Fnb Corp/Pa/ Q3 FY2023 Earnings Call

Good morning, and welcome to the F.N.B. 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'd now like to turn the conference over to Lisa Hajdu. Please go ahead.

Thank you. Good morning, and welcome to our earnings call. This conference call of F.N.B. Corporation and the reported files with the Securities and Exchange Commission often contain forward-looking statements and 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. Reconciliations of GAAP to non-GAAP financial measures to the most directly compatible GAAP financial measures are included in our presentation material 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. 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 Delie, Chairman, President and CEO.

Thank you, and welcome to our third quarter earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer; and Gary Guerrieri, our Chief Credit Officer. F.N.B. reported third quarter net income available to common shareholders of $143 million or $0.40 per diluted common share. This quarter's performance represents EPS growth of 3% linked-quarter. Our results reflect the execution of F.N.B.'s long-term strategies, geared towards risk management, client primacy, generating organic growth, and diversifying fee-based income. Our third quarter efficiency ratio equaled 51.7% and is expected to remain in the upper quartile on a pure relative basis. 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 interest rates, and return on tangible common equity was again at a solid level of 18.2%. As we have previously mentioned, F.N.B. is well positioned to steadily increase market share in this volatile environment, given the strength of our capital and liquidity position in adherence to our consistent and conservative underwriting guidelines. Total deposits ended the third quarter at $34.6 billion, a 2.3% increase from the second quarter while maintaining a relatively stable mix of non-interest-bearing deposits of 31%. Our third quarter linked deposit growth once again outpaced the Federal Reserve H.8 deposit data, continuing a trend with quarterly outperformance versus the industry and demonstrating the strength of our granular deposit base and diversified geographic footprint, 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 F.N.B. ranks in the top five in nearly 50% of the MSAs we operate in, and in the top three in nearly 30%. Despite the acceleration of deposit competition throughout the banking industry, F.N.B. spot deposits have decreased less than 0.5% since year end 2022, demonstrating our trusted position as our customers' primary operating bank. Our deposit growth this quarter was effectively funded dollar for dollar by our 2.5% linked-quarter growth in loans, which also meaningfully outperformed H.8 data. 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 cost provides balance sheet optionality and the ability to support our clients' capital needs. 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 deliver for retail and business customers. Our award-winning eStore offers a unique platform, driving a better customer experience and 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 across our seven state footprint. During the quarter, we fully charged off the commercial and industrial loan we mentioned in our second quarter earnings call. 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 consistent underwriting and managing credit risk to maintain a balanced, well positioned portfolio throughout economic cycles, enabling us to serve our customers through business cycles in ways our competitors cannot. I will now turn the call over to Gary to provide additional information on our credit performance.

Thank you, Vince, and good morning, everyone. We ended the quarter and 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 basis points and non-performing loans and other real estate owned decreased 10 basis points to end at the solid 36 basis points. Criticized loans were down 18 basis points with net charge-offs for the quarter and year-to-date of 47 basis points and 26 basis points, respectively. Excluding the isolated credit that Vince noted, net charge-offs for the quarter and year-to-date period were 7 basis points and 12 basis points, respectively. I'll conclude my remarks with an update on our credit risk management strategies and commercial real estate portfolio. As previously disclosed in the second quarter earnings call, we pledged a single $31.9 million commercial and industrial 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 $25.6 million providing for loan growth and the previously mentioned charge-off in excess of the $13 million specific reserve that we allocated to it at the prior quarter end. Our ending funded reserve decreased $12.1 million in the quarter and stands at $401 million or a solid 1.25% of loans reflecting our strong position relative to our peers. When including acquired unamortized loan discounts, our reserve stands at 1.39% and our non-performing loan coverage position remains strong at 3.94%, 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 recent exercise, which confirms that our diversified loan portfolio enables us to withstand various economic downturn scenarios. Regarding the non-owner-occupied commercial real estate portfolio, delinquency and non-performing loans remain very low at 31 basis points and 20 basis points, respectively, confirming that our consistent underwriting and strong sponsorship demonstrate the ability to perform in a rising rate environment. In closing, asset quality metrics ended the quarter at good levels, and we continue to generate diversified loan growth in attractive markets. 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.

Thanks, Gary, and good morning. Today, I will focus on the third quarter's financial results and offer guidance updates for the fourth quarter. Third quarter net income available to common shareholders totaled $143.3 million 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, and this quarter, they closed a large solar deal with a related investment tax credit. Loans and leases ended the quarter at $32 billion, growing $796 million or 2.5% linked quarter, driven by the success of our strategy to grow high-quality loans across our diverse footprint. Commercial loan growth of $470 million or 2.4% was across our seven state geography with notable contributions in the Pittsburgh, Mid-Atlantic and North Carolina markets. Consumer loans ended the third quarter at $12 billion, a linked quarter increase of $326 million or 2.8%, led by growth in residential mortgages. The investment portfolio remained flat at $7.1 billion, with a fairly even split between available for sale and held to maturity. The duration of our securities portfolio at September 30 is 4.4 similar to last quarter. Total deposits ended September at $34.6 billion with a healthy increase of $790 million linked quarter or 2.3%, 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 H.8 deposit data, where our deposit growth was nearly 220 basis points higher for the quarter and 320 basis points higher since year end 2022. The deposit mix shift slowed modestly this quarter as customers moved into time deposits and interest-bearing demand deposits, which grew $458 million and $712 million, respectively, more than offsetting the decrease in non-interest bearing deposits of $210 million. As time deposits have grown, we have intentionally kept the portfolio short with a weighted average maturity of 11 months, so that when rates do fall, we will have the ability to reprice these balances downwards. As of September 30, 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. Revenue totaled $408 million, driven by net interest income of $327 million and growth in non-interest income, reflecting our diversified fee income strategy. The third 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 1.93%, 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. Turning to non-interest income and expense. Non-interest income totaled $81.6 million, a 2% increase from the second quarter as capital markets income increased $1.2 million led by International Banking with solid contributions from swap fees, syndications and debt capital markets income. Mortgage banking operations income decreased $1 million due to negative fair value marks given the sharp increase in mortgage rates during the third quarter that more than offset a 46% increase in total saleable mortgage production versus last quarter. Non-interest expense totaled $218 million, an increase of $6.2 million or 3% from last quarter. Net occupancy and equipment expense increased $3.5 million largely due to the impact of technology investments and the inflationary macroeconomic environment. Marketing expenses increased $1.5 million due to the timing of digital marketing campaigns which helped drive deposit growth and acquire additional households. The efficiency ratio equaled a solid 51.7%, up slightly from 50% last quarter. For the first nine months of 2023, the efficiency ratio totaled 50.8% compared to 54.7% for the same timeframe in 2022. While supporting the strong loan growth, our capital ratios remained robust through the quarter. Our tangible common equity finished the quarter at 7.54% and when adjusted for held-to-maturity investment marks would equal 6.7%. 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 available for sale and held to maturity 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 accumulated other comprehensive income, which reduced the current quarter end tangible book value per common share by $1.06. On a year-over-year basis, tangible book value per common share increased a full dollar or 12.5%, demonstrating our commitment to internal capital generation. Let's now look at the fourth 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. The fourth quarter net interest income is expected to be between $315 million and $325 million, assuming no additional interest rate hikes for the rest of the year. Fourth quarter non-interest income is expected to be around $80 million, which is similar to our guidance levels for the first three quarters of the year as we continue to benefit from our strategy of diversified fee-based businesses. Fourth quarter guidance for non-interest expense is expected to be between $215 million and $220 million, driven by increased investment spend and the impact of the inflationary macroeconomic environment. Full year provision guidance has been revised to a tighter band of $70 million to $80 million and will be dependent on net loan growth and charge-off activity in the fourth quarter. Lastly, the full year effective tax rate should be between 17.5% and 18%, and the fourth quarter effective tax rate is expected to be between 17.8% and 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.

Once again, this quarter's financial performance was achieved through the dedicated efforts of all of our employees. The culture at F.N.B. is rooted in team working collaboration to collectively reach our goals. F.N.B. continues to earn national recognition for our inclusive culture based on independent feedback from our own team members, building on the multiple awards we received earlier this year for innovation, leadership in our family-friendly benefits and compensation programs, we 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, F.N.B. is well prepared to meet the needs of our consumer and business clients with a broad array of products and services, a strong balance sheet and a commitment to achieving success for all of our stakeholders. Thank you.

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

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 look like from a margin perspective and yields, that kind of stuff?

Good morning, Danny. I have a few comments on that. Considering everything the industry has faced this year, it seems clear that the peak was in the first quarter. In the third quarter, our net interest income only decreased by $2.6 million, with net interest margin compression moderating to 11%, which is down from a decrease of 19 basis points last quarter. Since May, the monthly decline in net interest margin has averaged around 3 to 4 basis points a month, showing a steady decrease within that range. Our outlook for the fourth quarter is between $315 million and $325 million, and we do not anticipate any rate increases, so the decline in margin similar to what we experienced in the third quarter is reflected in our guidance.

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 2023, in particular, physicians 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?

I believe we are in a strong position compared to many competitors, especially smaller banks that are facing capital and liquidity challenges. This enables us to actively pursue more opportunities with confidence and support our clients' capital needs as we approach 2024. While we haven't provided specific guidance for next year, I expect that loan demand will be unpredictable for everyone. To succeed, we need to focus on increasing our market share in areas where there is still solid GDP growth. Additionally, our company's expansion over the years allows us to explore multiple markets for opportunities. As we head into 2024, finding creditworthy borrowers may become more challenging, increasing competition. Our widespread presence should benefit us compared to companies concentrated in just a few states. We've also made significant investments in various platforms that will enhance our fee income. Alongside loan growth, we've performed well on the fee income front despite ongoing pressures. Our investments in digital platforms will support small businesses and deposit growth in the upcoming quarter as our Common application is fully developed. We've upgraded our treasury management systems and payment processing capabilities, which have shown improvements over the past year. In our Capital Markets division, we've enhanced our ability to engage in bond offerings, allowing us to participate in lower-risk transactions while meeting our return benchmarks. All these factors contribute to my confidence in our performance this quarter and moving forward. However, I acknowledge that the macroeconomic environment will influence our results, and we need to ensure that capital investment is occurring on the commercial side.

Terrific color. I appreciate all that. I'll step back. Thanks, guys.

Okay. Thank you.

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

Hey. Good morning, guys. Thanks for taking my questions. I wanted to start on a comment you made, Vince, about making investments on the OpEx side and trying to take advantage of the posture of the industry. I was wondering if you guys are willing to kind of go a 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 sheet to really kind of fully take advantage of them.

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

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.

Yes, that's a great question, and we've discussed this internally. There are two directions we could take as we head into next year. The banking industry overall is experiencing margin compression, and some banks are having difficulty growing revenue. There's a lot of competition in the depository area, which is why there's a lot of caution as we approach next year. However, considering our position, we have solid capital and excellent liquidity. We've invested in new retail expansions, which are starting to come online, although there will be associated expenses. We've begun investing in these projects, so you can expect to see depreciation expenses related to them. At this point, we anticipate they should start generating revenue soon. We launched several of these initiatives at the start of this year or late last year, so we expect to see positive results. These initiatives are primarily in higher growth markets that are not experiencing the same challenges as some of the more traditional markets. We feel optimistic about our performance there. We're also looking forward to the implementation of the Common application that I've mentioned. Customers can currently purchase multiple loan products on our platform, and by the end of this quarter, they will be able to apply for various loan and depository products with a single application. Training for our field teams has been ongoing, and we expect to see the benefits of that soon. Additionally, we revised our model in branches several years ago by introducing relationship bankers instead of tellers and platform staff, which means our branches now have more highly trained bankers. We are completing the transition in the last region to this upgraded banking model, which should improve cross-selling and product sales beyond just handling transactions. Moreover, there are several bankers pulling back at other institutions, which presents us with opportunities to pursue businesses we have been targeting in the commercial sector for a while. Specifically, we have invested in treasury management to strengthen our relationship with mid-market and larger companies. We've also enhanced our digital platform allowing us to capture a larger share of client wallets more efficiently by providing an improved onboarding experience. We have made significant investments in our institutional capabilities related to capital markets and client relationships. This will likely lead to better performance compared to our peers. Additionally, we have expanded our small business lending platform and plan to integrate merchant and treasury management services into a bundled program similar to the Common application, which we will start developing in the first quarter of next year. Currently, we have around 90,000 clients in the small business segment, with a penetration rate of about 3% to 5% among merchants. This presents a considerable opportunity for fee income, and we are focusing on this as we move into next year. These strategic investments are essential, and I believe it's prudent for the company to continue pursuing them to drive revenue growth in 2024, especially when it may be more challenging for others.

Thank you for the thorough explanation. I have a high-level question regarding the franchise's size and growth projections. I assume you have ongoing discussions with the Board and executive team about the appropriate level of capitalization. Given the discussions around capital on the asset side, I wonder what your updated perspective is on the optimal capital level for F.N.B. over the next few years. Do you anticipate it being higher than it has been in the past 24 months? While I understand you don't need to have an answer immediately, I'm interested in the internal conversations about capital, especially in light of current events and your plans for expanding market share and growing the balance sheet moving forward.

Yeah. Well, we cover capital and liquidity position of the company in every board meeting that we have. So we have a pretty separate team when we go over various elements of our financial performance. We discussed the balance sheet in detail and strategies around maximizing returns. That happens in every Board meeting. 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 that we had on the table for a long time. I think given the AOCI 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, in the consumer businesses while 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. I understand that $100 billion and greater, you're going to see greater expectations from regulators for capital. I believe we are currently in one of our strongest positions in years. Our portfolio is very solid, and we've made significant progress in the energy sector. Gary has done an excellent job of reducing risks in that portfolio with the sale of Regency, hospitality, and some adverse credits. We've effectively moved over $1 billion off the balance sheet even before the pandemic. From a capital standpoint, we feel very comfortable and we discuss this at each board meeting. Our returns on tangible common equity place us in the upper quartile. Despite holding higher capital ratios, we still maintain an 18% return on equity, indicating strong performance and profitability.

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

One more thing on capital, by the way. We've distributed over $1.5 billion through share repurchases or dividends over $1.5 billion in capital deployment to shareholders as well. So I think when you think about the company in 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, we have much higher capital ratios. That's part of the equation. So we feel that we need to evaluate where we are every quarter anyway, sorry.

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

Hey. Good morning. I just wanted to follow-up on the net interest margin. What are your thoughts on where it could bottom next year? Just kind of updated there and then I have a follow-up on deposits.

I'm not certain about the guidance for next year. I'll let Vince provide some insight on our current situation. Go ahead, Vince.

We'll share our insights when we provide guidance for next year in January. For now, it looks like the fourth quarter will likely be at a similar level to the third quarter. This might carry over into the first half of next year, but we have just begun our budgeting projects for next year. So, there's still some potential for fluctuation, and it's difficult to predict when it will reach the bottom. Based on current conditions, that might occur around the middle of 2024, but this could change by the time we finalize our budget and issue guidance in January. The compression I mentioned has clearly moderated. If the fourth quarter remains in line with the third quarter, net interest income only decreased by $3 million earlier, indicating that maintaining net interest income is crucial for us, particularly for achieving an efficiency ratio in the low-50s. More details will be available in January, but I can't definitely say what level it might bottom out at. The compression has indeed moderated as I previously commented.

I appreciate the insight. Regarding deposits, the customer value engine is indeed strong and aligns with what customers are seeking. Are you able to provide a breakdown of what you're observing? Is the increase from new customers or current customers transferring more funds? Can you elaborate on where you are seeing success?

Yeah. I would say...

Yeah, I think it's a combination...

Go ahead, Vince.

I'm sorry.

I think it's a combination of factors. Part of the strategy is to encourage people to move more money over to us, which some of our campaigns have focused on. Our money market and CD offerings have been successful in attracting new customers, with over 50% of the new funds coming from them. This approach has proven effective. The main reason for our success, and our ability to manage betas and migration, is the insights we gain from our customer base using AI tools and our data scientists. We spend considerable time analyzing customer behavior, which has helped us with pricing. Additionally, we've maintained a more disciplined approach compared to others, which is reflected in our cost of funds and margins. Being the primary bank for consumers and businesses is vital, and it requires consistent investment in technology and treasury management services, which go hand in hand.

I appreciate that. Do you have a rough average rate on the new CDs or what's your current best offer? Also, could you briefly discuss the seasonality in the municipality book?

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

Yes. I would say that the rates on the promotional CDs and money market rates have been around 5%, either slightly below or above that. As Vince mentioned, with all the data analytics and tools we have in place, we've attracted nearly $800 million in new funds since May. This has effectively strengthened our overall balance sheet. Regarding municipal flows, I have consistently noted that the range is between $300 million to $500 million. In the most recent quarter, we saw flows at the higher end of that range, distributed across various categories. A smaller portion is in the DDA, while most of it is in money market and sweep accounts. These flows fluctuate throughout the year, typically building through October and November, with the first quarter usually seeing the lowest activity.

I appreciate that. Now, shifting topics for a moment, what are your updated thoughts on buybacks? Given the significant growth this quarter, is that the primary constraint? It seems organic growth likely comes first, but could you explain where buybacks fit in, considering that CET1 is above your target?

I can certainly address that. The 10.2% figure indicates that we are slightly above our target. In the second quarter, we seized great opportunities to deploy capital. However, in the third quarter, due to our growth and the timing of the special assessment, we anticipated some uncertainty and opted not to be active. We remain committed to managing our capital in a way that aligns with our shareholders. We are monitoring the situation closely and may become active in the fourth quarter, depending on how the overall environment progresses. There is definitely room for that. With our dividend payout ratio now down to 30%, we have the flexibility to utilize our strong earnings generation. This will allow us to put that capital to work. Our loan growth remains robust, and we will leverage that to support our loan growth, as it has consistently been our primary and preferred use of capital.

Yes, Vince. The other thing I wanted to mention is the tax credit transaction that we 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. And 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 running because they actually have to be delivering power, right, before you can start the whole process from a financial perspective. 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 has done many of these very well positioned to keep pursuing opportunities. But 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, well, 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 understands. 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?

Yes.

I appreciate that added color. Thank you.

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

Good morning. Hey, guys. In terms of the guide for net interest income, 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 net interest income. 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.

Yes, I would say...

I'll let Vince...

Any rate movement at this point in the quarter doesn’t significantly affect the fourth quarter, so there's not much benefit to be gained. Given the current rates, the impact won't be substantial even for next year. We've been gradually moving towards a neutral interest rate risk position each quarter. In terms of our interest rate risk status, the range from plus 100 basis points to minus 100 basis points reflects about a 1% to 2% variance. There are benefits in both directions because the rates on our loans and investment securities remain higher than the portfolio rate. However, a 25 basis point change, in the overall picture, won't have a meaningful impact. We'll incorporate this into our guidance in January, but it won't significantly affect our projections.

Okay. And then just thinking about the fourth quarter 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 expenses or given everything you guys are doing, is that just better to think about as a run rate at this point?

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

Sure, I can address that. As Vince mentioned, we've consistently invested in the company, and you've been following us for quite a while, Frank. This is how we operate—by investing to create future revenue. We have maintained a strong efficiency ratio in the low-50s, which is fundamental to our business strategy. Internally, we continuously focus our capital expenditures on areas that will drive future revenue and invest in new markets. We have expanded into new areas through our de novo strategy and by enhancing our ATM presence in places like Virginia and Charleston, which are attractive markets. This also plays a role in our investments, as these new markets help generate future revenue. Regarding expenses in the fourth quarter, it can vary as we finalize year-end incentive plan accruals and similar items. When we present our guidance in January for the upcoming year, we will include a cost savings target, as we do every year. We have already reduced around $60 million in costs while scaling up. This approach is an integral part of how we operate. The initiatives Vince described, such as de novo digital investments and the infrastructure to support growth, help us achieve positive operating leverage while maintaining a low-50% efficiency ratio. It’s challenging, but it remains a priority for the company. Overall, these investments have been beneficial, and they will continue to be part of our strategy. So, it's not so much a drastic change, Frank. It's simply part of our ongoing operational approach.

Okay. Great. And lastly, regarding the tax rate and the renewable energy transaction, I understand that it's part of the deal and relates to the economics of the tax credits you receive. Would you say that the guidance for the fourth quarter of 2023 is somewhat lower than your rate over the last few quarters, except for this third quarter? Is there some fluctuation there? Do you expect more activity in the fourth quarter, or has that business ramped up enough to be potentially sustainable?

Yes. The fourth quarter level is closely linked to the solar deal we finalized in the third quarter. Most of the tax credit is recorded in the third quarter, and there’s some carryover that helps smooth out the effective tax rate for the year, which also benefits the fourth quarter. This wraps up that transaction. However, as Vince mentioned, we have a pipeline of transactions we are actively pursuing. The team is already working on additional opportunities that could materialize next year and into 2025. The fourth quarter is primarily tied to this transaction and the smoothing effect into that period.

Got it. Okay. That's helpful. Thank you.

All right. Thanks.

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

Hey. Good morning, guys.

Hey, Brian. Hey. I have a question regarding the margin for a moment, Vince. I appreciate the insight on the easing funding pressure, but concerning the deposit accounts, it seems that the contraction has slowed down a bit this quarter. I'm curious if you believe we are approaching a bottom there and how you view that overall. Additionally, could you provide an update on where new loan production is originating?

Yes, I would say, I guess, let me talk to...

I don't know which Vince Brian was asking about. Go ahead.

I can provide insights on the loans. After that, Vince can discuss our strategy regarding non-interest-bearing accounts. In the third quarter, the new loans were issued at an interest rate of 6.85%, a rise from 6.37% in the second quarter. The commercial loans were in the 7% range, while mortgages were in the mid to high 6% range during the third quarter, and these are now in the mid-7% range given the current mortgage rates. A rate of 6.85% is quite favorable and exceeds the overall portfolio yields, reflecting positive gains. The portfolio's spot rate has increased by 15 basis points due to the higher rates on our new loans compared to the existing portfolio. Additionally, we have a slide in the presentation that highlights our non-interest-bearing deposits, which have been a priority since I started here, and even before. We've increased from 16% to about 34%, peaking there, and we were at 26% right before COVID. We are committed to maintaining that figure as high as possible, as it remains a critical focus in our pricing strategy, ALCO meetings, and board discussions.

Yes, it's on Page 13 of the investor deck. We frequently discuss this, but it aligns with my strategic goal to increase non-interest-bearing deposits. In a low-interest rate environment, people didn't place as much value on them. In the past, our performance didn't attract attention regarding the STP benefit, which wasn't significant then. However, today it gives us a substantial buffer from a margin perspective. If you look back to 2019, our demand deposits were at 26%, 31%, and 20%. You can see the increase during the stimulus period, so we are optimistic about our position. We prioritize client relationships, which is an internal strategy to be the main depository and disbursement bank for both consumers and businesses. We continue to invest in new branch locations to bring in new households and enhance our consumer disbursement services. We've also focused on digital platforms and TM products and services, like the payment hub and other recently launched products, which reinforce our role as a primary depository bank. That's why our demand deposits remain stable compared to others; they aren't just idle cash. In many cases, those balances are active in funding services, remaining available for regular disbursements throughout the month or week. We're confident in our deposit mix, although there was some pressure when rates were lower, as individuals and companies, including myself, tended to leave their money in demand deposits more often. That perspective has shifted; consumers and businesses now expect to invest balances for better returns. We've shown for a long time that we are a reliable depository institution, heavily focused on low-cost funding sources. I hope that clarifies things.

Yes, that's helpful. It seems like it could potentially go a bit lower, but it’s still performing better than peers and remaining stable. So, that’s good. Please continue.

Yes, I believe we will outperform our peers. I can't predict where we will be in the future because it's difficult to forecast interest rates. However, I am confident that we will excel due to our business model. So that's what I think.

Got you. Okay.

In terms of the reserve, I mean, it's a constant focus from our perspective. At 1.25% and 1.39% with the unamortized discounts I mean it's upper quartile, strong compared to peers. We feel good about where it is and the position of the portfolio here entering the end of the year. So I would expect it to continue to track similarly as we go forward.

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

Our syndicate loan portfolio today is $3 billion, with over 40% categorized as investment grade, and the remainder is close to investment grade. This portfolio has performed exceptionally well and remains robust. Our strategy focuses on customers we know and those within our market, which has demonstrated its effectiveness over time. Additionally, we have generated significant deposits related to this portfolio.

Got you. Okay.

I hesitate to respond to the question, as it's difficult to compare the syndicated loan portfolios of different banks. Specifically, we aren't players in leveraged finance; we buy participations only if we believe it will lead to additional business and we're involved in bond economics. One key rule we have is that our bankers need to maintain relationships with the companies; they cannot depend solely on others to include us in a deal. This approach differs significantly from simply acquiring a less diverse portfolio filled with leveraged transactions for yield. As Gary mentioned, a substantial portion of our syndication portfolio consists of investment-grade credits. Additionally, we lead several credits due to our syndication efforts, which also contributes to that figure, and all of this is important to consider.

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 have relationships with. So it's been a very strong book of business for us.

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 just 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?

Yes, we are coming off a previous funding quarter. Typically, the pipelines we have set show a decline of about 5% to 10% in most markets. I've been tracking the statistics closely, and that's my assessment. While we are down 5% to 10%, we are still building. If we look at the overall commercial loan portfolio, attrition has slowed significantly due to climate rates, which will help stabilize the balances. Additionally, demand for capital has diminished as we approach next year. This is a factor in the pipeline's slight decrease, particularly in the 90-day pipeline, which is down about 4% to 5%. I tend to concentrate on this short-term view. I expect it to recover next year, depending on interest rates and the overall economy. I'm optimistic that there will be some growth. Lastly, I want to mention that utilization rates have edged down a bit, indicating a pullback. In our commercial book, we're seeing a 1% to 2% decline in utilization rates, suggesting that borrowers are pulling back.

Got you. And those pipelines, yes, are you referring to the 4% to 5% lower figures for both consumer and commercial, or was that primarily for commercial?

I'm sorry, I was referring only to the commercial sector. The consumer pipeline varies depending on the specific area. For mortgages, we have more than enough to handle, which is making us more competitive in order to reduce what's on our balance sheet. We're focusing on the conforming space, which does impact our margins a bit, but it helps us move those loans off our balance sheet. We've been quite successful in expanding our consumer and mortgage business, so I don’t have major concerns there. The small business sector is doing quite well, and our pipelines are increasing. Our focus on health care has benefited that segment, and we've gained significant traction with our small business lending area, which has expertise in this field, allowing us to create the products I mentioned earlier. The pipeline looks promising for small businesses, and I believe we have growth opportunities in that segment moving into 2024. We have a large number of small business clients across seven states, around 90,000 to 100,000 customers. Our small business pipeline reached record levels in the last quarter, and I expect us to capitalize on that. While it may not contribute significantly to the overall total, it should positively impact our retail consumer bank. We're not anticipating major issues with mortgages, although it is more challenging in a higher interest rate environment. The majority of loans we're originating currently are for purchase, and we've made substantial investments in our platform. Thus, I'm confident we can outperform our peers in the mortgage sector, as we have in the past. This success also creates home equity opportunities and other possibilities in the consumer space. Additionally, with the new application we've launched, we anticipate it will assist us in 2024 by enabling customers to open a depository account and apply for home equity loans at the same time, which should boost our loan originations in the consumer market.

Got you. 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 that we should think of the low-50% efficiency ratio as kind of a sustainable level here going forward?

Yes. We have always aimed for an efficiency ratio of 50% to 55%. Our goal is to keep expenses as low as possible, as all of us are motivated to manage costs effectively as part of our incentive program. I believe we will be very careful with our spending. However, considering our capital liquidity and digital investments, we must focus on growing revenue during this challenging period. We are well-equipped to manage risks effectively, and I am confident that we are in a strong position for growth in 2024. On the revenue front, I see opportunities to contribute to positive operating leverage compared to our peers. While there will be some increase in expenses, we also anticipate revenue growth accompanying it. This has been our strategy for a long time. I understand that there are periods of fluctuation, and there may be questions about our expense management. However, over the long term, we have consistently outperformed our peers for a decade. That’s where we currently stand.

Perfect. Thanks for taking all the questions, guys.

Yes. Thank you.

Thanks, Brian.

This concludes our question-and-answer session. I would like to turn the conference back over to Vince Delie for any closing remarks.

I want to thank everyone for their detailed and insightful questions. Your participation is greatly appreciated. I must also express my gratitude to our employees once again; their contributions are invaluable. We achieve success because we work cohesively as a team. A big thank you to our employees and our shareholders for their continued trust in us. We are committed to delivering results as we navigate through these challenging times. Thank you, and take care, everyone.

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.