11 basis points, Moderating from the 19 basis point decline last quarter. The yield on earning assets increased 17 basis points to 5.11, Reflecting higher yields on loans and investment securities. Total cost of funds increased 29 basis points to 193 As the cost of interest bearing deposits increased 39 basis points to 2.36 and was partially offset by the contribution from non interest bearing deposits. We continue to actively manage our total deposit costs and ended the quarter at 1.75%, bringing the cumulative deposit beta to 31%. We are projecting cumulative beta to end 2023 in the mid-30s.

Speaker 4

Turning to non interest income and expense. Non interest income totaled $81,600,000 a 2% increase from the 2nd quarter As capital markets income increased $1,200,000 led by international banking with solid contributions from swap fees, syndications and debt capital markets income. Mortgage banking operations income decreased $1,000,000 due to negative fair value marks Given the sharp increase in mortgage rates during the Q3, that more than offset a 46% increase in total salable mortgage production versus last quarter. Non interest expense totaled $218,000,000 an increase of $6,200,000 or 3 percent from last quarter. Net occupancy and equipment expense increased $3,500,000 largely due to the impact of technology investments and the inflationary macroeconomic environment.

Speaker 4

Marketing expenses increased $1,500,000 due to the timing of digital marketing campaigns, which helped drive deposit growth and acquire additional households. Efficiency ratio equaled a solid 51.7%, up slightly from 50% last quarter. For the 1st 9 months of 2023, the efficiency ratio totaled 50.8% compared to 54.7% for the same time frame in 2022. While supporting the strong loan growth, our capital ratios remain robust through the quarter. Our TCE finished the quarter at 7.54 and when adjusting for held to maturity investment marks would equal 6.7%.

Speaker 4

Our CET1 ratio at 10.2% is in line with peer median, and we remain well capitalized even when including the fair value marks in our AFS and HTM portfolios. Tangible book value per common share was $9.02 at September 30, An increase of $0.23 per share from June 30, largely from the higher level of retained earnings, more than offsetting the increased impact of AOCI, Which reduced the current quarter end tangible book value per common share by $1.06 On year over year basis, tangible book value per common share increased to full dollar or 12.5 percent, demonstrating our commitment to internal capital generation. Let's now look at the 4th quarter financial objectives, starting with the balance sheet. On a full year spot basis, we increased our previous guide for loans to grow mid to high single digits year over year As we take this time to invest in our capabilities to gain market share across our diverse geographic footprint. Total projected deposit balances are revised upward to end 2023, relatively flat to year end 2022 spot balances.

Speaker 4

The 4th quarter net interest income is expected to be between $315,000,000 $325,000,000 assuming no additional interest rate hikes for the rest of the year. 4th quarter non interest income is expected to be around $80,000,000 which is similar to our guidance levels for the 1st 3 quarters of the year as we continue to benefit from our strategy of diversified fee based businesses. 4th quarter guidance for non interest expense is Full year provision guidance is revised to a tighter band of 70 to $80,000,000 and will be dependent on net loan growth and charge off activity in the 4th quarter. Lastly, the full year effective tax rate should be between 17.5% 18% and the 4th quarter effective tax rate is expected to be between 17.8% 18.2%, reflecting benefits of investment tax credits generated through the financing transactions of our commercial leasing business in the quarter. With that, I will turn the call back to Vince.

Speaker 2

Once again, this quarter's financial performance was achieved through the dedicated efforts of all of our employees. The culture at FNB is rooted in teamwork and collaboration to collectively reach our goals. FNB continues to earn national recognition

Speaker 5

for our

Speaker 2

inclusive culture based on independent feedback from our own team members. Building on the multiple awards we received earlier this year for innovation, leadership and our family friendly benefits and compensation programs, we've also garnered additional National Culture Excellence Honors, Highlighting our commitment to diversity and employee appreciation and wellness and development. We strongly believe having an outstanding culture with engaged employees, results in superior performance and shareholder value appreciation. We are pleased with this quarter's results as we continued to outperform the industry reporting loan and deposit growth, while adhering to our conservative risk management philosophy, all while strengthening our capital and liquidity position. Given the strength in our performance, FNB is well prepared to meet the needs of our consumer and business clients Thank you.

Operator

We will now begin the question and answer session. Our first question comes from Daniel Tamayo from Raymond James. Please go ahead.

Speaker 6

Good morning, guys. Wondering if you could talk a little bit about updated thoughts on when you think the margin might bottom and if you had any more details on what the month of September looked like from a margin perspective and yields, that kind of stuff?

Speaker 5

Yes. Good morning, Danny. I guess a couple of comments on that. I think given everything industries stood this year, Clearly, the peak was in the Q1. If you look at our net interest income for the Q3, we only declined $2,600,000 In the NIM compression, as I commented on, moderated to 11 from after decreasing 19 basis points last quarter.

Speaker 5

The monthly decline in NIM has been averaging around 3 basis points, 4 basis points a month since May. So it's been coming down, but pretty steady within that range. Our outlook for the Q4 of the $315,000,000 to $325,000,000 doesn't have any rate increases, as I mentioned. The decline in margin kind of similar to what we saw in the Q3 is kind of what's baked into our guidance.

Speaker 6

Okay. That's helpful. Appreciate it. And then kind of moving over to loan growth, I'm just curious how you're thinking about loan growth potentially next year if the economy does slow. It's Sustained at a pretty strong growth level here throughout the 2023, in particular positions first in the residential mortgage book, but just curious on kind of higher level thoughts about the ability to sustain that kind of loan growth?

Speaker 2

Particularly many of the smaller banks who are struggling with capital and liquidity issues. So it puts us In a position where FMB can become we go on the offense basically and we're able to go after more opportunities with confidence and we can support our clients' capital moves as we move through 2024. We didn't give guidance For 24, so I can't really speak to specific numbers. But my expectation moving into next year It's going to be choppy for everybody from a loan demand perspective. I think for us to be successful, we're going to have to stay very focused on maximizing or growing market share in the markets that we've moved into where there still continues to be good solid growth in those markets from a GDP perspective, I think that's one thing that will help us.

Speaker 2

Secondarily, I think given the size span of the company today versus where we were years ago, we have multiple markets to pursue opportunities in. So I think going into 2024, depending on how the economy shakes out, It will be more challenging to find creditworthy borrowers that we would want to bank, right. In that environment, I think it's going to be more competitive. So I think having the right people spread across those areas would be a benefit to us versus somebody that's heavily concentrated in say Pennsylvania or Ohio. So I think all of that will play in our favor.

Speaker 2

I think we've also invested pretty heavily in certain platforms that will continue to drive fee income For us, so in addition to loan growth, we did perform pretty well from a fee income perspective, given the pressures We've invested in our digital platform, which should help us in small business and with gathering deposits as we move into this quarter and the Common App is fully built out. We've invested pretty heavily in treasury management systems. Our payment processing capabilities Lockbox capability that we still offer clients has been upgraded in the last year or so. Capital markets, we built out our ability to participate in bond offering through our debt capital markets platform and That continues to perform well for us and enables us to move up market and participate in lower risk transactions and still meet the return thresholds that we have internally. So all of that will play well for us as we move into next year.

Speaker 2

So those are the reasons why I feel more confident about our performance this order and then into next quarter, but I will caution you, I think the macroeconomic environment will play a role. Demand has to be there as well. So, and capital investment has to be occurring anyway on the commercial side.

Speaker 6

That's terrific color. I appreciate all of that.

Speaker 5

I'll step back. Thanks, guys.

Operator

The next question comes from Michael Lapuardo from KBW. Please go ahead.

Speaker 7

I wanted to start on a comment you made, Vince, about making investments on On the OpEx side and trying to take advantage of a lot of the pressure of the industry, I was wondering if you guys are willing to kind of Go layer deeper on that. I mean, I think it's evident and obvious from the financials that you guys are in a strong position here. So what type of investments Are you looking at what do you think could make the biggest difference as you look to the next 12 months here and obviously still have some growth opportunities in front of you and a lot of peers that Probably have some opportunities, but don't have the balance sheets to really kind of fully take advantage of them.

Speaker 2

I'm sorry, you Broke up a little bit. You're speaking specifically to digital. Is that your question?

Speaker 7

Yes. I mean, I imagine most of the Things you're looking at are digital, but just more broadly, any like initiatives or kind of areas of investment that you guys are particularly focused on that you think could be pretty fruitful over the next 12 months in terms of kind of continuing growth and being able to take share while the industry is in a weaker position?

Speaker 2

Well, first of all, I think it's a great question and we've talked about this internally. There are 2 paths to go down as we move into next year, let's face it, the banking industry in general is facing margin compression. Some banks are struggling to grow revenue, entirely competitive from a depository perspective. So I certainly understand why there's a lot of caution moving into next year. But I think given our position, we have strong capital, we're in a strong capital position, we have tremendous liquidity.

Speaker 2

We have made investments in de novo expansion in the retail space, which are coming online. Expense comes along with that. So we've already started to invest in those projects. So you'll see depreciation expense coming online with those, but we're at the point now where they should start to generate revenue or contribute to our effort, right, because we launched a number of them at the beginning of this year or late last year. So we should be seeing some good success there.

Speaker 2

And those are principally at higher growth Markets that are not feeling as much pain as some of the other more legacy markets that we're in from a growth perspective. We're very optimistic about the performance there. We're also optimistic about our build out of the common app that I spoke about, you can purchase multiple loan products on our platform today. By the end of this quarter, we'll be able to buy multiple loan products and multiple depository products with one application. And the trainings going on in the field, We've been doing training on our systems and on our capabilities for some time.

Speaker 2

I think you're going to start to see that pay off, we also changed our model in the branches several years ago in the consumer bank. We started rolling out relationship bankers instead of having tellers and platform people. So more highly trained bankers in the branches, we're finally closing out the last region in terms of converting those folks over to this higher profile banking position, which should help with cross sell and driving product sales in the branches beyond just doing transactions. And then we have bankers basically there are a number of bankers that are pulling back to other institutions, so I think we'll have opportunities to go after business that presents itself that Yes, we've been for companies that we've been calling on for a long time in the commercial space. We've made investments in so to be more specific, We've made investments in treasury management, which I think will assist us in becoming the primary client for a real market and larger company.

Speaker 2

We made investments in the digital platform to help us go after more share of wallet more quickly, right, with clients by The market perspective with the position with clients. So I think really we have a number of areas that we worked on and I think that we're definitely going to experience better than peer results because of it. So That's my commentary. We also, by the way, built out our small business lending platform. We continue to focus on that.

Speaker 2

Our plan is to integrate merchant and treasury management services into a bundled program similar to the common app. So that is going to be worked on in the Q1 of next year. We have about 90,000 clients that are either depository or loan clients in the small business segment, so there's quite a bit. I think we have about 3% to 5% penetration with merchant in that space. So there's quite a bit of opportunity there from a fee income perspective, and we've been focusing on that moving into next year.

Speaker 2

So those are some of the strategic investments that we've made. And I do believe that at this time, It makes sense for this company to continue to pursue those investments and drive revenue growth during 2024 when it might be more difficult for others

Speaker 7

Yes. No, that makes a lot of sense, Vince. That's great flavor. Thank you for walking through all that. So Just lastly for me and then I'll step back and let someone else jump in.

Speaker 7

Just curious, more of a high level question than a near term question. But As you think about the franchise, the size, the growth projections, I imagine you guys have constant conversations with the Board and the executive team around what the right level of capitalization is. And obviously, at the higher end of the spectrum on the asset side, there's a lot of conversations about capital. I'm Curious, what any updated thoughts around what you think kind of the right capital level for F and B is like over the next few years here, I mean, do you think it's a higher number than maybe what it was over the last 24 months? I mean, obviously, you don't have to get there right now, but just kind of curious with the conversation is internally around capital, just given everything that's happened and as you think about taking share and continuing to grow the balance sheet moving forward?

Speaker 2

Yes. Well, we cover capital and liquidity position of the company in every Board meeting that we have. So we have a pretty secular team where we go over various elements of our financial performance. We discuss the balance sheet in detail and strategies around maximizing returns. That happens in every Board meeting.

Speaker 2

And then we talk about what the investors Expect and what the street expects and how we're performing relative to those expectations. I think capital is a topic We had on the table for a long time. I think given the AICI impairment that you've seen impact others' capital position, We reviewed as having less capital because we actually operate with a lower risk profile within the commercial loan categories that we participate in the consumer business is what we're very conservative. If you look at where we are today with CET1 at 10%, our TCE ratio is 7.5% and growing. We feel pretty comfortable with where we are from a capital perspective.

Speaker 2

I understand that $100,000,000,000 and greater, You're going to see greater expectations from regulators for capital. But I think given where we are today, we're in one of

Speaker 5

the better positions we've been in, in years.

Speaker 2

We have a very solid portfolio. We've spent a lot of time and energy. Gary has done a tremendous job derisking That portfolio with the sale of Regency, the sale of hospitality, the sale of adverse Credits and we basically have done a lot. We've moved over $1,000,000,000 off the balance sheet before the pandemic even occurred. So I think we're in a great position from a capital perspective.

Speaker 2

We feel comfortable where we are today and we address it at every Board meeting. If you look at our returns on tangible common equity, we're upper quartile. So even with higher capital ratios, we're still in 18% Pretty good solid performance and profitability.

Speaker 7

All right. Thank you, Vince. I appreciate you taking my questions today.

Speaker 2

One more thing on capital, by the way. We've dividended out over $1,500,000,000 through share repurchases or dividend, over $1,500,000,000 in capital deployment to shareholders So I think when you think about the company and capital management, that's part of the discussions that we have with the Board, just to throw that in there. So our shareholders have benefited from that distribution of capital immensely. And obviously, we have retained that capital Much higher capital ratios, that part of the equation. We deal with that.

Speaker 2

We need to evaluate where we are every quarter,

Operator

The next question comes from Manuel Nieves from D. A. Davidson. Please go ahead.

Speaker 8

Hey, good morning. I just wanted to follow-up on the NIM. What are thoughts on where it could bottom next year, just kind of updated there and then I have a follow-up on deposits.

Speaker 2

Yes, I'm not sure that I think we're in guidance for next year. I'll let Vince answer the question. Go ahead, Vince. No, I was just going to call it where we are today.

Speaker 5

I mean, as far as we'll provide our thoughts when we provide guidance for next year in January. But I mean, I think as I mentioned, Q4 kind of coming down at a similar level to Q3. And I mean, Maybe first half of the year next year, but again, we have to do our we just started our budget process for next year. So I think there's still some movement down. Exactly when it bottoms is a hard thing to call for sure, but somewhere in the kind of middle of 'twenty four would be Kind of based on the way things are today, but they could change by the time we finalize our budget and put out guidance in January.

Speaker 5

But the compression I talked about is clearly It's moderated. If the Q4 comes down similar to the Q3, the net interest income, as I mentioned earlier, only came down $3,000,000 So I think The sustainability of the net interest income is very important, right, in driving our efficiency ratio in the low 50s. That's a key part of it. So more to come in January as far as what level it actually might bottom at. So it's definitely moderated the compression as I commented on.

Speaker 8

I appreciate the color there. On Pause it's the CD engine is definitely powerful. It's what customers are looking for. Are you seeing do you have some breakdown on what you're Is that from new customers, current customers bringing over more funds? Can you just kind of talk through where you're winning there?

Speaker 5

Yes, I would say

Speaker 2

Yes, I think it's a combination. Okay. I'm sorry. No, no, you go ahead. No.

Speaker 2

I was just going to say, I think it's a combination of all of the above. I think part of the strategy is to persuade Folks to bring additional dollars over. So some of the campaigns focused principally on that, the money market offering, some of the CD offerings that we have. I think we've had quite a bit of success bringing in new customers. So north of 50% of the new money that comes in is new customers.

Speaker 2

So it's better than fifty-fifty, but it's worked. Let's put it that way. But I think the principal reason why we're successful and we've been able to manage the betas and the migration a little better really is because of the insight that we have within our customer base with the tools that we put into place with AI, data scientists and the data hub that we have, we were able to We spent a lot of time analyzing behavior and I think that's really helped us with pricing and we've been a little more disciplined and others, I think if you look at our cost of funds, our margins are a little better. So it kind of shows there. But I also believe that being the principal bank for consumers and businesses, as I said in my remarks, is critically important and that requires a consistent investment in technology or new management services, all the things that That I mentioned earlier.

Speaker 2

So they both go hand in hand.

Speaker 8

I appreciate that. Do you have a rough percent on a rough average rate on the new CDs? What's your current best offer? And then just talk about the seasonality in the muni book briefly?

Speaker 2

Yes, Vince, I don't know. I don't have those details at the tip of my fingers. Do you have that, Vince?

Speaker 5

Yes, I would say, I mean, a couple of things. The rates And the promotional CDs and money market rates have been right around 5%, little below or little above. So we've had, as Vince said, with All the data analytics supporting it and the tools we have in place, we've brought in close to $800,000,000 in new money really since May through that, and that's kind of benefited the overall balance sheet. And then the muni flows, I've always talked about is $300,000,000 to $500,000,000 is kind of The range of what comes in during the most recent quarter, it's at the higher end of that and really kind of spread throughout the categories. A small amount is really in the DDA and most of it's more in the money market and sweep accounts where that Money flows through.

Speaker 5

And that peaks and troughs as you go through the year kind of builds through October, November and then the Q1 is always the trough of that.

Speaker 8

I appreciate that. And then just switching topics, switching gears for a second. What are kind of updated thoughts on buyback? You just had So much growth this quarter. Is that the main kind of limiter there?

Speaker 8

And obviously, that probably comes first organic growth. But can you just kind of walk through where buyback fits in given that CET1 is above your target?

Speaker 5

Sure. I can comment on that. I mean, we're at 10.2%, so we're a little above our target. I think during the Q2 when we were active, there were great opportunities to put some money to work there. And in the Q3 with the growth we had, Plus the timing of the special assessment, there was an expectation that might happen in the Q3.

Speaker 5

And just the uncertainty, we decided not to Be active during the Q3. As always, we're committed to managing capital in a manner that's fully aligned with shareholders. We're closely monitoring it. We may become active in the Q4, but we want to really see how the overall environment plays out. But clearly, there's room to do that.

Speaker 5

And With the dividend payout ratio that we've all worked really hard to get down to 30%, we now have flexibility and the strong earnings generation that we have This number will build and we'll put it to work. Loan growth stays strong. We'll use that to support loan growth. That's always our kind of first and best use. Yes.

Speaker 2

Hey, Vince, the other thing I wanted to mention is the tax credit transaction that we've closed this quarter, some folks have asked, is that like a one time event? No, we actually have a business that pursues tax credit transactions, particularly in the energy field. So we've done a number of them over the last few years. In the group, there's a pipeline of tax credit transactions that we pursue. So sometimes it's lumpy because it takes time to build out a solar field or it takes time to get certified and get that stuff up and wanting because they actually have to be delivering power, right, before you can start the whole process from a financial perspective.

Speaker 2

But It is a business that we have. It's in our corporate finance area and they've done a terrific job over the last few years. So I would expect that to continue as well into next year, because we've developed that expertise and we're confident that the people that we have Doing that, Tim and his team have done many of these and are very well positioned to keep pursuing opportunities. I would add that to the mix as well because it doesn't show up the same way from a profitability perspective because we book an asset that has a very low margin, right, That ends up impacting margin and then we get a tax benefit and then you all say, well, what? You're just winning on a tax benefit, But that's actually part of the profitability of the extension of the credit, just so everybody understand.

Speaker 2

So some folks have asked us about that and I wanted to make sure we were clear that that's something that we Pursue on an ongoing basis and will be additive to next year as well. And it provides capital too, right? I do. Yes. Yes.

Speaker 8

I appreciate that added color. Thank you.

Operator

Right. The next question comes from Frank Schiraldi from Piper Sandler. Please go ahead.

Speaker 9

Good morning. Hey, guys. In terms of the guide for NII, you mentioned no additional rate hikes. If we do get a November or December rate hike. I mean, I'm just wondering if that's meaningful anymore in terms of what that adds on an annualized basis to NII?

Speaker 9

And maybe if you could just talk a little bit about how you're managing the balance sheet sensitivity for the higher for longer rate outlook? Thanks.

Speaker 5

Yes. I mean, any rate movement, Frank, right, it's late in the quarter, doesn't really do much for the Q4. So there's not much benefit that we get there. And with where rates are, I mean, it's not that big of an impact even to next year. I mean, if you look at our IRR position, we've been Kind of gradually moving towards neutral as each quarter has gone by, kind of naturally getting there.

Speaker 5

When you look at when our IRR stats will be out in the queue, I mean, the plus 100 ramp to a minus 100 ramp is around 1%, 2%. So There's actually a benefit both ways because you have the rates on loans and investment securities we're putting on continue to be higher than the portfolio rate. So you kind of get benefits from that. But 25 basis points in the grand scheme of things, it doesn't it's not going to do that much. And we'll bake it into the guidance in January when we give it out, but it's really not going to move the dial.

Speaker 9

Okay. And then just thinking about the 4Q expense guide, is the right way to think about that? You talked a lot about the investments being made. Should we think more about that as an acceleration of investments and potentially So there's a potential leg down in expense or given everything you guys are doing, is that just better to think about At run rate at this

Speaker 2

point. Yes. Vince, I don't know if you want to cover that.

Speaker 5

Sure. I can comment on that. I mean, as Vince talked about, we've continuously invested in company, you know that Frank, they covered us for a long time. So it's been it's part of how we run the company, investing to generate future revenue, and we've been able to do that maintaining very good efficiency ratio in the low 50s. So it's just part of running the business and Conversations we have internally are always about focusing our CapEx spend where we can drive future revenue And investing in markets, right?

Speaker 5

We've added new markets through the de novo strategy, through expanding our AGM strategy, Northern Virginia, Charleston and markets that are very attractive. So that's also part of the investment is investing in those new markets, which then I mean, the expenses in the Q4, it's always At the end of the year, it can be a little lumpy or finishing up incentive plan accruals and those types of things that comes in. So when we do our guidance in January for next year, we'll have a cost savings target as we have every year. I mean, we've taken out $60,000,000 or so in cost as we've grown and created the scale, so that's always part of how we run the company. And the initiatives that Vince talked about, the de novo's digital investments, infrastructure to support that growth, we focus on generating that positive operating leverage and having a low 50 percent efficiency ratio.

Speaker 5

So it's not easy, but it's a focus within the company, and I think investments have served us well. So it will continue to be part of it. So it's not really a step function to it, Frank. It's a good question, but it's really just part of how we run the company.

Speaker 9

Okay, great. And then just lastly, on the tax rate and the renewable energy transaction and totally get that's just part of the deal, that's just part of the economics or these tax credits that you get. Would you say that if I look at the 4Q Q23 guide, it's a bit lower, I'd say, than your rate over the last several quarters, except for this 3Q. Is that would you say that's kind of lumpy too? Is there kind of more expected in 4Q or is that just has that business just ramped up to a degree where you could see that as Potentially sustainable.

Speaker 5

Yes. The Q4 level, Frank, is really tied to the same solar deal that we just closed in the 3rd quarter. The bulk of the tax credit gets recorded in the Q3, and then there's carryover kind of smoothing out the effective tax rate for the year that Also benefits the Q4, and that kind of completes it for this transaction. But as Vince said, there's a pipeline of Transactions that we continue to go after, and the team is already working actively on others that Could happen next year and into 'twenty five. So but the 4Q is really just tied to this transaction and kind of the smoothing of it into the Q4.

Operator

Our next question comes from Brian Martin from Janney Montgomery. Please go ahead.

Speaker 10

Hey, good morning, guys. Just one for me on back to the margin just for a minute, Vince. I guess, the appreciate the color on The abatement of the funding pressure here and but I guess as far as the DDAs go, I mean, I guess the contractions slowed a bit again this quarter. Just Wondering if you think we're nearing a bottom there, just how you're thinking about that in general and maybe just an update on kind of where new loan production is coming on.

Speaker 5

Yes, I would say, I guess, let me talk to I don't know. Go ahead, Vince.

Speaker 7

No. The

Speaker 2

answer, Vince. I wasn't sure which Vince Brian was asking. Go ahead.

Speaker 5

Well, I can comment on the loans. And then maybe, Vince, if you want to talk about the strategy on non interest bearing afterwards, that would probably be good. The new loans that we made during the Q3, they came on at 685, which was up from 637 in the 2nd quarter. The commercial loans came on in the 7s and mortgage is in the mid- to high 6s during the Q3, and those are kind of mid-7s as We sit here today just given where mortgage rates are. So 6 to 85, a pretty good level and above Overall portfolio yield, so you're getting that benefit coming through.

Speaker 5

I mean, the overall portfolio rate on a spot basis went up 15 basis points With that higher level of made rates on the loans that we made versus where the portfolio is. And then we have a slide in the deck, Brian, that you're familiar with. I mean, the non interest bearing deposits has been a focus as long as I've been here and Vince before me. We've grown from 16% to, I think we peaked at 34%. We were 26% kind of pre COVID, right?

Speaker 5

And we're going to work hard to keep that number as high as we can and it's just part of everything we do, every week of pricing, every ALCO meeting, every board meeting.

Speaker 2

Yes, it's actually on Page 13 in the investor deck line. We comment on that Frequently, but if you look, it goes to what I've been saying strategically, our goal was to drive up non interest bearing deposits. Basically, I know during the lower interest rate environment, people didn't value them as much. I used to talk about them all the time, talk about our performance here and people didn't pay attention because back then the FTE the benefit, the FTP benefit wasn't that great. But today, It really provides us with a pretty substantial buffer from a margin perspective.

Speaker 2

And if you go back to 2019, we were at 26% Demand deposits, 31 in 20. No, I mean, you then can see the surge coming in with stimulus. So we're feeling pretty good about where we are. We focused on client primacy. Rich Chan's term, he has the trademark on that.

Speaker 2

So he calls it client primacy. It's our internal strategy to make sure that we're the principal depository bank and disbursement bank for consumers and businesses. And again, we've continued to make investments in de novo branch locations to drive new households, where we can be the disbursement bank on the consumer side. We've invested in digital. We've invested in TM products and services, like I said, the payment hub that we put in place and some of the other products that we just rolled out that help us establish ourselves as the principal depository bank.

Speaker 2

That's why These demand deposits don't move around that much. So relative to others, they're not it's not just cash parked here. I mean, in many instances, those balances are being used to cover services. The balances have to remain to cover disbursements could go on throughout a month or a week. So it's pretty much embedded.

Speaker 2

So we're feeling pretty confident about our deposit mix here. That's not to say there wasn't pressure because when rates were lower, of course, companies and individuals, including myself, A little sloppy about leaving their money sitting in demand deposits. So that's changed. I think the consumers expect and the businesses expect to invest those balances given the returns they can achieve today. So I think we've demonstrated here over a pretty long period of time that we are a very solid depository institution with Heavy emphasis on low cost funding sources.

Speaker 2

Anyway, I hope that helps you.

Speaker 10

Yes. That's helpful. It sounds like it still could go a bit lower, but still better than beer and holding up well. So okay. And then maybe go ahead.

Speaker 2

Yes, I think it will I think we'll outperform the peers. I can't speak to where we're going to be in the future because who knows what if I can predict interest rates, I wouldn't be here, I'd be trading bonds. But I think that we're going to outperform because of our business model. So that's

Speaker 7

Got you. Okay, makes sense.

Speaker 10

Maybe just one for Gary on the reserve. I mean, the reserve was down a touch this quarter. It's still pretty healthy level, inclusive of the marks. But just wondering how to think about the reserve in conjunction with the strength in credit.

Speaker 3

Yes, Brian, in terms of the reserve, I mean, it's a constant focus from our perspective. At 125 and 130 With the unamortized discounts, I mean it's upper quartile, strong compared to peers. We feel good about where it is and the position to the portfolio here entering the end of the year. So I would expect it to continue to track similarly as we go forward.

Speaker 10

Okay. And remind me, Gary, I think there was a credit out there this quarter with some other banks with a SNC portfolio. How big your SNC portfolio is today?

Speaker 3

Yes. Our SNC portfolio today is $3,000,000,000 40% plus of it is investment grade and essentially the balance of it is Essentially right up against investment grade. So that portfolio has performed Extremely well, it's extremely strong. Our focus we don't buy paper. Our focus is really on customers that we know and customers in our market, so that focus has really Proven itself very well in that portfolio as over a long period of time.

Speaker 3

We've generated significant deposits that Vince has referenced around that portfolio as well and continue to It continues to perform exceptionally well. It's a very strong portfolio.

Speaker 7

Got you.

Speaker 2

Okay. Yes. I hate to answer Question though, because you can't compare every bank's syndicated loan portfolios. So on the buy side in particular, we're not a leverage finance player. We're buying with this patient if we participate in a deal because we think that we're going to get ancillary business, we're participating in bond economics, their customers, One of the rules we have is that our bankers have to have a relationship with

Speaker 7

the company.

Speaker 2

They can't just rely on Bank of America or P and C to bring us into a deal. Those are that's a different type of portfolio than having a less than portfolio that you just go out by leverage transactions and for yield. So to Gary's point, we have a big chunk of investment grade credits in that syndication portfolio. And then also, we need a number of credits. We have a syndications Efforts that we booked out.

Speaker 2

So that would be included in that number where we're left to leave. So all that needs to be taken into consideration.

Speaker 3

Yes. As Vince indicated, we're not in the leveraged finance business. We don't have a private equity business. It's really customers in our markets that we call on and So it's been a very strong book of business for us.

Speaker 10

Got you. I appreciate all the color there. And then maybe just last one was on the commercial and consumer pipeline. I know you're not giving any guidance on 24, but Kind of given the growth this quarter, just kind of want to see where the pipelines are at today relative to last quarter, just how do you frame it?

Speaker 2

We can't. We're coming off of a pretty good funding quarter. So typically what happens is the pipelines reset. I think we're down between 5% 10% in most of the markets. I just looked at the statistics across the markets.

Speaker 2

We track it pretty rigorously. So I'd say down 5% to 10%, but still building. I think when you look at the portfolio overall, The dynamics of our commercial loan portfolio, 1, I think that attrition has slowed dramatically because of the climate rates. So that's going to help stabilize the balances, that's number 1. Number 2, I think demand for capital It's slowed going into next year.

Speaker 2

So that's part of why the pipeline have slowed or Decreased a little bit, particularly I focus more on the 90 day pipeline, which is down about 4% or 5%. That's what I tend to focus on because we look at it both ways, right, total versus close in the short run. I think it will build again going into next year, obviously, depending on what happens with the Rates in the economy overall, but I'm pretty confident that there will be some build. And then the third thing I wanted to mention was that Utilization rates have declined slightly, which is an indication there's a pullback. So we're seeing in the commercial book 1% to 2% decline in utilization rates.

Speaker 2

And to me, that's an indicator that the borrowers are accountable exactly.

Speaker 5

Got you. And those pipelines, yes,

Speaker 10

the pipelines you're talking 4% to 5% lower both for consumer and Commercial or is that just primarily commercial?

Speaker 2

No, I was I'm sorry, I was speaking only to commercial. Consumer is

Speaker 5

the

Speaker 2

pipelines for consumer depends on which space you're in. If we want to talk mortgage, We have more mortgage than we need to. We're basically becoming more competitive to push product off the balance sheet, right? So we're more competitive in the conforming space, which impacts margin a little bit, so it gets it off the balance sheet. We've been very successful growing markets for a mortgage business.

Speaker 2

So I'm not too worried about that. Small business has performed pretty well. The pipelines are up. That's Physicians First program and emphasis on healthcare As kind of paid off for that group, we have some really good people that we brought on the head of our small business lending area, has a specific expertise In healthcare, which is why we're developing this product that I mentioned earlier in the call,

Speaker 5

the

Speaker 2

pipeline there looks pretty good. And I think we do have an opportunity moving into 'twenty four as I said, in the small business segment, which falls under consumer to grow that book of business, I mean, we have a boatload of small business customers across 7 states. I mentioned 90,000 to 100,000 So our small business pipeline at the most recent quarter was at record levels and I would expect us continue to capitalize on that. I know it doesn't contribute as much to the total, but that should go as well for the retail consumer That's where we are. I don't really we're not anticipating issues with Mortgage or so the mortgage is tougher, right, in the higher interest rate environment, but the majority of the loans that we're originating across a pretty broad footprint are purchase money loans and we've invested pretty heavily in the platform recently.

Speaker 2

So we're pretty confident we can achieve better than your results in the mortgage business like we have. And then that leads to home equity opportunities and or other opportunities in the consumer segment. And with the application that we rolled out, we also think that will help us in 2024. So being able to open a depository account and apply for a home equity loan simultaneously will help us Originate loans in the consumer space.

Speaker 10

Okay. And the last one for me was just on the efficiency. Just it feels like given the comments about managing expenses and what we saw this quarter We should think of the low 50 efficiency ratio as kind of a sustainable level here going forward?

Speaker 2

Yes, we target we've always said we target 50 to 55%. That's What we hope to achieve, we want to stay obviously as low as possible, right, because we're all incented to keep expenses well here as part of our incentive program. So I think that we're going to be very diligent, but I also think that given our capital liquidity, our digital investment, what we have going on here, we need to stay focused on growing revenue as we move through this difficult time. We're capable of managing risk very effectively. And I think we're in a very strong position to grow as we move into 24.

Speaker 2

So on the revenue side, I believe we'll have an opportunity to manage at least contribute to positive operating leverage outside relative to the peers. So there There's expense build, but there's also revenue growth coming along with it. So that's kind of the strategy. It's been the strategy for a long time. I know there's periods where it's lumpy and people ask in a way, your efficiency ratio is going to be.

Speaker 2

You can see the results over a long period of time we've been an outperformer relative to the peers for a decade, I believe. Anyway, that's where we are.

Speaker 10

Perfect. Thanks for taking all the questions, guys.

Speaker 2

Well, I just again, I'd like to thank everybody for the questions, very detailed questions, very good questions. So thank you for participating. I also would like to thank our employees again. I say it every But you can't do this without great people. So I'm engaged and enthusiastic employees no matter what basis We come through at the end because we work together as a team.

Speaker 2

But thank you to the employees and then thank you to the shareholders for continuing to have confidence and as we will continue to deliver as we move through these choppy years here. So thank you. Take care, everybody.

Operator

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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Earnings Conference Call
F.N.B. Q3 2023
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