First Commonwealth Financial - Q3 2023
October 25, 2023
Transcript
Operator (participant)
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 result release conference call. At this time, all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question again, press star one. Thank you. It is now my pleasure to turn today's call over to Mr. Ryan Thomas, Vice President of Finance and Investor Relations. Sir, please go ahead.
Ryan Thomas (VP of Finance and Investor Relations)
Thank you, Brent, and good afternoon, everyone. Thank you for joining us today to discuss First Commonwealth Financial Corporation's third quarter financial results. Participating on today's call will be Mike Price, President and CEO, Jim 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 three of the slide presentation for a description of risks and uncertainties that could cause actual results to differ materially from those reflected in the forward-looking statement. 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)
Hey, 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%, an efficiency ratio of 53.42%. The NIM compressed 9 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 costs. 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 some $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 metered loan growth commensurate with deposit growth each of the last three quarters. We have also strategically exited some non-relationship borrowers.
End-of-period deposits grew $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%-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 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 screens well, we believe, relative to our peers. On the digital front, adoption of Credit Score Manager, a Credit Score Manager tool in online banking, has grown faster than expectations.
Since launched 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 (EVP and CFO)
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 increase 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 9 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 5 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 ones, higher costing ones, 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 get the benefit of higher loan yields, in part because the variable rate loan portfolio does not reprice downwards. But in that scenario, we'd expect more deposit rotation into higher cost rate categories, which would offset some of the benefit of higher rates. Fee income was little change from last quarter.
SBA gain on sale premiums have been under pressure, but our wealth division did better. We expect fee 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-$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-$8.35, as retained earnings growth outstripped increased AOCI. Regulatory capital ratios improved slightly, while the tangible common equity ratio remained unchanged. 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 (participant)
At this time, I would like to remind everyone, in order to ask a question, press Star, followed by the number one on your telephone keypad. To withdraw your question, again, press Star one. Thank you. Your first question comes from the line of Daniel Tamayo with Raymond James. Your line is open.
Daniel Tamayo (VP of Bank Industry)
Good afternoon, everybody.
Jim Reske (EVP and CFO)
Daniel.
Daniel Tamayo (VP of Bank Industry)
Maybe we start on, you know, I just want to make sure I heard your guidance correctly here, Jim, on the margin.
Jim Reske (EVP and CFO)
Sure.
Daniel Tamayo (VP of Bank Industry)
Yeah, I mean, just, I guess I can just tell you what I—so if the Fed funds rate ends about 4% into the year, then the NIM's gonna expand, or sorry, yeah, expand during the year and then end the year around where it is now.
Jim Reske (EVP and CFO)
Right.
Daniel Tamayo (VP of Bank Industry)
Is there a contraction at the beginning of the year, or is that...? Did I hear that?
Jim Reske (EVP and CFO)
No.
Daniel Tamayo (VP of Bank Industry)
Just expands and then... Okay.
Jim Reske (EVP and CFO)
I'm sorry. I didn't mean to talk over you, but yeah, you got it right the first time.
Daniel Tamayo (VP of Bank Industry)
No problem.
Jim Reske (EVP and CFO)
A little bit of expansion from now, so you get some of the benefit of a loan portfolio of the rate increases that have happened this year, year to date, and a positive increase-
Daniel Tamayo (VP of Bank Industry)
Mm-hmm
Jim Reske (EVP and CFO)
In yields we've been experiencing, so that helps to give you a little bit expansion. But then, rates, if the Fed funds rate falls that much by the end of next year, there's pressure on the variable rate portfolio that brings the overall NIM down a bit, so it trails off towards the end of next year. And it ends next year in that projection, actually exactly where it is right now, at 3.76.
Daniel Tamayo (VP of Bank Industry)
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 (EVP and CFO)
We deal with it. So, yeah, with the big caveat that these are all projections, and we could always be wrong. They're a forecast, right? So the hard thing to forecast has been deposit 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 got that right. In that projection, we think that the low point for the margin is actually this quarter.
Daniel Tamayo (VP of Bank Industry)
On that note, do you have what the margin was kind of in September? Or just curious how it progressed during the third quarter.
Jim Reske (EVP and CFO)
You know, I don't, but I'll get it for you before the end of the call.
Daniel Tamayo (VP of Bank Industry)
Okay. Thanks. Sounds great. And then just wondering, I heard your comment on expense pressure continuing in 2024. Just curious if you could put a little finer point on kind of how you're thinking about that, if, you know, relative to maybe what you've done historically in terms of expense growth.
Jim Reske (EVP and CFO)
I'll start there, Daniel, and great question. Just, just a week ago, we went through 30 operating plans for regions, lines of business, and business support units. With resolve, we will try to get to a good point of operating leverage in next year's budget. And that'll include a combination of making the best assumptions we can about what's going to happen and different optionalities for interest rates, really driving some more costs out. And not, when you have enough turnover in a bank, you don't have to announce RIFs and things like that. They've just been process, coupled with process improvements. But we just expect every line of business, every business unit, every region to get better every year, to grow deposits, to grow loans, and to create some operating leverage in their own respective budgets.
We're about 50% through that process, so we'll land the plane here in the next 30 days. But that's the goal, and if you look at our track record over the last 11 or 12 years, we're pretty close or good at that, and if we miss, it's not by much.
Daniel Tamayo (VP of Bank Industry)
All right. Terrific. Well, I appreciate the color. I'll step back.
Operator (participant)
Your next question comes from the line of Michael Perito with KBW. Your line is open.
Michael Perito (Managing Director)
Hey, good afternoon, guys. Thanks for taking my questions.
Jim Reske (EVP and CFO)
Good to be with you.
Michael Perito (Managing Director)
I wanted to circle back on the margin conversation a little bit. Was curious if you guys could maybe give us a little incremental color in terms of, like, what the incremental spread is on your loan and deposit books today. So meaning, like, if your blended commercial loan yield on new originations against kind of your incremental dollar of deposits and, you know, 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 you know, any detail there would be helpful.
Mike Price (President and CEO)
Go ahead, Jim.
Jim Reske (EVP and CFO)
I think you're talking about, well, new loan spreads, like on corporate loans? I think they're holding up very nicely.
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 (Managing Director)
Okay. On the incremental funding side... Roughly, where are you guys kind of at today against that, you know, excess 8% figure?
Jim Reske (EVP and CFO)
Yeah, 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 specials, time deposit specials are right about 5%, and money market specials are between 4% and 4.5%.
Michael Perito (Managing Director)
Okay. All right. So I mean, it sounds like then the incremental spread is very supportive of kind of the margin, which I'm, I guess, backing into your commentary, Jim, to the prior question about how you think this could be the bottom for the NIM. I mean, that those facts would seem to be very supportive. I mean, is that kind of the build-up in terms of your projections?
Jim Reske (EVP and CFO)
Yeah, I think that's right. And just to be clear, that is the, the figure Mike was throwing out, there's a yield on some of the corporate categories. So if the overall yield and everything coming in is 7.43% in a quarter, and your marginal cost of funds is still in the 4-5 range, that does kind of support the continued stability of the NIM.
Mike Price (President and CEO)
Yeah. And we've pivoted, you know, 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's 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 (Managing Director)
That's helpful. And then if we think as we start, and I realize you're not really providing 2024 guidance yet, but as we think about the growth opportunities next year, it seems to me like it's kind of a balance between, you know, your appetite for growth and customers' appetite for taking credit, right? And so, I mean, on the one hand, it seems like your balance sheet's very well-positioned. If the spreads and the risk-adjusted returns are within your comfort level, you guys have room to grow loans, you know, in a net basis, you know, pretty, you know, at least mid-single digits next year without putting too much stress on really anything.
But I guess the flip side of that question is do you think there's enough customer appetite with, for example, corporate yields north of 8% to drive that type of production based on what you're hearing and seeing today? And would love just some color on kind of those two sides of the equation as we think about loan growth for 2024 for you guys.
Mike Price (President and CEO)
We do. I mean, we're not a market maker, we're a taker. You know, 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 the prior two years.
Part of that is because we're pretty balanced, and we have anymore, a pretty full range of solutions for clients.
Michael Perito (Managing Director)
Great. And then just last question for me. You know, obviously, the credit quality of your balance sheet remains pretty stable here. But you know, as we think about the third quarter, you know, there's really been some not-so-savory data points from many of you know, credit card delinquencies, auto delinquencies. You know, 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 culling your portfolio and 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, right? But could have broader implications for the economy if continued, right?
So just would love some updated thoughts around the current credit environment, and, yeah, I'm just curious how you guys are kind of approaching that, just given some of the data points we've gotten in the last kind of 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, each. And you know, this geography we're in tends to do pretty well through cycles and did through the great financial crisis in certain categories. We've really tightened, and we're tough on credit across the board, appropriately so. And we do feel there be some strain, but probably on things in retrospect that we knew we shouldn't have done at the time. But we'll, we'll work through it, and but we do think that there's enough demand out there, and the credit will hold up relatively well. Brian, do you want to add any color to that?
Brian Karrip (Chief Credit Officer)
Just that, you know, we have seen delinquencies in the consumer side tick up a couple of basis points. As we look at and take it apart, we know that our portfolio for indirect is up a few basis points, roughly 10 basis points quarter-over-quarter, but our portfolio is well underwritten. You think about the strong FICO scores 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.
Michael Perito (Managing Director)
Brian, if I could add, just kind of looking over your shoulder, there's a delinquency report. So, it still is a little bit mixed. Overall, consumer delinquencies are up as the categories you mentioned, but they're somewhere down as well, I think, right?
Brian Karrip (Chief Credit Officer)
Yeah, the HELOC category improved, and we think our portfolio is in good shape entering into this credit cycle.
Michael Perito (Managing Director)
Got it. No, I think that's very fair. I, I appreciate you guys all for pitching in there and providing some color. It's helpful. Thank you for taking my questions.
Brian Karrip (Chief Credit Officer)
Thank you.
Operator (participant)
Your next question comes from the line of Karl Shepherd with RBC Capital Markets. Your line is open.
Karl Shepard (AVP)
Hey, good afternoon, guys.
Mike Price (President and CEO)
Hi, Karl.
Karl Shepard (AVP)
... 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 (EVP and CFO)
Yeah, let me go right to the heart of your question on the deposit peak. The projections we have, even in a falling rate environment, they drift slowly upward. The analogy, I don't think it's a good analogy, but it's one I came up with, is it's like a motorboat. You shut off the engine, and it keeps drifting forward. Even if the Fed cuts rates next year, deposit overall deposit costs will continue to continue to drift upward just because of this rotation phenomenon that we've been talking about. That's why we've been trying to track it, understand it. I think we've been very successful in getting new dollars in the door and growing our deposit base, like I was, I mentioned in my lead off the lead off to my comments.
But it also reprices our own loan book, and that's going to continue next year. So it doesn't—in our projections, even in a falling rate environment, we don't see a peak. It kind of levels off towards the end of next year. And then in a, if rates stay higher for longer, if rates don't change from here in that environment, the deposit rates continue to drift, drift upward. It's just that the loan rates drift upward even at an even faster rate. And so that's why it's better from a margin perspective for us.
Mike Price (President and CEO)
Yeah, I would just add, and Jane's 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 dance 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 CRO)
Only that we have seen the requests 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, in our, money market specials, the retention rates have been very good. So we feel good.
Mike Price (President and CEO)
Yeah.
Jane Grebenc (Bank President and CRO)
You can never have too many transaction accounts, but we feel good.
Jim Reske (EVP and CFO)
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 will go to the rack rate, so they price lower, but about 40% will take the current special rate. But the retention rate's 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, the 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 non-interest 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 in a macro level, I mean, Jane's 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'm seeing them slow down.
That gives me a little, a lot of confidence. And even with that, we still look fairly aggressive assumption that it's going to continue next year. Even with that, we still get the instability. Oh, and one more thing. I do have the month-to-month NIM answer from the previous caller from, I think, Danny, you were asking. July NIM was 3.83%, which is pretty consistent with the second quarter, 3.85%. But July was 3.83%. August was 3.69%, and September was up to 3.76%. So there you go.
Karl Shepard (AVP)
Okay. Not that that wasn't a lot of color, but I'm still going to ask a follow-up on deposits, but-
Jim Reske (EVP and CFO)
Sure.
Karl Shepard (AVP)
The strategic focus is growing deposits to fund loan growth, right? We've talked a lot about the pricing pressures and that changing rotation. Just when you think about driving balance growth in 2024, it doesn't seem like it's going to be a CD special game. It seems like it's going to be more core relationship growth, but if you could just expand on those comments a little bit, that'd be great. Thanks for all the help.
Mike Price (President and CEO)
Jane, you want to comment and lead us off there?
Jane Grebenc (Bank President and CRO)
Well, I think we're always going to have CD specials, at least for the next couple three years. But, as I said before, I don't think the pace or the height of these specials is going to continue. And, you know, 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, you know, our average retail account is $11,000. Our average deposit size is $18,000. You might move over three or four basis points, but you're probably not... or 300 or 400 basis points, but perhaps not so inclined over an additional 25. And these are loyal customers in small communities. I mean, our Community PA, we call it the breadbasket of our company, is $3.5 billion of our deposits. And just great clients, deep relationships, just we do feel confident that we have a good depository, and we just they could surprise us, as Jim suggested, but we feel like we're well positioned.
Karl Shepard (AVP)
Okay, thank you. I'll step back.
Operator (participant)
Your next question comes from the line of Manuel Navas with D.A. Davidson. Your line is open.
Manuel Navas (Managing Director and Senior Research 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 Fed 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 the last quarter was about 740 in terms of-
Manuel Navas (Managing Director and Senior Research Analyst)
Yeah
Mike Price (President and CEO)
... new loan yields, and that ranged from as high as in certain categories, as high as, well over eight. And, the two key categories are commercial and really equipment finance. And equipment finance is really running in the high seven. And so those are, those are key categories for us, that there's good volume there, and that volume doesn't evaporate. And, even our indirect business has got up in almost 7%, 6.685%. So just good progression by the team in terms of getting paid for our 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 (EVP and CFO)
Yeah, Manuel, I'd add, so we're giving you the new loan yields, but the replacement yields, so 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. That's when new loans were coming on. The book was 7.01%, but it was 87 basis points higher than what was running off the books.
Manuel Navas (Managing Director and Senior Research Analyst)
Okay.
Jim Reske (EVP and CFO)
The differential in the third quarter was 115 basis points.
Manuel Navas (Managing Director and Senior Research Analyst)
Okay. Okay, that's, that's, that's helpful. As you're thinking about growth in the fourth quarter into the next year, where does 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. You know, they're 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 kind of we cherish a couple businesses right now that we're pinching a little bit more just because of of where the yields are at.
Jim Reske (EVP and CFO)
And by pinching, we mean we're pricing those so that the new origination volume is fairly close to the run-up volume. So the loan portfolio size doesn't grow, but it prices upward, which doesn't create any capital or funding pressures, but does increase yield and margin. And on the consumer side, that, that story is playing out fairly nicely.
Manuel Navas (Managing Director and Senior Research Analyst)
That's mainly auto, right?
Jim Reske (EVP and CFO)
Yes, I'm thinking particularly of auto. I think we've spoken about that before, but that's exactly what I'm thinking about. And that creates room when you want to, for which new growth that you want to fund and capitalize, gives you the ability to do that in commercial lending.
Manuel Navas (Managing Director and Senior Research Analyst)
Can you kind of give an update on equipment finance? That's been a nice place of growth. It seems like yields have kind of gotten even better, high sevens.
Jim Reske (EVP and CFO)
Yes.
Manuel Navas (Managing Director and Senior Research Analyst)
Just the latest there. It's obviously growing from a small base, but the growth has been pretty nice.
Mike Price (President and CEO)
Yeah. I mean, that's, it's now at, it grew,
Manuel Navas (Managing Director and Senior Research Analyst)
$46 million?
Mike Price (President and CEO)
$46 million this past quarter, or, like $35, actually, and $46 million of new volume.
Manuel Navas (Managing Director and Senior Research Analyst)
Okay.
Mike Price (President and CEO)
And at, you know, 769, and just we like the granularity of that. We've even pinched that a bit, a little bit in terms of the type of equipment finance that we're doing. And and so and we just have a terrific team that we did a lift out a few years ago, and we're just pretty bullish on the business and in some of our commercial categories.
Manuel Navas (Managing Director and Senior Research Analyst)
Just to shift. I appreciate that. Just a shift for my last question. Can you talk a little bit about new deposit flows and how much are coming from current customers bringing in more money or from gaining households?
Jim Reske (EVP and CFO)
Yeah. Yeah, so that relationship is actually something we've been watching this year. It's remained fairly stable. So when we get $100 of new money that we get in from a deposit special, about 50 is from our own book, we're pricing upward. So that'd be about a CD special, and what you're doing is people moving from an existing savings account on, on the savings into the new special, CD special or money market special. But the other 50 is new, and of that other 50 that's new, about half is from our existing customer base. So it is bringing more money to us, which is great. And then the last 25 is the real, the new money.
Mike Price (President and CEO)
I think what's helped us there is a year ago, our cost of funds, the deposit at this time last year, Jim, was 5 basis points.
Manuel Navas (Managing Director and Senior Research Analyst)
Yeah, right.
Mike Price (President and CEO)
We had all but driven off CD customers.
Manuel Navas (Managing Director and Senior Research Analyst)
Correct.
Mike Price (President and CEO)
And so I just think now that we hang rates, we have loyal customers, and we're getting, they have most of their household with us, but the hot money that might have been somewhere else at a different bank, I think, you know, our customers are aggregating it with us.
Manuel Navas (Managing Director and Senior Research Analyst)
Right.
Mike Price (President and CEO)
How long that continues to play out, the way it is currently playing out? Not sure, but, and again, a lot of that is coming from our rural markets.
Manuel Navas (Managing Director and Senior Research Analyst)
Okay. That's great. And I do want to catch up on the buyback. Well, how did that appetite change across the quarter? You kind of—so just from the ten-year rising to where it did, and you wanted to have a little more capital, and is that—should—does that lead me to think it could go up a little bit in terms of pace-
Jim Reske (EVP and CFO)
Yeah
Brian Karrip (Chief Credit Officer)
in the fourth quarter?
Jim Reske (EVP and CFO)
I just changed the cap on the price at which we're buying back the stock. We were early in the quarter, buying back at levels below $12.50, and towards the end, I said, "Let's cap it at $12." So we would buy back, and again, any given day, we're trading at $12 a share. That slows it down a little bit, partly so we keep some dry powder, but also because we want to be in a position with our sub debt to be able to call it. You recall, we have two tranches of sub debt at the bank level, $50 million each. One of those tranches is already callable and has lost 20% of its Tier Two treatment.
And so we'd really like to be able to call—be able to continue to build capital levels to be in a position to call that if we want to, by next June, when we lose another 20% of Tier Two capital treatment. That was the thinking behind that.
Manuel Navas (Managing Director and Senior Research Analyst)
That, that's helpful. Thank you. Thank you very much. Thank you, guys. Thank you.
Jim Reske (EVP and CFO)
Thank you.
Operator (participant)
Your next question is from the line of Matthew Breese with Stephens, Inc. Your line is open.
Matthew Breese (Managing Director and Research Analyst)
Hey, good afternoon, everybody.
Jim Reske (EVP and CFO)
Hey, Matt.
Matthew Breese (Managing Director and Research Analyst)
Jim, in the press release, you noted that because of some excess liquidity this quarter, it impacted the NIM by, I think, 8 basis points.
Jim Reske (EVP and CFO)
That's right.
Matthew Breese (Managing Director and Research Analyst)
I was curious your thoughts on how much excess you're currently holding onto at period end, how long you intend to hold on to it, and if with some of the margin dynamics you're talking about, there's also some normalization of liquidity in those assumptions.
Jim Reske (EVP and CFO)
Yeah. It's been about $250 million of excess liquidity where we took on right after Silicon Valley Bank failed 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 it at the Fed. We're going to continue to do both, so 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 in the next year as well.
Matthew Breese (Managing Director and Research Analyst)
Okay. So maybe we should think put to work $40-ish million a quarter. Is that a fair way to think about it?
Jim Reske (EVP and CFO)
Probably about right. Might be a little more than that. I think our securities portfolio, at least for last year, we were doing almost no purchases to let that run off so that we could redeploy it into loan growth, and that's a good profitable strategy, but it's gotten to a point where it's a little small in terms of the proportion of total assets compared to peers. And so we'd like to get the size of the securities portfolio up a bit.
Matthew Breese (Managing Director and Research 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 and over, over what time frame?
Jim Reske (EVP and CFO)
We don't have a hard target. We just know it's got to get bigger from here. I think but not aggressively so. I think in our last projections, we were projecting it to grow by another $100 million next year. So it's not - we're not going to go guns blazing and buy $500 million of securities next year, but we do want the portfolio to grow from where it is now.
Matthew Breese (Managing Director and Research Analyst)
Okay. I think accretable yields represented 10 basis points 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 (EVP and CFO)
Yeah. We think it's, it's about 10 basis, you're right, 10 basis points, and we're actually trying to make the point that accretable yield and the cash figures kind of offset each other. We think it's probably going to be about 7 basis points next quarter.
Matthew Breese (Managing Director and Research Analyst)
You know, seven slowly declining to five, is that a good estimation?
Jim Reske (EVP and CFO)
That-
Matthew Breese (Managing Director and Research Analyst)
-for 2024?
Jim Reske (EVP and CFO)
It is. I don't have the exact number and estimation for you for 2025 yet, or 2024 yet. I'll get to that next quarter, but,
Matthew Breese (Managing Director and Research Analyst)
Okay
Jim Reske (EVP and CFO)
... it is fading, fading out, so that's probably a fair assumption.
Matthew Breese (Managing Director and Research Analyst)
On the credit front, you know, the one category I'm curious on is auto. You know, there's been some more recent headlines that I think it's subprime auto delinquencies are starting to go higher. And 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, higher charge-offs, delinquencies, things of that nature.
Mike Price (President and CEO)
Well, we only do auto in-market. We had good experience through the last credit cycle and probably starting to hook a few more cars. But, Brian, why don't you give him the rest of the story?
Brian Karrip (Chief Credit Officer)
Yeah, we have a prime business. We don't have subprime. 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's tight, and we're going to continue to watch it, Matt. Thank you for your question.
Matthew Breese (Managing Director and Research Analyst)
I also wanted to ask, just staying on the topic of credit, what is the size of your syndicated, if you have one, loan portfolio? How is the credit performance there, and how much of that, if you have any, is out of market?
Brian Karrip (Chief Credit Officer)
Yeah, so. You want me to do it?
Mike Price (President and CEO)
Go ahead.
Brian Karrip (Chief Credit Officer)
Yeah. So the SNC book is $90 million. It's down significantly over the past several years, and it's performing fine.
Matthew Breese (Managing Director and Research 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 you know, 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 2018, and the pandemic, the property became 100% vacant. In 2021, we put it on nonaccrual. 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 leased-up assumptions from the appraiser, the conclusion, 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 nonaccrual 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 (Managing Director and Research 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 specifics $4.1 million.
Matthew Breese (Managing Director and Research Analyst)
Thanks. I'm sorry, specific is, is how much? 61?
Brian Karrip (Chief Credit Officer)
It's $4.1 million is the specific reserve, the loan-
Matthew Breese (Managing Director and Research Analyst)
$4.1 million
Brian Karrip (Chief Credit Officer)
Six.
Matthew Breese (Managing Director and Research Analyst)
Okay. Okay. Sorry for the pregnant pause. I'm just curious, how much, you know, how confident are you in the $4 million reserve covering potential losses contained there?
Brian Karrip (Chief Credit Officer)
We're as confident as the most recent appraisal, which is one month old.
Matthew Breese (Managing Director and Research Analyst)
Yeah.
Brian Karrip (Chief Credit Officer)
We continue to watch and monitor this. Should they find tenants or should they have a desire to sell the building, our special asset people will update the numbers, and then we'll post up on a quarterly basis.
Matthew Breese (Managing Director and Research Analyst)
Okay. Last one for me, 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 such a strong position. There's more conversations, whole bank or fee income. Thanks. That's all my questions.
Mike Price (President and CEO)
Yeah, there's more whole bank, and there's definitely a lot more conversation than I would say in the last five years. And, you know, we talk to everybody, and, and people in the past have come to us, a couple of times first, and that's been nice. But we're a good partner, quite frankly, and we tend to do right by the people that partner with us, and they do well, and we do well. I think we have a slide in our investor deck that shows how we'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.
Brian Karrip (Chief Credit Officer)
Sure.
Mike Price (President and CEO)
And so, you know, you just don't know, and we're not over aggressive, but we do talk to everybody, and it would be a great way to continue to supplement. We can grow the bank. We 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 (Managing Director and Research Analyst)
Very helpful, Mike. I appreciate it. Thank you for your time.
Mike Price (President and CEO)
Thank you.
Operator (participant)
Again, if you would like to ask a question, press star followed by the number one on your telephone keypad. Your next question comes from Daniel Cardenas with Janney Montgomery Scott. Your line is open.
Brian Karrip (Chief Credit Officer)
Hey, Dan.
Daniel Cardenas (Director)
Hey, guys. Good afternoon. Most of my questions have been asked and answered, just kind of a couple of modeling questions here, for you guys. What, how should I think about your tax rate on a, on a go-forward basis? I mean, it's been fairly consistent here. Is that, is that 20-ish% still kind of a good run rate?
Brian Karrip (Chief Credit Officer)
It is. About, yeah, it's 20.02, but call it 20.
Daniel Cardenas (Director)
Okay. And then, Jim, I missed your comments on fee income. Guess I can't multitask. Can you maybe just kinda quickly go through those again?
Jim Reske (EVP and CFO)
Yeah, sure, Dan. I can't multitask either, by the way. But the fee income is, we think it's relatively stable. There's next year, of course, we have the Durbin impact, right? So that's gonna-
Daniel Cardenas (Director)
Yeah
Jim Reske (EVP and CFO)
... affect the income, but we are looking at sources like growing SBA income to help offset that.
Daniel Cardenas (Director)
Okay, great. That's all I have for right now. Thanks, guys.
Brian Karrip (Chief Credit Officer)
Thanks, Dan.
Operator (participant)
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 (participant)
Ladies and gentlemen, this concludes today's conference call. You may now disconnect.