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FNB Corp
Earnings Call Analysis
Q3-2023 Analysis
FNB Corp
The company has exhibited a solid performance through a strategy that includes a balance between loan and deposit growth, investment in technology, and market expansion. This approach, especially the build-out of a common application platform and a model change in consumer banking, is anticipated to drive revenue growth and improve customer service, with management confident that these initiatives will position the company to outcompete peers in 2024.
Financially, the company reported a strong increase in tangible book value per common share, driven by retained earnings and robust capital ratios. Even with investments that led to increased marketing and occupancy expenses, the efficiency ratio remained solid, indicating controlled operational costs relative to revenue. Share repurchases and dividends have been part of capital management strategies, returning significant amounts to shareholders while maintaining healthy capital metrics, like a CET1 ratio in line with peers and an 18% return on equity.
Looking ahead, the company provided optimistic revised guidance for the year: loan growth in the mid-to-high single-digits, flat deposit balances year-over-year, and expectations of net interest income between $315 million to $325 million for the fourth quarter, assuming no additional rate hikes. Non-interest income and expense forecasts were also shared, underscoring ongoing initiatives and the potential impact of a challenging macroeconomic environment.
The company's capital management has been proactive, with a strategic focus on shareholder value. Management has highlighted the repurchase of over $1.5 billion in shares or dividends, whilst sustaining growth in tangible equity and remaining well capitalized. There's a keen emphasis on evaluating capital position quarterly, with an acknowledgment of the importance of balancing return on capital with the need for strategic internal investments.
In terms of future direction, management conveyed a strategic intent to continue investment in areas that would bolster share of wallet, enhance customer service, and drive revenue, especially through digital and small business platforms. The company also intends to take advantage of opportunities presented by other banks' retraction in the market, enhancing its position competitively.
The company has been focused on de-risking its portfolio, notably through divestitures prior to the pandemic, which has put it in a strong position from a capital perspective. The emphasis on lower-risk commercial and consumer loan categories and a conservative approach underscores the company's stake in maintaining a resilient balance sheet.
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Good morning, and welcome to the F.N.B. Corporation Third Quarter 2023 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Lisa Hajdu. Please go ahead.
Thank you. Good morning, and welcome to our earnings call. This conference call of F.N.B. Corporation and the reported files with the Securities and Exchange Commission of to contain forward-looking statements and non-GAAP financial measures. Non-GAAP financial measures should be due in addition to and not as an alternative for our reported results prepared in accordance with GAAP. Reconciliations of GAAP to non-GAAP financial measures to the most directly comparable GAAP financial measures are included in our presentation materials and in our earnings release.
Please refer to these non-GAAP and forward-looking disclosures contained in our related materials, reports and registration statements filed with the Securities and Exchange Commission and available on our corporate website. A replay of this call will be available until Thursday, October 26, and the webcast link will be posted to the About Us, Investor Relations section of our corporate website.
I will now turn the call over to Vince Delie, Chairman, President and CEO.
Thank you, and welcome to our third quarter earnings call. Joining me today are Vince Calabrese, our Chief Financial Officer; and Gary Guerrieri, our Chief Credit Officer. F.N.B. reported third quarter net income available to common shareholders of $143 million or $0.40 per diluted common share. This quarter's performance represents EPS growth of 3% in the quarter. Our results reflect the execution of F.N.B's. long-term strategies geared towards risk management, client primacy, generating organic growth and diversifying fee-based income.
Our third quarter efficiency ratio equaled 51.7% and is expected to remain in the upper quartile on a pure relative basis. In addition, operating leverage on a year-to-date basis is 8%. Tangible book value per share has increased 12.5% year-over-year to $9.02 despite the impact of higher industry and return on tangible common equity was again at a solid level of 18.2%. As we have previously mentioned, F.N.B. is well positioned to steadily increase market share in this volatile environment, given the strength of our capital and liquidity position and adherence to our consistent and conservative underwriting guidelines.
Total deposits ended the third quarter at $34.6 billion, a 2.3% increase from the second quarter while maintaining a relatively stable mix of noninterest-bearing deposits of 31%. Our third quarter linked deposit growth once again outpaced the Federal Reserve HA deposit data, continuing a trend with quarterly outperformance versus the industry and demonstrating the strength of our granular deposit base and diversified geographic footprint as well as our goal to be the primary bank for our clients. In fact, FDIC deposit market share data released in September revealed that F.N.B. ranks in the top 5 and nearly 50% of the MSAs we operate in and in the top 3 in nearly 30%.
Despite the acceleration of deposit competition throughout the banking industry, F.N.B's spot deposits have decreased less than 0.5% since year-end 2022, demonstrating our trusted position as our customers' primary operating end.
Our deposit growth this quarter was effectively funded dollar-for-dollar by our 2.5% linked quarter growth in loans, which also meaningfully outperformed HA data. Commercial loan growth of 2.4%, benefited from the highest level of quarterly production year-to-date, which was spread across the entire footprint. Since year-end 2022, we have achieved 6.3% spot loan growth while building our CET1 ratio to 10.2%.
Tangible common equity to tangible asset ratio also continues to build, totaling 7.54% this quarter, even against the backdrop of higher rates. Additionally, our solid liquidity position and better than peer funding cost provides balance sheet optionality and the ability to support our clients' capital needs. The loan-to-deposit ratio remains at a comfortable level of 92.9%.
We also continue to invest in capabilities to gain market share and further outpace our competitors, particularly in the digital offerings we deliver for retail and business customers. Our award-winning eStore offers a unique platform driving a better customer experience and product penetration.
Our most recent implementation, the eStore common application creates a single universal account application for the majority of our consumer loan products and services, enabling customers to apply for multiple products simultaneously in a very streamlined manner. In a few months, we will add our consumer deposit products to the common application, which will facilitate faster customer onboarding across multiple products and should meaningfully accelerate the adoption of the common application. We will capitalize on our competitive advantage with our superior digital offering and the strength of our balance sheet to acquire and grow customer relationships across our 7-state footprint.
During the quarter, we fully charged off the commercial and industrial loan we mentioned in our second quarter earnings call. Gary will provide more information during his presentation. Absent that isolated charge-off, total net charge-offs would have been a modest 7 basis points and total delinquency stood at 63 basis points. Our growth strategies are balanced by a diligent focus on risk management.
We closely monitor macroeconomic and market-specific trends to manage risk as part of our core credit philosophy which has served us well in softer economic times. We remain steadfast in our approach to consistent underwriting and managing credit risk to maintain a balanced, well-positioned portfolio throughout economic cycles, enabling us to serve our customers through business cycles in ways our competitors cannot.
I will now turn the call over to Gary to provide additional information on our credit performance.
Thank you, Vince, and good morning, everyone. We ended the quarter and year-to-date period with our asset quality metrics remaining at good levels. Total delinquency decreased 12 basis points in the quarter to end at 63 bps and NPLs and OREO decreased 10 basis points to end at the solid 36 bps. Criticized loans were down 18 basis points with net charge-offs for the quarter and year-to-date of 47 and 26 basis points, respectively. Excluding the isolated credit that Vince noted, net charge-offs for the quarter and year-to-date period were 7 and 12 basis points, respectively. I'll conclude my remarks with an update on our credit risk management strategies and CRE portfolio.
As previously disclosed in the second quarter earnings call, we pledged a single $31.9 million C&I loan on nonaccrual. Based on alleged fraud and upon later findings uncovered during our ongoing investigation, including subsequent bankruptcy filings by our borrower and its primary supplier, the outstanding balance was charged off. We will continue to monitor the bankruptcy process closely and aggressively pursue all opportunities to recover a portion of the charge-off.
Total provision expense for the quarter stood at $25.6 million providing for loan growth and the previously mentioned charge-off in excess of the $13 million specific reserve that we allocated to it at the prior quarter end. Our ending funded reserve decreased $12.1 million in the quarter and stands at $401 million or a solid 1.25% of loans reflecting our strong position relative to our peers. When including acquired unamortized loan discounts, our reserve stands at 1.39% and our NPL coverage position remains strong at 394%, inclusive of the unamortized loan discounts.
We remain committed to consistent underwriting and credit risk management to maintain a balanced well-positioned portfolio throughout economic cycles and continue to perform full stress tests of the loan portfolio on a quarterly basis. We were pleased with the outcome of the result of the recent exercise, which confirms that our diversified loan portfolio enables us to withstand various economic downturn scenarios. Regarding the nonowner-occupied CRE portfolio, delinquency and NPLs remain very low at 31 and 20 basis points, respectively, confirming that our consistent underwriting and strong sponsorship demonstrates the ability to perform in a rising rate environment.
In closing, asset quality metrics ended the quarter at good levels, and we continue to generate diversified loan growth in attractive markets. We closely monitor macroeconomic trends and the individual markets in our footprint, and we'll continue to manage risk aggressively. As part of our core credit philosophy, which has served us well throughout various economic cycles.
I will now turn the call over to Vince Calabrese, our Chief Financial Officer, for his remarks.
Thanks, Gary, and good morning. Today, I will focus on the third quarter's financial results and offer guidance updates for the fourth quarter. Third quarter net income available to common shareholders totaled $143.3 million or $0.40 per share, bringing year-to-date earnings per share to $1.18. The results include contributions from our commercial leasing team to originate renewable energy financing transactions as part of their business model, and this quarter, they closed a large solar deal with a related investment tax credit. Loans and leases ended the quarter at $32 billion, growing $796 million or 2.5% linked quarter, driven by the success of our strategy to grow high-quality loans across our diverse footprint.
Commercial loan growth of $470 million or 2.4% was across our 7-state geography with notable contributions in the Pittsburgh, Mid-Atlantic and North Carolina markets. Consumer loans ended the third quarter at $12 billion, a linked quarter increase of $326 million or 2.8%, led by growth in residential mortgages.
The investment portfolio remained flat at $7.1 billion, with a fairly even split between AFS and HTM. The duration of our securities portfolio at September 30 is 4.4 similar to last quarter. Total deposits ended September at $34.6 billion with a healthy increase of $790 million linked quarter or 2.3%, reflecting organic deposit growth and seasonal municipal deposit inflows.
Our deposit gathering capabilities have continued to outperform the industry as illustrated by the Federal Reserve HA deposit data where our deposit growth was nearly 220 basis points higher for the quarter and 320 basis points higher since year-end 2022. The deposit mix shift slowed modestly this quarter as customers moved into time deposits and interest-bearing demand deposits, which grew $458 million and $712 million, respectively, more than offsetting the decrease in noninterest-bearing deposits of $210 million. As time deposits have grown, we have intentionally kept the portfolio short with a weighted average maturity of 11 months, so that when rates do fall, we will have the ability to reprice these balances downwards.
As of September 30, noninterest-bearing deposits comprised 31% of total deposits compared to 32% at June 30 and 34% at year-end. Given our granular stable deposit base, we believe we will continue to outperform the industry with a favorable mix of noninterest-bearing deposits to total deposits even in a higher for longer interest rate environment. The loan-to-deposit ratio remains at a comfortable level of 92.9%, flat with June 30. Revenue totaled $408 million, driven by net interest income of $327 million and growth in noninterest income, reflecting our diversified fee income strategy.
The third quarter's net interest margin was 3.26%, a decline of 11 basis points, moderating from the 19 basis point decline last quarter. The yield on earning assets increased 17 basis points to 5.11%, reflecting higher yields on loans and investment securities. Total cost of funds increased 29 basis points to $193 as the cost of interest-bearing deposits increased 39 basis points to 2.36% and was partially offset by the contribution from noninterest-bearing deposits. We continue to actively manage our total deposit costs and ended the quarter at 1.75%, bringing the cumulative deposit beta to 31%. We are projecting cumulative beta to end 2023 in the mid-30s.
Turning to noninterest income and expense. Noninterest income totaled $81.6 million, a 2% increase from the second quarter as capital markets income increased $1.2 million led by International Banking with solid contributions from swap fees, syndications and debt capital markets income. Mortgage banking operations income decreased $1 million due to negative fair value marks given the sharp increase in mortgage rates during the third quarter that more than offset a 46% increase in total saleable mortgage production versus last quarter.
Noninterest expense totaled $218 million, an increase of $6.2 million or 3% from last quarter. Net occupancy and equipment expense increased $3.5 million largely due to the impact of technology investments and the inflationary macroeconomic environment. Marketing expenses increased $1.5 million due to the timing of digital marketing campaigns which helped drive deposit growth and acquire additional households. The efficiency ratio equaled a solid 51.7%, up slightly from 50% last quarter. For the first 9 months of 2023, the efficiency ratio totaled 50.8% compared to 54.7% for the same time frame in 2022.
While supporting the strong loan growth, our capital ratios remained robust through the quarter. Our TCE finished the quarter at 7.54% and when adjusted for held-to-maturity investment marks would equal 6.7%. Our CET1 ratio at 10.2% is in line with peer median, and we remain well capitalized even when including the fair value marks in our AFS and HTM portfolios.
Tangible book value per common share was $9.02 at September 30, an increase of $0.23 per share from June 30, largely from the higher level of retained earnings more than offsetting the increased impact of AOCI, which reduced the current quarter end tangible book value per common share by $1.06. On a year-over-year basis, tangible book value per common share increased a full dollar or 12.5%, demonstrating our commitment to internal capital generation.
Let's now look at the fourth quarter financial objectives, starting with the balance sheet. On a full year spot basis, we increased our previous guide for loans to grow mid- to high single digits year-over-year as we take this time to invest in our capabilities to gain market share across our diverse geographic footprint. Total projected deposit balances are revised upward to end 2023 relatively flat to year-end 2022 spot balances. The fourth quarter net interest income is expected to be between $315 million and $325 million, assuming no additional interest rate hikes for the rest of the year.
Fourth quarter noninterest income is expected to be around $80 million, which is similar to our guidance levels for the first 3 quarters of the year as we continue to benefit from our strategy of diversified fee-based businesses. Fourth quarter guidance for noninterest expense is expected to be between $215 million and $220 million, driven by increased investment spend and the impact of the inflationary macroeconomic environment. Full year provision guidance is revised to a tighter band of $70 million to $80 million and will be dependent on net loan growth and charge-off activity in the fourth quarter.
Lastly, the full year effective tax rate should be between 17.5% and 18%, and the fourth quarter effective tax rate is expected to be between 17.8% and 18.2% and reflecting benefits of investment tax credits generated through the financing transactions of our commercial leasing business in the quarter.
With that, I will turn the call back to Vince.
Once again, this quarter's financial performance was achieved through the dedicated efforts of all of our employees. The culture at F.N.B. is rooted in team working collaboration to collectively reach our goals. F.N.B. continues to earn national recognition for our inclusive culture based on independent feedback from our own team members, building on the multiple awards we received earlier this year for innovation, leadership in our family-friendly benefits and compensation programs, we also garnered additional national culture excellence honors, highlighting our commitment to diversity and employee appreciation and wellness and development.
We strongly believe having an outstanding culture with engaged employees result in superior performance and shareholder value appreciation. We are pleased with this quarter's results as we continued to outperform the industry reporting loan and deposit growth while adhering to our conservative risk management philosophy all while strengthening our capital and liquidity position.
Given the strength in our performance, F.N.B. is well prepared to meet the needs of our consumer and business clients with a broad array of products and services, a strong balance sheet and a commitment to achieving success for all of our stakeholders. Thank you.
[Operator Instructions] Our first question comes from Daniel Tamayo from Raymond James.
Wondering if you could talk a little bit about updated thoughts on when you think the margin might bottom? And if you had any more details on what the month of September look like from a margin perspective and yields, that kind of stuff?
Danny, I guess a couple of comments on that. I think given everything industries withstood this year, clearly, the peak was in the first quarter. If you look at our net interest income for the third quarter, we only declined $2.6 million in the NIM compression, as I commented, on moderated to 11% from -- after decreasing 19 basis points last quarter. The monthly decline in NIM has been averaging around 3-4 basis points a month since May. So it's been coming down but pretty steady within that range.
Our outlook for the fourth quarter of the $315 million to $325 million, it doesn't have any rate increases, as I mentioned, with the decline in margin, kind of similar to what we saw in the third quarter is kind of what's baked into our guidance.
Okay. That's helpful. Appreciate it. And then kind of moving over to loan growth. I'm just curious how you're thinking about loan growth potentially next year if the economy does slow, it's sustained at a pretty strong growth level here throughout the 2023, in particular, physicians first in the residential mortgage book. But just curious on kind of higher-level thoughts about the ability to sustain that kind of loan growth?
Yes. I think, first of all, I think that we're in a really strong position relative to many competitors, particularly many of the smaller banks who are struggling with capital and liquidity issues. So it puts us in a position where F.N.B. can become -- we go on the offense basically, and we're able to go after more opportunities with confidence. We could support our clients' capital needs as we move through 2024.
We didn't give guidance for '24, so I can't really speak to specific numbers. But my expectation moving into next year, it's going to be choppy for everybody from a loan demand perspective, I think for us to be successful, we're going to have to stay very focused on maximizing our growing market share in the markets that we've moved into where there still continues to be good solid growth in those markets from a GDP perspective. I think that's one thing that will help us.
Secondarily, I think given the size, span of the company today versus where we were years ago, we have multiple markets to pursue opportunities in. So I think going into '24, depending on how the economy shakes out, it will be more challenging to find creditworthy borrowers that we would want to bank, right? In that environment, I think it's going to be more competitive. So I think having the right people spread across those areas would be a benefit to us versus somebody that's heavily concentrated in, say, Pennsylvania or Ohio.
So I think all of that will play in our favor. I think we've also invested pretty heavily in certain platforms that will continue to drive fee income for us. So in addition to loan growth, we did perform pretty well from a fee income perspective given the pressures that we were facing. But we've invested in our digital platform, which should help us in small business and with gathering deposits as we move into this quarter and the common app is fully built out. We've invested pretty heavily in treasury management systems, our payment processing capabilities and lockbox capability that we still offer clients has been upgraded in the last year or so.
Capital Markets, we built out our ability to participate in bond offerings through our debt capital markets platform, and that continues to perform well for us and enables us to move up market and participate in lower-risk transactions and still meet the return thresholds that we have internally. So all of that will play well for us as we move into next year. So that -- those are the reasons why I feel more confident about our performance this quarter and then into next quarter. But I will caution you, I think the macroeconomic environment will play a role. Demand has to be there as well. So the capital investment has to be occurring anyway, on the commercial side.
The next question comes from Michael Perito from KBW.
I wanted to start on a comment you made, Vince, about making investments on the OpEx side and trying to take advantage of the posture of the industry. I was wondering if you guys are willing to kind of go a layer deeper on that. I mean I think it's evident and obvious from the financials that you guys are in a strong position here.
So what type of investments are you looking at? What do you think could make the biggest difference as you look to the next 12 months here? And and obviously still have some growth opportunities in front of you and a lot of peers that probably have some opportunities but don't have the balance sheet to really kind of fully take advantage of them.
I'm sorry, you broke up a little bit. You're speaking specifically to digital. Is that your question?
Yes. I mean, I imagine most of the things you're looking at are digital, but just more broadly, any like initiatives or kind of areas of investment that you guys are particularly focused on that you think could be pretty fruitful over the next 12 months in terms of kind of continuing growth and being able to take share while the industry is in a weaker position.
Yes. Well, first of all, I think it's a great question, and we've talked about this internally. There are 2 paths to go down as we move into next year. Let's face it, the banking industry in general is facing margin compression. Some banks are struggling to grow revenue. It's highly competitive from a depository perspective. So I certainly understand why there's a lot of caution moving into next year.
But I think given our position, we have strong capital, we're in a strong capital position. We have tremendous liquidity. We have made investments in de novo expansion in the retail space, which are coming online, expense comes along with that. So we've already started to invest in those projects.
So you'll see depreciation expense coming online with those. But we're at the point now where they should start to generate revenue or contribute to our effort, right? We just -- we launched a number of them at the beginning of this year, or late last year. So we should be seeing some good success there. And those are principally at higher growth markets that are not feeling as much pain as some of the other more legacy markets from a growth perspective. So we're very optimistic about the performance there.
We're also optimistic about our build-out of the common app that I spoke about. You can purchase multiple loan products on our platform today. By the end of this quarter, we'll be able to buy multiple loan products and multiple depository products with one application. And the training is going on in the field. We've been doing training on our systems and on our capabilities for some time. I think you're going to start to see that pay off.
We also changed our model in the branches several years ago in the consumer bank. We started rolling out relationship bankers instead of having tellers and platform people. So more highly trained bankers in the branches. We're finally closing out the last region in terms of converting those folks over to this higher profile banking position, which should help with cross-sell and driving product sales in the branches beyond just doing transactions.
And then we have bankers basically -- there are a number of bankers that are pulling back at other institutions. So I think we'll have opportunities to go after business that presents itself that we've been -- for companies that we've been calling on for a long time in the commercial space. We've made investments in -- to be more specific, we've made investments in treasury management, which I think will assist us in becoming a primary client for mid-market and larger companies. .
We made investments in the digital platform to help us go after more share of wallet more quickly, right, with clients by presenting them to a more efficient platform to onboard clients. We've invested pretty heavily in our institutional capabilities from a capital market perspective, with different position with clients. So I think really, we have a number of areas that we've worked on. And I think that we're definitely going to experience better than peer results because of it. Well, that's my commentary.
We also, by the way, built out our small business lending platform. We continue to focus on that. Where our plan is to integrate merchant and treasury management services into a bundle program similar to the common app. So that is going to be worked on in the first quarter of next year.
We have about 90,000 clients that are either depository or loan clients in the small business segment. So there's quite a bit -- I think we have about 3% to 5% penetration with merchants in that space. So there's quite a bit of opportunity there from a fee income perspective, and we've been focusing on moving into next year. And those are some of the strategic investments that we've made. And I do believe that at this time, it makes sense for this company to continue to pursue those investments and drive revenue growth during 2024 when it might be more difficult for others to do that.
Yes. No, that makes a lot of sense. That's a great flavor. Just lastly for me and then I'll step back and let someone else jump in. Just curious, more of a high-level question than a near-term question. But as you think about the franchise, the size, the growth projections, I imagine you guys have constant conversations with the Board and the executive team around what the right level of capitalization is. And obviously, at the higher end of the spectrum on the asset side, there's a lot of conversations about capital.
I'm just curious -- what -- any updated thoughts around what you think kind of the right capital level for F.N.B. is like over the next few years here? I mean do you think it's a higher number than maybe what it was over the last 24 months? I mean, obviously, you don't have to get there right now, but just kind of curious what the conversation is internally around capital just given everything that's happening. And as you think about taking share and continuing to grow the balance sheet moving forward?
Yes. Well, we cover capital and liquidity position of the company in every board meeting that we have. So we have a pretty separate team when we go over various elements of our financial performance. We discussed the balance sheet in detail and strategies around maximizing returns. That happens in every Board meeting. And then we talk about what the investors expect and what the street expects and how we're performing relative to those expectations.
I think capital is a topic that we had on the table for a long time. I think given the AOCI impairment that you've seen impact others capital position, we reviewed as having less capital because we actually operate with a lower risk profile within the commercial loan categories that we participate in, in the consumer businesses while we're very conservative.
If you look at where we are today with CET1 at 10%, our TCE ratio is 7.5% and growing, we feel pretty comfortable with where we are from a capital perspective. I understand that $100 billion and greater, you're going to see greater expectations from regulators for capital. But I think given where we are today, we're in one of the better positions we've been in years. We have a very solid portfolio. We've spent a lot of time in energy.
Gary has done a tremendous job de-risking that portfolio with the sale of Regency, with the sale of hospitality, the sale of adverse credits and we basically have done a lot. We've moved over $1 billion off the balance sheet before the pandemic even occurred. So I think we're in a great position from a capital perspective. We feel comfortable where we are today, and we address it at every board meeting. If you look at our returns on tangible common equity, we're upper quartile. So we -- even with higher capital ratios, we're still at 18% ROE, so pretty very good solid performance and profitability.
Great. All right. Vince, I appreciate you taking my questions today.
One more thing on capital, by the way. We've dividended out over $1.5 billion to or through share repurchases or dividends over $1.5 billion in capital deployment to shareholders as well. So I think when you think about the company in capital management, that's part of the discussions that we have with the Board, just to throw that in there. So our shareholders have benefited from that distribution of capital immensely. And obviously, we have retained that capital, we have much higher capital ratios. That's part of the equation. So we feel that we need to evaluate where we are every quarter anyway, sorry.
[Operator Instructions] The next question comes from Manuel Navas from D.A. Davidson.
I just wanted to follow up on the NIM. What are thoughts on where it could bottom next year? Just kind of updated there and then I have a follow-up on deposits.
Yes, I'm not sure that I think guidance for next year. I'll let Vince answer the question. Go ahead, Vince. Give us a little bit of color where we are today.
I mean as far as -- we'll provide our thoughts when we provide guidance for next year in January, but I mean I think, as I mentioned, fourth quarter kind of coming down at a similar level to the third quarter. And I mean maybe first half of the year next year, but again, we have to do our -- we just started our budget projects for next year. So I think there's still some movement down exactly when it bottoms is a hard thing to call for sure, but somewhere in the kind of middle of '24 would be kind of based on the way things are today, but they could change by the time we finalize our budget and put out guidance in January.
But the compression I talked about is clearly it's moderated. If the fourth quarter comes down similar to the third quarter, the net interest income, as I mentioned earlier, only came down $3 million. So I think the sustainability of the net interest income is very important, right? And driving our efficiency ratio in the low 50s. That's a key part of it. So more to come in January. I don't know as far as what level it actually might bottom out. But it's definitely moderated to the compression as I commented on.
I appreciate the color there. On deposits, the CV engine is definitely powerful. It's what customers are looking for. Are you seeing -- do you have some breakdown on what you're seeing from -- is that from new customers, current customers bringing over more funds? Can you just kind of talk through where you're winning there?
Yes, I would say...
Yes, I think it's a -- go ahead, Vince, I'm sorry.
No, you go ahead.
I was just going to say -- I think it's a combination of all of the above. I think part of the strategy is to persuade folks to bring additional dollars over. So some of the campaigns focused principally on that. The money market offering, some of the CD offerings that we have. I think we've had quite a bit of success bringing in new customers. So north of 50% of the new money that comes in is new customers. So it's better than 50-50, but it's worked.
Let's put it that way. But I think the principal reason why we're successful, and we've been able to manage the betas and the migration a little better really is because of the insight that we have within our customer base with the tools that we put into place with AI and our data scientists and the data hub that we have, we're able to spend a lot of time analyzing behavior. And I think that's really helped us with pricing. And we've been a little more disciplined than others. Maybe if you look at our cost of funds and our margins a little better. So it kind of shows there.
But I also believe that being the principal bank for consumers and businesses, as I said in my remarks, is critically important, and that requires a consistent investment in technology, treasury management services, all the things that I mentioned early. So they both go hand in hand.
I appreciate that. Do you have a rough percent -- a rough average rate on the new CDs or what's your current best offer? And then just talk about the seasonality in the muni book briefly?
Yes, Vince, I don't know. I don't have those details at the tip of my fingers. Do you have that, Vince?
Yes. I would say, I mean, a couple of things. The rates on the promotional CDs and money market rates have been right around 5%, a little below or a little above. So we've had -- as Vince said, with all the data analytics supporting it and the tools we have in place, we've brought in close to $800 million in new money really since May through that. And that's kind of dedicated the overall balance sheet. And then the muni flows, I've always talked about is $300 million to $500 million is kind of the range of what comes in.
And during the most recent quarter, it's at the higher end of that and really kind of spread throughout the categories. It's a small amount is really in the DDA and most -- it's more in the money market and sweep accounts where that money flows through. And that peaks and troughs as you go through the year, kind of builds through October, November and then the first quarter is always the trough of that.
All right. I appreciate that. And then just switching topics -- switching gears for a second. What are kind of updated thoughts on buyback? You just had so much growth this quarter. Is that the main kind of limiter there? And obviously, that probably comes first organic growth. But can you just kind of walk through where buyback fits in, given that CET1 is above your target?
Sure, I can comment on that. I mean the 10.2%, so we're a little above our target. I think during the second quarter, when we were active, there were great opportunities to put some money to work there. And in the third quarter, with the growth we had, plus the timing of the special assessment, there was an expectation that might happen in the third quarter and just the uncertainty, we decided not to be active during the third quarter.
It's -- as always, we're committed to managing capital in a manner that's fully aligned with shareholders. So we're closely monitoring it. We may become active in the fourth quarter, but we want to really see how the overall environment plays out. But clearly, there's room to do that. And with the dividend payout ratio that we've all worked really hard to get down to 30%. We now have flexibility and the strong earnings generation that we have where this number will build, and we'll put it to work. The loan growth stays strong. We'll use that to support loan growth. That's always our kind of first and best use of the cap.
Vince, the other thing I wanted to mention is the tax credit transaction that we closed this quarter. Some folks have asked, is that like a onetime event? No. We actually have a business that pursues tax credit transactions, particularly in the energy field. So we've done a number of them over the last few years. And the group, there's a pipeline of tax credit transactions that we pursue.
So sometimes, it's lumpy because it takes time to build out a solar field or it takes time to get certified and get that stuff up and running because they actually have to be delivering power, right, before you can start the whole process from a financial perspective. But it is a business that we have. It's in our corporate finance area, and they've done a terrific job over the last few years.
So I would expect that to continue as well into next year because we've developed that expertise, and we're confident that the people that we have doing that, Tim and his team has done many of these very well positioned to keep pursuing opportunities. .
But I would add that to the mix as well because it doesn't show up the same way from a profitability perspective because we book an asset that has a very low margin, right? That ends up impacting margin, and then we get a tax benefit. And then you all say, well, well, you're just winning on a tax benefit, but that's actually part of the profitability of the extension of the credit, just so everybody understand. So some folks have asked us about that. And I wanted to make sure we were clear that, that's something that we pursue on an ongoing basis and will be additive to next year as well.
And it provides capital too, right?
Yes. Yes.
The next question comes from Frank Schiraldi from Piper Sandler.
In terms of the guide for NII, you mentioned no additional rate hikes. If we do get a November or December rate hike, I mean, I'm just wondering if that's meaningful anymore in terms of what that adds on an annualized basis to NII. And maybe if you could just talk a little bit about how you're managing the balance sheet sensitivity for the higher for longer rate outlook.
Yes, I would say...
Yes. I'll let Vince answer that.
Yes. I mean any rate movement, Frank, right, it's late in the quarter doesn't really do much for the fourth quarter. So there's not much benefit that we get there. And with where rates are, I mean, it's not that big of an impact even to next year. I mean if we look at our IRR position, we've been kind of gradually moving towards neutral as each quarter has gone by kind of naturally getting there. .
When you look at -- when our IRR status will be out in the Q, I mean, the plus 100 ramp to a minus 100 ramp is around 1%, 2%. So there's actually a benefit both ways because you have the rates on loans investment securities we're putting on continue to be higher than the portfolio rate.
So you kind of get benefits from that. But 25 basis points in the grand scheme of things, it doesn't -- it's not going to do that much. And we'll bake it into the guidance in January when we give it out, but it's really not going to move the dial.
Okay. And then just thinking about the 4Q expense guide. Is the right way to think about that, you talked a lot about the investments being made. Should we think more about that as an acceleration of investments and potentially, so there's a potential leg down in expense or given everything you guys are doing, is that just better to think about as a run rate at this point?
Vince, I don't know if you want to...
Sure, I can comment on that. I mean, as Vince talked about, we've continuously invest in the company.you know that, Frank. You have been covering us for a long time. So it's part of how we run the company investing to generate future revenue. And we've been able to do that, maintaining a very good efficiency ratio in the low 50s. So it's just part of running the business. And the conversations we have internally are always focusing our CapEx spend where we can drive future revenue and investing in markets, right?
We've added new markets through the de novo strategy through expanding our ATM strategy, [indiscernible] Virginia, Charleston and markets that are very attractive. So that's also part of the investment is investing in those new markets, which then generates future revenue for us.
I mean the expenses in the fourth quarter, it's always a -- to the end of the year, it can be a little lumpy or finishing up incentive plan accruals and those types of things as it comes in. So when we do our guidance in January for next year, we'll have a cost savings target as we have every year. I mean we've taken out $60 million or so in cost as we've grown and created the scale. So that's always part of how we run the company. And the initiatives that Vince talked about, the de novo digital investments, infrastructure to support that growth, we focus on generating that positive operating leverage and having a low 50% efficiency ratio.
So it's not easy, but it's a focus within the company. And I think the investments have served us well. So it will continue to be part of it. So it's not really a step function to it, Frank, it's a good question, but it's really just part of how we run the company.
Okay. Great. And then just lastly, on the tax rate and the renewable energy transaction and totally get that just part of the deal, that's just part of the economics of these tax credits that you get. Would you say that if I look at the 4Q '23 guide, it's a bit lower, I'd say, than your rate over the last several quarters except for this 3Q. Is that -- would you say that's kind of lumpy too? Is there kind of more activity expected in 4Q? Or is that just -- has that business just ramped up to a degree where you could see that as potentially sustainable?
Yes, the fourth quarter level, Frank, is really tied to the same solar deal that we just closed in the third quarter. The bulk of the tax credit gets recorded in the third quarter, and then there's carryover kind of smoothing out the effective tax rate for the year that also benefits the fourth quarter. And that kind of completes it for this transaction. But as Vince said, there's a pipeline transactions that we continue to go after. And the team is already working actively on others that could happen next year and into '25. So -- but the 4Q is really just tied to this transaction and kind of the smoothing of it into the fourth quarter.
[Operator Instructions] Our next question comes from Brian Martin from Janney Montgomery.
Just one for me on back to the margin just for a minute, Vince, I guess, the -- I appreciate the color on the abatement of the funding pressure here and -- but I guess as far as the DDAs go, I mean, I guess, the contraction slowed a bit again this quarter. Just kind of wondering if you think we're nearing a bottom there, just how you're thinking about that in general and maybe just an update on kind of where new loan production is coming on?
Yes, I would say, I guess, let me talk to...
I don't know -- go ahead, Vince. I don't know which Vince, Brian was asking. Go ahead.
Well, I can comment on the loans. And then maybe, Vince, if you want to talk about the strategy on noninterest bearing afterwards, that would probably be good. The new loans that we made during the third quarter, it came on at 6.85%, which was up from 6.37% in the second quarter. So the commercial loans came on in the 7s and mortgages in the mid- to high 6s during the third quarter, and those are kind of mid-7s as we sit here today, just given where mortgage rates are.
So 6.85% is a pretty good level and above overall portfolio yields, so you're getting that benefit coming through. I mean the overall portfolio rate on a spot basis were up 15 basis points with that higher level of rates on the new loans that we've made versus where the portfolio is.
And then we have a slide in the deck, Brian, that you're familiar with. I mean the noninterest-bearing deposits has been to focus as long as I've been here and Vince before me. We've grown from 16% to -- I think we peak at 34%. We were 26% kind of pre-COVID, right? And we're going to work hard to keep that number as high as we can, and it's just part of everything we do, every week at pricing every ALCO meeting, every board meeting, so...
Yes. It's actually on Page 13 in the investor deck point. We comment on a frequently, but if you look, it goes to what I've been saying strategically, our goal was to drive up noninterest-bearing deposits. Basically, I know during the lower interest rate environment, people didn't value them as much. I used to talk about them all the time, talk about our performance here and people didn't pay attention to the fact then, the benefit -- the STP benefit wasn't that great. But today, it really provides us with a pretty substantial buffer from a margin perspective.
And if you go back to 2019, we were at 26%. Demand deposits, 31% and 20%. I mean, you then can see the surge coming in with stimulus. So we're feeling pretty good about where we are. We focused on client primacy first chance term. He has a trademark on that. So he calls a client primacy. It's our internal strategy to make sure that we're the principal depository bank and disbursement bank for consumers and businesses. And again, we continue to make investments in de novo branch locations to drive new households where we can be the disbursement back on the consumer side. We've invested in digital. We've invested in TM products and services, like I said, the payment hub that we put in place and some of the other products that we just rolled out that help us establish ourselves as the principal depository bank.
That's why these demand deposits don't move around that much. So relative to others. They're not -- it's not just cash parked here. I mean, in many instances, those balances are being used to cover services, the balances have to remain to come in disbursements that go on throughout a month or a week. So it's pretty much embedded. So we're feeling pretty confident about our deposit mix here. That's not to say there wasn't pressure because when rates were lower, of course, companies and individuals, including myself, we're a little sloppy about leaving their money sitting in demand deposits.
So that's changed. I think the consumers expect and the businesses expect to invest those balances given the returns they can achieve today. So I think we've demonstrated here over a pretty long period of time that we are a very solid depository institution with a heavy emphasis on low-cost funding sources. Anyway, that's -- I hope that helps you.
Yes. No, that's helpful. It sounds like it still could go a bit lower, but still better than peer and holding up well. So okay. And then maybe -- go ahead.
Yes. I think it'll -- I think we'll outperform the peers. I can't speak to where we're going to be future -- in the future because who knows what -- if can predict interest rates, I wouldn't be here at the trading bonds. But I think I think that we're going to outperform because of our business model. So that's...
Got you. Okay. Makes sense. Maybe just one for Gary on the reserve. I mean the reserve was down a touch this quarter, still a pretty healthy level, inclusive of the marks, but just kind of wondering how to think about the reserve in conjunction with the strength in credit?
Yes, Brian, in terms of the reserve, I mean, it's a constant focus from our perspective. At 1.25% and 139% with the unamortized discounts I mean it's upper quartile, strong compared to peers. We feel good about where it is and the position of the portfolio here entering the end of the year. So I would expect it to continue to track similarly as we go forward.
Okay. And remind me, Gary, I think there was a credit out there this quarter, some other banks with a SNC portfolio, how big your SNC portfolio is today?
Our SNC portfolio today is $3 billion. 40-plus percent of it is investment grade and essentially the balance of it is essentially right up against investment grade. So that portfolio has performed extremely well. It's extremely strong. Our focus -- we don't buy paper. Our focus is really on customers that we know and customers in our market.
So that focus has really proven itself very well in that portfolio over a long period of time. We've generated significant deposits that Vince has referenced around that portfolio as well and continue to -- it continues to perform exceptionally well. So very strong portfolio.
I hate to answer the question, though, because you can't compare every bank's syndicated loan portfolios. So on the buy side, in particular, we're not a leverage finance player we're buying participations if we participate in a deal because we think that we're going to get ancillary business, we're participating in bond economics. Their customers, one of the rules we have, is that our bankers have to have a relationship with the company. They can't just rely on Bank of America or P&C to bring us into a deal. Those are -- that's a different type of portfolio than having a less in portfolio that you just go out and buy leveraged transactions and for yield. So to Gary's point, we have a big chunk of investment grade credits in that syndication portfolio.
And then also, we lead a number of credits because we have a syndication effort that we looked out. So that would be included in that number where we're left the -- so all that needs to be taken into consideration.
Yes. As Vince indicated, we're not in the leveraged finance business. We don't have a private equity business. It's really customers in our markets that we call on and have relationships with. So it's been a very strong book of business for us.
Got you. I appreciate all the color there. And then maybe just last one was on the commercial and consumer pipeline. I know you're not giving any guidance on '24, but just kind of given the growth this quarter. Just kind of want to see where the pipelines are at today relative to last quarter? Just how do you frame it?
We can -- we're coming off of a previous funding quarter. So typically, what happens is the pipelines we set. I think we're down between 5% and 10% in most of the markets. I just looked at the statistics across the market and track it pretty rigorously. So I'd say down 5% to 10% but still building. I think when you look at the portfolio overall, the dynamics of our commercial loan portfolio, one, I think that attrition that slowed dramatically because of the climate rates. So that's going to help stabilize the balances. That's number one.
Number two, I think demand for capital has slowed going into next year. So that's part of why the pipeline have slowed -- decreased a little bit, particularly, I focus more on the 90 days pipeline, which is down about 4% or 5%. That's what I tend to focus on because we look at it both ways, right? Total versus close in the short front. And I think it will build again going into next year, obviously, depending on what happens with interest rates and the economy overall. But I'm pretty confident that [indiscernible] be some build.
And then the third thing I wanted to mention was that utilization rates have declined slightly, which is an indication, there's a pullback. So we're seeing in the commercial book, a 1% to 2% decline in utilization rates. And to me, that's an indicator that the borrowers are kind of pulling back.
Got you. And those pipelines -- yes, the pipelines you're talking 4% to 5% lower both for consumer and commercial? Or was that just primarily commercial?
No, I'm sorry, I was speaking only to commercial. Consumer is -- the pipeline for consumer depends on which space you're in. If we want to talk mortgage, we have more mortgage than we need stuff. We're basically becoming more competitive to push off the balance sheet, right? So we're more competitive in the conformance space, which impacts margin a little bit. It gets it off the balance sheet. So we've been very successful growing our consumer and mortgage business.
So I'm not too worried about that. Small business has performed pretty well. The pipelines are up. That physician's first program and emphasis on health care has kind of paid off for that group, we have some really huge pull that we brought on the head of our small business lending area has a specific expertise in health care, which is why we're developing those products that I mentioned earlier in the call. The pipeline there looks pretty good.
And I think we do have an opportunity moving into '24, as I said, in the small business segment, which falls under consumer to grow that book of business. I mean we have a boatload of small business customers across 7 states. I mentioned 90,000 to 100,000 customers. So for our small business pipeline at the most recent quarter was at record levels, and I would expect us to continue to capitalize on that.
I know it doesn't contribute as much to the total, but that should bode well for the retail consumer bank. That's where we are. I don't -- really, we're not anticipating issues with the mortgage or -- the mortgage is tougher, right, in the higher interest rate environment that the majority of the loans that we're originating across a pretty broad footprint, our purchased money loans, and we've invested pretty heavily in the platform recently. So we're pretty confident we can achieve better than peer results in the mortgage business like we have. And then that leads to home equity opportunities and other opportunities in the consumer segment.
And with the application that we rolled out, we also think that will help us in '24. So being able to open a depository account and applied for a home metric loans simultaneously will help us originate loans in the consumer space.
Got you. Okay. And the last one for me was just on the efficiency. Just it feels like given the comments about managing expenses and what we saw this quarter that we should think of the low 50% efficiency ratio is kind of a sustainable level here going forward?
We target -- we've always said we target 50% to 55%. That's what we hope to achieve. We want to stay obviously as low as possible, right, because we're all incented to keep expenses well here as part of our incentive program. So I think that we're going to be very diligent. But I also think that given our capital liquidity, our digital investment, what we have going on here, we need to stay focused on growing revenue as we move through this difficult time. We're capable of managing risk very effectively. And I think we're in a very strong position to grow as we move into '24.
So on the revenue side, I believe we'll have an opportunity to manage -- at least contribute to positive operating leverage outside relative to the peers. So there's expense build, but there's also revenue growth coming along with it. So that's kind of the strategy. It's been the strategy for a long time. I know there's periods where it's lumpy and people ask [indiscernible] into issue. You can see the results over a long period of time we've been at an outperformer relative to the peers for a decade, I don't believe. So anyway, that's where we are.
This concludes our question-and-answer session. I would like to turn the conference back over to Vince Delie for any closing remarks.
Well, I just -- again, I'd like to thank everybody for the questions, very detailed questions, very good questions. So thank you for participating. I also would like to thank our employees again, I say it every time, but you can't do this without great people. So I'm engaged and enthusiastic employees. No matter what basis, we come through at the end because we work together as a team. But thank you to the employees and the thank you to the shareholders for continuing to have confidence in us. We will continue to deliver as we move through these choppy years here. So thank you. Take care, everybody.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.