Q3 2019 Earnings Call

Greetings and welcome to the be Okay Financial Corporation third quarter 2019 earnings Conference call. At this time, all participants are willing to listen only mode. A question and answer session will follow the formal presentation.

Any once you require operator assistance during the conference. Please press star zero under telephone keypad.

My pleasure to introduce your host Steven No Chief Financial Officer thinking you may begin.

Good morning, and thanks for joining us today, our CEO , Steve Bradshaw will provide opening comments that Stacy kinds executive Vice president of corporate banking will cover our loan portfolio and credit metrics.

I'll then provide some details regarding our income statement items for the third quarter and provide high level guidance for the fourth quarter.

Our executive Vice President of wealth management, as well as Mark Malone Executive Vice President and Chief Credit officer available for questions.

PDF of the slide presentation, and third quarter press releases are available at our website at www dot the okay, Yes dot com.

We refer you to the disclaimers on slide two as it pertains to any forward looking statements we make during this call.

I'll now turn the call over to Steve Bradshaw.

Good morning, Thanks for joining us to discuss the third quarter 29 team financial results.

We're pleased to report a second consecutive record quarter could be okay financial both from a net income and an earnings per share perspective.

Despite some challenging industry headwinds. These results are a testament not all went to the organizations unique mix of business revenues, but to the outstanding efforts will be entire be okay financial team.

Shown on slide four third quarter net income was 142.2 million for $2 per diluted share that's up 3% from the previous quarter and up 21% from the same quarter a year ago.

The quarter over quarter growth was driven by a number of key factors being commission revenue continued its upward trajectory this quarter, expanding nearly 6% or brokerage and trading and mortgage banking revenues continue to outperform on strong mortgage backed securities trading and mortgage loan production volumes, both impacted by lower mortgage interest rates.

And increased market volatility this girl fully offset the pressure real life on net interest income and net interest margin that Stephen will cover in detail momentarily.

Expense management with consistent this quarter with a minimal increase in total operating expenses, mostly attributable to higher compensation related to our fee based businesses are low loss provision. This quarter was slightly higher at 12 million. This level was influenced by continued loan growth turning to slide five average loans were 22.4 billion.

The increase of nearly 2% for the quarter Paydowns in the public today at the manufacturing segments late in the quarter, along with loan fills up period end loans relatively flat, but we remain confident at mid single digit loan growth for the remainder of the year.

Average deposits were up over 2% and peered in deposits were up over 3% this quarter with a significant increase in interest bearing deposits growing deposits to fund loan growth has been a significant area. This is for be okay, which you can now see in our result.

And we saw an opportunity to further best in our capacity at a favorable price this quarter as we bought back 337000 be okay upstairs at $77 in three cents per share in the open market.

I'll provide additional perspective on the result at the conclusion of their prepared remarks, but now Stacy guys will review the loan portfolio and credit in more detail I'll turn the call over to Stacy.

Thanks, Steve.

You can see on slide seven total loans were 22.3 billion up 30 million for the quarter on a period end basis.

Total thinking I was up half of a per cent for the quarter, our expertise in energy and health care continues to be the driving factor and was responsible for the bulk of the thinking I growth.

Energy was up 193 million or nearly 5% for the quarter.

The lower than normal churn trend in the energy portfolio. We've discussed continues as companies continue to be slower to the faster so in the current market environment.

Our credit history in the energy segment.

Proven through the last energy cycle affirms our ability to properly underwrite and manage this lending class.

Our health care channel grew 107 million this quarter or 3.6%.

Well pay downs impacted period end growth rates last quarter steady growth and commitment levels and our focus in the thing you're having space preserves health care as a major cnine growth engine.

This continued strength in energy in health care was offset by an intentional refinement of relationships in the public finance segment as well some large client pay downs and the manufacturing and other segments.

Public finance and we mentioned at the time of the Cobiz acquisition is not a significant area of focus breath. At this point you did a low lending margins in this segment today.

[noise] continued discipline and concentration limits in the commercial real estate, coupled with late quarter Paydowns left the segment down 1.8% for the quarter.

Commitment volume is still very strong in this space and we continue to high grade through stringent customer selection as we reload the portfolio.

On slide eight you can see the credit quality remains strong as it has all year Nonaccruals were down 11 million during the quarter, primarily due to a 15 million decrease in other commercial and industrial loans and a 10 million decrease in health care sector loans.

Energy loan Nonaccruals did increased by 17 million this quarter, but this was due to a few lingering credits from the energy downturn in 2015.

We do not see any new stress on our energy portfolio today.

Net charge offs moved up slightly to 19 basis points remaining well below the historical trends.

Potential problem loans, which are defined is performing loans that they've been known information Cogs management concern as to the borrower's ability to continue to perform totaled 143 main at September Thirtyth down from 161 million at June Thirtyth.

This was due largely to a decline in energy host, our retail sector and other commercial and industrial loan partially offset by an increase in services and health care sector loans.

Based on an evaluation of all credit factors, including overall loan growth changes and not occurring in potential problem loans and net charge offs. The company determined that a $12 million provision for credit losses was appropriate for the third quarter of 2019.

We remain appropriately reserved for the combined allowance, 0.92% I period end loans and leases.

I'll turn the call over to Steve and now the cover the income statement in more detail Steven Thanks Stacy.

As noted on Slide 10, then interest income for the quarter was 279 million down 6.3 million from the second quarter comparatively the second quarter included 2.7 million more of interest recovery and 2.4 million of higher accretion normalizing for these items that interest.

Revenue was relatively flat.

Net interest margin was 3.01% down from 3.30% the previous quarter.

I provided on the slide I roll forward to highlight significant items impacting NIM calculation.

First the higher interest recoveries and accretion levels in the second quarter impact that NIM by three and four basis points respectively.

Second the 1.3 billion expansion of our fixed income mortgage backed securities portfolio had a dilutive effect on me about nine basis points, but added 650000 to net interest income.

Additionally, a higher level of securities held to hedge our mortgage servicing rights that alluded Nam an additional four basis points. The remaining nine basis points difference is attributable to the overall lower interest rate environment.

Loan yields parse largely price drop of LIBOR floor declined 21 basis points, and a carryover of higher pricing and deposit gathering activities increased interest bearing deposit costs by four basis points.

Well, we are working to defend net interest income significant interest rate cuts will continue to provide pressure.

On slide 11 fees and commissions were up 186 million an increase of nearly 6% for the quarter. The trends, we mentioned last quarter continue to accelerate as declining rates fueled activity on wealth management and mortgage.

Brokerage and trading revenue increased over 8% for the quarter continuing its strength triggered by lower interest rates on strong mortgage backed security trading results, coupled with higher loan syndication activity.

Lower mortgage interest rates led to a 7% increase in mortgage revenues and drove a two year high and mortgage refinance volumes.

Gain on sale margins increased five basis points this quarter.

But this year and asset management revenue was down quarterly due to a seasonal increase in tax fees collected in the second quarter.

The year over year figure is impacted by the large onetime fee earned in the third quarter of 2018.

Other revenue was up due to an increase in repossessed asset revenues from a certain set of oil and gas properties in a business insurance credit increased repossessed asset revenues, largely offset by higher operating expenses related to these properties.

Turning to slide 12, we continue to carefully manage expenses to drive operating leverage in fact, we were able to maintain a sub 60% efficiency ratio this quarter.

Total operating expenses were 279 million up 2.2 million for the second quarter.

Personnel expense increased 2.2 million over the previous quarter.

Incentive compensation increased 5.5 million led by an increase in cash based incentive compensation.

Primarily related to increased sales activity on the wealth management and commercial banking.

This increase in incentive compensation was partially offset by decrease in regular compensation by 1.2 million an employee benefits by 2 million.

Employee benefit expenses down largely due to a seasonal decrease in payroll taxes.

Non personnel expense was overall flat from the second quarter with certain offsetting components.

Mortgage banking costs increased 3.4 million, primarily due to an increase in the amortization of mortgage servicing rights as lower interest rates drive an increase in prepayment speeds.

In addition data processing and communications expense increased 2.2 million and net losses in expenses on repossessed assets increased 1.1 million insurance expense decreased 2.2 million in business promotion expense decreased 1.3 million.

One additional thing I'll mention that this quarter included a 5.2 million tax benefit largely due to the finalization of the 2018 tax return for be Okay financial and cope is along with completion of the tax credit project.

Slide 13 has our current outlook for the remainder of 2019.

As I've done in previous years, all hold off on discussing next year in any detail until our budgeting process is further along I will say however that our initial planning is centered around a flat rate environment for 2020.

But focusing on the fourth quarter.

We think mid single digit loan growth for CNR categories is expected for the remainder of the year.

Provision level in the fourth quarter will be influenced more by loan growth as opposed to any expected credit deterioration.

The last rate cut we saw in September has clearly place negative pressure on net interest income and net interest margin. We also expect another rate cut before year end. So additional pressure on in <unk> and NIM will depend on the timing of that caught.

We've increased our fixed income securities portfolio in the last couple of quarters to a level that we're comfortable with so I would expect occur remained relatively flat.

Revenue from fee generating businesses, particularly brokerage and trading a mortgage should continue to benefit from lower interest rates, however, seasonality could influence mortgage activity.

Our ability to hold our efficiency ratio at or below 60% is largely dependent on total revenue and revenue mix.

We'll allocate sufficient capital to support organic loan growth and expect to continue to a modest level of opportunistic share repurchases.

Capital ratios are expected to improve slightly over time.

And lastly on slide 14, a word on seasonal.

We are nearing completion of our seasonal implementation project our models have been developed and validation as being finalized.

We have established an internal economic forecast committee and completed several test runs of the seasonal process.

These test runs considered data from our loan systems forecasts developed by the economic Committee evaluation of the modeling result, and qualitative adjustments for credit exposure not appropriately measured by the models.

Based on the results of these test runs our allowance committee expects the pre tax transition adjustment from seasonal implementation will be between 50 million and 75 million.

As provided in our previous disclosures the transition adjustment considers the requirement to provide duplicate allowance on nearly 2 billion of acquired loans that were previously marked to fair value, including a credit discount.

And to provide an accrual for credit exposure on approximately 3.5 billion of loan service for Ginnie Mae that are backed by the department of Veterans Affairs.

Of course, the final transition adjustment will depend on the composition of our loan portfolios and the current and forecasted economic conditions as of January 1st 2020, the effective date for the seasonal adoption.

I'll now turn the call back over to Steve Bradshaw for closing commentary.

Thanks, Steven as I mentioned at the top of the call to be Okay financial second consecutive record quarter is a product of our structure discipline revenue approach our fee businesses more than compensated for decreasing net interest income this quarter, which is how we have built the bank to perform consistently through economic and interest rate cycle. This is a quarter that really underscores the.

For earnings potential of our company.

Looking ahead, I really believe that we're well positioned for continued earnings performance, even if industry headwinds intensified with 40% of our revenues derived from fee business. We have the ability to help mitigate the decline in spread revenue if rates continue to fall.

Well period end loan growth was flat this quarter average loan growth till the real story, well leg quarter pay downs might give the impression that loan growth is slowing our energy and health care channels continue to outpace expectations and leave us optimistic for continued loan growth.

So with that we're pleased to take your questions operator.

Thank you at this time, we will be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.

Hey, confirmation Tom will indicate your line is in the question Q you May Press Star too if you would like to remove your question from the Q.

Participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Once again that is star one to register questions at this time.

My first question is coming from Ken Zerbe of Morgan Stanley . Please go ahead.

Great. Thanks, Good morning, everyone again, finally start fun in terms of expense guidance, the 60% efficiency ratio.

Do you guys feel that you're having to delay any projects are investments in the business or are we kind of it a good steady state I'm, just trying to figure out if and how much pressures on the expense side given the weaker revenue outlook, probably okay. Ken This is Stephen.

Yeah, I think we are at a good steady state I don't really see.

A big bubble of expenses coming at Us and 2020, I think it's more business as usual and so I think that's why I made the comment about our efficiency ratio being really determine more around the revenue side and revenue mix as I think the expenses are pretty steady state.

Hi, This is Steve Brad So let me tag onto that I think that.

I'm, a big part of our expense allocation, obviously is to technology investment.

And we're maintaining that level, even in the face of some revenue headwind. So we think of that really kind of as a percentage of revenue and we're also seeing.

Some pretty significant technology investments, we made in in infrastructure back at me out of that 14, and 15 timeframe that are now rolling off so it's giving us more capacity to focus our resources on technology, that's more customer facing.

Product enhancements, so we feel good about that despite the headwinds out there.

Okay, Great and then Stephen if we do get an October rate cuts.

What do you envision happens to NIM in fourth quarter.

Continues to go down.

Can you get another can you quantify other perfectly [laughter] well just you know it's hard for me to quantify 'cause there's lots of moving parts that did impact our NIM calculation as with anyone.

But clearly the LIBOR based loans are going to continue to move down at a faster pace than our deposit pricing.

The wholesale funding that's really funding.

Securities portfolio that were rolled down pretty much lockstep with any kind of fed.

And so will the loans, you'll get benefit from the fact that we have the.

Larger fixed income securities portfolio that will hold it spread it actually gained some spread.

As I said last quarter, you know the wildcard here is really the deposit gathering activity and I would say that we are seeing some rollover and are administered pricing and consumer we're seeing some movement downward in our exception pricing on commercial.

That's a long as we continue to fund our loan growth with.

More market based wealth type deposits than youre going to see that deposit overall.

Interest bearing deposit.

Costs stay relatively stable, if not perhaps a little higher.

Got it Okay, and then maybe just staying with them just for my last question.

What's that lets say, what's the right level of interest recoveries and also accretion because obviously hurt you this quarter I get accretion comes down yeah, but is this the right level of interest recoveries on what do you expect VPA. Thanks interest recoveries were only 700 million or $700000 excuse me I'm not in the third quarter. It was three point.

4 million in the second quarter somewhere in between we usually have some level of interest recovery in the 1 million or so level. It is hard to say.

And then accretion.

That the level you saw in the second quarter I think it was a bit elevated.

This quarter is a little bit more normal and is as time goes by we still have about $90 million left over in the and the overall discount amount that will be recovered overtime.

The next two three years and there'll be a tail on that so that pinpoint.

9 million that you saw this quarter will will begin to taper down as we enter 2020.

Okay, great. Thank you very much.

Thank you. Our next question is coming from Brett Robertson of Piper Jaffray. Please go ahead.

Hey, good morning, everyone wanted morning.

Wanted to ask about the loan growth and hanging on the guidance is mid single digit loan growth from seeing eye categories expect for remainder of the year can you talk about that versus commercial real estate and if you expect.

Additional payoffs third I kind of me loan growth or can you give us maybe a little color on how you see the various categories impacting the total balance.

Yeah, I mean, it's hard to predict individual categories, obviously, even in real estate, we had some weight pay downs at the end of the third quarter, which impacted total growth.

I mean generally speaking we feel very comfortable what we've talked about for you know almost a year now that the total portfolio would grow on a year to year basis in the mid single digit range and I still very still feel very comfortable with that we've got capacity in real estate, a we've for outstanding growth and we think that we'll continue to have Uh huh.

Opportunities there I don't see anything market from a real estate perspective.

That's driving kind of a market impetus to pay down loans and that we've seen in years past.

Just normal kind of timing of when loans pay off versus when they advance inside that real estate portfolio.

I think as you look in usually look forward I think we've talked I think last quarter. Just organically you may have some headwind in the see an ice space and the the business banking space around.

The that kinda uncertainty in the broader markets as you go through an election cycle a as you work through that I think sometimes that creates trepidation on the part of a borrower to kind of see what's going to happen enough uncertainties never in our favor from that perspective, but I think overall, we've got to a big portfolio, we've got a lot.

The levers health care and energy have been good drivers for US we've got other places in the portfolio that create opportunities to grow a theory will continue to grow at a modest pace overall and so we still feel good about that me at mid single digit kind of annualized loan growth that we've been talking about.

Okay.

And then you mentioned energy wanted to talk about that for a second you mentioned no new issues, but you had a few.

Lingering ones I'm curious you guys have not really change to your underwriting versus the industry. That's kind of move to more cash flow versus reserve based I'm curious your growing the portfolio have you adjusted anything in terms of how you do energy and have you changed your debt service to us given the environment.

You know.

I I've heard that that you know people are moving to more of a cash flow based underwriting style and I don't understand that every loan we've ever underwritten at this bank in energy has had a cash flow underwriting component to that and so you know we have never looked at this asset class.

Last as strictly an asset based loan for which were making alone against the collateral and I can't speak to how others may be underwriting this asset class, but I can tell you in my history here at the bank, we have never underwritten this without looking at cash flow as it repayments source.

Based cash flow repayment of all debt based cash flow repayment of bank debt as part of our underwriting and maybe that's why we've outperformed the market in this segment.

But I think that that that's why this has been corridor.

We haven't made changes to the underwriting because our underwriting has been consistent and has performed through cycles and we have not had to make changes as a result of that.

Okay.

And if I can sneak one last one out I'm just back on the margin question. You know I know, there's a lot of moving parts. When would you expect and I are to be down from here just thinking about the various pieces of the income.

[noise], Brad if we get one more rate decline in the fourth quarter, which were expecting then I would say yes.

That we would expect eni to be down slightly.

Largely because of the you know the impact on our LIBOR based loans will grow loans.

Certainly and that helps.

But I could I can see us scenario certainly we're in goes down in the fourth quarter, if we get another rate decline now.

If we.

We're planning I think I mentioned, we're planning in 2020, a flat rate environment. If that holds in 2020 and we continue to grow loans is certainly we're going to grow and I high but I feel pressure there in the fourth quarter.

With another right okay.

Okay appreciate the color.

Thank you. Our next question is coming from Peter Winter with Wedbush Securities. Please go ahead.

Good morning, Hello, Peter Peter.

Just going back to energy I guess this is a second quarter of where there's been a decent size increase in nonperforming loans.

Im just wondering if you can talk about the reserves you have against these loans and what's your thinking in terms of maybe potential future charges.

Yeah, I think you know in the midst of the downturn in 15 and 16, we talked about you know because kind of the broader market did around energy reserves, specifically, we've never liked that discussion because of that the totality of the reserve is available for.

All losses, whether their energy or not so we're not kinda back into trying to disclose a specific river reserved energy goals, we've got a big reserve.

And it's available for all of our loans I think what I would say is energy loans by virtue of of how wells are drilled and those type things or larger and so when you have one deteriorate you're going to have more lumpiness as it comes through criticized classified and ultimately nonperforming because of the size of alone that's on the good and the bad side is.

They get better then then there'll be lumpy from that perspective to they deteriorate there'll be lumpiness there as well.

From a loss perspective, we when we talk about in our presentation and on the slide around credit quality that we've been at about 19 basis points of average charge offs over the last five quarters.

And that's certainly better than kind of went through cycle, you have kind of 30, 30 540 basis points.

From that perspective, and I would tell you as we look forward I think that kind of 20 basis point average charge offs is a good place to pega.

I think that based on the fact that we know today in the circumstances that we know today I think thats a that run rate is one that that feels that we can continue to stay on that trajectory, even though it's better than.

His long term historical average from a credit loss perspective.

Great.

If I ask a kind of a big picture type question obviously.

Do you have a very long and strong history in energy I'm, just wondering kind of.

When we look out you are seeing private equity a really pulled back a and away from the space, but what kind of gives you the confidence to continue to grow in this area.

I think the the biggest issue if you think about our underwriting here is is those private equity investments are.

Really for future activity not for what has already occurred in our lending bases on proved developed production.

And we're very comfortable with the cash flow that we believe will come from those wells over time to repay our debt and that has been proven out overtime I think the issue with private equity and frankly, the capital markets being close kind of broader.

More complex issues around the broader energy kind of capital stack issues really is about future investment how much growth can there be you see rig counts coming down almost every month now when you see those those statistics coming down that's gonna have an impact.

On new well production and and the growth in the commodity supply, but but we're not counting on future private equity investments or an open capital markets to repay our debt.

Back to kind of the earlier view, where we're counting on the cash flow that we underwrite in the existing wells to repay our debt and so if there. If there is no future investment I think it changes you know maybe a lot of these loan would play that too it's kind of logical conclusion, if there's no future investment then.

There's no future drilling and a lot of these energy loans become term loans and they get repaid as the asset depletes overtime.

But but we're not counting on the capital markets are private equity to bail without we're not counting on them to make an investment that is going to improve our deal.

We underwrite and we approve alone based on the existing cash flow and asset base of that borrower and accounting on back to pay us back even times, where we look at maybe private equity commitment. They've made we don't we don't give lending credit for kind of opened an unfunded private equity.

Mmm a week, we look at that we understand that but but we're not dependent upon that to repay our energy loans.

Great. Thanks for all the color appreciate it.

Thank you. Our next question is coming from Jennifer Demba of Suntrust Robinson Humphrey. Please go ahead.

Thank you good morning.

Good morning question on the mortgage business just wonder how strong your pipelines are right now and how much of the strength. We signed three key will bleed over to what is usually the softer for Q.

Yes, I think we have good pipelines, there, but I'll I'll just tell you that the fourth quarter generally softer I mean, it's.

Thats seasonality in that business when you get into the holidays.

And that Tom in your view, you generally see a slowdown in mortgage origination so even though the environment is still very.

Conducive for for good mortgage activity.

I do think you'll see some slowdown largely just from the normal seasonality in that business. Yeah. This is Steve I think the the only Mitigant is if you see further decline in mortgage rates. Then you could you can see a thesis that would suggest that there will be higher rebuy levels.

Coming now I think refineries in the third quarter.

We're kind of approaching 40% for us and we can see that go higher in a further decline rate market. So.

That would be I agree with Stephen you would typically see purchase purchase lending go down in the fourth quarter and you'll see that virtually every year, but the rifai business is a little bit of the wildcard relative to rights.

Okay.

Question.

On credit Stacy, though some great color before on your thoughts on kind of near term charge offs.

Can you give us.

Color on what the total leverage lending book looks like for be okay.

And if you guys have any restaurant and you're seeing eye portfolio right now.

I'll, let mark a mark monarch, Chief credit officers here I'll, let him handle that yeah.

From a standpoint on leverage lending that is not something that we focus on in terms of defining it as enterprise value type lending.

We have very limited amount of what I would call pure based on.

Support.

The value of the company to get us repaid from a collateral basis. So thats. It thats not of a line of business, we focus on and we've maintained vast process that.

Strategy going forward.

On the restaurant side, we have had a limited amount of business, we have $177 million and outstanding credit is basically select very select.

Brands that we are invested in on a franchise basis, we don't do anything that isn't based on a franchise.

Concept.

So there and we tend to have the larger companies the ones that are similar Warner number two or number three franchise.

Companies.

For that particular brand and frankly right now the credit quality that is all positive.

Jennifer that's never been an area of business development focus you know just from a credit philosophy, we've always like kind of belt and suspenders, both collateral and cash flow and so we have never a set out with a strategy to grow that or develop business in that space.

Okay. Just one more question on credit what what kind of concentration are you comfortable with in terms of health care loans to the total portfolio.

As you as you.

Congrats overtime.

What.

Well, we continue to evaluate that every six months.

Okay, what's going on the industry, we look at what's going on with the regulatory environment.

And assess what works best for Us.

We have modified our strategy over time and focus more on the senior housing because of the demographics really favor us in that.

In that area as opposed to some of the out of network type.

Businesses in the healthcare, so we're much more comfortable and where theres, a Medicare and Medicaid reimbursement model.

We're going to keep it and in line with what we have we have concentrations focused on energy. We have spoken focused on CRT and we have focused on healthcare, which account for a little over 650% of our total loans and we'll keep that.

Are those ratios in line overtime, so Jennifer those three areas that Mark highlighted are the ones that the credit committee in the board monitor from a concentration limit perspective, what I would tell you we've been growing health care in the 6% to 10% range and I think we have plenty of capacity to continue to grow health care in and at that rate as we look forward.

Thanks.

Thank you.

Thank you. Our next question is coming from Matt Olney Stephens. Please go ahead.

Hey, Thanks, Good morning, and wanted to ask about fee in fee income and specifically the brokerage and trading line can you just remind us of the Knicks that line how much of the brokerage line is from securities trading that can be influenced by rate volatility and then beyond that what are some of the other dry.

Operator that could influence that line from quarter to quarter.

Sure. So this is Scott.

Matt and.

When you when you look at our product mix, we are on the fixed income side with which obviously all of the.

The fixed income lines are going to be interest rate sensitive and be impacted by volatility in rates.

So when you look at our.

Taxable component.

Of our fixed income mix it accounts for about 40.

Percent of our total revenue on the fixed income side, our single largest category is our mortgage backed securities.

Group.

And.

Then we have a stable about 10% to 15% mix of municipals.

The rest are a combination of corporates treasuries.

Certificates et cetera. So.

That fairly high percentage of our total.

Revenue is going to be interest rate sensitive we have little.

On our trading component that's equity related.

The other products and derivatives, but we do have an active hedging activity as well in our financial risk management.

Okay. That's great. Thank you. Thank you Scott and then yes, Matt This is Steve when the when the 10-Q comes out we have a table that breaks down specifically all of the brokerage and try all of the businesses in fact, when it breaks down the brokerage and trading line item in about by different categories, along with what Scott.

Said you could look at that when it comes out in a week or so.

Okay perfect.

And then on the margin and typically on the interest bearing deposit costs those were up a little bit the third quarter can you talk about your expectations for the fourth quarter interest bearing deposit cost and how much confidence you have that fourq you costs will be below the third quarter levels.

Yeah, I talked a little bit about that with Ken Jeremys question earlier, but again I feel like we're seeing some.

Deposit cost decline in some of our exception price commercial deposits and also in some of our administered rates over on the consumer side, although we didnt raise all that much when rates were going up.

It's it's the the wildcard here is how much of the.

Loan growth that we expect to continue that we're going to fund with new deposits and a lot of those new deposits are coming out of our wealth space and to gain some of those new deposit.

Balances from our wealth customers, we're having to pay no more towards the market index type right I mean, some of those rates or 175 in the Bob.

And so when you think about that level of deposit growth relative to the.

Composite.

1.17% interest bearing deposit costs than you see the that if you could actually average it up a little bit.

Depending on the size of the wealth deposits that we bring in.

So it yes, that's the wildcard yeah okay.

And then the balance sheet migrations, we saw some really strong deposit growth this quarter and as you noted that you saw some.

Flat ended period loan growth because the pay downs does that imply that the pay downs you receive from on the loan side, what those surprising to you with a just earlier any kind of commentary you can talk around that the pay downs in threeq.

It really wasn't that surprising and there was a few categories that we have kind of migrated away from we saw a little bit of that go away, we actually had a small loan sale.

Before the end of the quarter less than 100 million, but it was there.

That impacted period end balances, but none of that activity really.

You know.

I think the growth that Stacy talked about in terms of mid single digit I think we still feel confident with that despite the fact that we saw some some quarter and pay down.

Okay. Thank you.

Thank you. Our next question is coming from Jared Shaw of Wells Fargo. Please go ahead.

Hi, good morning.

I just wanted to I guess stay on the deposit question, our conversation a little bit more so.

Yes, I understand that maybe look at overall cost of deposits are of interest bearing deposits going higher because of that mix shifts, but as we look at the.

Categories within deposits or the cost of those categories should we expect to see fourth quarter.

Maybe a decline in those incremental categories. So you know you look at transaction costs.

Went up you look at time deposit costs. They went up you might look at savings. They went up this quarter should we start to see some incremental decline there, but the overall costs being more impacted by the mix.

I think you should see some deposit cost decline in some of those categories I think what I'm trying to emphasize here as the new deposits that we pull in or more market rate type deposits and so yeah. The core deposits in consumer other core deposits in our commercial categories even.

That's in our wealth size, we think will contain some of that will come down is the new deposits were bringing on at much higher rates.

That fit into that composite rate and that's what you know really trying to figure out is that going to increase in the fourth quarter is it stays stable or is it slightly decline my feeling as if we find the loan growth we expect in the fourth quarter with for these market type rates and well you can see.

Deposit costs actually flat or slightly go up.

So keep in looking at that mining at 117 costs being flat or slightly up okay.

It could happen.

You also give some seasonality with deposits in the fourth quarter as well.

Right.

Okay, and then on that on the DTA side I guess he has really as you look over the last four quarters. The average deviate balances have.

Trickled down where do you I guess see that boarding bottoming out and you know when could we potentially see so growth in average CDIY.

We saw some growth point to point in D.A., the averages down a little over 100 million, but the point to point growth was there and so I I feel like as rates continue to go down a little bit our expectation for that that you see some stabilization of D.A. balances.

Okay, and then I guess finally from me just on the on the provision side you know the 12 million provision this quarter.

You said is tied to the loan growth. So if we see.

Similar average loan growth for fourth quarter, then yeah, we should we expect that the DTA I'm, sorry, the provision say and that.

Well then dollar inch.

Well I think the first thing I'll point out that we did in the third quarter. If we wanted to cover the charge offs. So charge offs were a little bit higher although gross charge offs in the third quarter actually a little bit lower than gross charge offs in the second quarter, but we had less recoveries, but the overall net charge offs for the third quarter were 10.6 million I believe.

And we wanted to cover that with our provision and then we covered a little bit extra for the loan growth that we're talking about so.

Depending on what happens with net charge offs in the fourth quarter.

And depending on what happens to growth I feel like there will be more influence on the provision related to growth as opposed to any expected deterioration in credit quality.

Okay, great thanks for that color.

Thank you. Our next question is coming from Gary Tenner of D.A. Davidson. Please go ahead.

Thanks, Good morning.

Had a question on in terms of the balance sheet. Stephen if we assume that this scenario that you laid out of one more cutting the fourth quarter and flat rates next year plays out how do you think about adding additional leveraged balance sheet in the fourth quarter to kind of support the fourth quarter potential margin pressure and support and <unk> or and then next year.

In a flurry environment.

How does that she I really think we don't have any additional plans to add fixed income securities above what we already added.

I know the average was up 1.3 million, we've actually added the last couple of quarters 1.9 billion. So when you look at the period and balance sheet.

In the press release, you see available for sale balance of that 11 billion I don't really see much change to that to answer your question, we're not going to add to that position.

But I don't think we would take away either.

Certainly wouldn't during the fourth quarter.

Okay. Thanks, and then just to clarify on your Cecil slide.

Is that.

Just oh I'm sorry, so is that that's 50 to 75 is the delta today Triple L. that you'd expect on day one.

There'll be a component of that the we actually will pick up in another liability reserve, but that 50 to 75 million represents about 25% to 35%.

In increase in the overall Cecil implementation.

Of which I believe the originated loans and kind of unfunded legacy loans will be okay. AFE is about 10% to 20% of that.

And then about 10% relates to our acquired loans in another 5% to cover the the V.A. and other items. So that's the way we kind of view it.

But there will be that will show up in a couple of different categories on the on the balance sheet.

Okay got it thank you.

Thank you. Our next question is coming from John That's true of RBC capital markets. Please go ahead.

Thanks, Good morning, Hey, John warning.

Couple of lending questions I want to ask about mortgage as well, but still see the public finance pay downs their expected but.

You still have close to 750 million imbalances. There just curious what the longer term a plan is an trajectory is.

Yes, the margins in that business kind of ebb and flow over time, and you know we kind of evaluated it with our other lending segments and as the margins become favorable and we can get a favorable return on equity then we get more aggressive in that space, but when the return on equity for that segment moves below our hurdle rate. Then then it's harder for us to originate and be competitive there.

In today's environment. The return on equity in that segment is lower and so it's not a current business development focus and a large way okay. So you're not saying the 750 million is.

Really running down it's just more of a conscious decision on your part.

Thats, a good really around new origination around around the returns on equity in that business not not.

We're not making a commentary on the asset class at all from a credit perspective, it performed extremely well, it's really just the margins in the business ebb and flow and impact the return on equity and that's kind of how we.

Decide to move and I move out of a spaces as our internal capital allocation.

On C or you use the term high grading the portfolio.

Can you maybe give us an example of that help us understand. It then is it are you expecting just churn in the portfolio as you high graded or or actual growth.

I I expect modest growth in theory, if we look forward I think that that we we feel very good about what we've done there that doesn't mean that if there is a recession in there I was going to some things that come out of that that we look at and and say yeah. I wish that have done that differently series. The most pro cyclical segment, which is why we keep.

Such a discipline concentration around that and there are things that can come out in a recession that that maybe isn't what you anticipate that but in the last 45 days, we've had a very a thorough review inside that portfolio between the business line and our credit partners to look at loans that are performing as agreed that are doing very well.

But that maybe there is something that's changed about our view of that segment, our that geography or something like that that's different than what the way we looked at it when we originated it in some cases, two or three years ago, and there's a modest amount of a bad that we'll look at and say you know when when there's an exit opportunity will will do.

Something different there but.

A lot of what came out of that was we still feel extremely good about the underwriting them happen there and how it's performing and how we look at it. So I still see if we look forward I don't see kind of that I don't see us treading water in real estate I don't see double digit loan growth, but I see kind of low mid single digit kind of growth as we look forward there.

Okay. Good.

And then on more get back on mortgage.

Help us understand what's different in mortgage to where you were a year ago.

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Mortgage loans funded for sales, obviously up a lot and I know some of that is is refinance.

Mortgage production volume is also up a lot and it seems to me you're saying that.

You might expect a bit of a drop off in Q4, but in terms of just your ability to generate production.

What's different than than maybe where you were a year ago.

John This is Steve I'd, we've actually made.

Pretty fundamental changes in that business really over the last 18 months, we exited the correspondent business, that's probably being actually closer to two years ago. And then we also made the decision to largely exit our consumer direct channel, which was really in the lead purchase business and.

Focus the core of that group on.

Retention of our existing mortgage servicing portfolio working leads coming out of our branches that kind of thing.

Our timing to then really fortuitous of that because as we've seen the rifai business kind of come Roaring back with these rate declines we've had the ability.

To process that business in a really effective ways, our margins are up in that business.

Our focus is really squarely on the relationship side in footprint.

Opportunities there and we have reduced.

A pretty significant amount of operating expense out of that unit that was supporting those two areas that we've in essence exited so the profitability driver for that business is probably never been better for us than where we sit today were.

Being cautious about our expense management, there, we're using pricing really to manage our capacity as opposed to adding a significant amount of incremental expense.

We want to see a little bit more durability.

The origination business purchase market business as opposed to kind of this re rifai.

Many boom that we're kind of in today, but that's really what's fundamentally changed about the way that we're managing that business and we think its.

It's absolutely essential to the core way, we think about relationships across the footprint and.

Thats been beneficial for us or timing.

As been really good we can't take credit for that necessarily.

But but managing down into our that core and ahead of a refinance and an increase in the purchase market has been really advantageous for us. So we're pleased where we are with mortgage today, Okay and Steven for you just on the follow up there it looks like you're entering the quarter with some.

Pretty large commitment volumes and I guess, you're expressing some cautiousness, but at this point, you're not necessarily seeing any taper off and volumes is that fair.

On a mortgage commitments yeah.

Yeah, No I think we've got a good pipeline there just these for one I just wanted to.

Point out that there is some seasonality to this business that you generally see in the fourth quarter despite rates.

Favorable rate environment.

Talking through that a little bit no.

Alright, and then just one more Steven for you in terms of let's say, we get a rate next week, how how long do you think it takes for cut to be fully reflected.

And your balance sheet and the NIM I know you have a lot of wholesale funding and variable rate loans, but you know is it because of the quarter is a two quarters. What do you think that's it's really a quarter I mean, it when you think about the 70 thoughts into your loans are variable and most of them are tied to LIBOR, that's pretty immediate or within 30 days or so.

And then you know your wholesale funding moves I mean at most that's overnight move pretty quickly.

And then.

Of course, the lag is on the deposit side.

It takes it takes 60 to 90 days for that to the kind of flow through.

Okay, Alright, thanks, guys.

Thank you. Thank you.

Thank you at this time I would like to turn the floor back over to management for any additional or closing comments.

Okay. Thanks again, everyone for joining us a if you have any further questions. Please call me at 9.859, 530, 30, or you can email it IR at be okay, Yeah dotcom upgrade that.

Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect. Your lines at this time and have a wonderful day.