James M. Anderson

Thank you, Archie and Good morning. Everyone slides 4, 5, and, 6 provide a summary of our most recent financial results. The third quarter was highlighted by strong earnings and net interest margin that exceeded our expectations and a 10% increase in tangible book value.
Our net interest margin remains very strong at 4.08%. The margin declined 2 basis points from the length quarter as flat asset yields combined with a favorable shift in funding mix to offset a modest increase in the cost of deposits similar to the second quarter. We were pleased that the increase in deposit costs moderated in comparison to prior quarters. However, we expect margin contraction in the coming periods due to recent rate cuts. Loan growth was modest during the quarter as growth in the leasing and mortgage books was was partially offset by higher payoffs and other portfolios. Average deposit balance has increased $166 million or 4.9% on an annualized basis.
Overall, the deposit mix continues to shift slightly toward higher cost deposits.
However, we maintain 23% of our total balances in non interest bearing accounts and are strategically focused on maintaining deposit balances.
Turning to the income statement third quarter fee income was solid, led by foreign exchange wealth management and leasing income.
Noninterest expenses increased slightly from the linked quarter due to higher leasing expenses and a supplemental contribution to our foundation. However, the impact from our efficiency initiative is becoming more meaningful. We expect to see further benefits in the coming periods.
Our ACL coverage increased 1 basis points during the quarter to 1.37% of total loans. This resulted in $10.6 million of provision expense during the period which was driven by net charge off and slower prepayment speeds.
Overall asset quality trends were in line with expectations. Annualized net charge offs were 25 basis points during the period. And NPAs as a percentage of assets were relatively flat at 36 basis points. From a capital standpoint, our regulatory ratios are in excess of both internal and regulatory targets, tangible book value increased $1.32 or 10.2%, while our tangible common equity ratio increased 75 basis points to 7.98% during the period. Slide seven reconciles our GAAP earnings to adjusted earnings. Highlighting items that we believe are important to understanding our quarterly performance adjusted net income was $63.6 million or $0.67 per share for the quarter.
Adjustments to noninterest income were a $4.4 million deferred tax gain as well as $17.5 million of losses on securities.
The loss on securities includes $8 million in losses from sales and $9.7 million of impairment losses on two securities. With credit deterioration that we anticipate selling in the near term.
Noninterest expense adjustments exclude the impact of efficiency costs as well as acquisition, severance and branch consolidation costs as depicted on slide. Eight, these adjusted earnings equate to a return on average assets of 1.42%, a return on average tangible common equity of 20% and a pretax pre-provision ROA of 2%. Turning to slides 9 and 10 net interest margin declined two basis points from the linked quarter at 4.08%. Asset yields were relatively flat compared to the prior quarter as loan yields declined 1 basis points and the yield on the investment portfolio increased 1 basis points.
Funding costs were also relatively flat compared to the linked quarter. As a favorable mix shift mostly offset a slight increase in deposit costs.
Our cost of deposits increased 5 basis points compared to the linked quarter. However, you, as you can see on the bottom right chart, that pace of growth declined significantly from previous periods and was essentially flat on a month to month basis by the end of the quarter. Slide 11 outlines our various sources of liquidity and borrowing capacity. We continue to believe we have the flexibility required to manage the balance sheet through the expected economic environment.
Slide 13 illustrates our current loan mix and balance changes compared to the linked quarter, loan balances increased 1% on an annualized basis with with modest growth in almost every portfolio.
As you can see on the right growth was driven by mortgage and leasing which offset an increase in prepayments during the period.
Slide 14 provides detail on our loan concentration by industry.
We believe our loan portfolio remains sufficiently diversified to protect us from deterioration in any particular industry.
Slide 15 provides detail on our office portfolio. Similar to last quarter, about 4% of our total loan book is secured by office space and the overall portfolio performance metrics remain strong.
No office relationships were downgraded to non accrual during the quarter and our total non accrual balance for this portfolio remains approximately $17 million.
Slide 6 shows our deposit mix as well as the progression of average deposits from the length quarter. In total average deposit balances increased $166 million during the quarter, driven primarily by increases in retail CDs and money market accounts. These increases offset seasonal declines in public funds as well as modest declines in noninterest bearing deposits and savings accounts. Similar to recent quarters, this was expected as the current interest rate environment has driven customers to higher costs, deposit products. Slide 17 illustrates trends in our average personal business and public fund deposits as well as a comparison of our borrowing capacity to our uninsured deposits.
On the bottom right of the slide, you can see our adjusted uninsured deposits were $3.3 billion. This equates to 24% of our total deposits. We remain comfortable with this concentration and and believe our borrowing capacity provides sufficient flexibility to respond to any event that would stress our larger deposit balances slide. '18 highlights our noninterest income for the quarter. Total fee income was $46 million during the quarter or $59 million as adjusted with Bannockburn, Summit, and wealth management all having solid quarters. Additionally, mortgage deposit service charge and other noninterest income increased from the second quarter.
Noninterest expense for the quarter is outlined on slide 19. Core expenses increased $2.2 million during the period. This was driven by higher leasing business expenses and a supplemental contribution to our foundation.
As I mentioned earlier, we're recognizing more of the expected benefit from our ongoing efficiency initiative and expect to see further cost reductions in the coming periods.
Turning now to slides 20 and 21. Our ACL model resulted in a total allowance which includes both funded and unfunded reserves of $176 million and $10.6 million of total provision during the period.
This resulted in an ACL that was 1.37% of total loans which was a one basis point increase from the second quarter.
Provision expense was primarily driven by net charge offs which were 25 basis points for the period. Additionally, our NPAS to total assets held steady at 36 basis points.
In other credit trends, classified asset balances increased to 1.14% of total assets primarily due to the downgrade of four relationships. These downgrades were not concentrated in any loan or collateral type.
Our ACL coverage increased and we continue to believe we have modeled conservatively to build a reserve that reflects the losses we expect from our portfolio.
We anticipate our ACL coverage coverage will remain relatively flat or increase slightly in future periods as our model responds to changes in the macroeconomic environment.
Finally, as shown on slides, 22 and 23, regulatory capital ratios remain in excess of regulatory minimums and internal targets. During the third quarter, tangible book value increased 10% and the TCE ratio increased 75 basis points . Absent the impact from AOCI, the TCE ratio would have been 9.34% compared to 7.98% as reported. Our total shareholder return remains strong with 44% of our earnings returned to our shareholders during the period. Through the common dividend, we maintain our commitment to provide an attractive return to our shareholders and we continue to evaluate capital actions that support that commitment and I turn it back over to Archie for some comments on our outlook. Archie.

Archie Brown

Thank you, Jamie.
Before we end our prepared arcs, I want to comment on our forward-looking guidance which can be found on slide 24. Loan pipelines have strengthened and we expect seasonally high production or summit Business unit to contribute to mid single digit growth on an annualized basis for the fourth quarter for securities. We expect the port to remain relatively stable deposit growth has been significant thus far this year and we expect to continue to see strong growth for the next quarter as we experience some yearend seasonal inflows, our net interest margin continues to be strong and industry leading, but we expect it to come down to between 3.85% to 3.95% for the next quarter as the fed eases assuming another 25 basis points rate cut in both November and in December. We expect our credit cost to remain flat over the next quarter while ACL coverage as a percentage of loans is expected to be stable to slightly increasing for the full year. We expect net charge that charge off to be approximately 25 basis points to 30 basis points.
The income is expected to be between $63 million and $65 million which includes $13 to $15 for foreign exchange and $18 to $29 for the leasing business revenue.
Noninterest expense is expected to be between $126 million and $128 million with potential variability of leasing business and fee based incentive expense as they are tied directly to revenue in closing. We're very proud of our financial results for the first nine months of 2024 overall, the economy remains healthy and the general easing of interest rates should extend economic growth in the coming periods.
We believe we're in a great position to finish the year on a high note and head into 2025 with continued momentum with that. We'll now open up the call for questions, Jeanie.

Question and Answer Session

Operator

Thank you. The floor is now open for questions if you have dialed in. I would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again.
If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute. When asking your question again. Press star one to join the queue and your first question comes from the line of Daniel Tamayo with Raymond James. Please go ahead.

Daniel Tamayo

Thank you. Good morning guys.
Maybe starting on the on the loan growth. So a little bit slower as you guys mentioned and expected in the third quarter, you, guided to that improving in the fourth quarter and Archie, you mentioned some seasonal strength from summit. Just curious as we, as we look into you know, beyond fourth quarter and, and kind of what you guys have done this year was, was pretty strong, you know, we've got mid single digit guidance for the fourth quarter, but curious how, how you think we should think about what would be a more normalized growth rate for you guys. Given the, the additions you've had from agile and other businesses recently looking into 2025.

Archie Brown

Yeah, Danny, we feel, I mean, I think we feel pretty good about certainly the fourth quarter improving. And then as you look into 2025 we're, we're finalizing our, our plans for for next year, but I would tell you we're probably in that mid to upper single digits in terms of annualized loan growth in 2025. A pretty balanced across most of the portfolios and you know, even some of this quarter, we're, I think we're rationalizing more making sure that if it's a, you know, lower return type of a, of a relationship or loan, we probably exit a few of those in the quarter and we'll continue to be dissipate around that. So that may temper growth from what it could be. But even with that, we still see kind of a mid to high single digits for 2025.

Daniel Tamayo

Okay. Terrific. And then, you know, I guess maybe on the on the yield side there, if you can give us a sense, you know, that the loan yields certainly have, have have remained stronger than than I was expecting. And you mentioned the mix shift there with agile again, but if you could give us a sense for, you know, where those loan yields are, are coming on the books and, and rolling off as, as maybe we do see some, some pressure begin to, to show it, show itself here in the fourth quarter and, and next year.

Archie Brown

Yeah, I mean, I could tell you on the, we'll look here for the runoff side of that on the origination side for the quarter. Origination yields were probably in the high seven, say 7-8 ish or so. And even in September, they're only down maybe 10 basis points. So still kind of high high 70 ish in September. So, you know, as that cuts, there's going to be some continued decline, that's baked in and of course, how we look at the margin, you know, if you speak with the.

James M. Anderson

So, yeah, the loans going on the books right now, Danny, that we originated in the third quarter, we're going on an average yield of about in the high sevens and like the 75-780 range and the payoff yields are just slightly slightly below that, maybe 20 basis points below that at this point.

Daniel Tamayo

Okay.
All right. That's helpful.
I think that's what I wanted to cover. Yeah, I'll go ahead and jump off. I appreciate the color guys.

James M. Anderson

Thanks David. Thank you.

Operator

Your next question comes from the line of Terry McEvoy with Stephens. Please go ahead.

Terry McEvoy

Hi, good morning, Jamie. Good morning, Archie. Thanks for taking my questions. Maybe we could just start the $8 million of losses from restructuring activity. Could you just talk about yields on the securities? You sold the reinvestment? Maybe when, when it occurred in the quarter. So we could figure out the benefit and, and how, how that comes into play in your, in your forward guide.

James M. Anderson

Yeah. So we just so, you know, we've taken that into account when we, you know, the 385 basis points to 395 basis points margin that we talk about in the fourth quarter that's already baked into that number. The, the sales occurred. So we, we sold about $140 million of securities, kind of, I would say in the, it all happened kind of in the middle of the quarter. So we got, you know, the reinvestment can take a little bit of time too. So we didn't really get much of a benefit of that within the third quarter. We'll get the full benefit in the fourth quarter. So we sold $140 million of securities and we picked up about 330 basis points on the on the reinvestment. So the earn back on that is a little bit less than two years, about 1.7 years. And we've been trying to keep that. We've done a few of those in the year, we did one in the fourth quarter of last year as well. Just kind of small incremental type of restructurings there. You know, nothing, nothing huge but so the $8 million loss, you know, we're picking up about $4.5 million or so on a on a go forward run rate on that on that, on those sales. So about 330 basis points on the $140 million.

Terry McEvoy

Great. Thanks for all the details, Jamie. And then maybe just a question on summit, how are the credit trends performing there relative to projections? It continues to be a nice platform for growth. And I asked that only because we are seeing and hearing some stress in in the small ticket area in in a few specific industries.

Archie Brown

Yeah.
Yeah.
The portfolio we put on the portfolio obviously a couple of years ago, we've grown it and it's, it's now stabilized at a good size and you know what we're seeing in there is not unexpected. Overall, we have seen some transportation come through on the launch and works that you would expect based on some of the headlines there, but nothing really out of the ordinary from all the care eye on credit, performing very well.

James M. Anderson

And to add to Archie, you know that they're not huge and small ticket. In terms of the overall mix of the portfolio and, and Bill talked about a couple of transportation related. I think their total exposures of under $100 million being that in that book, probably $80 million to $90 million, I think in total bill. What are we $221 million or $220 million or so in the total total book for the company.

Terry McEvoy

Great. Thanks for all the color. Have a nice day.

Archie Brown

Thanks, sir.

James M. Anderson

Thanks sir.

Operator

Again, if you would like to ask a question, press star, then the number one on your telephone keypad.
Your next question comes from the line of Chris McGratty with KBW. Please go ahead.

Hey, how's it going? This is Andrew on for Chris McGratty

James M. Anderson

Hey, Andrew.

Okay. So just on capital, you guys continue to have strong capital generation and in the CAT one up to 12%. Now, can you just remind us where your capital deployment priorities lie and maybe some thoughts or conversations you're having around? M&A? Thanks.

Archie Brown

Hey, Andrew. This Archie. On the, on the M&A front. Look, we are, we're primarily focused on organic growth and executing our strategy. I do believe we're interested in Bank M&A and believe they're going to be more opportunities over the next year or two. We do remain disciplined though in our, in our kind of our pricing, you know, disciplined around our pricing and, and how we model initial opportunities and we're going to be patient to make sure that if we do a deal, when we do a deal, it's going to have the best outcome for our shareholders. So I think there'll be opportunities. I hope it with a play, but it could be something that really fits well for our shareholders.

James M. Anderson

Yeah, and Andrew on the, on the capital front in terms of capital deployment. We don't, we don't see us, you know, doing any stock buybacks at this point where our stock is trading in terms of relatively tangible book value. You know, we did increase the dividend by a penny last quarter. So, I mean, at this point, we're still, I think in the, in the capital building mode and growing tangible book value. We just think that's important here for the time being. You know, but if like Archie said, if we see something that looks attractive, we'll be opportunistic there.

Oh, okay. Thank you. And on the income guidance looks to be about $5 million step up from this quarter. How should be thinking about growth there relative to Q4 entering 2025

James M. Anderson

In terms of, are you talking about in terms of non interest income?

Yeah. Yeah, notinterest income.

James M. Anderson

Yeah. So, you know, we have, we see good growth there going forward, you know, both from and one of the main drivers that we, that we have there as summit ramps up their balance sheet when they put on, when they put on operating leases, obviously that, that hits down, you know, those payments hit down in fee income. So, you know, the growth and, and non interest income will be, you know, driven by, you know, the, the what I would call the normal, you know, normal lines in terms of, banning burn on the wealth side. You know, the, our capital markets group with banning burn has been growing, you know, 10% or 15% a year. But, a again as, as summit puts on, you know, more operating leases and ramps up their, ramps up their balance sheet. We've owned them for three years. So the average you know, average term of those leases that they put on the books are, are roughly four years. So we're still ramping up the balance sheet, you know, until we get to kind of a more stable asset base there and stuff starts to, to, to churn that that fee Income Line will continue to to grow there for that, for the leasing business.

Okay, great. Thanks. Thanks for the call. I'll step back.

Operator

Thank you.
That concludes our Q&A session. I will now turn the conference back over to Archie Brown for closing remarks.

Archie Brown

Thank you Jeannie and thank you all for joining us today to hear about our progress in the third quarter. We look forward to talking to you again after the fourth quarter. Have a great day

Operator

That concludes today's conference call. Thank you for joining you. May now disconnect.