FIRST BANK (Hamilton)
NASDAQ:FRBA
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FIRST BANK (Hamilton)
Earnings Call Analysis
Summary
Q3-2023
The bank has faced a tough interest rate environment but expects core profitability to improve towards 2024 due to operating efficiencies, including those from the Malvern acquisition. Deposits are up, primarily from this acquisition despite a $104.3 million decline, and a shift from noninterest-bearing to interest-bearing deposits is underway. Cost of deposits rose by 28 basis points in Q3, but deposit growth remains a focus, with new campaigns to drive growth and retain funds at risk from the competitive landscape. Loan portfolio integration from Malvern is progressing, with $212 million in the pipeline and a focus on C&I loans for deeper customer relationships. Asset quality remains stable post-merger. Future balance sheet growth will be driven by deposit growth initiatives, although overall growth may be below the $200 million level previously projected due to repositioning in response to the rate environment.
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Ladies and gentlemen, thank you for standing by. My name is Cherelle, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Bank FRBA Earnings Call Third Quarter 2023 Conference Call. [Operator Instructions]
I would now like to turn the call over to Patrick Ryan, President and CEO. Please go ahead.
Thank you. I'd like to welcome everyone today to First Bank's, Third Quarter 2023 Earnings Call. I'm joined today by Andrew Hibshman, our Chief Financial Officer; Darleen Gillespie, our Chief Retail Banking Officer; and Peter Cahill, our Chief Lending Officer.
Before we begin, however, Andrew will read the safe harbor statement.
The following discussion may contain forward-looking statements concerning the financial condition, results of operations and business of First Bank. We caution that such statements are subject to a number of uncertainties, and actual results could differ materially, and therefore, you should not place undue reliance on any forward-looking statements we make. We may not update any forward-looking statements we make today for future events or developments.
Information about risks and uncertainties are described under Item 1A Risk Factors in our annual report on Form 10-K for the year ended December 31, 2022, filed with the FDIC.
Pat, back to you.
Great. Thanks, Andrew. I'd like to start with some high-level remarks before we get some additional detail from Andrew, Darleen and Peter.
Overall, I think it's important to highlight, we did close on the Malvern Bank merger during the quarter. We also finalized our facilities and systems integration projects which overall have gone very well so far.
The numbers in our financial statements and releases include the impact of this transaction. Given the significant noise in the numbers this quarter, I'm going to focus my remarks on bigger picture items and the strategic impact of the merger.
Most importantly, as many of you know, we added significant size and scale in our core Southeastern Pennsylvania market. We now have 1/2 of our overall 26 branch locations in the Greater Philadelphia market, 10 of them in Pennsylvania and 3 of them in Southern New Jersey. And almost 1/3 of our loans are sourced from the Greater Philadelphia and Southern New Jersey markets.
Second, we made significant progress on what we call Project Sculpt where we're reshaping our balance sheet. As many of you saw in the release, we sold approximately $95 million in investment securities. We sold another $100 million in residential mortgage loans. We used these proceeds to pay off about $130 million in borrowings. And we also let $68 million in brokered deposits run off during the quarter. The net result of these activities will drive better ROA, improved ROE and increased capital efficiency while also freeing up contingent funding availability.
We continue to explore additional sculpting opportunities to shed noncore assets that have been mark-to-market through the acquisition. This project should continue into 2024 as we use proceeds from investor real estate loan payoffs and paydowns to fund some of our newer C&I loan initiatives with the goals of improving capital efficiency, getting more deposits per customer relationship and reducing our overall investor real estate concentrations.
Our focus for the remainder of this year and into 2024 will be portfolio optimization and strong profit growth, not overall balance sheet growth.
Furthermore, merger benefits have already started driving our core profitability higher. When adding back onetime merger-related costs, we achieved the following results during the third quarter. EPS of $0.42, which is $1.68 annualized; our return on average assets of 1.13%; and adjusted return on tangible common equity of 13.23%.
The current earnings run rate could be even higher than these adjusted figures because they do not include a full quarter of interest rate mark accretion, and the numbers during Q3 also include some extra costs that will not continue into Q4.
Here's a brief summary of the merger accounting. The final tangible book value per share dilution came in higher than originally anticipated at 15% versus our estimate in December of 9%. But that change is entirely driven by the interest rate market environment and how that moved since December of 2022. The tangible book value per share impact when adding back the interest rate marks was negligible. That doesn't mean it's not real, but rather, it reduces the risk and uncertainty in terms of our ability to earn back that dilution that was recognized during the quarter.
Our projected earnings accretion moved much higher for the same reason. A larger interest rate mark equates to more interest rate earnings accretion moving forward. In summary, the integration thus far has gone very well, and we believe the economic benefits derived from establishing critical mass in the attractive market of Southeastern Pennsylvania and the benefits from creating significant scale and cost savings will make this an excellent deal for our shareholders.
These benefits will materialize in the form of really strong earnings growth and capital appreciation as we head into 2024.
At this time, I'd like to turn it over to Andrew to discuss our financial results in a little more detail.
Thanks, Pat. For the 3 months ended September 30, 2023, we recorded a net loss of $1.3 million or $0.05 per diluted share. Excluding merger-related expenses, the initial credit loss expense on the Malvern-acquired loan portfolio and some other onetime items during the current quarter, adjusted net income was $10.1 million or adjusted EPS of $0.42 and an adjusted return on average assets of 1.13%.
The acquisition of Malvern closed on July 17, 2023. The combined stock and cash transaction was valued at approximately $129.7 million with Malvern providing $953.8 million in assets, $727.7 million in loans and $671.9 million in deposits on the date of the acquisition.
During the third quarter, as Pat mentioned, the sale of certain acquired investments and residential loans netted us approximately $165 million in cash, which allowed us to reposition our balance sheet to manage interest rate risk and boost efficiency. Net of impact of the loan sales, loans increased by $581.1 million during the third quarter primarily due to the Malvern acquisition. Excluding the remaining balance of acquired Malvern loans, which was $626 million at the end of September, loans declined by $42 million during the quarter.
Total deposits were up $567.6 million during the third quarter of 2023, also primarily due to the Malvern acquisition. Excluding the $671.9 million in deposits acquired from Malvern, deposit balance declined by $104.3 million during the 3 months ended September 30, 2023.
The decline during the quarter was primarily due to the bank allowing some higher-cost brokered and noncore funding to leave, but the overall industry-wide deposit declines and competitive pricing pressures are also impacting our total deposit levels.
Primarily due to the benefits of the Malvern acquisition, our net interest income improved from 3.28% in the second quarter of 2023 to 3.36% in the third quarter of 2023. Because the Malvern acquisition closed in the second half of July, our net interest income only included 2 months of acquisition accounting accretion, which had an approximately $2.7 million positive impact on net interest income.
Also, the asset sales allowed for the reduction of certain higher-cost deposits and borrowings, but most of this activity occurred later in the quarter. Deposit costs continued to move higher as market pressure persisted, but the weighted average rate on loans originated during the quarter also moved higher. We believe that a full quarter of accretion income, coupled with the balance sheet repositioning we have will have a positive impact on the margin in Q4, even despite the challenges related to deposit pricing conditions and the inverted yield curve.
Liquidity levels remained stable during the third quarter as we used the proceeds from the asset sales to pay off the $130 million in FHLB borrowings that Pat mentioned, and it also allowed some higher cost deposit runoff.
We have significant unused borrowing capacity and expect to enhance that contingent funding availability even further in the fourth quarter.
As of September 30, 2023, our allowance for credit losses to total loans increased to 1.42% from 1.25% at June 30, 2023. The increase, however, was primarily due to the impact of specific reserves on certain acquired loans.
In the third quarter of 2023, total noninterest income declined primarily due to losses on loan and investment sales, which were net against noninterest income on our income statement. The investment and loan sale losses were the result of the aforementioned sale of residential loans and investments that were acquired from Malvern. These assets were marked at fair value at the time of acquisition, but saw some additional decline in value between the acquisition date and the ultimate sale date of the assets, primarily due to continued interest rate movement.
Noninterest expenses were $23.5 million in Q3, 2023 or $16.5 million, excluding merger-related expenses. Noninterest expenses, excluding merger-related costs, increased $2.7 million or 19.5% from the prior quarter, primarily due to the new Malvern employees and locations.
Annualized Q3 2023 noninterest expenses, excluding merger-related expenses, were 1.83% of average assets compared to 1.93% in the second quarter of 2023. We realized a number of immediate cost savings after the Malvern acquisition, and we are confident that we will hit our announced goals on cost savings as we head into 2024.
We continue to believe that one of our strengths is our operating efficiency and believe the Malvern acquisition has provided us additional opportunities to improve our efficiency metrics. Although we continue to operate in a difficult rate environment, the Malvern acquisition, coupled with the balance sheet repositioning we executed during the quarter, has positioned us to improve our core profitability metrics as we move towards 2024.
At this time, I'll turn it over to Darleen Gillespie, our Chief Retail Banking Officer for her remarks. Darleen?
Thank you, Andrew, and good morning, everyone. I'll start off by stating that there were no big surprises relative to the [ paused ] activity in the third quarter. While we have initiatives in place focused on retention and acquisition, we're not immune from the unprecedented shift in funding mix and pressure on funding costs experienced within the industry.
The second quarter -- in the second quarter, we reported strong deposit growth, primarily in our government and commercial portfolios. In Q3, while total deposits were up mostly due to the Malvern acquisition, as Andrew has mentioned, we experienced a $104.3 million decline, of which $68 million was higher-cost brokered and noncore deposits.
We continue to experience declines in our time deposit portfolio due to the rate environment. However, we anticipate some stabilization and potential growth with some of the offers we've recently launched in the market.
We experienced larger-than-normal outflows from some of our commercial clients that move funds for rate and/or business purposes. We know who these clients are and while their balances may have declined, they still remain customers of our bank.
Our cost of deposits increased 28 basis points in Q3, inclusive of the deposits we onboarded from Malvern, but it's less than the increase we experienced in the second quarter. Again, a result of the rate environment, but overall, we're managing this metric by letting go of higher-rate funding.
Our deposit mix continues to shift with noninterest-bearing moving into interest-bearing vehicles and noninterest-bearing funding remains a strategic focus as we build on expanding the relationships that our customers maintain with us.
As we move forward, one of our key priorities is to continue to focus on deposit growth. We remain steadfast with our strategic initiatives. And this month, we launched a fall deposit campaign focused on driving growth as well as retaining funds that are at risk because of the competitive landscape.
We're excited about our 8 new branches from the Malvern acquisition and the growth opportunities with expansion into the Southeastern part of PA. The sales teams are engaging with our new customers, and the feedback has been very, very positive.
So at this time, I'll turn it over to Peter Cahill, our Chief Lending Officer, for his remarks. Peter?
Thanks, Darleen. As you just heard and read in our earnings release, third quarter was a busy one for all areas of the bank, and that includes the folks in lending. You might recall that we had a very good first half of the year where loans grew $100 million, and we were right on plan to meet our annual growth goal. Despite the good results, we were seeing signs then of the impact of a slowing economy, rising interest rates as well as our increased focus on growth in C&I lending and other loans where relationships include increased levels of deposits.
During the third quarter, we continued this focus while consolidating the Malvern loan portfolio into ours. As Andrew mentioned, we sold a portfolio of residential mortgages and onboarded the remaining loans. We think going forward we'll drive a lot of synergies by folding that portfolio into our existing sales teams.
You can see in the schedules in the earnings release a breakdown of the portfolio by loan type. Obviously, these numbers are post-consolidation with Malvern so the percentages are impacted by the merger. But we did experience some good organic growth in C&I during the quarter despite some payoffs there.
Absent the positive impact of the Malvern merger, overall organic loan growth was negative in the quarter, as Andrew mentioned. We saw some loans, primarily investor real estate loans, refinance out of the bank for lower interest rates elsewhere. And we sold a couple of loan participations to smaller community banks, and we also saw a decline in loans of approximately $50 million because the assets securing those loans were sold. Nearly 66% of this $50 million bucket were non-investor real estate loans, meaning they were mainly C&I and in a couple of cases, businesses just got sold and it was completely out of our control.
Overall, on the topic of organic loan growth, we're pleased that the sales teams are holding firm on structure and interest rates while pursuing relationship business. C&I growth, where we find deeper relationships, totaled 73% of new loans booked during the 9 months ending 9/30/23.
Looking at our loan portfolio, while we continue to focus on relationship business, our pipeline at September 30 stood at $212 million, up from the June 30 level of $171 million. This is a healthy increase and puts us back at about the same level as we were at the end of the first quarter. In fact, our average for the 9 months has been $214 million. So we're right in line there.
And the number of loans in the pipeline hasn't changed much either. At September 30, it was $209 million compared to the average for the year of $208 million. So overall, I'm happy with where the pipeline stands.
Regarding asset quality, due to the consolidation with Malvern, there are a lot of moving pieces. And Andrew's comments in the earnings release really lay out well where we are. Overall, I believe that we know the former Malvern portfolio very well. And the pre-Malvern First Bank portfolio has not changed from an asset quality perspective. So I see no areas of great concern from the combined banks. Credit quality to me seems in line with prior quarters.
Our objectives for the remainder of the year and into 2024 are to complete the integration of the former Malvern Bank portfolio and continue to grow organically loans and deposits where we can gain relationship business.
In addition to our regional relationship management teams, our new asset-based lending group has developed a nice pipeline. Our SBA unit has also been busy building its business and our enhanced focus on our Business Express product, which is for smaller business loans and deposits, has been producing good results.
This concludes my comments for the third quarter in lending, and I'll turn things back over now to Pat for final comments. Pat?
Thank you, Peter. Well, at this point, I'd like to turn things back to the operator to open things up for the Q&A session.
[Operator Instructions] Your first question comes from the line of Justin Crowley with Piper Sandler.
I was wondering if you could maybe expand a bit on some of the efficiencies gained with the deal. Obviously, real nice progress as telegraphed. It seems like there's maybe a bit more to come next quarter. I wasn't sure if you're in a position to get a little more specific on how that may look. And then maybe just more broadly speaking, not necessarily specifics, but just heading into 2024.
Yes. So obviously -- well, I shouldn't say obviously, but there are stages in merger integration. And when we closed on the deal on July 17, there were some folks who were not retained starting at that point. And then there was another group of people that we retained through the end of September to help with the systems and facility integration. So the -- kind of the stages of cost savings really reflect that process.
And then as you move forward, there's always some inevitable attrition that comes from folks that you thought might stay that decide to move on or folks you thought you wanted to keep, but it doesn't work out. So things continue to evolve as we move forward. But I think on the people side, Andrew, we've gotten the bulk of what we expect there. And we're continuing to realize savings in other areas in terms of back office, professional service and things like that.
So there'll probably be some lingering expenses that we'll need to incur in the fourth quarter just to kind of finalize legacy Malvern expenses and onetime merger-related things. But I think we'll have a pretty good view of the run rate for Q1 when we regroup on our next call.
But Andrew, anything you want to add there?
I think that's a great summary. There's probably going to be a little bit of continued noise in the fourth quarter as we wrap up some of the things that we need to wrap up. And still, there's still some people on things that we're figuring out. But yes, I mean, I think as we head into the first quarter of 2024, all that "noise" should clear up and we should continue to see some additional cost savings now.
As you then head into the next year, there will be other things that impact expenses, obviously. So there's a lot going on, especially with the size we're at now, but we expect to continue to get some additional benefits. But we did, I think, get more upfront maybe than we even anticipated, but there is still, I think, at least a little bit more to come on the cost savings side.
Okay. Got it. Appreciate that. And then just looking at the balance sheet repositioning in the quarter, a lot was expected and I think a big added benefit of doing the deal. But just curious if you could talk through maybe a bit more what continued opportunity could look like. I know timing can be tough to pin down for sure, but maybe just in terms of magnitude compared to what we've already seen so far.
Yes. I wouldn't say from a magnitude perspective, there would be major additional sales along the lines you saw in the third quarter. There may be some one-off situations where there may be some noncore assets that could be sold. But again, I wouldn't expect anything in the size and scale of what we realized in the third quarter.
And then some of it is just more gradual, Justin, where you've got loans that you might view as not strategically necessary and you have negotiations around rate and structure and price that you might hold the line on a little stronger if you're not worried about the loan leaving.
So I do think we'll see some situations where some loans will mature or rates will reset. And we might see some continued payoffs and paydowns, particularly in the investor real estate portfolio. And those are things that I expect will continue to happen as we move forward over the next couple of quarters. But I don't think it would be a big headline announcement as much as a gradual strategic transition out of some less relationship-based investor real estate loans into more relationship-driven higher deposit balance C&I loans.
Okay. So -- and combining that sort of with some of the commentary on some loan growth and just the size of the balance sheet, is -- what is the right way to think about it? And I'm sure it's sort of a moving target, but a flat balance sheet? Or is contraction a more likely scenario just looking out over the next couple of quarters?
Yes. Listen, I don't know. Right? At the end of the day, it's all about adding the right types of customers and transitioning out of potential noncore nonstrategic assets. But if our team does an incredible job, which I hope they will, and generating good new core deposit balances, then we've got plenty of activity in the loan pipeline, as Peter outlined, to grow loans a little bit over the next couple of quarters. But if the core deposit funding is hard to come by, then I'd say a flattish scenario where we reposition payoffs and paydowns into new loans is probably more likely.
But I'm not overly concerned about whether it's flat or 5% growth. It's about doing the right kind of business. And in this environment, we can generate value without growing by optimizing the portfolio. But that doesn't mean we won't grow if there are good opportunities to add quality customers and relationships though.
Okay. Understood. And then just one last one quickly for me. Just on the margin. Andrew, I'm not sure are you able to walk through just the purchase accounting impact and quantifying, if you can? And then just perhaps what the thought is on how that trend is moving forward?
Yes. So I think in the remarks, I mentioned the kind of net impact of purchase accounting accretion was $2.7 million. And again, that was because the deal closed later in the month of July, that was 2 months. So you can kind of figure out what the monthly run rate. Now that runs down over time, but not quickly. So it will run down gradually over time. But yes, I mean that's all those large interest rate marks that we have gone.
So that's kind of the number that we saw in the second quarter based -- or third quarter based on 2 months. You can kind of figure out what the run rate will be kind of the trailing off over time going forward.
There's also some impact on some other areas, not just the margin, like core deposit intangibles and things like that, that get amortized back through expenses on the core deposit side. So there is some other impacts, but those are more muted than the interest rate marks, which is the number that I gave you there.
Your next question comes from the line of Manuel Navas with D.A. Davidson.
Just a big picture. I have your slide deck with the businesses you're focusing on. Are there any businesses that you've exited fully that aren't on that slide?
No. I mean we obviously sold a big chunk of residential mortgage loans that were legacy Malvern loan. But we haven't stopped making new residential consumer loans. But as you know, it's never been a real big part of our business. So we continue to make consumer residential loans where there's a larger relationship involved, and it makes sense. But those are areas where we've historically been very selective, and I think we'll continue to be selective.
And then on the investor real estate side, we're definitely not exiting that area. We're just looking to rebalance the portfolio as we move forward to bring down some of that real estate concentration as well as grow in some areas where we think we can generate additional deposit balance.
Okay. That's helpful. In the past, you talked about some of the repositioning opening up room for buybacks. Are those still on the table? It looks like it mainly went to borrowings and the NIM is -- that should help the NIM, and that is a very solid way to use the proceeds as well. But just wondering how you balance that versus buyback.
Yes. Listen, I think in the short run, our focus over the next couple of quarters is going to be replenishing capital. Obviously, the acquisition both with the cash component and the mark to market used up some of our excess capital. I think we'd like to first replenish that. But if down the road, the buyback remains an attractive way to deploy excess capital, we would absolutely continue to look at it. As I think you know, we did -- we did some buybacks early in the year.
As we sort of project out, with flat to slight balance sheet growth and significantly enhanced earnings, we expect we're going to be able to replenish capital quite quickly. So I don't think we'll be on the sidelines for too long on the buyback, but in the short run, I think the priority is to get those capital ratios back up a little higher than where they are right now.
What is that medium-term target on CET1? Or what metric would you use?
Yes. I mean we've got internal levels that we keep an eye on. Our Tier 1 risk-based is at 9% right now, which again is a level we're perfectly comfortable with. But I think we'd want to see that a fair bit over 9% before we started buying back stock.
So there's not a magic number. It depends on where the stock's trading and other strategic initiatives underway. But I think at 9%, we'd be focused on moving that number higher in the short run. And then as we build up some additional buffers, we'll take a look and see where the stock's trading. And if that's the right way to deploy any excess capital we might have, we'll absolutely look at it.
All right. The growth -- the organic growth took a step back, but the pipeline has rebuilt. Do you -- do you see fourth quarter as you're back to normal? Or is it still going to take a couple of quarters before kind of the different loan and deposit channels are fully back up and running again?
Yes. Again, I think the loan pipeline is robust. So there's no shortage of good quality loan opportunities out there. At this point, we're focused on funding the quality loans that we can fund with core deposit growth. And Darleen and her team and Peter and his teams are out there pounding the pavement every day to find new opportunities and look to grow those deposits. I think we're doing a great job acquiring new customers. The challenge is there continues to be some seepage out of the banking industry into money market, bond funds, et cetera.
So sometimes you're adding customers, but you're running in the wind a little bit, and so it may not result in a lot of overall balance sheet growth. But that's going to be the driver. And at this point, we don't need to force it. We can drive strong earnings growth without the need for significant balance sheet growth. Again, that doesn't mean if we have good opportunities, we won't continue to do that. But the way we've been able to reposition the balance sheet and the way we can manage attrition and payoffs and paydowns along with deposit growth will allow us to continue to add new business. Whether that translates into modest growth or flat balance sheet, time will tell. But I don't view that as a huge variable in terms of us hitting our goals on a financial performance perspective.
And Nick (sic), I would add that, as Pat and I think Peter both mentioned, typically right after a deal closes, there is some workouts of loans. We're trying to work out if they're problem loans. And we're getting out of some strategic and nonstrategic relationships. So that will obviously impact the net loan growth as well as we'll see. We will ultimately see some elevated payoffs and paydowns over the next couple of quarters.
That brings up kind of my next comment is that pipeline can help generate -- in the past, the projection was about $200 million in growth just out of that pipeline. Obviously, there's going to be some -- that's not going to be net fully next year. But is that kind of the production you think you can generate even as soon as next year? Just kind of some thoughts there in terms of that production side. Obviously, there's going to be continued runoff. There's going to be continued kind of keeping what you want to keep. But do you feel comfortable with the production side being at that $200 million level? Or could it be a little bit higher?
Yes, I don't see it being higher than $200 million. If I had to guess, I'd say it's going to be less than $200 million, not because there's not good loan opportunities out there, but just because as we see opportunity to reposition the balance sheet, we're not going to force it. Right? There's no reason in this inverted yield curve environment to be borrowing money to fund loans. So we're going to do what we can based on our deposit growth initiatives. And if the headwinds in that market mean that we don't have as much in core funding as we'd like to fund all the good loan opportunities, then we may end up growing less than that $200 million number that we've done in the past. But it's not for lack of good loan opportunities. It's really just dealing with the rate environment we're in and the funding market for it.
Okay. And then what levels of attrition are you seeing on the deposit side? And is that slowing? Is that progressing as expected? Just kind of some thoughts on customer retention?
Yes. I think we knew we were going to have some excess cash coming through the sales of securities and residential mortgage loans. So for a good part of the third quarter, we weren't aggressively pricing deposits. And if it was a rate-sensitive situation, we decided to let some of that money go. And as you saw, almost 3/4 of the decline in deposits during the quarter was a function of letting brokered run off, which is much more of a turn it on, turn it off type funding store.
So we've got a nice new deposit campaign going. We've got our group laser-focused on finding core deposits, and we're seeing some initial good results from our current promotion. So I think we'll return to deposit growth in Q4.
Darleen, anything you'd add there?
No. I would just ditto your comment that we have some great campaigns out in the market. We have a great sales team that is focused on expanding relationships and acquiring new customers and deposits. So as long as we continue with that trajectory, I think that we'll continue to see positive deposit growth as we move into 2024.
And I just -- I appreciate that. My last question's on the NIM outlook. Is the best way to kind of think about the NIM next quarter is taking that $2.7 million and adding an extra month, because that was 2 months of accretion, add that -- kind of going forward, add some little bit of growth. Are there any other moving parts I should be thinking about on that near-term NIM?
Yes. The market environment. I mean that's the right way to start the analysis, and then you got to factor in where you think deposit costs are going and what you're seeing on the loan side. We do think we're getting to a point where the increase in loan yield is almost offsetting the increase on the deposit funding costs. So we hope to be in a position where the net impact of those 2 variables is neutral from a margin standpoint. I'm not sure we'll be there in Q4. Hope to get there soon. But even with some of those headwinds, just the math of the interest rate accretion earn back, the margin should be moving higher for sure.
Is there like opportunities for security yield pickup? Is there opportunities -- what are like new loan yields coming on? I know it's more C&I, that should be higher. What's in the pipeline. Those are the kind of things that I can't quite see that could be a nice benefit to the NIM going forward?
Yes. And I think anything we're doing, that short-term variable rate is getting priced really anywhere between 8% to 10%. So plenty of yield on the new production, on the floating rate stuff. I think the term fixed rate stuff is now getting priced in the probably 7% to 7.5% range and so if you line up a new incremental deposit dollar, which is probably coming in at close to 5% against a new fixed rate loan at 7.5%, obviously, that's only 2.5% spread, which would tighten your margin a bit. But I'd say of the new loan production we're doing right now, 2/3 or more is in the shorter-term floating rate category. So I think the net benefit on the loan yield side is getting pretty close to matching what we're seeing in terms of the increase on the funding cost side.
Okay. I appreciate that color. And with that, just to follow up briefly, would that kind of give you the expectation as that's bottoming out, that you could see some expansion in the second half next year? Like what's -- any kind of thoughts on the NIM trajectory?
Well, again, I mean, just with the math on the earnings accretion, it's going to move higher significantly in the first half of the year. At some point, that does slow down a little bit. But the downside of larger interest rate marks upfront and the tangible book value dilution just means there's more interest rate mark income to earn back in. So "you get the benefit of that" over a longer period of time. So I don't know.
Andrew, we haven't finalized our budget for '24 and beyond, so I don't think we're prepared to give you guidance beyond the next couple of quarters at this point.
Yes. I mean, obviously, there's -- there's, it's all contingent on what the rate environment looks like. If it stays inverted like this for a long time, it'll continue to put pressure on the margin. If we get some -- some relief from the yield curve environment, that will help. But Pat's point is right. I think over the -- at least over the next few quarters, starting in the fourth quarter, we should see some improvement. And then hopefully, it stabilizes. But again, it's going to be very contingent on rate environment and a lot of things out of our control.
At this time, there are no further questions. I would like to now turn the call back over to Patrick Ryan, President and CEO.
Okay. Thank you very much. We certainly appreciate folks dialing into the call today. And we look forward to providing additional updates when we do our fourth quarter update later in January. Thanks, everyone.
Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.