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FNB Corp
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Good morning, everyone, and welcome to the F.N.B. Corporation’s Third Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note today’s event is being recorded.
At this time, I would now like to turn the floor over to Lisa Constantine, Manager of Investor Relations. Ma’am, you may begin.
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 also 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 operating 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 statement 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 Wednesday, 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.
FNB’s third quarter operating earnings per share totaled a record $0.39, increasing 26% on a linked quarter basis. The success of this quarter was highlighted by record revenue, high quality loan and deposit growth, digital technology enhancements, and continued positive credit quality performance. We were also pleased to receive all regulatory approvals for our pending merger with UB Bancorp and anticipate the merger to close and convert in December of this year. We are looking forward to welcoming Union Bank employees and clients to FNB. We are confident that they will benefit from our deep product suite and robust digital tools.
Revenue totaled $380 million, led by 17% growth in net interest income, driven by solid loan growth, favorable deposit mix and the asset sensitive position of our balance sheet. Our fee-based businesses contributed to over $82 million, once again demonstrating the importance of our long-term strategy of building diversified sources of income. Record revenue coupled with well managed expenses led to our historically low efficiency ratio of 49%, as well as double-digit positive operating leverage for the third quarter.
As we planned for 2023 and remain keenly focused on risk management, expense control, diversification of revenue, and continuing to generate positive operating leverage. FNB again delivered double-digit annualized linked quarter loan growth with total loans ending at nearly $28.5 billion. Consumer loans grew $547 million, driven by adjustable rate and Physicians First mortgage funds. Physicians First mortgage product continued its success and accounted for 39% of the linked quarter growth as we leverage the investments in the e-store with the digital Physicians First off lines.
Commercial loans increased $189 million during the quarter with annualized growth of 9% and 2% in C&I and CRE respectively. While growth was spread across the entire FNB footprint, but Cleveland and North Carolina markets contributed the largest increases. Deposits increased $413 million during the quarter or 4.9% annualized. We ended the quarter with non-interest bearing deposits accounting for 35% of total deposits and Union Bank will enhance our overall position by contributing a higher proportion of non-interest bearing deposits.
Another area of continued success this format was with our digital channels where e-store visits increased over 120% year-over-year in September. And monthly visits averaged over 37,000, we continue to expand our digital offerings for both our retail and business customers. As we launch e-store online deposit applications for multiple business deposit products beginning in November. Next year, we will introduce enhancements to our mobile application, including real time alerting capabilities and an update to our hard guard debit card control service. Both features enhance our customers' ability to manage their account balances.
Lastly, it is important to highlight the strong position of FNB’s balance sheet in a time when leading indicators point to a potential economic softness. Our credit culture has been consistent, maintaining uniform underwriting standards through all parts of the economic cycle. That same credit culture served us well during great recession when our loss rates meaningfully outperformed our peers. The credit team monitors the portfolio not only through typical historical analysis, but also uses perspective trends and analytics to identify any emerging risks. They also run various stress tests during their comprehensive reviews to evaluate our risk management systems and portfolio performance.
Further mitigating risk and supporting our growth strategy is the geographic diversity of our footprint. Our presence in seven states in the District of Columbia provides FNB access to high growth metropolitan areas and a variety of high quality opportunities. Our numerous markets allow FNB to meet our growth objectives, while still adhering to our conservative underwriting standards. This key risk management objective have been an important driver for our expansion strategy, as well as our unique business model.
We continue to prudently manage our capital levels. As of last quarter, our CET1, TCE and reserve coverage ratios all ranked at or above peer meeting. While it is too early to know this quarter's results for our peer set, we expect that we will continue to maintain capital and reserve coverage ratios at or above the meeting, once again demonstrating our solid position within the banking industry. FNB is well positioned for a potential economic slowdown with conservative management of our diversified loan portfolio and the strength of our reserve coverage and capital ratios.
I will now turn the call over to Gary to provide additional details of our asset quality.
Thank you, Vince and good morning everyone. We had a solid third quarter with our credit portfolio favorably positioned following stable performance on both a quarter-to-date and year-to-date basis. Our key credit metrics ended September with delinquency remaining at very favorable levels, while we saw further reductions in non-performing and classified credits. Additionally, net charge-offs remained low and continue to track well following two consecutive quarters of very favorable results.
I would like to cover the GAAP asset quality highlights for the quarter and then I will provide a brief update on the upcoming UB Bancorp acquisition scheduled to close in Q4. Finally, I'll offer some color around the macroeconomic environment and the steps we're taking to proactively manage risk in our credit book to better position us as we look to the quarters ahead.
Let's now review our third quarter results. Total delinquency ended September at 59 basis points remaining nearly flat, compared to last quarter's historically low level, up only 1 basis point. The increase was driven by early stage past dues tied to the runoff of the PPP credits still in process. Non-accrual levels improved by nearly $5 million on a linked quarter basis with NPLs and OREO down 3 bps, ending September at a solid 32 basis points, which reflects the tireless efforts of our workout teams to aggressively address and resolve problem assets.
Net charge-offs for the quarter totaled $2.8 million or 4 basis points annualized with year-to-date net charge-offs through nine months of $4.3 million or 2 bps annualized. Funded provision expense totaled $10.1 million, up $3 million linked quarter to support strong loan growth, as well as some model build tied to updated macroeconomic factors and a continued decline in forecasted prepayments.
Our reserve at the end of September totaled $385 million or 1.34%, down 1 basis point versus the prior quarter as credit quality results remain favorable. Our NPL coverage position further strengthened to 440%.
Now turning to the UB Bancorp acquisition that is scheduled to close in the fourth quarter, we remain on track with our established conversion process and we continue to closely track and monitor the loan portfolio and its credit performance through legal day one. We do not anticipate any material impact to our corporate credit metrics or loan risk profile, as the portfolio remains in line with our expectations from due diligence. As we welcome the team from UB, we look forward to deepening our relationships with the UB customer base and the product offerings available to meet their banking and lending needs.
Let's now switch gears and discuss the evolving macroeconomic environment, specifically some of the measures we've taken to manage credit risk and position our book moving forward. As I've shared in the past, our credit philosophy is to take a holistic approach beginning with consistent and prudent underwriting across the footprint and throughout economic cycles. As we continue to execute on our loan growth strategies and our lending pipelines convert we actively monitor our concentrations of credit and asset mix on a continuous basis to maintain a diverse and balanced loan book that fits within our desired loan risk profile.
With the ongoing investments we've made in our credit systems and expansion of our risk analytics, we can make strategic data-driven decisions to better manage and mitigate risk in the book. Furthermore, our bankers remain in close contact with our customers to understand the challenges and headwinds they face allowing us to identify signs of stress resulting from ongoing elevated inflation, rising interest rates and the standing labor supply chain and energy-related challenges across various industries and markets. These factors are carefully analyzed and addressed as underwriting as macroeconomic and market specific conditions continue to evolve with our core credit philosophy remaining front and center.
Closing, we are very pleased with the continued strength, consistency and favorable positioning of our credit portfolio following a successful third quarter. As we look to finalize the UB Bancorp acquisition in the months ahead and close out the year strong, we remain vigilant of the evolving macroeconomic conditions and will continue to proactively and aggressively manage our credit portfolio each and every day. As we look ahead, we remain committed to our consistent approach to underwriting, which has proven itself well throughout prior economic cycles.
I will now turn the call over to Vince Calabrese, our Chief Financial Officer for his remarks.
Thanks, Gary. Good morning, everyone. Today I will focus on the third quarter's financial results and offer guidance for the remainder of the year. The third quarter net income available to common shareholders totaled a record $135.5 million or $0.38 per share after adjusting for $2.1 million of merger-related expenses net income reached $137.2 million or $0.39 per share.
The growth in the balance sheet, driven by loans and investment securities that were largely funded through deposit growth brought assets to $43 billion at period end, investment securities totaled $7.2 billion with a fairly even split between AFS and HTM. During the quarter, we largely reinvested our securities cash flows, which was around $100 million per month, while staying in the 3.5 to 4.5 duration area.
Period-end total loans increased $736 million linked quarter or 10.4% annualized, including an increase of $547 million in consumer loans and $189 million in commercial loans and leases. Commercial loans saw another quarter of healthy production with year-to-date activity 7.5% higher than the same period in 2021. With such strong production, the 90-day pipeline has softened a bit relative to last quarter.
Consumer loan growth was driven by strong organic residential mortgage activity across our footprint with particularly strong growth in the Carolinas and Mid-Atlantic regions. The Physician's First mortgage program accounted for $141 million or 39% of the increase in the mortgage balances on a linked quarter basis.
Indirect auto lending increased 10.5% linked quarter, as we saw more seasonal activity in that space, as well as an increased supply of vehicles. Indirect book is predominantly higher quality time paper.
Total deposits ended the quarter at $33.9 billion, an increase of $413 million linked quarter or 4.9% annualized. The deposit mix continues to be favorable with non-interest bearing deposits comprising 35% of total deposits at quarter end. Long-term debt increased $347 million following the August 2022 issuance of $350 million in three-year senior notes. We plan to use the net proceeds from the offering for general corporate purposes, which excludes the extinguishment of debt.
On the income statement, net interest income totaled a record $297.1 million, an increase of $43.4 million or 17.1%, reflecting growth in average earning assets and benefits from the higher interest rate environment as our net interest margin increased 43 basis points to 319. Managing deposit costs continues to be an ongoing focus, while the cost of interest bearing deposits increased 29 basis points from last quarter, they remained fairly low at 57 basis points. In terms of deposit betas year-to-date, we have a cumulative beta of 12.5% on total deposits.
As the Fed continues to increase rates, this creates competitive pressure on deposit pricing and we are currently anticipating our deposit costs will increase in the fourth quarter, bringing the total 2022 cumulative deposit beta to around 20%.
Turning to non-interest income and expense. Non-interest income totaled $82.5 million, a slight increase from last quarter. Capital markets income increased 12% linked quarter to a total of $9.6 million with solid contributions from syndications, international banking and swap fees. Service charges increased $1.3 million linked quarter, largely due to growth in treasury management services, interchange fees and higher customer activity.
Mortgage banking operations income decreased $1 million as sold mortgage volumes declined to $111.2 million or 34.2% as consumer preferences shifted to adjustable-rate mortgages we are holding on balance sheet. On an operating basis, non-interest expense increased $2.2 million or 1.2%, compared to the prior quarter, excluding merger-related expenses of $2.1 million and $2.0 million in the third and second quarters of 2022, respectively.
Salaries and employee benefits increased $2.8 million, reflecting reduced vacancy rates and higher production and performance related incentives. Marketing decreased $1.4 million due to the timing of digital advertising and campaigns for our Physicians First program in the prior quarter. Overall efficiency ratio came down to a record 49.4%, a significant improvement compared to the second quarter ratio of 55.2% in the year ago quarter's result of 55.4%.
Tangible book value per common share was $8.02 at September 30, a decrease of $0.08 per share from June 30. This change reflected the impact of AOCI reducing the current quarter’s tangible book value per share by $1.8, compared to $0.72 at the end of the prior quarter, which was largely mitigated by the higher level of earnings for the quarter. The increased unrealized losses in AFS portfolio due to rising interest rates will accrete back into capital over time as securities mature or prepay.
Lastly, as Vince mentioned, we are expecting the UB Bancorp acquisition to close and convert in December of this year. Their balance sheet continues to trend within our expectations and we are excited to add their low cost deposit base in a higher rate environment.
Now let's turn to guidance, which excludes the announced UB Bancorp acquisition. We increased our full-year guidance for loans to mid-teens growth with underlying organic growth in the high-single to low-double digits on a year-over-year spot basis. Total deposits are projected to grow mid to high-single digits on a year-over-year spot basis.
Full-year net interest income is expected to be between $1.10 and $1.11 billion with the fourth quarter between $315 million to $325 million. Our guidance currently assumes a 125 basis points of rate increases for the fourth quarter. We are increasing non-interest income to be between $317 million and $322 million with the fourth quarter in the mid to high-$70 million area. The revised full-year non-interest income guidance is due to higher-than-projected third quarter income.
Full-year guidance for non-interest expense was only revised to provide a tighter range of $768 million to $773 million on an operating basis, while maintaining our previous guide of $190 million to $195 million for the fourth quarter. This does not include the one-time expenses associated with acquisitions and branch consolidations.
Full-year provision guidance was also revised to a tighter range of $25 million to $35 million, which does not include the initial $19.1 million of provision related to Howard and is dependent on net loan growth and macroeconomic factors during the fourth quarter. Lastly, the effective tax rate should be between 20% and 21% for the fourth quarter, which does not assume any investment tax credit activity in the quarter.
With that I will turn the call back to Vince.
Thank you, Vince. We are pleased with this quarter's record revenue and earnings per share, as well as our loan and deposit growth and our current level of non-interest bearing deposits. Our asset quality continues to perform favorably with a low delinquency rate of 59 basis points and only 4 basis points of net charge-offs. We continue to stay focused on changes to the economic environment and remain confident in our ability to manage through potentially challenging macroeconomic conditions.
Our FNB employees have performed admirably throughout uncertain times and I know that they will remain dedicated to fulfilling our commitment to all of our stakeholders. To them, I extend my sincere gratitude, as their collective efforts are what drives our performance, and I look forward to working alongside our dedicated team as we close out 2022.
Ladies and gentlemen with that, we'll begin our question-and-answer session. [Operator Instructions] Our first question today comes from Jared Shaw from Wells Fargo Securities. Please go ahead with your question.
Hey guys, good morning.
Hey, Jared.
Good morning, Jared.
I guess maybe just starting on asset sensitivity and the outlook for the -- as we go into ’23. Any thoughts on starting to moderate that asset sensitivity with the UB deal coming on, like you said, that's going to add even more DDA? How should we be thinking about what you're doing in terms of portfolio decisions? So to potentially look at calling rates as we build out our models here?
Yes, I would say a couple of things, Jared. I mean, over the course of 2022 with various strategies since our exposure to downside rates as you look ahead here, we've reduced our cash position, added asset duration in the loan side to mortgage and securities books plus we've executed about $1 billion or so in receipt fixed swaps to protect us on the downside in the midst of, kind of, looking at potential other opportunities to put some more derivatives on pottentially protect us from downside [indiscernible] rates next year is expected.
So it happened organically outside of that $0.5 billion and I think the way we're positioned today, there's still a good amount of benefits to come from the expected movement in rates as we get into the fourth quarter and then into next year and we'll capture that obviously in the guidance for ‘23. But there's still upside to the margin into the net interest income as you look into the fourth quarter for sure, given the overall asset sensitive position of the balance sheet.
And I would just say again to that, over time, we've kind of foregone some short-term earnings to kind of position the balance sheet, so that we would get that benefit from rising rates when it ultimately did come we've stayed short on our investment portfolio. We have had, consistently had a 50-50 split between AFS and HTM, which helps on the AOCI impacts that everybody is experiencing right now. So I think some of those tactics that we've taken in the past and strategies are benefiting. We sit here today and as we look ahead from here.
Okay, thanks and then on the deposits, great beta performance this quarter. Could you give us an update -- anything that we should think about with the deposit growth this quarter? Is there any seasonality there that could roll off? What were spot rates at the end of the quarter and as we look forward, what do you think the -- through the cycle of beta could be on the overall blended deposit base with UB there?
Yes. I would say a couple of things. I mean, we do have seasonality in our municipal busines that we have every year and kind of swings, I'd say $300 million to $500 million as you go, kind of from peak to trough and go through the year and that still builds through October into November. So that's kind of normal seasonality there, but on top of that we continue to have good success adding new accounts on the retail side, as well as on the commercial side with the markets we're in, we continue to win not just lending side, but also bringing in the operating accounts. So that's clearly a benefit to the overall deposits growth, we've consistently had and our DDAs continuing to build over time has been a focus. There's a new slide that we added. We look back from 2009 forward from 16% up to 35%, and it's been continuously moving up, it's a big focus in the company for sure.
As far as the betas, I mean the liquidity and banking system is still there. We still have $1.8 billion in excess cash on our balance sheet. As like others, we're starting to see more pressure on deposit rates as the Fed continues to move. At this point, there's been very limited movement of our retail deposit rates, but definitely more frequent conversations with municipal business clients, where we've been making adjustments, particularly for those that have a full relationship with us. We have not lost any clients, which is important. I think the commercial customers and municipal customers are having conversations with us aren't just closing accounts and moving somewhere else. So I think it speaks to the relationships that people have built up over time.
As we have a new slide that we added in there. I mean, so far, cumulative beta for total deposits was at 12.5% at the end of September. Our forecast is to be around 20% for total deposits at the end of the year.
Okay, great. And then I guess just finally for me, on the expense side, as we look into ‘23 any more update on sort of the hiring pace of hiring in the D.C. Northern Virginia area. Is that going to be an area of continued growth and then potentially enrichment with that how you did down there?
Yes. We -- I mean, our hiring in D.C. has been underway. So we don't expect a particularly fall in that area. There are several locations, retail locations that are coming online, so could be a little bit of an expense pickup, but it's not significant relative to the total base. When you look at expenses overall, we've been engaged in a multi-year expense takeout exercise. So we targeted certain levels and then we achieved them, we did it repeatedly over the last three years. We expect to continue to stay focused on it. There is some opportunity within our expense base to continue to manage expenses down in the face of inflation, so we can offset some of the natural increases that we're going to see.
I think from an occupancy or a vacancy perspective, vacancy has been reasonable for us. The culture at the company is such that I think our employees are genuinely happy and are committed to the company. We've made -- taken some actions to increase salaries here and there and continue to take care of the employees as we move along. So we weren't hot off guard. If you recall, we had significant increases in the retail space over the five years or so in salary expense to retain those people and with commercial banking upgrades that we've reassessed throughout time.
So our vacancy rate has been within historical ranges. It hasn't -- it's on the upper end, but it's been within historical ranges, so not really an outlier. But I hope that helps. We didn't give guidance for next year on expenses. I'll turn it back over to Vince, if he want to add something.
Yes. No, I would just add to Vince's point, over the last four years, including this year, we had $70 million of cost savings that we've realized. It's always a focus every year as far as coming up with what that target should be. And it really comes out of just continuing to renegotiate with vendors, optimizing space throughout the footprint, as well as a variety of process improvement initiatives that is just kind of ongoing. So we've always had that disciplined focus and continue -- we'll continue to have that.
And as you can see from the guidance this year that has been consistent is that $190 million to $195 million and managing expenses within that band and that will continue to be a focus for us and creates the positive operating leverage that's in the double-digits that we were able to generate this quarter that we expect will continue to be at very good levels in coming quarters here.
Great. Thanks, Vince. Thanks for the taking the questions.
Sure. Thank you.
Our next question comes from Daniel Tamayo from Raymond James. Please go ahead with your question.
Thanks, guys. Good morning. Maybe just following up on the margin discussion, I know you gave a lot of color on deposit betas and expectations there. But if I could just get your thoughts, I guess, on maybe where the margin may peak in relation to when we get the last rate hikes and kind of your thoughts around what happens once we get the peak margin, if we get a decline or stabilization or maybe another floating up? Thanks.
Yes. I would just say that, as I commented on minutes ago, I mean, there's still upside in the margin from here with the continued Fed actions. I think our team has -- across the board done a nice job managing the deposit costs on the retail and the commercial and municipal side that's very much a focus for us given the excess cash we have on the balance sheet and just kind of operating the company. We have a very active process every week through our pricing committee to kind of optimize where those rates should be. So I mean, when I -- when we give guidance for next year, obviously, we'll give you a kind of an outlook for the full-year, as well as the quarterly path, but I think there's still upside.
There's definitely more upside here on the margin and net interest income. And then as I said earlier, we've taken some action to protect us for when rates do come down. So there's still plenty of upside, but put some protection in place to hope with that when it happens and none of us know for sure exactly when that could happen. And I should comment, too that the guidance has an additional 125 basis points in rate hikes as we mentioned on that slide, in the fourth quarter that's what's kind of baked into our outlook.
Okay. Shifting gears here then over to credit quality. Obviously, that's been really strong for you so far things looking very clean in the numbers. Your comment is very positive based on what's available now. But where are you kind of most concerned or looking at most closely in terms of the loan books given what we're expecting here going into the next cycle?
Yes. I think, Daniel one of the focuses of our team today is on the economically sensitive areas. And we feel that those are the small business portfolio, as well as the indirect portfolio on the consumer side. Those books of business have continued to perform really well. Delinquency flat quarter-over-quarter in both of them. Charge offs did tick up a little bit with car prices coming down in the indirect book as expected, but those are the areas of focus at the moment. And like I said, we're pleased with how they've held up to this point and expect them to perform well even though there are headwinds in those areas.
We've also been underwriting -- we've been stressing interest rate sensitivity, right? Gary, within the commercial real estate portfolio.
Yes. And across the C&I book as well. I mean, we're pretty aggressive with our interest rate stresses, I mean, we're underwriting CRE transactions today at north of 7.5%. And then we're stressing it from there. So we've got some pretty heavy stresses built into the front side of the underwriting equation and the oversight management of the book and the stresses that we place on those portfolio.
And we've said this before on other calls, I mean, Gary stated it in the prepared comments, we manage credit risk consistently through cycles. We don't go crazy during the good times in loosened structure and we don't tighten in a crazy way during the bad times and conservative underwriting upfront, better LTVs, if you look at the consumer book, the credit scores and the LTVs are very solid, I'd say, in most cases.
Yes. I mean, the average or average there is in the high-700s.
So basically, what that does is it protects your downside as you move through the cycle and when others are returning capital and shrinking their balance sheet, it gives us an opportunity to selectively grow our balance sheet. And that happened throughout the last cycle. We reported multiple quarters of loan growth when the industry was shrinking, and our credit performance was pretty darn good.
So I'm very confident in our team, I know we have -- there's a lot of uncertainty moving forward. We're not naive to it. We monitor portfolios prospectively. We do all kinds of things from an analytics perspective and stressing perspective, and we're very active at grading our credits accurately and quickly. So what you're seeing from us is it's close to real time as we can get it. I think things are pretty good today. We're looking forward and Gary's team is being very cautious as we move forward.
Terrific. I appreciate all that color. And then, kind of, just a related follow-up on reserves. How much would you say the qualitative side is impacting the level of where you are right now in reserves. Just kind of thinking how changes in macro forecast could impact reserves going forward? Thanks.
Yes. The qualitative piece of the reserve today annual is right at about 25%. We would expect that to move down slightly as we go forward and some of the other quantitative models take effect. During the quarter, as I mentioned in the remarks, the loan growth naturally took some provision expense, a pretty good chunk of it. We did see slower prepayment speeds, which are naturally extending the lives of some of those portfolios and naturally, the impact provision there from a CECL standpoint.
Our economic forecasts have seen some softening. These are quantitative models in our model around CRE and housing variables. So that did take a little bit of provision expense as well. That all said, those builds were on that side of the equation were primarily offset by improvements in credit quality, which ultimately drew the reserve down 1 basis point at 1.34 as mentioned. So all told, credit quality continues to be a driver there. And loan growth is going to drive the provision going forward.
Our reserve position relative to our peer group is still very positive, very favorable. And I attribute that to, you know, gradation, you know, staying on top of the credits, making sure we're understanding where we are from a risk perspective and a gradation standpoint. I don't know, Gary, do you want to talk about --
No, I would agree with that. I mean we viewed the pandemic as not something that was finite and totally ending. So we were a little cautious around that. And I go back to 1.5 years back, when we were really starting to get worried about the inflationary signs that we were seeing [Technical Difficulty] releasing large chunks of it. So we've managed it, I think, appropriately and accordingly, and we're pleased with the strength of it today.
That’s great color. Thanks for all that. That’s all from me. Apprciate it.
Thank you.
Our next question comes from Casey Haire from Jefferies. Please go ahead with your question.
Yes, thanks. Good morning, guys. Question for Vince C. So the non-interest-bearing deposit mix has been very strong. Just wondering is that 35% level sustainable from here or are you factoring in some attrition as you -- in your 20% cume beta through the end of the year?
Casey, this is Vince Delie. We focused on that historically to grow that position. I mean, if you go back, and I think if you look at the chart that’s in the deck, you can see the deposit mix has shifted very favorably. That's been an effort, a multi-year effort that type of -- these changes are built into our DNA. I mean, basically, have incented people to focus more on low-cost deposit gathering. They work pretty diligently, strategically to secure treasury management relationships. So that 35% we're hoping is sticky.
And having said that, I mean, I'm sure as you move forward in a rising rate environment, there's pressure, right, on non-interest-bearing deposits. So it's reflected in the deposit beta guide that we gave, right, Vince. I don't know if you have any other details that you want to break down [Multiple Speakers]
The other thing I will add, Casey, is our small acquisition is also additive, right, because their deposit mix is also favorable to even higher percentage of demand deposits higher than average, right, is 42% right?
Had announcement. Yes, we are 42%.
So it's going to be additive from that standpoint as we move into a period of elevated rates.
Okay, understood. And then on the cash position, I think you mentioned excess cash of $1.8 billion. What is sort of like the bare minimum that you want to run at just a reminder there, so we get a sense as to when that does run low, a little bit more like the use of wholesale borrowings becomes more prevalent?
Casey, that's really what we would consider excess cash to $1.8 billion. We have a certain core level of cash on the balance sheet that you would typically see. But that $1.8 billion that I referenced is truly the excess cash. So that can go down to zero.
Okay. All right. So a decent cushion from here. And then just lastly on the loan pipeline, obviously, a strong result here. It sounds like the pipeline is a little bit softer. Just wondering, if there's any -- a little more color on any verticals? Or is it just a little bit lighter after a strong production quarter? And then also, the indirect auto has had a very nice growth over the last two quarters. Is that seasonal in nature? Or is that going to slow down? Or is that momentum going to continue?
Well, I'll answer the question. The first question about the overall pipeline, I'll let Gary talk about indirect auto. It is still reports up through Gary. But the pipelines in general, they were fairly robust leading into the last two quarters actually. And we've been able to produce some pretty significant loan growth as we close out those transactions the pipeline has contracted, which is pretty natural. We're at a point in the cycle where you typically don't see a surge in commercial borrowing requests seasonal period basically.
And from a cyclical perspective, I wouldn't expect to see a surge in demand, particularly in the C&I book as we move towards the end of the year. I think those pipelines will refill. I mean, they're not terribly low. They're at a decent level, they've just been reduced because of all the stuff we closed in the 90-day bucket. So my hope is that we're able to go out, given the size of our footprint, the fact that we have a fairly significant share across seven states and the District of Columbia, I would expect us to be able to go out and continue to generate high-quality earning assets. That goes for both consumer and commercial. And I know that our regional presidents, while they face a very significant amount of competition quarter-after-quarter, we're very optimistic about their ability to execute in the markets that they're in.
Gary, I don't know if you want to comment on indirect auto?
Yes, sure, Vince. Thanks. The second and the third quarters, Casey, are seasonally high periods for us. So we do normally see that type of spike in volume during the middle part of the year. We've really been focused over the last month, 1.5 months, a couple of months on enhancing our margins in that business. I would expect, as we move through Q4 here that we'll see lower volumes there. Again, we're focused as always on high-quality paper. So I would expect that to seasonally dip for those couple of reasons, as well as our focus on enhancing those margins.
Okay. Understood. And just -- sorry, one last more housekeeping question. The tax rate guide is up a little bit, 20% to 21%. Is this the level we should assume carry into ‘23?
What I was going to say it will always be dependent on the level of investment tax credit activity that we execute and we'll continue to be active on those types of transactions. But don't foresee any activity in the fourth quarter. So that's why we're up -- what I would say is a normalized 20% to 21%, absent those types of transactions.
So 20% to 21% with a benefit provided that there's some taxes in transactions.
Yes. We expect -- there's something we had teed up in the fourth quarter that we expect to happen next year. So that will create some benefits to that rate pretty clean rate [Technical Difficulty].
Understood. Thank you.
Alright. Thanks for the clarification.
Thank you.
Our next question comes from Michael Perito from KBW. Please go ahead with your question.
Hey, good morning everyone. Thanks for taking my questions.
Good morning, Mike.
Hi, Mike.
I wanted to ask -- just first, if you could -- maybe just give us a quick refresher on the Physicians First mortgage program, kind of, the structure, the type of the use case, just a little bit of a refresher as it's clearly seen some nice growth recently for you guys. Just wondering if you could give us a rundown of kind of how that product works generally?
Well, we had -- we started with a mortgage product that had a more advantageous LTV. Basically, we get the basic premise of it for physicians, medical professional’s, doctors that are starting out typically are loaded with student loan debt. So we made some adjustments to the underwriting along that product to assist the physicians in securing their homes. We migrated it from a purely physical origination process to a digital origination process, and we bundle a series of other products, medical practice loan, which is a small business loan, the student loan, refinance product with the depository product and then the first mortgage product, and we call that our physicians first bundle, and it's on our digital e-store, which is our e-commerce website that we set up and I referenced it in the prepared comments.
And then we use that platform with our originators to go after physicians will -- and that portfolio has performed extraordinarily well. Over time, it's grown nicely. Gary, I don't know if I might comment on some of the --
Yes. I mean delinquencies in that portfolio were very near zero high FICO scores, very solid debt-to-income ratios. I mean, it's a high-quality book of business, and we continue to see good opportunities there. The bundling of the programs and the opportunities in that small business practice lending business, I think, are ahead of us, as well as some of the student loan we buy opportunities there. So we expect that to continue to bear fruit as we move forward with that program.
Is that competitively --
Do you guys. Sorry, go ahead.
Go ahead. Go ahead and ask your question, Mike.
I was going to say competitively, do you guys feel like that there is a little bit of an edge you guys have here or a lot of other banks in this face or focused on this niche? Or is there room for you guys to kind of take some market share?
There are other banks focused on this niche. I mean, just about every competitor we have offers a similar mortgage product. The difference is the way we've organized our approach to gathering those clients. We use data analytics. We use our digital tools, the e-store, if like we said in our prepared comments, we had 37,000 customers visit our site. So we've created traffic on our website, which translates into the ability to promote certain products and services and then when we engage in digital advertising and traditional advertising methodology, we can direct them to our portal.
So when you look at it, the physicians first e-store page, for example, it grew to 900 visits per month from zero. So we just stood that up not that long ago, a couple of quarters ago. So that supported the growth year-over-year of 18.2% in that category in terms of use on that site. So -- and it supports the overall views. So when we use that tool, that digital tool we're creating traffic that enables customers to look for solutions. And then we're applying in some instances, our analytics tools to present products to customers as they visit the site.
So they put the physician's first package, the mortgage package in the shopping cart and then the other items pop up. And they say people that purchase this product, typically look at these other products. So it's led to more views and ease of marketing and a higher visibility, right? So we're attributing some of our success to obviously, the people matter [Technical Difficulty] but some of our success is directly attributable to our digital strategy and the e-store concept that we've developed.
Got it. Helpful, thanks. Yes. No, it is very thorough. And then 900 --
900 positions a month. Now look at our website, just to keep that in perspective. I mean, that's 900 positions we would normally see most likely. So helps build awareness and supports our brand.
And then just lastly and unrelated, just on the capital markets fees, which were pretty solid in the quarter. Is it reasonable to think that in the current environment, there's room for that to, kind of, continue to be elevated with rates moving and some of the economic uncertainty and everything you're seeing a little lecture engagement from the commercial pipe there? Just love a little extra color there, if you don't mind.
It's a great question. I mean, I think we're a little bit of an anomaly, right? Because we have a pretty broad offering for our size. So we have a debt capital markets group that participates in bond economics, they support our large corporate calling activity, our large corporate bankers. We have syndication effort that's outsized, I think, for a bank our size. In fact, our syndications revenue is double, right? And it's more than doubled over the last year. So it's a sizable contributor, we do hedging, we throw international into the mix, because we do some hedging for international clients that's grown nicely.
The derivatives business is a core business for the company, that's more volatile, because of the changes in interest rates and demand from a loan perspective, they both -- that both impacts that area. But we have a very strong team and have had great success structuring products for clients to protect them in both up and down interest rate cycles. So sure, I mean, I mean, I'm bullish on our capital markets platform in general over the long-term. I believe there's significant upside over the long-term. In the short run, you're going to see variability. It's lumpy because of the changes in rates. But --
I think capital markets is very early.
Yes, debt capital markets is early. Syndication is -- there's still upside there, even though we performed extraordinarily well this year, there's upside. There's always an opportunity in the debt capital markets area, because of the activity that goes on with our larger borrowers in terms of the issuance of debt, bonds, not the bank debt or [added] (ph) debt. And then as we've grown as a company, our credit appetite in terms of hold positions has grown. And in order for us to compete more effectively against larger competitors and to hold our own against some of the regional players that we compete with day in and day out, we built out our syndication capability. We have a very strong corporate bank there are terrific corporate bankers across the company.
I've been in the business for 35-years. I can tell you, have competed against everybody over the last three decades. We have a very strong team. So their knowledge and capability will lead to growth in capital markets. The stronger your bankers are, the more opportunities you have in that space. And that's why over the long haul, I'm very optimistic about that area, barring economic headwinds.
Got it. Makes sense, it's good to see the momentum this year. Thank you guys for taking my question.
Yes. Thank you. Appreicate it.
Our next question comes from Brandon King from Truist Securities. Please go ahead with your question.
Thank you. Good morning.
Good morning.
Yes. So I just had one question really on loan yields. I was just curious what the loan yield was for new loans in the month of -- this month of October? And also wanted to know if you can give us color on what you're seeing from a loan spread dynamic? Are you seeing more competitive pressures? Or are you actually seeing expansion in loan spreads given, kind of, what you've been able to price out there in the market?
I can comment on the mids and then maybe ask Gary or going to comment on spreads or current loans. The new loans made during the third quarter amount at a yield of 4.38%, which is up significantly from 3.53% in the second quarter. And if you look at kind of the overall spot portfolio rate, it increased 87 basis points to 4.53% after increasing 46 basis points in the second quarter to 3.66%. So the new rates where they're coming on, as you would expect, significantly higher, which bodes well for my comments earlier about kind of the margin as you get into the fourth quarter and continue building net interest income there.
Yes. In terms of the spreads, we are seeing them strengthen. So we're seeing some benefit pretty much across the board high-quality paper is naturally bringing very, very low rates in terms of the strength of investment-grade credits, but that has also moved up. So I would tell you that everything is up 20 basis points to 25 basis points upwards of 50 basis points from a spread standpoint, depending upon asset class.
Yes, we're not a yield chaser, by the way. We focus principally on credit quality. So we like to do -- even though some transactions may be more thinly priced, the ability to reduce results through cycles is directly hinged on how creditworthy those borrowers are going in. So while we try to benefit from higher yields in certain asset classes across a broader spectrum of lending, so we have a portfolio as of late dairy, many of the C&I credits that we brought in were larger, right, and more creditworthy and the credit spreads on those deals are thinner.
So anyway, just thought I'd bring that up. That's in the C&I book in the consumer book. Again, we tend to chase higher fall of the borrowers. But that's going to impact your overall credit spreads and our perception of spreads. In other words, we're not out there doing high-risk private equity deals with significant leverage, right? That's where you'll find the best yield. That's not in our portfolio.
Brandon, just a further comment to your question. So the 4.38 that I mentioned, that's the rate for new loans for the entire third quarter. If we look at the month of September, loans came on at 4.94 relative to the 4.38 average for the quarter. So kind of responsive to your question about kind of more current. So that's where we ended the quarter for the month of September.
Got it. Got it. Thanks for taking my question.
Alright. Thank you.
Thank you.
Our next question comes from [Manuel Navis] (ph) from D.A. Davidson & Company. Please go ahead with your question.
Hey, good morning. I think most of my questions have been answered. But just can you describe any differences you're seeing in terms of loan pricing or deposit pricing just regionally? You talked a little bit about loan growth, Cleveland being pretty strong. But just kind of -- could you continue that with loans and deposits just in terms of pricing competition?
Yes. We're in some pretty intense markets. Our core markets are actually extraordinarily competitive. People think it's the opposite. But Cleveland, Pittsburgh, even Baltimore are very competitive markets. I mean, Cleveland has always been a tougher market to pricing. As you move into the Southeast, while there are more competitors, there tends to be more activity. So it kind of buffers the competitive environment slightly. But if you look overall, the variations are not that great, but there are variations. So I just pointed them out, but I think that goes for both loans and deposits.
And as you look at the State of Pennsylvania where we compete, as you move across the state into Philadelphia, credit spreads tend to narrow as you get closer to Philadelphia, because it is more competitive even more competitive in that area. So once you cross in the Central PA into the Philadelphia market, the commercial pricing becomes a little thinner from a depository perspective, it's the same type of thing.
But we're really focused as a company on gathering demand deposits. This is a very strong deposit franchise. It's evident in the results. You can see it in the trend that we've presented. Our objective here is to be the principal operating bank for our clients. We're not out buying deposits to fund our operations. So what that means is the commercial bankers are out, they're selling treasury management services. We're getting the principal disbursement accounts. So we have balances that are typically used to pay for services or are sitting for liquidity purposes for the company and demand deposit accounts. And then on the consumer side, we strive to be the principal bank for the consumer. So I mean that's how you're able to maintain pricing and produce better betas and all the things that.
Leveraging a time and lead generation [Multiple Speakers]
It's all tied together anyway. I hope that answers your question.
No, I appreciate that. Thank you.
Thank you very much.
And our next question comes from Brian Martin from Janney Montgomery. Please go ahead with your question.
Hey, good morning, guys. Thanks for taking the question. Maybe just one follow-up on the loan yields. I think Vince, you said it was a 4.94 yield in the month of September. Can you, I guess, give a little color on just the commercial yields outside of -- whether it's for the quarter or just for the month on where new production is coming on?
I don't have that handy that level of granularity.
I can tell you, I don't think we have that at our fingertips. But when you look at the deals that are coming in, typically, a middle market commercial deal is anywhere from $1.75 to $2.50 in credit spread.
Got you.
And that's what, Brian, that's been fairly consistent. So if you want to convert that to a fixed-rate yield, you'd have to look at the yield curve. We focus on credit spreads in that space and kind of manage the groups that way versus looking at an outright yield. They may look at fixed rate loan, they may do a variable or adjustable rate loan. So we're kind of keying in on that credit spread. But I would say credit spreads have broadened slightly across the board. I don't know what.
No, they have. I mean they're up, like I said, 25 basis points to 50 basis points in some asset.
And then that new origination, the reason it's difficult to put your finger on what the yields would be in the commercial book is because we run the broad spectrum of the market from small business up to large corporate. So if we book a large corporate deal at LIBOR plus about 50 or about 25, that's your spread, right? So it's going to reduce the yield in that quarter, but we look at it more broadly from a portfolio perspective and trying to manage it that way. And that helps us manage as well. I can't give you any more than that. I hope that we're expecting credit spreads to continue to broaden as we move through a difficult period in the cycle.
Got you. No, that's helpful. And then maybe just the reinvestment rates for securities today, where are they at? I guess, whether for the quarter or for September, just kind of how you're thinking about next quarter?
Yes. I would say just to make a few comments on that. The reinvestment rates averaged 3.83 for the quarter. For the third quarter, it was up from 3.27 last quarter, 1.90 in the first quarter. As we know, the freights haven't moved up. So the 3.83 compares to a roll-off rate of 2.04. So that kind of gives you a reference point there. The duration of what we invested during the quarter was still in that kind of 4, 4.2 level. The kind of -- if we look at where we're investing today, we continue to take advantage of the market yields. We've been investing at about 4.80 as we sit here so far in October, with the duration just a little bit South of 4.
Got you. Okay. No, that's helpful. So all right. Perfect. And then just how about -- maybe this one for Gary. On the commercial real estate concentration levels, just are there any areas you guys are staying away from lending today, just given maybe an increased focus here from the regulatory side on commercial real estate? Or just any thoughts on if you're staying away from anything today and just kind of where the current concentration levels are?
Yes. We've been extremely cautious for -- I would say, the last 1.5 years, a couple of years and beyond even in the retail space. So we're doing very little volume around retail CRE, we do occasionally come across a very strong transaction with long-term leases, credit tenants and those type of underwritings and we'll continue to pick our spots there.
The other space is the office space overly cautious there. I mean, it's been a space that we identified very early on in the pandemic as one that's going to have an elongated tail around potential risk in that space. So again, similar as the retail, we'll find beyond transaction that is long-term leased to an extremely strong credit type of tenant, and we'll move forward with a transaction like that, but very, very little volume.
We have very little hospitality. The portfolio is time.
Yes, the hospitality we don't. We haven't made a hospitality loan in five, six years.
I don't think in all of my time in banking, I would -- this portfolio as it sits is in a very good position moving into the cycle, that we're in. And I give that credit to Gary and his team. They've been -- obviously, you want to grow the book, you want to grow revenue. But when we're in choppy waters like this, this is one of the best places to be, right? You you've addressed risk within the portfolio, we're very conservative. What Gary didn't say is we don't have a lot of urban large office buildings. We don't. We have office buildings, but they're largely smaller suburban buildings that haven't experienced the same level of vacancy. So I think that we're very well positioned.
Obviously, everybody is going to be facing in the industry a slowdown next year if it occurs. And if we perform the way we have through other cycles, we'll be in really good shape. So I think we have the same team. So we're able to manage through this more effectively and outperform others. I don't know if you have any other questions?
No, I think that answers mostly on the real estate. Just the last two just general questions. Just on the -- your outlook on the loan growth side, I know you're not giving much outlook for ‘23. But just -- are you seeing more caution? It sounds like you're seeing more caution among the commercial customers, obviously, based on where we are in the cycle and just economically. But is that how we should kind of think about at least as we look at ’23, that's probably what we would expect as you get a little bit deeper in this quarter and share more next quarter, but is that kind of the trend you're seeing among the customers today on the commercial side?
Yes. I think the clients, you got to remember, we've all gone through a pretty significant turbulent time, but the pandemic is pretty shocking to a lot of people, a lot of clients. So I think that they're thinking about things more conservatively as we move into this cycle, I obviously, the economic headwinds are real. Inflation is real, the supply chain disruption is real. I think our commercial customer base appears to be pretty realistic about revenue expectations moving into next year, which ultimately translates into fixed charge coverage and performance on our loans.
So I'm hopeful that on the commercial side, the customer base that we have, we're relying on those management teams to get us through just like we -- our shareholders rely on us to get them through. So I think we have a very strong customer base. We have very prudent customers. They think about their business, they manage leverage appropriately, and that will get them through a difficult time.
On the consumer side, the consumers appear to be in pretty good shape. I mean, there's obviously stressors out there from an economic perspective, but globally, when we look at the performance of the portfolio, delinquency rates low, the charge-off rates are low. I know those are lagging indicators. And then if we look at cash positions, within the consumer segment themselves, they appear to still be fairly healthy even though I would expect that to deplete over time with inflation. But with inflationary pressure and other things.
But I think we're in a very good position moving in to this next cycle, and we're very cautious. So I don't know how else to leave it. So I may come across that way, it's because we aren't cautious. In terms of pipelines, we manage our pipelines fairly rigorously. We do credit reviews upfront. So that's really going to be contingent upon what's going on from an economic perspective and over time, how other capital providers are impacted. So it's kind of tough to predict where the pipelines are going to -- but I feel pretty good about where we are today and the pipelines are -- have softened, but a lot of it has to do with transitioning deal flow, and there's still at reasonable levels that were being into next year. So we'll see what happens.
And just an additional note Brian. Just this within the last week, I've been pulled into three new transactions and all of them extremely strong. So the pipelines can build rather quickly based on some of the transactions that we're able to look at these days. And I was very pleased with those three discussions, and they're all moving forward.
Got you. No, that's helpful. And just the last one for me was just on capital. Just any changes in the outlook, just kind of where -- maybe where the capital levels ended in fourth quarter just post the union deal and just how you're thinking about the buyback and just managing the capital levels today?
Yes.No no change in our strategy there. We continue to target CET1 ratio around 10%. And the 9.8% estimated for this quarter is up 9.7%, as you saw on the slide, the strong earnings more than supported the asset growth for the quarter and the dividend payout ratio is at a very attractive level. We would expect to build CET1 ratio to 10% in the near-term and then gradually build that ratio in ‘23, just given kind of higher earnings generation levels as we benefit from the asset-sensitive positioning.
Regarding the buybacks, it's still the same philosophy, Brian, I mean, our first and best use of capital is organic loan growth. So the level of buybacks would be dependent on that. We did not buy back any shares this quarter, but we will be opportunistic as we go forward given we still think there's significant value in our relative PE to the peers, and we've made outperformed the peer significantly in recent periods, and we think there's still room for that PE to expand relative to the peers. So we will be opportunistic. But the overall philosophy is still the same.
Got you. Okay. And I don't know if someone asked earlier, but just you talked about the positive operating leverage. The efficiency ratio being below 50% today, is that kind of an achievable -- is that kind of a sustainable level, kind of given the outlook for what you're seeing with the margin still trending higher here as you kind of look over the next couple of quarters?
I would just say, I mean, for the fourth quarter, right, we'll give guidance in January for next year. And as I mentioned, there's still upside in the net interest income that's baked into our guidance, and we'll continue to manage expenses diligently as we always have. So there's still -- there's upside to that ratio or improvement to that ratio into the next quarter and then next year, we'll cover that when we into guidance.
Great. Got you. Okay, thank you for taking the questions guys.
Alright.
Thanks, Brian.
Ladies and gentlemen with that we've reached the end of today's question-and-answer session. And at this time, I would like to turn the floor back over to Vince Delie for any closing remarks.
Yes, first of all I'd like to thank our team. This was an exceptional quarter, but it's been a series of exceptional quarters. So that doesn't happen without a lot of hard work, focus and I really appreciate what our team has done all of our employees have really stepped up. Very proud to work here, it shows in the results right.
So thank you and thank you, Gary and your team for keeping us moving along here and deploying capital through a cycle. I think that's going to be very positive. I think we've shown that there's tremendous amount of positive momentum. The business model is working. And we're looking forward to continuing to drive results for our shareholders. So thank you and I look forward to our next call. Take care everybody.
Ladies and gentlemen, with that we'll be concluding today's conference call. We do thank you for joining. You may now disconnect your lines.