Earnings Call Transcript - FCF Q3 2023

Operator, Operator

Ladies and gentlemen, thank you for standing by. My name is Brent and I would like to welcome everyone to the First Commonwealth Financial Corporation Third Quarter 2023 Earnings Results Release Conference Call. At this time, all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. It is now my pleasure to turn today's call over to Mr. Ryan Thomas, Vice President of Finance and Investor Relations. Sir, please go ahead.

Ryan Thomas, Vice President of Finance and Investor Relations

Thank you, Brent, and good afternoon everyone. Thank you for joining us today to discuss First Commonwealth Financial Corporation third quarter financial results. Participating on today's call will be Mike Price, President and CEO; Jim Reske, Chief Financial Officer; Jane Grebenc, Bank President and Chief Revenue Officer; and Brian Karrip, our Chief Credit Officer. As a reminder, a copy of yesterday's earnings release can be accessed by logging on to fcbanking.com and selecting the Investor Relations link at the top of the page. We've also included a slide presentation on our Investor Relations website with supplemental financial information that will be referenced during today's call. Before we begin, I need to caution listeners that this call will contain forward-looking statements. Please refer to the forward-looking statements disclaimer on Page 3 of the slide presentation for a description of risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statements. Today's call will also include non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. A reconciliation of these measures can be found in the appendix of today's slide presentation. With that, I will turn the call over to Mike.

Mike Price, President and CEO

Thank you, Ryan, and good afternoon everyone. For the third quarter of 2023, we are pleased to report core net income of $39.6 million, which translates to $0.39 of earnings per share, an ROA of 1.38%, and an efficiency ratio of 53.4%. The NIM compressed nine basis points quarter-to-quarter to 3.76%. The rate of deposit cost increases is slowing, and we believe that the NIM will stabilize going into the end of the year and continue to hold up in 2024. In a higher-for-longer environment, we believe that improvement in loan yields would likely outstrip growth in deposit cost. Operating expenses were up $1 million from the prior quarter, driven by costs associated with debit cards. Basically, we had a one-time recognition of $900,000 in losses identified as part of a new automated system for processing debit card disputes. In addition, we had a $600,000 increase in FDIC insurance compared to last quarter due to the acquisition of Centric and the associated deposit balances. This was somewhat offset by $1.1 million in decreases in salaries and benefits due in part to lower hospitalization expenses. Total loans grew approximately $102 million in the quarter or 4.6% annualized. Our Northern Ohio and Pittsburgh regions led the way geographically. From a line of business perspective, Commercial Banking and Equipment Finance were the key categories driving growth. We've shown loan growth commensurate with deposit growth each of the last three quarters. We have also strategically exited some non-relationship borrowers. End-of-period deposits grew $94.8 million or 4.2% annualized in the third quarter, which is just short of the loan growth in the quarter. Average deposits increased by 2.1% from last quarter. Strong regional contributors included Central Ohio and Community PA. This led to the loan-to-deposit ratio rising slightly from 96.4% to 96.7% in the quarter. We ended the quarter with solid credit metrics. Total delinquency was 25 basis points, and non-performing loans as a percentage of total loans were flat at 54 basis points. Reserve coverage was a healthy 280%. Criticized loans and classified loans both improved. Net charge-offs annualized as a percentage of average loans were $4.4 million or 18 basis points, of which approximately $1.2 million was related to the Centric acquisition. Provision expense for the third quarter totaled $5.9 million, driven by loan growth and an additional $4.1 million in specific reserves, reflecting an updated appraisal on a non-accrual commercial loan. The allowance for credit losses at quarter-end totaled $134.3 million and the allowance as a percentage of loans was a healthy 1.51%, which compares favorably relative to our peers. On the digital front, adoption of the credit score manager tool in online banking has grown faster than expectations since its launch in late April. We now have 30,000 users taking advantage of this robust financial wellness tool we believe is a best-in-class solution. The focus on our digital account openings has yielded expected growth so far in 2023, especially for checking accounts, with an increase of over 190% in openings compared to the same period last year. We are now opening approximately one of every five accounts via the digital channel versus in person. In closing, we've built enough strong revenue engines and have sufficient risk appetite to grow constructively, provided we fund the asset growth with organic deposit growth. With that, I'll turn it over to Jim Reske, our CFO. Jim?

Jim Reske, Chief Financial Officer

Thanks, Mike. We have been able to produce solid deposit growth all year to fund our loan growth. On a year-to-date basis, making no adjustments whatsoever for our Centric acquisition, loans have grown by $1.28 billion, while deposits have grown by nearly the same amount, $1.24 billion. As a result, our loan-to-deposit ratio has been relatively stable in the mid-90s all year, but that masks our ability to grow our deposit base to fund our loan growth. Excluding the Centric acquisition, total loans have grown by $354 million year-to-date while period-end deposits excluding Centric have grown by $597 million. These deposits, however, came at a cost. In the third quarter, we saw our cost of deposits increased by 28 basis points, while our loan yields improved by only 21 basis points. Deposit rotation from low-yield categories to higher-cost deposit categories continued, but at a slower rate than last quarter. Fortunately, the overall pace of deposit cost increases continued to slow in the third quarter. Average cost of funds increased 48 basis points in the second quarter, but only increased 32 basis points in the third quarter. It's too early to call the peak on deposit costs, but loan yields keep coming up nicely as well. New loans came on the books at an average rate of 7.43% in the third quarter, up nicely from 7.01% in the second quarter and 6.61% in the first quarter. The result, as Mike said, was nine basis points of margin compression to 3.76%, a level which we still believe compares relatively well with peers. Our initial outlook for next year continues to show margin stability, though the range of potential outcomes is wider than usual due to the unpredictability of depositor behavior. Our base case rate scenario calls for a Fed funds rate of about 4% by the end of next year. In this projection, the NIM actually expands a bit until mid-2024 and then falls slightly in the second half, ending 2024 right about where it is now, hence NIM stability. In a higher-for-longer rate scenario, you don't see that dip in the second half of 2024. So the NIM is marginally better by about five basis points. These forecasts are highly dependent on assumptions regarding depositor behavior. For example, we have fairly conservative assumptions around the continued rotation of customer deposits in 2024 from low-cost categories into higher-yielding loans, even in a falling rate environment. So even in that falling rate environment, we assume that we'll still have about 10% of the low-cost deposits rotate into higher-cost categories, in keeping with our experience in 2023. And even with those assumptions, the 2024 NIM looks stable. By contrast, in a higher-for-longer rate environment, we would expect more deposit rotation into higher-cost categories, which would offset some of the benefit of higher rates. Fee income was little changed from last quarter. SBA gain on sale premiums have been under pressure, but our wealth division did better. We expect the income to be little changed next quarter. For next year, we are looking to grow SBA fee income to help offset slowing mortgage gain on sale income and the impact of lost interchange income due to the Durbin Amendment. Non-interest expense was elevated in the second quarter in part due to costs associated with debit cards and related items as Mike described. Our expected non-interest expense is around $65 million to $67 million next quarter. We think expense pressures will continue in 2024, but we're committed to keeping a lid on costs. We repurchased approximately 260,000 shares in the third quarter at a weighted average price of $12.36. We slowed share repurchases somewhat late in the second quarter to conserve capital. Tangible book value per share increased from $8.24 to $8.35, as retained earnings growth outstripped increased AOCI. Regulatory capital ratios improved slightly, while the tangible common equity ratio remained unchanged. And with that, I will turn it back over to Mike.

Mike Price, President and CEO

Operator, now we'll turn it over for questions.

Operator, Operator

Your first question comes from the line of Daniel Tamayo with Raymond James. Your line is open.

Daniel Tamayo, Analyst

Good afternoon, everyone. I want to clarify your guidance on the margin, Jim. If the Fed funds rate ends the year around 4%, will the NIM expand during the year and finish at about the same level as now? Is there a contraction expected at the start of the year, or did I understand that it will just expand?

Jim Reske, Chief Financial Officer

I'm sorry, I didn't mean to speak over you. You're correct in your understanding. There will be some expansion moving forward, benefiting from the loan portfolio and the rate increases that have occurred this year. Additionally, a positive replacement has been observed, contributing to this expansion. However, if the Fed funds rate decreases significantly by the end of next year, there will be some pressure on the variable rate portfolio, which could lead to a slight decline in the overall net interest margin. Consequently, that margin is projected to align with current levels by the end of next year.

Daniel Tamayo, Analyst

Okay. So you've got the margin going up next quarter essentially and then Fed dependent kind of as we move into 2024?

Jim Reske, Chief Financial Officer

Yes. With the big caveat that these are all projections and we could always be wrong their forecast, right? So the hard thing to forecast has been depositor behavior, which is one of the reasons I was trying to give a little more disclosure on some of the deposit behavior assumptions underlying the projections. But that's right. You've got that right. In that projection, we think that the low point for the margin is actually this quarter.

Daniel Tamayo, Analyst

On that note, do you know what the margin was in September, or are you curious how it changed during the third quarter?

Jim Reske, Chief Financial Officer

I don't, but I'll get it for you before the end of the call.

Daniel Tamayo, Analyst

Okay, that sounds great. I heard your comment about ongoing expense pressure in 2024. Could you elaborate on how you are viewing that in comparison to your historical expense growth?

Mike Price, President and CEO

I’ll start with your question, Daniel. Just a week ago, we reviewed 30 operating plans across various regions, lines of business, and support units. With RESOLVE, we aim to achieve effective operating leverage in next year’s budget. This will involve making informed assumptions about potential interest rate changes, reducing costs, and managing turnover without necessarily announcing cuts. We also plan to implement process improvements. We expect every line of business, business unit, and region to improve each year, growing deposits and loans while creating operating leverage within their respective budgets. We’re about halfway through this process and will finalize it in the next 30 days. That’s our goal. Looking at our track record over the past 11 or 12 years, we tend to be quite accurate, and if we do fall short, it's by a small margin.

Daniel Tamayo, Analyst

All right. Terrific. I appreciate the color. I’ll step back.

Operator, Operator

Your next question comes from the line of Michael Perito with KBW. Your line is open.

Michael Perito, Analyst

Hey, good afternoon guys. Thanks for taking my questions. I wanted to circle back on the margin conversation a little bit. I was curious if you guys can maybe give us a little incremental color in terms of like what the incremental spread is on your loan and deposit books today. So meaning, like your blended commercial loan yield on new originations against kind of your incremental dollar of deposits and where that spread is today? And it would seem like based on your margin guidance that you guys feel a bit more confident about being able to maintain or grow that spread moving forward now. But just curious, if I'm interpreting that correctly. And any detail there would be helpful.

Mike Price, President and CEO

Go ahead, Jim.

Jim Reske, Chief Financial Officer

I think you're talking about new loan spreads on corporate loans, which are holding up very nicely.

Mike Price, President and CEO

They are and in fact our biggest category of growth is commercial variable, and our spreads there on advances and really all-in are well in excess of 8%.

Michael Perito, Analyst

Okay. And on the incremental funding side, roughly where you guys kind of at today against that excess 8% figure?

Jim Reske, Chief Financial Officer

Yes. Incremental funding is going to be driven by the kind of deposit specials we have out right now, which is going to be between 4% and 5%. Current CD special time deposit specials are right about 5%, and money market specials are between 4% and 4.5%.

Michael Perito, Analyst

It appears that the incremental spread is quite beneficial for the margin, which aligns with your earlier comments, Jim, regarding the possibility that this could mark the bottom for the net interest margin. These details seem to support that perspective. Is this how you're approaching your projections?

Jim Reske, Chief Financial Officer

Yes, I think that's right. And just to be clear, the figure, Mike, sorting the yield on some of the corporate categories. If the overall yield on everything coming in is 7.43% in the quarter and your marginal cost of funds is still in the 4% to 5% range, that does kind of support the continued stability of the NIM.

Mike Price, President and CEO

Yes, and we've pivoted, we're supporting growth in categories quite frankly that have the best spread. And we're really believers in all of our businesses, but there are times where we've pinched some of those businesses that have lower yields at this time. We want to keep our producers looking forward, but we're putting on assets in the most attractive categories generally.

Michael Perito, Analyst

That's helpful. As we consider the growth opportunities for next year, it appears to be a balance between your desire for growth and customers' willingness to take on credit. Your balance sheet seems well positioned; if the spreads and risk-adjusted returns are within your comfort level, you have the capacity to grow loans at least in the mid-single digits next year without overextending yourselves. On the other hand, do you believe there is enough customer interest, particularly with corporate yields above 8%, to support that level of production based on your current insights? I would appreciate some context regarding these two aspects as we look at loan growth for 2024.

Mike Price, President and CEO

We do. I mean, we're not a market maker. We're a taker. We're in most of the markets we're in. There is sufficient volume and opportunities out there for us to compete. And we have a number of competitors both small and large that either don't have the flexibility or desire to grow right now. So that's where we're at. It's a good position to be in. And by the way, that varies by geography. We have six markets: capital region in Eastern PA, Community PA, Pittsburgh, Northern Ohio, Central Ohio, and Cincinnati. And it does vary by geography, but we believe there's enough out there to comfortably hit what are lower loan figures this year and next year than we've done in the prior two years. Part of that is because we're pretty balanced, and we have a pretty full range of solutions for clients.

Michael Perito, Analyst

Great. And then just last question for me. Obviously, the credit quality of your balance sheet remains pretty stable here. But as we think about the third quarter, there's really been some not so savory data points from many credit card delinquencies, auto delinquencies obviously, Discover was pretty bearish on their earnings call. So how do you guys kind of approach the credit piece here? I mean, obviously, you're calling your portfolio, stressing it, and looking at it, but there are starting to become somewhat obvious signs of deterioration. Obviously, that doesn't directly correlate to your loan book, but could have broader implications for the economy if continued, right? So I just would love some updated thoughts around the current credit environment. And yes, I was just curious how you guys are kind of approaching that just given some of the data points we've gotten in the last week or two?

Mike Price, President and CEO

Well, we have Jane Grebenc, myself, Brian Karrip, and others that have been through several cycles over 35 years or so. In each of these geographies we're in tends to do pretty well through cycles and has through – did through the great financial crisis in certain categories. We've really tightened and we're a top fund credit across the board appropriately so. And there are – we do feel there'll be some strain, but probably on things that in retrospect that we knew we should have done at the time. But we'll work through it and – but we do think that there's enough demand out there and that credit will hold up relatively well. Brian, do you want to add any color to that?

Brian Karrip, Chief Credit Officer

Just that we have seen delinquencies in the consumer side pick up a couple of basis points. As we look at it and take it apart, we know that our portfolio for indirect is up a few basis points, roughly 10 basis points quarter-over-quarter. But our portfolio is well underwritten. If you think about the strong FICO score in that business around 744 weighted average, you think about the granularity in the portfolio, the deal size, the go-to-market strategy, we feel pretty comfortable that we can see what we have in our portfolio and address any increase in delinquencies.

Jim Reske, Chief Financial Officer

Brian, if I could add just kind of looking over your shoulder at delinquency reports, this still is a little bit mixed. Overall consumer delinquencies are up as the categories you mentioned, but somewhat down as well I think, right?

Brian Karrip, Chief Credit Officer

Yes, the HELOC category improved and we think our portfolio is in good shape entering into this credit cycle.

Michael Perito, Analyst

Got it. No, I think that's very fair. I appreciate you guys all pitching in there and providing some color. It's helpful. Thank you for taking my questions.

Mike Price, President and CEO

Thank you.

Operator, Operator

Your next question comes from the line of Karl Shepard with RBC Capital Markets. Your line is open.

Karl Shepard, Analyst

Hey, good afternoon, guys.

Mike Price, President and CEO

Hey, Karl.

Karl Shepard, Analyst

I wanted to pick up here on the deposit conversation. Jim, I appreciate kind of all the help and the sensitivities and the forecasting. But – what are you guys hearing from this field that gives you a little bit of confidence in the forecast. And I know the comment was, I think, slowing deposit pressures. But if you had to give it your best shot, when do you think deposit costs can peak, assuming the Fed is done?

Jim Reske, Chief Financial Officer

We address your question about the peak in deposits. Our projections indicate that, even in a declining rate environment, deposit costs will gradually increase. A comparison would be like a motorboat: once the engine is turned off, it continues to move forward. Even if the Fed reduces rates next year, overall deposit costs are likely to keep rising due to the rotation phenomenon we've discussed. We've been focusing on understanding this and have successfully attracted new deposits, which has helped expand our deposit base, as I mentioned earlier. However, this also affects our loan pricing, which will carry on into next year. In our forecasts, we do not anticipate a peak even in a declining environment; instead, it stabilizes toward the end of next year. If rates remain elevated for an extended period, and do not change from their current levels, deposit rates will continue to rise, or loan rates will increase at a faster pace. This scenario is more favorable for us in terms of margin.

Mike Price, President and CEO

Yes. I would just add, and Jane is on the phone, I think her and the team have done a terrific job pivoting to deposits, bringing deposits in. And as you recall, we got off to a late start simply because we had to prance under $10 billion with Durbin. But once we got focused, we've grown deposits pretty nicely from quarter to quarter and added a lot of new deposits. Jane, any color you want to add?

Jane Grebenc, Bank President and Chief Revenue Officer

Only that we have seen the request for deposit exceptions decline a bit, which tells us that competitors are slowing down a bit. And our retention rate on the CDs that we have been bringing in and our money market specials, the retention rates were very good. So, we feel good. You can never have too many transaction accounts, but we feel good.

Jim Reske, Chief Financial Officer

It's Jim again. If I could jump back in just because Jane mentioned it, our CD retention rate has been really remarkable. We retain about 80% of the CDs that mature. Now of that the ones that we retain, we've seen about 60% of those would go to the rack rate so they're priced lower, but about 40% will take the current special rate. But the retention rate has been really strong. That's been really in our favor. Let me also just take a minute just to give you a little more color on that whole deposit rotation concept we've been talking about because it really informs our projections for next year. So, if I look at the low-cost deposit categories, really of noninterest-bearing and savings, those together were about $4.6 billion at the end of the first quarter. And that's a good starting point for us because we closed the Centric acquisition in the first quarter. Those two categories together fell to about $4.3 billion in the second quarter. That was a 5.8% decline in those categories. But in the third quarter it fell to $4.2 billion. That was a 3.6% decline in those categories. So just at a macro level, I mean Jane is giving you the color from the street of the day-to-day exceptions that we deal with and customers and those interactions. But on a macro level, I'm watching the numbers and I've seen it slow down. That gives me a lot of confidence. And even with that we still have a fairly aggressive assumption that it's going to continue next year. And even with that, we still get things to buy. Oh and one more thing. I do have the month-to-month NIM answer from the previous caller. From July, the NIM was 3.83%, which is pretty consistent with the second quarter 3.85%. July was 3.83%. August was 3.69%, and September was up to 3.76%. There you go.

Karl Shepard, Analyst

Okay. Not that that wasn't a lot of color, but I'm just going to ask a follow-up on deposits. But the strategic focus is growing deposits to fund loan growth, right? We've talked a lot about the pricing pressures and that changing location. Just when you think about driving balanced growth in 2024, it doesn't seem like it's going to be a TD special game. It seems like it's going to be more core relationship growth. But if you could just expand on those comments a little bit, that would be great. Thanks for all the help.

Mike Price, President and CEO

Jane, do you want to comment and lead us out there?

Jane Grebenc, Bank President and Chief Revenue Officer

Well, I think we're always going to have CD specials at least for the next couple or three years. But as I said before, I don't think the pace or the height of these specials is going to continue. And we still have a very strong transaction account base, and we've got a nice savings book. So, I feel very good about our deposit positioning.

Mike Price, President and CEO

We have a good slide on Slide 15. This is Mike. Sorry to interrupt. Thanks for that Jane. But our average retail account is $11,000. Our average deposit size is $18. You might move over three or four basis points but you're probably not going to move 300 or 400 basis points, but perhaps not still inclined over an additional 25 and these are loyal customers and small communities. I mean our Community PA, we call it the breadbasket of our company is $3.5 billion of our deposits, and this is great clients with deep relationships. We do feel confident that we have a good depository and they could surprise us as Jim suggested, but we feel like we're well-positioned.

Karl Shepard, Analyst

Okay. Thank you. I’ll step back.

Operator, Operator

Your next question comes from the line of Manuel Navas with D.A. Davidson. Your line is open.

Manuel Navas, Analyst

Hey, good afternoon. What are you kind of assuming on that like loan yield repricing kind of in a normal quarter with no hikes, with no change to that funds rate? Do you have kind of a standard loan yield increase?

Mike Price, President and CEO

I'll just start where I think Jim might have mentioned it, but our portfolio here in the last quarter was about 7.40% in terms of new loan yields, and that ranged from as high as in certain categories as high as well over 8%. And the two key categories are commercial and really equipment finance, and equipment finance is really running in the high 7s. And so those are key categories for us, but there's good volume there and that volume doesn't evaporate and even our indirect business has got up almost 7%, 6.85%. So, just good progression by the team in terms of getting paid for risk and wherever they're at on the yield curve. And so that's a nice position to start from. Jim, anything you want to add?

Jim Reske, Chief Financial Officer

Yes, Manuel, I'd add. So we keep giving you and we were giving you the new loan yields, but the replacement yields, the differential between the yield on what's coming on versus what's coming off has been expanding. And that also gives us confidence in the margin. So in the second quarter, that differential was 87 basis points, and new loans are coming on the books is 7.01%, but it was 87 basis points higher than what was running off the books. And this is the differential in the third quarter was 115 basis points.

Manuel Navas, Analyst

Okay. Okay. That's helpful. Is your thinking about growth in the fourth quarter into next year, where do pipeline stand? And there's usually been a shift towards more commercial at the back half of the year? Is that going to keep happening? Just kind of thought process on the mix of loan growth at the back half of the year and into next year.

Mike Price, President and CEO

Pipelines are definitely lighter than they were a year or two ago, but the two years preceding this we grew in the low teens. And so understandably, we do think the kind of guidance we've given mid-single digits from four to six is very achievable in a variety of ways. And if anything we're kind of pinching volume, if the spread isn't right or it's not in the right category. And at the same time, we cherish a couple of businesses right now that we're pinching a little bit more just because of where the yields are at.

Jim Reske, Chief Financial Officer

And by pinching, we mean we're pricing those so that the new origination volume is fairly close to the runoff volume. So the loan portfolio size doesn't grow, but if the price is upward, which doesn't create any capital or funding pressures, but has increased yield in margin. And on the consumer side, that story is playing out fairly nicely.

Manuel Navas, Analyst

That's mainly auto, right?

Jim Reske, Chief Financial Officer

Yes, I'm particularly thinking about auto. We've discussed this before, and that's exactly on my mind. This situation creates opportunities for funding and capitalizing growth in commercial lending.

Mike Price, President and CEO

Yes. I mean, that's now at the group.

Jim Reske, Chief Financial Officer

$46 million.

Mike Price, President and CEO

We achieved $46 million this past quarter, which is approximately $35 million in actual figures, along with $46 million of new volume at a rate of 7.69. We're pleased with the details of that. We have also fine-tuned our approach concerning the types of equipment financing we offer. Additionally, we have a strong team that we brought in a few years ago, and we are optimistic about the business in several of our commercial sectors.

Manuel Navas, Analyst

I appreciate that. For my last question, can you discuss new deposit flows? Specifically, how much is coming from existing customers contributing more funds versus new households?

Jim Reske, Chief Financial Officer

We've been monitoring the relationship this year, and it has remained quite stable. When we receive approximately 100 in new deposits from a promotional offer, about 50 comes from repricing our existing accounts. For instance, when we launch a new CD promotion, some funds are transferred from existing savings accounts into this new offering. The other half of the new deposits comprises entirely new funds, with about 50% coming from our current customers, which is excellent for us. Finally, the remaining 25% represents completely new money.

Mike Price, President and CEO

I think what's helped us there is a year ago our cost of funds deposits at this time last year, Jim, was five basis points, right?

Jim Reske, Chief Financial Officer

Yeah. Right.

Mike Price, President and CEO

And we had all been driven off CD customers.

Jim Reske, Chief Financial Officer

Correct.

Mike Price, President and CEO

I believe that now that we have stable rates, we are seeing our loyal customers consolidating their household finances with us. Customers who had placed their funds at other banks are choosing to bring that money to us. It’s uncertain how long this trend will continue, but a significant portion is originating from our rural markets.

Manuel Navas, Analyst

Okay. That's great. And I do want to catch up on the buyback. How did that appetite change across the quarter? Kind of just from the 10-year rising to where it did and you want to have a little bit more capital, and does that leave you to think it could go up a little bit in terms of pace in the fourth quarter?

Jim Reske, Chief Financial Officer

I have adjusted the cap on the price for our stock buyback. Earlier in the quarter, we were buying back shares at prices around $12.50, but now the cap is set at $12. We're engaging in a buyback strategy, and on any given day that we're trading below $12 a share, it does slow down our buyback activity a bit. This is probably to maintain some liquidity, but also because we want to ensure we have the capacity to call our subordinated debt. We have two tranches of subordinated debt at the bank level, each worth $50 million. One tranche is already callable and has lost 20% of its Tier 2 capital treatment. Therefore, we want to be in a strong position to call that debt when needed, especially as we approach next June when we may lose another 20% of Tier 2 capital treatment.

Manuel Navas, Analyst

No. That's helpful. Thank you very much. Thank you guys. Thank you.

Jim Reske, Chief Financial Officer

Thank you.

Operator, Operator

Your next question is from the line of Matthew Breese with Stephens Inc. Your line is open.

Matthew Breese, Analyst

Hey. Good afternoon everybody.

Mike Price, President and CEO

Hey, Matt.

Matthew Breese, Analyst

Jim, in the press release you mentioned that the excess liquidity this quarter affected the NIM by about eight basis points. I'm interested in knowing how much excess liquidity you are holding at the end of the period and how long you plan to maintain it. Additionally, considering the margin dynamics you're discussing, do you expect any normalization of liquidity in those projections?

Jim Reske, Chief Financial Officer

Yeah. It's been about $250 million of excess liquidity when we took on reactor Silicon Valley Bank sale in the first quarter. We started to deploy some of that in the third quarter. I think got it down to about $160 million, but of excess just excess cash. So when I say excess cash that means we borrowed money from the FHLB and we parked to the Fed. We're going to continue to - what we've been experiencing is deploying that cash into securities purchases, and we're going to continue to do that here for the rest of the year and into next year as well.

Matthew Breese, Analyst

Okay. So maybe we should think of putting to work $40-ish million a quarter. Is that a fair way to think about it?

Jim Reske, Chief Financial Officer

It will be about right. Might be a little more than that. I think our securities portfolio for at least in last year we were doing almost no purchases to let that run off. So that we can redeploy in the loan growth and it was a good profitable strategy, but it's gotten to a point where it's a little small in terms of a portion of total assets compared to peers. And so we'd like to get the size of the securities portfolio up a bit.

Matthew Breese, Analyst

Okay. That was actually on my list of questions. We're down to 11% securities to assets. But this quarter, obviously, a pop up close to 6% period-to-period. Where would you ultimately like to be over what time frame?

Jim Reske, Chief Financial Officer

We don't have a specific target, but we want it to grow from here. We anticipate an increase of around $100 million next year. We're not planning to make huge investments like $0.5 billion in securities next year, but we do aim for the portfolio to expand from its current size.

Matthew Breese, Analyst

Okay. I think accretable yields represented 10 bps of the NIM this quarter. It's always a hard to model figure. Could you just give us the most recent forecast there? How much of an impact every quarter you expect it to be on the NIM?

Jim Reske, Chief Financial Officer

We believe it’s around 10 basis points per year and we are trying to highlight that the accretable yield and the cash figures balance each other out. We anticipate it will be approximately seven basis points next quarter.

Matthew Breese, Analyst

And seven slowly declining to five. Is that a good estimation for 2024?

Jim Reske, Chief Financial Officer

It is. I don't have the exact number in estimation for you for 2024 yet. I'll get to that next quarter, but it is fading out. So that's probably a fair assumption.

Matthew Breese, Analyst

On the credit front, the one category I'm curious about is auto. There's been some more recent headlines I think it's sub-prime auto delinquencies are starting to go higher. I wanted to know what your experience has been and if you see anything underneath the hood there that we should be incorporating into our models for higher charge-offs, delinquencies, things of that nature?

Mike Price, President and CEO

Well, we only do auto in the prime market. We had good experience through the last credit cycle and probably started to hook a few more cars. But Brian, why don't you give them the rest of the story?

Brian Karrip, Chief Credit Officer

Yeah. We have a prime business. We don't have sub-prime. As I mentioned earlier, delinquencies are up from quarter in June 30 basis points to 40 basis points this quarter. We're watching it closely. We've got a very experienced leadership team in that business. They're managing the business well. The underwriting is tight. And we're going to continue to watch it, Matt. Thank you for your question.

Matthew Breese, Analyst

I also wanted to ask just staying on the topic of credit. What is the size of your syndicated loan portfolio? How is the credit performance there? And how much of that if you have any is that of market?

Mike Price, President and CEO

Yeah. Please proceed.

Brian Karrip, Chief Credit Officer

So the SNC book is $90 million. It's down significantly over the past several years, and it's performing fine.

Matthew Breese, Analyst

Okay. And then I did want to touch on the specific reserve this quarter. It was based on a reappraisal. What was the credit? Was it a commercial real estate or commercial credit? And what were some of the primary factors that changed the appraisal enough where you had to put some money aside?

Mike Price, President and CEO

Brian?

Brian Karrip, Chief Credit Officer

Yeah. Thank you for your question. So this is an office property in the eastern part of the state, Central Business District. The loan was originated in 2018, and the pandemic, the property became 100% vacant. In 2021, we put it on non-accrual. Our procedure is to get an annual appraisal, and the appraisal value that came in most recently showed a significant decrease in value, so we added a specific reserve of $4.1 million. So the appraisal year-over-year reflected a 100 basis point increase in the cap rate and as I mentioned earlier, the lease-up assumptions from the appraiser indicated that it would take a fairly long period of time to lease the property. That's why the value decreased.

Mike Price, President and CEO

I think we have just one additional non-accrual borrower that is an office property. They're paying as agreed. It's a $2.2 million loan, and we feel pretty good about that one.

Brian Karrip, Chief Credit Officer

That's correct.

Matthew Breese, Analyst

The loan where you put aside a specific reserve this quarter, what's the total loan size? And how much are you now covered for on the reserve?

Brian Karrip, Chief Credit Officer

The loan size is $12.6 million and the specific is $4.1 million.

Matthew Breese, Analyst

Thanks. I'm sorry, specifically how much? 6.1 million?

Brian Karrip, Chief Credit Officer

It's $4.1 million is the specific reserve for the loan.

Matthew Breese, Analyst

I'm just curious about how confident you are in the $4 million reserve covering potential losses.

Brian Karrip, Chief Credit Officer

We're as confident as the most recent appraisal which is one month old. We continue to actually monitor this. Should they find tenants or should they have a desire to sell the building or special asset people will update the numbers, and then we'll post up on a quarterly basis.

Matthew Breese, Analyst

Okay. Last one for me is just around M&A. You still have a pretty strong multiple relative to the group, and I'm curious if you're hearing more from your nearby peers that might not be in a strong position. There's more conversations whole bank or fee income?

Mike Price, President and CEO

Yes, there's more whole bank, and there's definitely a lot more conversation than I would say in the last five years. And we talk to everybody and people in the past have come to us a couple of times first and that's been nice. We're a good partner, quite frankly, and we tend to do right by the people that partner with us, and they do well and we do well. I think we have a slide in our investor deck that shows how we've grown organically and with small M&A generally $1 billion or less. And that's been very accretive to us over time. And those would be ideal transactions kind of tongue in cheek, particularly a rural depository. You just don't know. And we're not overaggressive, but we do talk to everybody and it would be a great way to continue to supplement. We can grow the bank. We've just flat out can. It's just, you got to do it right and you got to do it with low-cost funding. And Jane is all over that, trust me. So, is that helpful?

Matthew Breese, Analyst

Very helpful, Mike. I appreciate it. Thank you for the time.

Mike Price, President and CEO

Thank you.

Operator, Operator

Your next question comes from Daniel Cardenas with Janney Montgomery Scott. Your line is open.

Daniel Cardenas, Analyst

Hey, Dan. Good afternoon, everyone. Most of my questions have already been addressed. I have a couple of modeling inquiries for you. How should I approach your tax rate moving forward? It's been relatively stable recently. Is a rate around 20 percent still a reasonable expectation?

Jim Reske, Chief Financial Officer

It is about yes, it's 20.02, but call it 20.

Daniel Cardenas, Analyst

Okay. And then Jim, I missed your comments on fee income. I guess I can't multitask. Can you maybe just kind of quickly go through those again?

Jim Reske, Chief Financial Officer

Yes, Dan. I can't multitask either, by the way. We believe fee income is relatively stable. However, we will see the impact of Durbin next year, which will affect fee income. We are exploring options such as increasing SBA income to help mitigate that.

Daniel Cardenas, Analyst

Okay, great. Thanks guys.

Mike Price, President and CEO

Thanks, Dan.

Operator, Operator

There are no further questions at this time. I will now turn the call back over to the CEO, Mr. Mike Price.

Mike Price, President and CEO

We always appreciate your interest in our company and the opportunity to interact and hear what's on your mind. Thank you for your time today and thank you.

Operator, Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.