FNB Corp
NYSE:FNB
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FNB Corp
Earnings Call Analysis
Q3-2024 Analysis
FNB Corp
F.N.B. Corporation reported a robust third quarter for 2024, ending with an operating net income of $123 million, or $0.34 per diluted share. This performance reflects significant financial health, buoyed by a remarkable 15% year-over-year increase in tangible book value, which now stands at $10.33. The company demonstrated the ability to produce quality loans and deposits, maintaining a stable liquidity position with noninterest-bearing deposits around $10 billion.
The bank successfully grew total loans to nearly $33.7 billion, marking a 1.2% increase linked-quarter excluding a $431 million indirect auto loan sale. F.N.B. achieved a total deposit balance of $36.8 billion, up 5% from the prior quarter, supported by successful deposit initiatives spearheaded by their commercial banking team. New deposits included a $1.3 billion increase in interest-bearing demand deposits, enhancing the company's position in the competitive market.
F.N.B.'s capital ratios have reached unprecedented levels, with a Common Equity Tier 1 (CET1) ratio of 10.4% and a tangible common equity ratio of 8.2%. These metrics provide the organization with flexibility to deploy capital and enhance shareholder value, particularly by managing the loan-to-deposit ratio, which improved significantly to 91.7%, nearly a 5 percentage point decrease from the previous quarter.
Looking forward to Q4, F.N.B. anticipates net interest income of $310 to $320 million, amid expectations of a 25 basis point rate cut in November and another 25 basis points in December. Loans are projected to grow at mid-single digits on a year-over-year basis, while noninterest income is expected to remain strong, projected between $85 and $90 million. Total noninterest expenses are expected to decrease sequentially to a range of $225 to $235 million.
The bank's operating noninterest expenses were reported at $234 million, slightly up from the previous quarter. This was attributed to increased salaries and benefits tied to production-related variable compensation, yielding a strong efficiency ratio of 55.2%, reflective of their focus on maintaining a disciplined expense approach. Cost-saving initiatives are in progress as they prepare their 2025 budget, balancing revenue and expense growth.
F.N.B. reported stable credit metrics, with total delinquency remaining low at 79 basis points. Quality remains intact, with a nonperforming loans (NPL) ratio of 0.39%. The management believes in a proactive credit risk strategy, which positions them well to mitigate potential losses even in fluctuating economic conditions. The bank's allowance for credit losses covers approximately 90% of projected charge-offs in severe downturns.
F.N.B. is well-positioned for long-term growth with its successful initiatives to expand market share, acquire cost-effective deposits, and foster strong community relationships. They plan to institute rigorous asset management strategies while capitalizing on new market opportunities, especially post-election. Overall, the third quarter results reflect successful navigation of current economic conditions as they continue to provide favorable returns for shareholders.
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Good morning, and welcome to the F.N.B. Corporation Third Quarter 2024 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Lisa Hajdu, Manager of Investor Relations. Please go ahead.
Good morning, and welcome to our earnings call. This conference call of F.N.B. Corporation and the reports it files with the Securities and Exchange Commission often contain forward-looking statements and non-GAAP financial measures. Non-GAAP financial measures should be viewed in addition to and not as an alternative for our reported results prepared in accordance with GAAP. Reconciliations of GAAP to non-GAAP operating 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 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 Friday, October 25, 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 operating net income available to common shareholders of $122 million (sic) [ $123 million ] or $0.34 per diluted common share after adjusting for $15 million (sic) [ $15.3 million ] of significant items impacting earnings.
The third quarter's results demonstrate our ability to produce quality loans and significant deposits throughout our footprint while maintaining stable noninterest-bearing deposit balances at approximately $10 billion. We generated linked-quarter revenue growth, strengthened our balance sheet with a record CET1 ratio of 10.4% and drove shareholder value with tangible book value growth of 15% year-over-year and an operating return on average tangible common equity of 14%.
We are also particularly proud of our ability to gain market share in a number of MSAs across our footprint and achieved a #2 traditional retail deposit share position in Pittsburgh despite competition from some of the nation's largest banks. In this environment, it is important we continue to manage our capital and liquidity position. During the quarter, F.N.B. completed a $431 million indirect auto loan sale, allowing us to remove lower-yielding assets from our balance sheet with minimal impact to forward earnings while improving capital and loan-to-deposit ratio. Vince Calabrese will provide the details about the sale during his remarks. Total loans ended the quarter at nearly $33.7 billion, a 4.6% annualized linked-quarter increase when excluding the loan sale. F.N.B's loan growth has once again exceeded the published H8 data as we continue to gain market share, which can be attributed to our business model and its emphasis on a diverse and attractive footprint as well as ample capital and liquidity to support our clients. Total deposits ended the quarter at $36.8 billion, an increase of 5.1% or $1.8 billion from the second quarter, benefiting from new production that was generated through successful deposit initiatives as well as seasonal deposit inflows.
Our strong sequential deposit growth highlights the successful efforts of our commercial and business bankers to establish and deepen client relationships. We also have leveraged our digital and data analytics capabilities to effectively market and capture deposits from new and existing retail households through data-driven lead generation. We made strides in consumer and small business deposits through our Omnichannel, Clicks-to-Bricks environment, leveraging our diversified geographic branch footprint and award-winning eStore common app. Our loan-to-deposit ratio improved significantly to 91.7%, a decrease of nearly 5 percentage points from the last quarter. This-linked-quarter change demonstrates our ability to execute strategies to manage the loan-to-deposit ratio when needed. In the third quarter alone, F.N.B. generated nearly $1.8 billion of deposits completed a loan sale and supported $391 million of loan growth. We will continue to manage the loan-to-deposit ratio through our long-term strategy of being our customers' primary operating bank across both the consumer and commercial portfolios, aided by our advanced digital tools, Clicks-to-Bricks strategy and product bundling capabilities.
This quarter's total revenue growth of 2.3% was driven by an all-time high noninterest income of $90 million and stronger net interest income levels. We will further advance our strategy of diversifying revenue streams and leveraging ongoing investments, including a focus on expanding business lines in our Capital Markets segment. Operating noninterest expense totaled $234 million, driven by higher salaries and benefits, partially associated with strategic hiring necessary to grow market share and our continued investment in our risk management infrastructure. We strategically increased marketing expenses $2 million to support deposit initiatives that led to our robust deposit growth. Expense management remains a high priority, and we expect fourth quarter expenses to be down sequentially.
Our ongoing expense management and growing diverse revenue streams led to a peer-leading efficiency ratio of 55.2% in the third quarter. Another area of ongoing focus is maintaining consistent and conservative underwriting guidelines, enabling us to continuously serve our customers. Over the last decade, our credit team has built a comprehensive framework to effectively and proactively manage credit risk in concentration through various economic cycles. This long-standing approach to credit risk management continues to serve us well.
With that, I will now pass the call to Gary to review the overall credit performance. Gary?
Thank you, Vince, and good morning, everyone. We ended the quarter with our asset quality metrics remaining at stable levels. Total delinquency finished the quarter up slightly at 79 basis points or 15 bps (sic) [ 16 bps ] from the prior quarter with NPLs and OREO ending at 39 basis points, up 6 bps. Net charge-offs totaled 25 basis points and 17 basis points on a year-to-date basis, reflecting solid performance in the current economic environment. Criticized loans were down 22 basis points on a linked-quarter basis, reflecting improvement across the portfolio. Total funded provision expense for the quarter stood at $22.9 million and covered charge-offs. Our ending funded reserve stands at $420 million, an increase of $1.4 million, ending at 1.25%, up 1 basis point from the prior quarter. When including acquired unamortized loan discounts, our reserve stands at 1.34% and our NPL coverage position remains strong at 352% (sic) [ 353.7% ] inclusive of the discounts. The nonowner CRE portfolio credit metrics continue to remain at satisfactory levels with delinquency and NPLs up slightly at 69 and 31 basis points, respectively. The early-stage delinquency increase was primarily related to several performing credits that had matured and were in documentation, a number of which were renewed in the normal course of business after quarter-end and are now current. The NPL increase was driven by one credit that was placed on nonaccrual status. We remain committed to our strategy of proactively managing and reducing the nonowner CRE exposure as reflected on Page 11 of the earnings slide deck.
On a monthly basis, we'll review upcoming and previously resolved maturities, largest exposures and market conditions for the various property types across our footprint as we have communicated in the past. As Vince mentioned, we believe our proactive approach to credit risk management allows us to quickly engage our experienced special assets team when necessary, working with our customers to minimize any potential losses. On a quarterly basis, we perform targeted reviews of various portfolios, along with a full portfolio stress test. Our stress testing results for this quarter have once again shown lower net charge-offs and stable provision compared to the prior quarter's results with our current ACL covering approximately 90% of our projected charge-offs in a severe economic downturn, again, confirming that our well-balanced loan portfolio enables us to withstand various stressed economic scenarios. In closing, our credit metrics ended the quarter at solid levels, and our loan portfolio continues to remain stable.
We continue to invest in credit risk management systems and staff that align with our consistent underwriting and core credit philosophy. Our tenured leadership strives to maintain experienced banking teams to enable the company to attain prudent loan growth while proactively managing credit risk through 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, including details on the indirect auto loan sale and walk through our guidance for the fourth quarter. Third quarter operating net income totaled $122 million (sic) [ $123 million ] or $0.34 per share when excluding the $11.6 million loss on the indirect auto loan sale and $3.7 million software impairment. $431 million of performing lower-yielding indirect auto loans were sold as part of our ongoing balance sheet management strategies. The loan sale positively impacted the loan-to-deposit ratio by approximately 120 basis points and the CET1 capital ratio by approximately 10 basis points. Excluding the loan sale, total loans and leases increased $391.4 million or 1.2% linked-quarter or a period-end balance of $33.7 billion. Consumer loan growth of $299 million, excluding the loan sale was led by residential mortgage originations as volumes remained elevated given the pullback in mortgage rates during the third quarter. Commercial loans and leases grew $93 million linked-quarter, in line with our expectations, given the significant level of commercial loan closings in the second quarter and reflective of lower revolver balance. Total deposits ended September at $36.8 billion, a robust increase of $1.8 billion or 5% linked-quarter, benefiting from our successful deposit initiatives that demonstrate the value of our granular deposit base across a very attractive geographic footprint.
Third quarter deposit growth was led by a $1.3 billion increase in interest-bearing demand deposits and $783 million increase in time deposits. The mix of noninterest-bearing deposits to total deposits totaled 27% at quarter-end compared to 29% last quarter, reflecting the strong interest-bearing deposit growth and noninterest-bearing deposit balances remaining fairly stable around $10 billion. Last quarter, I discussed our goal to reduce our loan-to-deposit ratio organically through slower loan growth and deposit seasonality alongside several loan and deposit initiatives our team has implemented. Success of our ongoing balance sheet management and deposit gathering initiatives led to a loan-to-deposit ratio of 91.7% at September 30, nearly a 5 percentage point improvement from 96.5% at June 30. We expect the loan-to-deposit ratio to be relatively stable in the fourth quarter as deposit growth continues to be a strategic focus. Net interest income totaled $323.3 million, an increase of $7.4 million or 2.4% from the prior quarter, primarily due to earning asset yields increasing 8 basis points to 5.51% and higher loan balances as well as a favorable mix shift in interest-bearing liabilities as total borrowings decreased $1.6 billion or 28% linked-quarter. This was partially offset by the cost of interest-bearing deposits increasing 15 basis points to 3.08% and continued growth in higher-yielding deposit product balances. Third quarter's resulting net interest margin was 3.08%, stable with the second quarter margin. Since the Fed began raising interest rates in March of '22, our total cumulative spot deposit beta equaled 40% at August 31 of 2024, outperforming our peers through the rate hiking cycle. We continue to manage our balance sheet towards a more neutral position as interest rates are lowered.
Since the Fed's decision to reduce the federal funds rate by 50 basis points in September, we have strategically lowered deposit pricing on several deposit products, including our current CD and money market promotional offerings. At quarter end, we have nearly $7 billion of non-maturity deposits that are currently priced at or above 4.25% and a $7.7 billion CD portfolio with a 9-month duration and $2.9 billion maturing in the fourth quarter of 2024 at a weighted average rate of 4.75%. Additionally, we have $2.8 billion of short-term or floating rate borrowings with an average rate of 5.15% and around $1 billion of swaps that mature beginning in January of '25 with rates between 75 and 100 basis points. Turning to noninterest income and expense. Noninterest income reached an all-time high of $89.7 million, a 2% increase from the prior quarter. Capital markets income increased $1.1 million with broad-based contributions from syndications, debt capital markets, customer swap activity and international banking. Mortgage banking operations income increased $1.4 million (sic) [ $1.6 million ] from the strong levels in the prior quarter, driven by net MSR impairment of $2.8 million in the third quarter of 2024 due to accelerating prepayment speed assumptions given recent declines in mortgage rates, offsetting the increase in saleable production volumes. BOLI income increased $3.1 million (sic) [ $3.1 million ], reflecting higher life insurance claims. Operating noninterest expense totaled $234.2 million, an $8.4 million increase from the prior quarter after adjusting for the significant items. The largest driver for operating expense was a $5.1 million increase in salaries and employee benefits due to production-related variable compensation and lower salary deferrals given reduced on-balance sheet mortgage production as well as strategic hiring associated with our focus to grow market share and continued investments in our risk management infrastructure.
Marketing expense increased $2 million tied to the timing of opportunistic marketing campaigns for our successful deposit initiatives. We continue to manage our expense base in a disciplined manner, and as we prepare our 2025 budget, we are working on a number of cost-saving initiatives to bring revenue and expense growth into better balance. With some of the incremental expense growth tied to revenue growth, the efficiency ratio remains at a peer-leading level of 55.2% for the third quarter, up slightly from 54.4% last quarter. F.N.B's capital levels reached all-time highs with a tangible common equity ratio at 8.2% and CET1 ratio at 10.4%, providing flexibility to deploy capital to increase shareholder value. On a year-over-year basis, tangible book value per common share increased $1.31 or 15% to $10.33, demonstrating our commitment to internal capital generation.
Let's now look at the guidance for the fourth quarter of 2024. Loans are expected to grow mid-single digits on a full year basis, inclusive of the loan sale. Total projected deposit balances are expected to grow mid-single digits on a year-over-year basis, up from the previous expectation of low single digits. Our projected fourth quarter net interest income is expected to be between $310 million and $320 million, assuming a 25 basis point rate cut in November and another 25 basis point rate cut in December. Given the continued strength of our noninterest income generation, the fourth quarter expectation is between $85 million and $90 million. We anticipate fourth quarter noninterest expense to be lower than the third quarter level, and we're guiding to a range of $225 million to $235 million. Fourth quarter provision is expected to be between $20 million and $30 million, dependent on net loan growth and charge-off activity.
Lastly, the full year effective tax rate should be between 21% and 22%, which does not assume any investment tax credit activity that may occur. As we have previously mentioned, renewable energy financing transactions are part of our leasing company business model with deals in various stages and sizes in the pipeline with uncertainty on when the recognition of the investment tax credit will occur. With that, I will turn the call back to Vince.
Thank you, Vince. F.N.B's success includes the deep relationships we build within our communities. On behalf of F.N.B., I want to offer our support to those impacted by Hurricane Helene and Milton, including our fellow team members, customers and neighbors. F.N.B. continues to work with partners in the affected area to support recovery and healing in the coming days, weeks and months. We encourage our customers who are directly impacted by the hurricanes to reach out if they require assistance. F.N.B's strong reputation is evident in the top deposit share we hold in markets throughout our footprint. We deepened our penetration as we grew or maintained deposits in nearly 90% of our MSAs over the past year, with F.N.B now ranking in the top 5 in nearly 50% of the MSAs we operate in across 7 states. Our performance once again garnered recognition with additional national and regional awards this quarter for our workplace culture, diversity and inclusion and client experience.
Notably, we received global recognition as one of Time's World's Best Companies, Newsweek's designation as one of America's most Admired Workplaces and Global Finance Magazine's Best Bank for small- and medium-sized enterprises in the Mid-Atlantic. Our performance also conveys the quality of our workforce. We focus on hiring and retaining the most talented and experienced individual. Our investment in our workforce enables us to scale effectively. In fact, 90% of our senior management team has larger institution and/or public accounting experience and bring a wealth of knowledge to our risk management, operations and revenue-generating areas. As I have often stated on these calls, the high caliber of our employees translates directly to stakeholder value. F.N.B's successful navigation through various economic cycles is directly correlated to our diverse and experienced team. Their ability to effectively grow revenue, mitigate risk, optimize our balance sheet and execute on our proven strategies results in our ongoing success. I thank our teams for their dedication and our shareholders for their support. Thank you, and we will now open the call up for questions.
[Operator Instructions] The first question comes from Frank Schiraldi with Piper Sandler.
Obviously, always a good time to be bringing in core deposits. But could you just talk about the average rate you're seeing on these inflows? And Vince, you mentioned moving towards a neutral -- a more neutral interest rate position. Wouldn't all this growth on the deposit side work against that a bit, at least in the near term?
Yes, I would say a couple of things. As we said last quarter, we had significant growth in short-term borrowings to fund this very strong loan growth that we had in the second quarter. So the goal was to bring in meaningful deposits, and we did. I mean we brought in $1 billion of new money. In total it was $1.8 billion, but $1 billion of new money around 4.25%, that rate. And nature of those deposits are very short term, a combination of money market and very short-term CDs, 5-month CDs. So we have a lot of flexibility as we move forward to reduce the rates on the liabilities we brought in. I think it positions us well from a loan-to-deposit ratio. We were in the 96s. Our goal is to bring it down, and we brought it down meaningfully to 91.7%. And if you look at kind of the balance sheet as a whole, as we sit here at the end of the quarter, we have $11 billion of liabilities that are repriceable today, subject to market forces, of course, about $11 billion. And we have another $5.4 billion in CDs that mature in the next 6 months, $2.9 billion of that in the next 3 months at a 4.75% rate. And then we have $1 billion in cash flows from the investment portfolio, that kind of rolls off around 2.91% and we're investing between 4.25% and 4.50%. So there's a lot of levers, obviously, there that help us reprice. With the Fed moving 50 basis points in September, kind of bigger than maybe what was expected, that has an impact on our loan portfolio over a 3-month period. So we'll be kind of playing some catch-up there, but we have the levers here that can kind of offset that.
And our team is very well positioned, and we've already started to bring interest rates down. We brought rates down 50 basis points on our CD offer and a variety of different deposit categories. We've started to bring rates down and kind of ready to continue to bring rates down. So I said a lot there, but we have -- feel that we have the levers positioned well to move forward so that we can kind of adjust as rates move down.
Great. Okay. And then you were -- I think, F.N.B. was a bank that was pretty conservative in your expectations of deposit beta on the way down, at least in the first few rate cuts. I just wondered now that we've seen that 50 basis points, you mentioned you've already cut -- you have cut some deposit rates. Any updated thoughts on what a sort of early deposit beta could look like for these first few cuts through the end of the year?
Yes. I would say our guidance has, obviously, the 50 plus 2 more 25 basis point cuts kind of baked into that. What our guidance implies is like a 15% beta by the end of this year. I'd like to think we can do better than that. So we're all, everybody is geared up to be able to adjust prices. A lot of our competitors have been lowering rates so that there's an ability to do that. So kind of what's baked in is 15%, and our goal would be to do better than that by the end of the year.
Okay. And then just lastly on the indirect auto sale. Just kind of thoughts on additional opportunities on the balance sheet here. Was any of this kind of moving the credit box a little bit? Or -- and at this point, are you looking to just exit this business given the yield?
We're not looking to exit the business. We saw an opportunity for us to move some low-yielding assets off the balance sheet. It was not a credit play. It was more about managing the overall balance sheet and particularly -- in particular, our loan-to-deposit ratio. We looked at it basically with our deposit -- with our ability to generate deposits and coupled with the sale of those loans, we were able to bring it down fairly substantially. And there were some questions in the last earnings call about our ability to do that and our ability to grow deposits in this competitive environment. I think we proved that we're capable of doing those 2 things. I would say that in the normal course of business in that indirect auto portfolio, there will be loan sales from time to time. We've always used it as kind of a way to manage the balance sheet and manage our loan-to-deposit ratio. We've done it a number of times. But we retain the servicing. So we're still maintaining the clients. We do use the information on those clients to try to cross-sell other services to them. So that works pretty well for us. But it's not -- it was not a credit play.
And it's a very short-term asset. I mean, 2-year life to it. So from an income statement standpoint, given the borrowings we paid off, there's really no impact on earnings on a go-forward basis. And it added capital. CET1 ratio, we picked up 10 basis points. And just that alone added 100 or reduced the loan-to-deposit ratio by 120 basis points. So it's an attractive...
It's an attractive transaction and it helps with capital and essentially puts us in a much better position to support our clients. I think loan demand will pick up. It just based on the earnings calls that I've listened to and read about, it seems that credit is more benign than folks would have thought and the economic environment is a little better. I think there's a lot of wait and see right now. Once we get past the election, I do think irrespective of who wins, there'll be demand in the C&I book, in particular. So we want to be positioned to take advantage of that. And I think, Frank, the other thing is on display here, over the course of the past year and during this last quarter, great financial institutions are able to fund themselves and they're able to generate deposit balances.
And we've talked about our business model. We've talked about leveraging data analytics and how we're positioned in the markets and the prominence that we have in the markets, our share in the markets. There have been a lot of -- there's been a lot of talk among some of the larger bank CEOs about the inability for midsized and regional banks to gain share. We've proven that wrong. So our business model works. We've grown share. If you look at Pittsburgh, I mentioned it we passed up the legacy Mellon Bank franchise here with deposits share. So just in the last turn. And that's -- those are real customer deposits. So we're doing very well in regard to acquiring names. We're doing well at becoming the primary client, which is why our demand deposit balances have been sustained at around $10 billion. Others have seen migration at a much faster pace. All the things we've said that are embedded in our business model have proved out in this quarter. So I just want to emphasize that, and I know we've said it over and over again. I think the proof is in the results.
The next question comes from Russell Gunther with Stephens.
I was hoping to start on expenses, if you could just revisit 3Q results for a minute, what the drivers were that took you guys through the high end of the prior guide? And then provide some color around the bracket for 4Q. Is that simply tethered to fees? Or what could keep you towards the higher end of that range?
Sure. Expenses on an operating basis for the quarter, as you know, came in at $234 million. The guidance range we provided in July was $220 million to $230 million. The key drivers to that were a couple of things, $2 million increase in marketing, which we decided to do to grow the $1.8 billion in deposits. So that was something that we -- obviously was a strategic decision to spend some more money on marketing, bring in the deposits and it worked very well. And then $5 million increase in comp benefits, that was driven by a few things. Higher production-related incentives, the success we've been having on the noninterest income side. There's commissions related to that, the deposit raising and the fee income. We mentioned in the release, opportunistically hiring some producers in some key markets for us and investing in risk management staff just to support our continued growth. And then just for [ fund ], we had an extra workday in the third quarter. It's another $1 million. So those were kind of the drivers kind of to get us a little bit above the range. But if you look at the efficiency ratio, we continue to post top quartile results. I mean last quarter, we were 54.4%, which we were the third best among our 21-bank peer group.
This quarter is 55.2%, I think we'll compare well again. And then as you go ahead to the fourth quarter, so we're using a range of $225 million to $235 million, up $5 million from the prior guidance. But -- and it's a few things, continued variable compensation supported the strong noninterest income, seasonally slower loan production, it affects the FAS 91 cost deferrals would be lower. FDIC insurance levels kind of staying at a higher level and then the impact of the hiring. But if you step back, overall, the absolute level in fourth quarter, we expect it to be down from the third quarter, which is key.
Yes, okay. That's great color, Vince. I appreciate it. And then maybe just looking forward or taking that conversation forward, you guys remarked about bringing revenue and expense growth into balance. So as we look to '25, is positive operating leverage something you guys expect to be able to deliver? Or do we really need to see a Fed easing cycle end and deposit costs catch up to drive the efficiency more meaningfully lower and deliver positive operating leverage for '25?
No, I would say, it's obviously getting to a more positively sloped yield curve later next year would make a difference. So I think having it for some portion of '25 versus '24 is definitely achievable. But I think having that yield curve will be kind of the key driver to getting us there.
Yes, having an appropriate slope in the curve drives our -- if you look at our balance sheet and how we're positioned, we performed extraordinarily well in that environment. So that is key to our success, obviously, we're no different than other banks. But if you look, that's the ultimate scenario for us in terms of profitability. So hopefully, we see some adjustments on the short end of the curve gets the slope of the curve in the appropriate position for us to benefit.
Yes. And that will drive meaningfully higher net interest income and net interest margin as you move forward and get to that point.
Got it. Okay. Understood. And then just last one for me. You guys reiterated a mid-single-digit growth guide for the year. As you guys look forward, is there any optimism for being able to accelerate that pace? Or are we -- should we be thinking about headwinds like paydowns or potential additional portfolio exits that would keep you guys at a mid-single-digit clip?
I don't think we're in a position right now. We haven't given guidance for next year. But I would look back historically, I think we've done a very good job over a long period of time. I've been here for almost 14 years in this seat, 19 years overall. I think we've grown loans and deposits just about every year I've been here, maybe the pandemic, maybe there was a time when loans didn't grow 1 quarter. But we've put up pretty consistent organic loan growth. It's in the mid- to high single digits, irrespective of the size of the balance sheet over time. And as we've grown the balance sheet, we've shifted our strategy to move into markets that would provide us with opportunities, right? So we could sustain our growth trajectory irrespective of the size of the balance sheet.
So I think that's played out over time. So I can't say I'm optimistic because there's so much uncertainty right about next year. But I do believe that we're in the best position of anyone to generate that loan growth once the market comes back. So demand picks up in a way that [ hits ] the growth scenario, let's put it that way.
The next question comes from Timur Braziler with Wells Fargo.
Circling back on the deposit acquisition strategy. Just looking at the new money cost this quarter at 4.25%, I mean that's still dilutive to the overall rate. I'm just wondering, as we look into 4Q and ahead, just the composition of the deposit growth and the 50 basis point reduction in CDs, is that off of that 4.25% level? Or is new money acquisition still north of 4% here?
Yes. I don't think we're going to get into specific strategies around how we price so that our competitors don't listen in. But I will tell you that you've got to look at it in total, while that is the new money rate coming in, that's basically on the money market.
Yes, it's the money market in 5-month CDs so it's...
CDs in the money market that are driving that. There is a component of demand deposit. There's runoff now or shift in mix but we are bringing in primary clients. So we do have operating accounts as well that have the free balances. So I would expect us to be able to benefit as we move along. And then I also would note, based upon your comment that it's not accretive, it actually -- we replaced short-term borrowings that were at a much higher rate.
5%...
They were 5%. So it actually was beneficial. So the way I look at it, Scott and I go back and forth depending on the interest rate environment, Scott's our Treasurer. I basically say, hey, I'd rather have clients, right? New clients than rely on wholesale funding or some other source of funding that's institutional in nature. So this trade was actually a very good trade for our shareholders.
Yes, bringing loan-to-deposit ratio down as much as it did gives us the flexibility to be able to actively reprice the rest of the portfolio. So there's...
And I'm going to say it again because in the context of the competitive environment we're in, we are not outsized from a pricing standpoint relative to our competitors. So our business model is working, and we are driving share in the market in a way that is accretive to our margin and our profitability. So -- and over time, having new clients, we have the flexibility to price according to changes in the market. So it ultimately leads to higher profitability on a per client basis as well. Anyway, that's the strategy behind what we accomplished.
Yes. I would just add one last thing, too, is we have a meaningful pipeline on the commercial side of additional deposit accounts that we're going after and pursuing. And we've had great success in the past quarter, and there's still a very meaningful amount that we're going after to bring in relationships.
Okay. That's great color there. And then just maybe again, circling back to the auto sale or indirect auto loan sale. Just any kind of underlying characteristics of the loans sold? I guess, how did you choose which portions of that portfolio were divested this quarter?
I'll let Gary answer that question because that actually reports up through Gary.
Yes. Timur, it is just across-the-board sample of current transactions in the portfolio. That portfolio sale did not include any account that was past due. So it was high FICO, high-quality paper with an average life of 2 years.
Okay. Great. And then just lastly for me, there's been some growing speculation of Mid-Atlantic M&A, your name kind of into the mix. Just would love to get an update as to what your thoughts are around capital deployment going forward and where M&A might fit into that mix?
We haven't changed our position. We've indicated in the past that we are not looking to dilute tangible book value in a material way. I don't think that -- I don't want to comment on specific transactions, but we're still focused on doing deals in market, smaller in size, if that was even available to us, we're being opportunistic in terms of what's out there. So in-market acquisitions with cost saves are on the list. The deals would have to be immediately accretive to earnings with limited tangible book value dilution, as I've said. And then the return has to be well above our cost of capital. So I don't think we've deviated at all. And there are a lot of rumblings out there, but we're going to stay true to our strategy. I think it's -- we've done well over the last few years, focusing on tangible book value accretion and returns. And that's going to be our focus as we move forward.
The next question comes from Daniel Tamayo with Raymond James.
Maybe just starting on the 4Q guidance for NII for net interest income. Just some clarification, trying to get a sense for what the margin compression could look like to fit into your guidance? Is there -- on the balance sheet side, is there something that was in the third quarter in terms of the pace of growth that would impact the average balances in the fourth quarter? Is that something where you could see that number come down? Just trying to think about rightsizing how to get to the margin number?
If I -- I think it goes back to what I said earlier, Danny, about the implied beta that's in there, right? So the Fed moved 50 in September, you only had a partial month impact of that. So you'll have the full quarter's impact of that. And then there's 2 more 25. So I think there's some conservatism in our NII guide, but we're using a 15% beta by the end of the year. We can do better than that, then there's upside to that. We don't have any other portfolio exits or anything like that teed up as we sit here today. So it would just be kind of normal activity. But fourth quarter, like Vince said earlier, is there's some seasonality to some slower activity and then you have the uncertainty with the election and everything. So no, there's still some level.
Our mid-single-digit guidance on the Loan side is still the same guidance that we've been giving. So there's nothing unusual. It's just us managing the rates down we get between now and the end of the year.
Okay. Understood. So the average earning assets likely increase in the fourth quarter, and it's a margin issue in the fourth quarter before we start to see that stabilize at some point next year. Is that fair?
Yes. And I would just say that I would characterize the margin as flattish. I mean if it's down, it's down a few basis points, not a lot. So just a starting comment.
Okay. All right. That's helpful. And then maybe one for Gary on the kind of the credit environment, specifically just net charge-off environment. Obviously, you got volatility a little bit higher in the third quarter, but just interested in your current thoughts around how you think about what might be a good run rate for net charge-offs for the bank as you think about the next -- the near term?
Daniel, I think that we're very aggressive from a risk management standpoint and staying ahead of our clients with information flow and understanding their position and the risks in the portfolio. We've continued to perform exceptionally well from a risk management and a charge-off perspective and all the credit metrics have been at/or near record low levels for quite some time now.
This quarter, we were at 25 bps on a year-to-date basis, 17 basis points, which is really, really strong result in this environment, which continues to be a bit uncertain. And as we all know, the CRE environment is surely continuing to see some stress here and there. So I would expect continued performance as we have put up over the last number of years. And is it going to edge up a touch? I mean, it may normalize, but I feel very good about where we sit and as we look ahead, continuing to outperform from the industry's perspective.
Gary and his team have done a fantastic job of making sure that the risk ratings are current. So he mentioned gathering the information. I think that where we stand today is where we're going to stand tomorrow basically, with the exception of any major shifts in the global economic environment. So we're not going to be sitting here with surprises, let's put it that way. We do a pretty thorough job of underwriting and assessing risk ratings on a frequent basis, stress testing and evaluating risk. So what you see is what you get. And I think that's been true for a very long time for us, and Gary has done a fantastic job. So keeping us there.
The next question comes from Kelly Motta with KBW.
I hate to beat a dead horse, but I just want to button up a few more things on the margin. On the prepared commentary about the 15% beta by the end of the year, just a point of clarification, wondering if that's interest-bearing or total deposit beta, one? And then two, I know you haven't done the budget for next year. But just from a high level, wondering how you anticipate deposit betas on the way down more broadly as we look ahead past this next quarter?
Yes. The 15%, Kelly, is total deposit beta by the end of the year. And we've talked about historically kind of a mid-30s level on the down kind of we have some statistics we look at from the past cycle. So that's kind of what's in our head. So I don't know, by the end of next year, it could be around 30-ish, I would say, kind of as a level total -- again, total deposit beta by the end of next year is kind of what's in our heads at this point.
Got it. That's very helpful. And then on the Loan side of things, just wondering what you're seeing in your markets in terms of how spreads might be holding up for commercial loans? And if you're seeing any differences between how that's performing in the Carolina markets versus some of your more legacy Mid-Atlantic markets?
Yes. Surprisingly, it's fairly consistent across the board. And you would expect it to be different regionally, as your question implies. But it has been fairly consistent. I think with capital exiting the CRE space, there's a little more pricing flexibility in that bucket. If you find a high-quality CRE opportunity, you're able to get a little more margin out of it today. That's a function of banks pulling back and financial nonbanks pulling back as well. So I would say there's not a lot of demand from a C&I perspective kind of across the board right now. Everything is on hold. I would expect that to change as we move into next year. I don't have a crystal ball, but my gut and 30 years of experience tells me that there's quite a bit being held back.
So I would suspect that moving into next year, we'll be able to see a higher level of demand, particularly for the C&I. I expect that to happen. And then on the Consumer side, consumer home equity and direct installment has been pretty benign. I would expect that to pick up a little bit as well. And our mortgage company has done a remarkable job of gaining share pretty much across the board. So we would continue to -- I hope to continue to succeed there. I don't know if that answers your question, but it's pretty much the same. The margins are the same based upon the risk profile, pretty much across the board.
That's interesting. That's very helpful. And then on the Expense side, again, I know it's too early to start talking about next year, but one thing you have talked about is the double carry of the rent expense with the build-out of the new headquarters. Just wondering the timing of that, if that's still kind of on track to -- I think it was about $7 million come out of next year as you move over to the new space?
Yes. I don't know that it's actually $7 million, but it -- the building is on track. We're scheduled to move in on November 25, I think, is the date. I think we picked the worst possible -- Thanksgiving -- I don't know what it is, but that's when we'll all be moving over there. We have nearly 800 employees moving into one location. We're in 7 buildings here on the north side of Pittsburgh.
We're scattered all over the place. I think we'll eke out efficiency just by being together in productivity. Our people are in the office pretty much. So I think that will help us immensely. That rent that we talked about, that's basically because we had a year of free rent, right? So that gets built baked into the total length of the lease gets carried out over the lease according to GAAP accounting, and we still have rent expense in this building. So that's why that's occurring, if you've forgotten. So I would expect that to come back a portion of that $7 million. It's not the total amount, but a portion of it will be coming back next year.
Now there might be demand for additional space. It's going to be hard to see. I can't lay that out apples-to-apples, but theoretically, yes, we should be receiving a benefit from a GAAP accounting perspective. The other rent is noncash.
The next question comes from Manuel Navas with D.A. Davidson & Company. We'll go to the next questioner then. The next questioner is Brian Martin with Janney Montgomery.
Just one question just on the -- going back to the deposits for a minute, Vince, and the success this quarter. The DDA did come down a bit. And I know you guys have talked about kind of being the primary bank for your customers and then also the new commercial, Vince, you talked about that you see opportunities on. I mean, does that -- I guess, is your expectation that, that stabilization in that level is still kind of a way to think about the DDA as you kind of look at the next couple of quarters here at that 27% level? Or do you see it drifting lower from where it's at today?
Well, the mix moved down. Obviously, we're in a period where you see some outflows in the Demand Deposit category, plus we brought on a lot of new models so, it's been a shift, but we've been running at around $10 billion pretty consistently. So you saw it as rates went up, we were able to maintain that. I believe as rates come down, we should be able to maintain it and grow it over time. So I can't speak to the overall. If you look at the Total Deposits and you look at Demand Deposits as a percentage of the total, sure, it's going to be smaller. But that $10 billion in Noninterest-Bearing Deposits has really been beneficial to us. And if you look at our cost of funds overall and compare it to peers, we match up pretty well.
But that's the main reason. So I would say, we have opportunities to grow the Noninterest-Bearing category because as customers grow and we brought new clients on, and we're able to stand up all the treasury management services and the used balances to pay for services for their disbursing funds out of operating accounts that we have, we'll have a pickup in Demand Deposits over time. But there's still -- it's a very difficult environment to maintain Demand Deposits because anybody that has excess balances is looking to get a higher yield, right? Because of what they can get versus where we were during the pandemic when everything was close to 0, right? There's nowhere to go. So -- but I think we've done well, and I would expect us to continue to do well in that category.
Plus we brought in a lot of -- okay...
I was going to say, Brian, we also saw about a 1% reduction in revolver balances, which also is going to impact DDA balances, moving from the DDA to pay down some debt as customers being cautious during these times with everything that's going on in the election on top of us, did make some decisions to pay down some revolver balances. So there's a slight impact there as well.
Good point, Gary.
And I'm just going to add, we've added a lot of new names, Brian, too, on the Retail side with new households plus new commercial clients that once we have them, there's an opportunity to broaden those relationships, and that's been a focus over time, really to be the full bank for our customers.
Yes. Got you. Okay. All makes sense. And then just in terms of -- Vince, I think you seem optimistic at least on the loan growth next year. I guess just nothing immediate from the first rate cut that we saw, which is like you said a bit more than maybe people thought. Any pickup in just dialogue with your customers kind of getting the sense that there is that optimism for next year on the loan growth side? I know you guys will give more color next quarter, but it seems like a handful of people, other banks have said that first rate cut really did spur some new interest from their customers. And I didn't sound like you were getting that sense yet, maybe the election and getting past a few things here?
Yes, I'm not as close to the customers as I used to be, but I'm interacting with the bankers and talking to some of the clients. I'm not seeing that yet, to be honest. I think it's still kind of let's wait and see and they're expecting additional cuts. So there may be dialogue, but they're thinking, "Hey, I'm going to get a much better opportunity down the road here because everybody is signaling that there will be additional rate cuts", right? So I'm not seeing everyone leaping forward and saying, I'm going to take advantage of this 50 basis point reduction. I think they're kind of sitting back and saying, "Hey, let's see how the election plays out". A lot of things can happen. Postelection, corporate taxes are on the table, all kinds of things that impact our clients are on the table.
So they're going to sit back and say, "Hey, I want to wait and see what's happening". And that's kind of what I'm hearing and seeing. And again, I don't have as much insight as maybe. I don't know, Gary, you want to add anything?
Yes, Vince, I would agree with everything that you said. That's kind of the way it feels right at the moment. I would expect based on this period where we are here pre-election that once we get into 2025 and the middle part of the year when things start getting quite active, that we'll see some stronger demand.
And I've been out the last few months, Brian. I mean, I've been in Winston-Salem, I've been all over the place. Winston-Salem, I've been in Ohio, around Pennsylvania. So I'm hearing the same thing. I'm not hearing anything different. But again, I don't have the full picture. I mean I might be getting biased information on.
Yes. And maybe just one on the margin. It sounds like maybe just Vince can remind us what the immediate -- I think you went through some of the stuff to reprices, but the immediate on the loan side, what reprices? And then it just sounds as though secondarily, I guess if you -- maybe the expectation is to see a little bit of pressure here on the margin, modest in the fourth quarter. And then if you are neutral, I guess the expectation is you can kind of keep the margin relatively stable. And then as you get into next year and if you get the yield curve steepening, you get some pickup later in the year. Is that just in general, how to think about that?
Yes, I think you said it perfectly, Brian. I would just help with that. But to your initial question, Slide 15 does a good job laying out the moving parts. Just to remind everybody, the 47.5% you can see in the chart there of the $33.7 billion that reprices on the loan side over a 3-month period. And as I mentioned earlier, if you look at the levers that we have, we have $11 billion of liabilities that are repricable today. We have another $5.4 billion in CDs that will mature in the next 6 months, $2.9 billion in the next 3 months at a 4.75% rate and then $1 billion in cash flows from the investment portfolio that is coming off at 2.91% and be reinvested today, at least between 4.25% and 4.5%. So that kind of gives you the key moving parts that are there.
Got you. Okay. Yes. And then I think you mentioned, Vince or somebody mentioned on the call some hiring that you guys had done on the -- maybe on the fee income side. Maybe just if you can just point us to what you're doing there. And then just one just modeling question. It sounds like the fee income this quarter, the BOLIs maybe kind of, I don't want to call it, nonrecurring and then there was also a negative you said on impairment on the mortgage that...
That kind of neutralizes.
Yes, there was an MSR impairment of $2.8 million.
So they offset each other. If you look at the fee income, Brian...
Yes. Okay, that makes sense. Okay. And then just the hiring that you've done, I guess, is there an area you're focused on? Was it capital markets, Vince, you talked about as far as -- I think there was some comment about hiring and I'm just trying to understand where there..
Yes. We've added folks. We've replaced people. In certain markets, we've uptiered with the replacements. We had -- that's one area that's driving a little bit of the increase in the salary expense. So we've been able to bring some really talented people in. And then we've been building out our risk management framework, and we stood up an operating efficiency group for our operations area because we felt that with the changes that are going on with AI and our investment in our data hub, we're going to be able to drive efficiency in operations.
So we've hired -- we made some changes. There was a press release that was put out, but we brought in some very talented people, some process engineers to help us drive efficiency and improve customer satisfaction and deal with risk in the back office. So while that's not a front end higher, that should benefit us over the long haul. And that's really what's embedded in the increase in the run rate of expenses, salary expenses. It's not as large as the total amount that we're reporting because there's all kinds of pieces in there. Some of it's directly related to production, right, higher production in those fee income areas. We're paying out commission. But I think we're putting ourselves in a pretty good position moving into next year, both with funding, right? So if there is a pickup in demand, keeping that funding short, short duration in our strategy so we can reprice down, take advantage of the changes in interest rates that occur and then investing in areas that produce revenue and create efficiencies.
So those are the factors that drove all of our decisions.
Got you. Okay. That should be it for me. I guess just remind me, from a sensitivity standpoint, are you guys -- you're pretty neutral? Is that what I heard? I guess nothing's changed on the sensitivity where you guys are at today?
No, I would say -- I mean, we're still asset sensitive, but we're clearly moving towards neutral. I mean all the different levers I've talked about, Brian. if you looked at our 10-Q, it still shows asset sensitivity, but I would say we're more neutral than what the rate calculation would show and towards that. Yes.
And we have a question from Manuel Navas from D.A. Davidson.
Can you guys hear me now?
Yes, we can. Please go ahead.
So a lot of my questions have been answered. But can you just dive a little bit more into where you're seeing the market share gains in deposits? What geographies are driving it best and kind of where you expect continued momentum?
Yes. We saw some fairly [Technical Difficulty] Carolinas was double-digit, I think that's one area where we've had great success. Pittsburgh, we continue to have success. I think because we have such a huge market share here, it beats on itself. I mean we now have the scale to be able to compete effectively here and bring new clients on and bigger relationships, and that's still happening. So that -- we're benefiting there. In the central part of Pennsylvania, we've done extraordinarily well. So we brought in quite a bit there. And then as you move into the Mid-Atlantic region, we've had some success in the markets that we're expanding into. And then also Charleston, South Carolina and the South Carolina market that we're [indiscernible] good results for us. Those are -- it's pretty much -- I guess it's pretty much everywhere, right? I think we've done well in a bunch of markets. But I would say the Carolinas and the central part of Pennsylvania is probably leading the charge, right, and then Pittsburgh.
Yes. We had growth in 35 of the 57 MSAs that we operate in. And from either increased share or maintained, it was 91% of the MSAs that we're in. So I think it's a very good result. And in Carolinas, we had increases in 6 of the markets that we're in there so...
I was just referring to the increase quarter-over-quarter. I wasn't referring to market share data pickup. But it's pretty consistent. It's pretty similar story.
[indiscernible] Shift for a second, if we do get significant rate cuts by middle of next year, what's kind of the fee upside you see? You're gaining new relationships in the Carolinas. Could that convert quickly to improved Mortgage business? Can you just kind of talk about that fee upside with lower rates?
Yes. Mortgage business really hinges on -- for us, it hinges on demand because we're big purchase money lenders. So hopefully, there's more housing supply out there, more people decide to sell. But I think that will be good. I think the swap income that we get from commercial customers, somebody else asked the question, I think it was Brian, what are you seeing out there? Well, the one thing that I can tell you is that the customers that are looking to go to a fixed rate swap, they're watching what's going on, and they're not moving yet because they're hearing repeatedly in the media that there's additional cuts coming. So that's -- when you dialogue with them, they say, well, I'm not going to do anything yet.
But I think that business has an opportunity to grow. I think our Syndications business over time, will have opportunities because there'll be more M&A, particularly in the middle market and lower end of the middle market, which plays favorably for us. We've also -- we're also expanding several areas. We're getting into the Advisory business. We're building out our public finance capability. So there are things that will lead to fee generation in '25 that we don't even have today.
So I think -- and they won't be -- it won't be gigantic, but it will have an impact. Anyway, those are the things we're thinking about as we look forward.
And the debt capital markets had a record year this year.
Yes, debt capital markets, obviously, has been good. And that should continue, right? Because in the numbers Gary mentioned online utilization, we looked at the larger clients and really have very few capital markets events driving reduction in revolver balance, which is why he said -- Gary said, "hey, that's going to zap your demand deposits", right? Our clients are using their cash balances to pay down debt moving into this next quarter.
So that's what we've seen. And there's probably a little bit of reset going on within the customer base and their balance sheets, they're preparing themselves too for what's coming. Anyway, those area...
This concludes our question-and-answer session. I would like to turn the conference back over to Vincent J. Delie for any closing remarks.
Okay. Thank you, everybody. Thank you for the questions. I appreciate the time you've invested with us, and we're really looking forward to next quarter and delivering. And I appreciate everything the employees have done and continue to do to keep us moving in the right direction. So thank you. Thank you, everyone. Take care.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.