Q3 2021 Bank Ozk Earnings Call
Thank you for standing by and welcome to the Bank E. K third quarter 2021 earnings Conference call. At this time all participants are in.
In listen only mode. After the speaker's presentation, there will be a question and answer session to ask a question. During this session you will need to press star one on your telephone as a reminder, today's program is being recorded I would now like to introduce your host for today's program, Tim Hicks Chief credit and administrative officer. Please go ahead Sir.
Good morning, I'm, Tim Hicks, Chief credit and administrative officer for Banco Z K. Thank you for joining our call. This morning and participating in our question and answer session. In today's Q&A session. We may focus on forward looking statements about our expectations estimates and outlook for the future. Please refer to our earnings release management comp.
As in other public filings for more information on the various factors and risks that may cause actual results or outcomes to vary from those projected in or implied by such forward looking statements.
Joining me on the call to take your questions are George Gleason, Chairman and CEO, Brian <unk>, and Hamlin President, Greg Mckinney, Chief Financial Officer.
Comment and Cindy Wolfe Chief Banking officer.
We will now open up the lines for your questions. Let me ask our operator, Jonathan to remind our listeners how to queue in for questions.
Certainly once again, if you have a question. Please press Star then one if you wish you remove yourself from the queue. Please press the pound key our first question comes from the line of Kansas from Morgan.
Officer Stanley Your question please.
Alright, great. Thanks, good morning, everyone.
Starting off in terms of interest bearing deposit costs, you guys have done a great job of.
Bringing those down over time I was just kind of curious what the pace is further.
Interest bearing deposit cost reductions.
So if you're getting or 13 basis points and fourth quarter, I mean is that even possible.
Thanks.
Ken I think the.
The pace of that is going to slow obviously, we've had some really good.
Improvements in it we do have.
From here is as outlined in our document we've got several more quarters.
<unk>.
Reasonable volumes.
Somewhat higher rates, but.
The.
Big gains have been gotten there I think there are more gains to come.
Okay.
Probably the more important.
Aspect of that whole story is the work that.
Cindy and Carmen Maclennan audit currently and the other people on our retail and deposit teams are doing.
Really.
Working.
Tom.
Non interest bearing longer term core counts.
The benefit of that should be seen when we get in a rising rate environment.
Our deposit betas.
Should if we execute their strategies as well.
To grow <unk> less.
<unk>.
In a rising rate environment than we experienced in the last rising rate environment. So we're working hard in the short run to get further improvement in the.
The long run too.
Improve the quality of that deposit.
So much so it just performs better in the next cycle. So.
That I think is our view on it at least.
Okay. No. That's helpful. Thank you and then just as a follow up question.
A provision expense a lot of banks that reported this quarter definitely made a lot of <unk>.
Yes.
But by closer to their seasonal day, one ACL ratios.
I know you guys seem to be slowing the pace of reserve release at least this particular quarter are you seeing anything in the portfolio that would justify a sustainably higher reserve ratio than your Cecil day, one reserves on a go forward basis.
Yes.
No.
<unk> not seen anything and I'll let.
Tim and Brian and also comment on that but our point of view on this is is conservative.
There is there is a lot of uncertainty in the economy. There is a lot.
We are getting concerned.
Fiscal policy monetary policy landscape and supply chain issues and.
There are so many chefs in the kitchen in Washington trying to.
Create policy.
A lot of change in social structures in our country and so forth.
The risk of unintended consequences from Washington is always a factor that you have to keep in your mind. When you got as many people trying to do as much as.
Is trying to be done in Washington now.
Try many different directions.
Creates a lot of risk for unintended consequences for example, the big push for an infrastructure program well you you look at.
The.
Supply chain disruptions and material in the.
LIBOR market.
From his disruptions and labor availability, and we see that having incremental cost increases in all of our projects and yet there is a massive push for a big infrastructure program.
Washington that can't do anything except <unk>.
Aggravate that.
Market already challenging situations. So we're just want to say some of these cards play out in <unk>.
We're going to take a fairly conservative view.
Future economic conditions until we see more things.
Develop that give us greater.
Confidence that.
Some unintended consequences don't tip is back in an adverse direction on the economy.
Alright understood. Thank you very much.
Thank you. Our next question comes from the line of Brock Vandervliet from UBS.
<unk> please.
Brock you might have your phone on mute.
That's right I do hey, good morning.
Good morning.
Just following on Ken's question on that on the deposits, particularly time.
I can appreciate it if you don't want to.
Sure the goal with this but.
One I guess do you have a goal for the percentage of of time deposits. Even if it's an internal one that you think you can get to looking at that category, you've dropped $3 billion or so.
Your question.
Yes.
A nice remix Im wondering where are you where you think that could that could go if you have any insight.
Brock we don't have a specific goal on that.
Our goal is to just do everything that we realistically and reasonably can.
<unk> two.
Continuously rig mix and improved the mix of that now.
Obviously.
Part of our ability to remix that lower than that.
Price Cds at a lower rate and let a lot of those.
Cds run off.
Particularly the higher cost or brokered or our public funds say days.
It is a product of the fact that we've had a lot of loan repayments.
Little or no or even somewhat negative loan growth in recent quarters.
So as we.
Get into much more.
Positive growth environment, which we hope today.
And I think is a reasonable thing to do.
We'll probably.
Need to augment our growth in core counts with some growth in <unk>. So I don't think it's.
Get constant downward trajectory on the.
CD book, but we hope that at the same time that we're achieving good balance sheet growth and needing to add some Cds were also adding a lot of core deposit R. R.
Our mixing that.
Why that is.
Keeping our deposit betas that are relatively tolerable level, when we get in a rising rate environment, assuming we do get in a rising rate environment. So.
We're working hard on it every day, but we don't have a specific mix than we realized.
Favorable book will probably grow.
So to some degree when we get in an environment, where we're getting a lot of loan growth, which we hope will occur.
And just as a.
A follow up on the.
You've done a lot in terms of.
Focusing the branches on gathering core deposits is that.
Template fully in place at this point.
It's now just about execution or are there more more changes pending there.
Well.
I'll, let Cindy Wolfe.
That question, if you don't mind Sandy.
Sure I'm happy to do that thank you for the question.
<unk> is in place broadly so now we're in a refinement mode of.
The biggest pieces of the playbook are in place and we're seeing some nice.
From that in the mix as George said, we don't have a goal and of course the story.
It tends to be the Cds right now but.
Yeah.
The things we put in place in the retail bank are arent quick fixes are short term things that are really foundational things.
All to position us for the long term. So we'll continue to refine those but the biggest pieces of that are in place, including a lot of the.
We've recruited.
We're happy for the early signs of success of that and then in the mix and.
The effect, it's having on <unk>.
Not only the mix that the service charges and we just expect that trend to continue.
Great I appreciate the color. Thank you.
Thank you. Our next question comes from the line of Tim more Brazilian from Wells Fargo. Your question. Please.
Hi, good morning, Thanks for the question.
Maybe starting on our ESG.
He says pay.
Pay down activity.
And to date, a little bit in the third quarter.
Order there.
There was a comment in the management of leather that some of that was pushed out into the fourth quarter. I guess can you quantify how much of that was pushed out in the fourth quarter and I know youre still expecting payoff activity to the top.
2019 levels.
But if it if it were to match.
It would still be up linked quarter reduction in the fourth quarter. So can you maybe quantify.
How much you expect payoff activity to top 2019.
Further into the year.
Well I'm going to let brannon Hamblen tag.
Take that question, but I will.
Tell you we're not.
Not going to be able to give you a tam an exact number because these are.
Big Chunky loans on our ESG portfolio, and they're moving around a month or two is nothing unusual and it does make it hard to.
Precisely predict as a pay off going to occur.
December or is that a January or February pay off and so there is a lot of movement, but.
Tim.
Brandon can give you some good color on.
All of that so Brandon.
Sure sure Tim Thanks for the question and good morning.
George's answer is accurate.
As we've said, we've got it from quarter to quarter.
As George said, the loans are quite chunky and.
The market is pretty active right now.
That's.
Good news for our origination side, but.
There are a lot of people trying to.
A lot of transactions closed.
<unk>.
And I guess, a quieter year in 2020, and so it's not going to be unusual for <unk>.
Loans to move in.
I could even if I told you what I thought in Q4 because of the size of some of the loans that are paying off.
It really can matter.
Around what the final result is so it's.
I've said this before and we're just wish points you again to our.
Sure.
Sort of vintage chart.
Points to the origination trends and those are going to guide you pretty well on repayment.
Trends and as we move into <unk>.
2018 19 vintage.
Loans are going to be coming to us and as we've guided.
That's that's that's going to affect our Q4 numbers in 2021 is going to be.
I believe a.
A record year I don't think we will have that much push that we don't achieve that but.
At any rate Theres nothing unusual around that pushing its just timing of a lot of transactions in the marketplace trying to get get accomplished.
Okay, I appreciate that color and maybe on the other side of the equation on the production side.
I'm just wondering was there any pull forward.
On that production.
Any thought was going to close in the fourth quarter. They got pulled into the third quarter and then turning to your comments that the market is active right now is that kind of a reasonable production rate here at least for the near term kind of $2 billion plus.
Yeah.
I alluded to the fact that the <unk>.
Transaction volume out there is affecting both the repayment and the origination timing our guys have done a phenomenal job.
In this market really.
Getting new business with new customers.
Expanding product types.
No.
That we really like in markets that we really like and.
We've got a healthy portfolio.
I think you asked if anything pulled forward from Q4 into Q3 I don't.
I don't see a lot of that happening.
It's generally taking.
King.
Longer to close transactions in and Thats affected pay off and it's affecting originations and we've got we've got a healthy pipeline.
I would tell you that.
Bye.
Won't predict too far in the future, but I think we've got a very good shot to meet or beat.
What.
What we did in originations.
In Q3, so looking forward.
We're we're we're seeing good volume good loans that fit our criteria. So that's the.
The guidance I would give you there.
Okay. Thank you.
Then maybe one more if.
If I can just looking at the Securities book this quarter.
And then pairing that with.
The comments on adding a veteran investment portfolio officer.
So your bench.
What is the outlook for securities and is that indicative of maybe getting back.
Kind of some of the lost balances from the third quarter and the fourth quarter, especially when it's coming up a little bit I guess, how should we think can be thinking about the bond book and where you'd like to see that as a portion of total assets.
It's a great question, Tim and I will take that.
We had almost.
Most no purchases I think $150 million purchase in the bond book in the quarter just ended that that number might not be exactly right, but it was very minimal purchases in the quarter and of course.
Portfolio is short and even the mortgage backs.
And at a pretty short duration with a lot of cash flow. So.
The bond book did shrink in the quarter and that was fine with us given the.
Less than compelling reinvestment opportunities certainly you've seen a little bit of lift in.
Sure.
<unk>.
Rates more recently.
Which is getting us closer to an area, where we could do.
Some reinvestment.
We are very pleased to have added another veteran team member to our investment team.
In the quarter.
This guy has a lot of experience I've done business with in known him for 30 years probably.
So I think that gives us some more horsepower to get into some niches of investment where we can.
Unlock some real value that.
It requires.
Or more.
Research and understanding and so forth to appreciate the value and the <unk>.
Quality of some.
Some investments so.
We'll we'll see that portfolio shrink our increase depending on what market conditions are forward, but.
It does seem like we are getting toward a situation with our new team member more likely to see some growth in that portfolio.
If not in Q4, then maybe Q1 and Q2 of next year.
Then more more new purchases.
I am more pause.
Positive trend than we saw in the last quarter.
Got it thank you.
Thank you. Our next question comes from the line of Michael Rose from Raymond James Your question. Please.
Hey, good morning, Thanks for taking my questions just wanted to touch on expenses and they are up a little bit you cited.
Wage inflation and obviously you're hiring in some areas as we think about next year can you just frame kind of the investment.
Options that are out there both in terms of talent than anything else and if you could take a stab at what expense growth would look like given some of those initiatives that'd be great. Thanks.
Greg you want to take that.
Yeah, I can Georgia, then surely add color.
Michael.
We have.
We completed our annual process of going through the entire composition of our personnel.
Yes.
We've evaluated the.
What we need to be effective for our business, what do we need to support growth to support our operations to provide the service we need to provide to our customers.
Clearly the the nationwide worker shortage is having significant impacts on pretty much every company across the country.
Included.
We do expect there to be.
You have to see some some increases in our salary and benefits line items as we move into 2022.
We've commented that our.
But we think that our run rate for the for the third quarter is somewhat indicative of what we would.
Expect.
In the future quarters, right at or maybe slightly above the $110 million. So.
Think thats a pretty good baseline as we think about.
The.
Our thoughts as we move into 'twenty two.
We are as everybody.
He is trying to feel certain positions that.
That we'd need to make sure that we can effectively serve our customers and.
Run our business the timing of our ability to fill those positions and you may have some impact.
Own salary cost and when that salary cost makes its way into the P&L.
But I think that our run rate in Q3 is a fairly indicative run rate of what we would expect as we move into at least the first part of next year.
Including even the fourth quarter of this year so.
I think I think I would look at that and then.
Certainly.
<unk>, you've got to keep in mind.
Just the net the worker shortage and how that might impact in our ability to hire and replace.
As we have those needs.
And Michael I'll give a little more color on that greg's spot on.
But I'll give you a little detail we started on July 19th with our annual salary budget process and just completed it earlier this week so.
I have personally with the various department heads and all the way down to individual.
Team members supervisors been through every employee in the company.
And that process setting their pay rates for the next year.
In light of the worker shortage situation.
Units, we reviewed in our last.
A couple of weeks of July.
A lot of those rights as most of those rates were effective in early August the units. We reviewed in August most of those wages were effective in September what we reviewed in September.
Were predominantly effective 10, one and what we finished up now.
<unk> is going to be 10 or 11, 1%.
One one and our other early next year raises so.
We accelerated the review process by about 90 days this year.
Two.
Yeah.
Respond to LIBOR market.
Shortages and conditions.
Wage escalation there.
We made those raises in many cases effective sooner than we would have previously.
So you see some of those wage increases in Q3, you'll see a chunk of them in Q4 and of course.
As our management comments document.
Mentioned, we had in our noninterest expense line item, we had a couple of million dollars branch closing costs in Q3 and about $800000 cost related to.
Early redemption of the.
The higher interest rate subordinated.
Note that we paid off on July one so that created close to $3 million of <unk>.
Noninterest expense so it was sort of.
Atypical items in.
In Q3.
That plus the salaries that were already recognized in the last quarter, probably give us the room that we need to or close to it.
To absorb the wage increases that we're going to see in Q4 and fill.
Filling unfilled positions and so forth there is a little bit of plus and minus and all of that but.
Greg said in his comments and he drafted this.
Language in our management comments that says that that $110 million sort of noninterest expense looks like a good run rate for.
The next quarter or two.
Again, there's a lot of weight.
Wage pressure out there and we're trying to hire.
Quite a few people so the impacts that wage pressure and the timing of those hires could have a little impact on that but.
The 110.
Timber sales.
<unk> block a pretty good starting point for Q4.
That's very helpful guys and just as a follow up it looks like you used a little more than 12% of the buyback George.
Stock still here at about one five of tangible just help us frame how.
How we should.
You'd think about utilizing that as we move forward just given it appears loan growth is picking up.
Just how we should think about it thanks.
Well I'll offer one comment on that and then I'll turn it over to Tim who is really managing that program for us.
My comment.
And is it the first buyback we've ever done and when it was approved.
Last quarter, we we took a fairly conservative approach to it since it was our first time out with added slide driving a new car you don't want to see how fast. It will go to you I'm sure you know what it is that's kind of stair an.
Operate so Tim you can give our thoughts about where that goes.
Sure.
Yes, Thanks, Michael.
Yes, we do expect to be more active this quarter, it's going to be dependent on.
Our stock price as we go throughout the quarter clearly.
But we will have it outstanding for the.
Quarter as opposed to just part of the quarter.
The last quarter and to Georges point, we were.
Making sure that.
We were aware of all the parameters in.
And how it would operate as well so.
Hard to predict a number and give you a number.
What we'll do in Q4, because it's going to be dependent on on our stock price reacts as we go throughout the quarter.
But but do plan to be to be active.
Okay. Thanks for taking my questions.
Thank you.
Thank you. Our next question comes from the line of Catherine.
Mueller from <unk> Your question please.
Thanks. Good morning, just wanted to follow up on a question about the origination volume, which.
Really encouraging level and looks like we'll see the same level or something close to that next quarter.
As we think about the timing for those originations funding.
Is there.
How should I think about some of the headwinds within the environment.
Today with an adequate liquidity, that's in the environment and the supply chain.
And you mentioned that it is kind of taking time to close loans.
Is in this new environment is this is the timing from origination to funding.
Maybe a wider gap than it has done in the past and how should we think about kind of what that timeframe looks like thanks.
Catherine This is Brandon and thank you for the question. Good question relevant question.
I'd tell you that that on the whole as we sit here today.
We're.
Not seeing a material impact there.
There are a lot of things that impact the timing of funding on our loans.
A lot of it depends on.
The project is when we close whether there is an initial funding that may be.
Material.
Against a very conservative land loan to value.
And how many of those loans we do.
Some markets tend to see more of those than others.
And product mix as well I would say that.
A lot.
A lot of the delay in closing some of the loans today is.
A real sharpening of the pencil as it relates to project cost tying down contracts.
There are a lot of different.
Sources of equity in the market today that.
Yeah.
Our.
And especially on some of the larger loans.
When you have.
More.
Players in the equity stack.
They are really wanting to make sure those numbers are tightened down given the degree to which they have moved over the last 12 to 20.
Four months.
So thats playing into some of the timing around slower closing, but also gives you more certainty around you've got contracts locked in and.
And don't have delays there in the future now doesn't answer the supply chain issue quite quite fully.
And.
And Thats one that.
As we stand here today has not yet had a material effect, but as George noted.
I noted earlier in the call there are a lot of things that are.
Being discussed and that could have further impact on that and it's one of those things were.
We're watching too to understand but.
I know your question is predominantly about timing of funding. We also want to make sure that we've got great reserves and all those sorts of things and contingencies, which we have always and always will work hard to do in our loans. So.
I guess the bottom line is hard to say at this point in time, if it has a material impact havent seen it so much yet post closing, but we're watching it.
Yes.
Thank you Brandon.
Brandon It's Scott.
Delays that we've seen.
So far on new loans are mostly freight cost the same and not post closing because.
People are working really hard to tie down those costs before they close because I've experienced a lot of variability in house and in the last year or two so.
It's making it harder to get things closed.
Closed once you get them closed by Dave already seem to have done the work too.
Keep the things on track and as Brandon said, unless you're just totally unexpected supply chain disruptions.
Okay. Okay understood. Thank you so much.
Thank you. Our next question comes from the line of Matt Olney from Stephens. Your question. Please.
Thanks, Good morning.
Wanted to ask more about loan yields I think last quarter, we talked about higher levels of miscellaneous fees even outside of <unk>.
PPP by way of extension fees amendment or fees that were heavy.
Heavier than normal.
I'm curious what these levels were in the third quarter versus more normalized levels.
Yes.
When you have something that bounces around all over the place Matt its hard to describe what normal is but.
I would tell you that the degree of unusual fee.
Apart from pay they pay that we specifically carve out disclosure on NR.
And our management comments, the other prepayment penalties minimum interest.
Short term extension phase in Q3.
Or.
More typical.
All of what we would think of as a normal level than the <unk>.
More elevated levels of phase in.
In Q1 and Q2.
So.
That number will bounce around.
There was not any sort of.
Particularly.
Elevated level that you need to account for other than the PPP impact.
Contributed about I think six basis points, both in the quarter and for the first nine months of the year or two our net interest or our loan yield.
Yeah.
Okay great.
That's helpful.
And then also wanted to ask about.
Interest rates and the bank's sensitivity to rates I think the market is now assuming fed tightening sometime in kind of late next year.
Thank you guys provide some great disclosures around loan floors, and it looks like the level of loan floors.
It's moderating.
What else should we be anticipating over the next year.
<unk> prepared the bank for higher interest rates.
Well, where we look at that all the time and we are.
The more the portfolio seasons at the current.
Interest rate levels.
Less those floors impede our ability to raise rates loans that were originated three years ago in a higher rate environment to have higher floors enhance.
Writes after rise more before.
For those loans get a hit the floor and get off the floor and the actual write on the alone.
Keeps increasing but I appreciate the fact that <unk> been paying attention to our graphs, there and if noted that.
Percentage of loans that don't adjust until we get up to.
Higher.
Right levels has been steadily trending down and as all of our loans pay off and newer loans replace them. The floors on those newer loans are much closer to the current contractual rights, which means those newer loans will adjust more quickly as rates rise so every quarter.
We stay here it makes us more rate sensitive.
In an upright environment, so we're working hard too.
Kill off what we call the dead zone alone the difference between where the.
The.
Formula right, ignoring the floor with day to day and the.
The actual rate on the loan to the floor that difference we call the dead zone because.
The rate is dead in bed and adjust until you hit that floor. So we're working hard continuously to reduce and kill off the dead zone in loans.
Mature without giving up yield.
Yes.
Every quarter through a combination of.
Renewals.
And.
Payoffs that situation gets gets more favorable so.
We think it's wise to be preparing for.
A rising rate environment, particularly.
Yield over the level of.
Deficits.
The fact that a tight rein of monetary stimulus is likely to be necessary or occur at some point in the future. So.
We're working hard to be prepared for that and it's not just.
Sure.
Preparing.
Particularly the loan side, but it's also.
Sandy talked about earlier really them.
The quality of that deposit base.
Beginning to extend a little bit of duration into.
Deposit base as well on the CD side, So we're nibbling away.
Bearing all of those initiatives to try to improve that.
Mix in a rising rate environment.
Okay.
Thank you.
Thank you.
Thank you. Our next question comes from the line of Stephen Scouten from Piper Sandler Your question. Please.
Yeah.
Hey, thanks for.
For taking the call.
I wanted to circle back around and maybe this is more of a brand question or George your comments as well would be nice, but on the <unk> kind of the product mix and what you guys are seeing on new projects can you give some color about where what types of projects. Those are coming from is it more condo office is it mixed.
And are there any types of projects that youre more wary about I know some banks have been hesitant on office, but it looks like you guys did a couple of those projects here this quarter and new originations. So just some color there on mix would be great.
Brandon go ahead.
Sure Stephen Thanks for the question I sure can give you some color so in Q3.
Next.
We continued a lot of originations in multifamily that was probably at the top of the list, but as we had been telling you we're seeing more and more of.
Of the mixed use projects come to market in.
We had.
Strong strong.
Pipeline there.
Not as many loans, but by dollar volume more than multifamily and then Hugh.
You noted office that was that was also a big big part of it those were the three sort of largest components.
From a market perspective.
Hi.
Again, great diversity.
Lot of what you would expect in the south southeast.
But also activity in the northeast Midwest and West So the guys really across the platform.
Finding good opportunities in terms of what we're wary of.
In this market we continue to just.
Make sure that.
We're finding the right sponsorship on the right deals in there.
Lot of deals out there coming to market that you got to pick between and make sure you're getting the stuff that fits.
Our box in the <unk>.
As I've said and done a phenomenal job of doing that and finding new great sponsors that we haven't done business with in getting that first.
Good along with them and some of those are already working on second one so.
By product type.
We are.
We're careful obviously hospitality as a product type two that everyone's watching carefully havent seen as much there, but I would expect that we will see some in that world again, it's it's not a program, it's where it is what it is and who needs it and who's building it in.
We're looking at it.
Okay, great that makes a lot of sense and then I guess, maybe an extension of that is a lot of this <unk>.
Projects that are getting picked back up that were maybe started pre pandemic are you seeing real.
New projects coming out of the ground and come in.
For them today, and becoming lendable opportunities today.
Well.
Yes and of course again.
These projects and some of them have size take a long time to put together and so our guys are you're asking about what's new with the fact of the matter is our guys have been.
Being frac in some of these things for.
For literally years, so its not so new to us, but things have come together such that it makes sense to.
Move forward and and then and then you have those that are more.
Geographic trends in migration.
Trends that we've seen this year.
Year, obviously, Texas has.
I will say a bit more space to build new apartments. On then perhaps Manhattan just by way of an extreme so there are definitely new projects that are responding to very current.
Demographic trends.
<unk> trends as well so you have a little bit.
Everything in the mix there.
Got it Okay and maybe just one last quick question from me is deposit service charges were really strong in the quarter and it's been trending that way for a while is that just indicative of the progress you guys have made with your deposit mix and account growth or is there anything.
Unusual to note there.
Cindy you want to take that.
There really isn't anything unusual it is indicative of the shift in the quality and quantity of.
Core although there is the usual movement in NSF and Eddie NSF fee.
The income is not a focus of ours in terms of.
Central.
Central to our strategy our service charges strategy that it does follow the.
Spending.
And so spending will go up and down with Covid and the variant and so we see some of that as part of the increase just full disclosure some of that is.
Simply a function of.
Yeah.
The movement in the economy, but that underneath that we do see fundamental changes to the good and the.
The sustainable growth of the real service charge income that were going for.
Great question.
Yes, that's fantastic thanks, guys and thanks for all the.
And congrats on a really great quarter.
Thank you.
Thank you. Our next question comes from the line of Brian Martin from Janney Montgomery. Your question. Please hey, good.
Morning.
Okay.
Just I guess, one one followup to the last question just on the new production, maybe more for Brannon, George but just the.
The color reduction can you break out how much of that I guess, if any it was really contributions from kind of the new initiatives you guys have have put in place from the new lending teams.
Talked about it's one on this quarter and the equipment finance, obviously in that part of it but the ABL and other ones.
Is that what kind of gives you confidence on this.
Sustainability.
Of this the production continuing.
Brian Let me, let me, let me respond to that and then I'll, let I'll, let brannon add some additional color but.
We've not seen any growth yet.
Out of either our ABL team or our new leasing.
Sure.
<unk>, which is <unk>.
Freshly freshly minted.
Those guys seem to be making good progress and they are looking at things and we.
Hope to have some <unk>.
Loadings and those units in Q4, or Q1 or hopefully both quarters, but.
That's not contributing yet.
Our indirect guys, which you didn't mention.
Continue to work with this new business model that environment has gotten.
Very competitive so it slowed our ramp up buyer.
That to a positive net.
Positive, we're still having net negative growth in that indirect portfolio, but.
I spent quite a bit of time on the phone with those guys.
Over the last week 10 days, and we're making a few tweaks and adjustments to their model.
Net.
We think we will.
We'll get their growth up next year, so we're expecting positive growth out of that.
And our community bank.
If you take out the net originations and net paydowns on PPP or community bank groups have been positive.
For the full.
Year to date nine months and the.
Quarter slightly now Theyre negative when you net out the.
Net effects of PPP paydowns, but those guys had gotten a little bit of positive.
Momentum in our corporate and business specialty group this last quarter got a little bit of positive momentum.
And our ESG is looking at some great pipelines, if we can.
Bringing all of those things to closing so.
We're we're feeling.
Reasonably positive.
About our ability to.
Contain.
Continue to generate loan growth across multiple fronts in 2022, now Q4 will be.
Paydown challenged quarter I believe.
But we're pretty optimistic about.
Our ability to put up some really decent.
Recent growth numbers in <unk>.
2022, so brand and add whatever you want to add to that.
Well I would just agree with it you hit all the basis I was just referring to our ESG before.
Brian.
The guys in these other groups are starting.
Starting to see some traction as George said.
I'm hopeful to to have an origination on the ABL side and in the.
The numbers from a Cvs G group, even included some reduction in the snake portfolio for the quarter. So.
Again, I think we've got some some good.
Good things coming next year.
No that's helpful and just last one or two follow ups, just maybe for Tim I don't know just given all the positivity on organic loan growth I mean, I guess I know M&A has been you've talked about it being a little bit more of a focus it seemed like maybe the last quarter a quarter ago, but just kind of where where things with dialog stands in.
On that front or how youre thinking about that today any changes.
No changes we are still very interested in doing M&A, it's hard to predict when we could do a deal certainly we're looking at those.
We're going to be very disciplined financially and want to make sure.
It is.
Hits hits, our financial hurdles.
And we're pretty conservative on those as well, but we're certainly very interested in looking and will continue to be active in looking at M&A opportunities. We do have robust capital levels. So we can do we can do organic growth, we can add business lines and we can do M&A.
So we're focused on all of those items.
Got you, Okay and the last one was just on the margin it sounded like last quarter. When we talked it was kind of peaking out and just wondering if there's any change in your outlook. There and then maybe just when you think kind of the non purchase loans may be able to stabilize I know.
Pressure that's out there.
About earlier.
Okay.
Yeah.
We're we're certainly having good results in improving our core spread I think for.
About five quarters in a row now in a couple of quarters of mass trends in our net interest margin.
You talked that we are originating.
The real story with you about this we're originating loans at rates that are <unk>.
Notably lower than a lot of the loans that are on the books and paying off today. So there is some.
Future downward pressure on loan yields buyer.
No.
We're going to mitigate as much of that as we can with continuing to improve those deposit cost although that gets harder as we get lower and lower deposit costs.
But.
Our investment book is a bit of a wildcard.
How that impacts all of that so there are a lot of moving pieces.
We probably are.
In the current environment.
At or near the.
Top we can get to on our NIM.
In our core spread.
Maybe we can bring in.
Bit more of improvement out of that in the short run but.
As the loans, we're originating today is stark funding next year, they'll blend our loan yields a bit lower.
As we go forward.
Gotcha Okay.
Card for all the color and taking the questions.
Thank you.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to George Gleason, Chairman and CEO for any further remarks.
<unk>. Thank you for your time and attention today, we appreciate you being on the call and we look.
Forward to being with you again about 90 days have a great quarter. Thank you.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.
Okay.
[music].
Thank you.
[music].
Yeah.
[music].
Thank you for standing by and welcome to the Bank <unk> E. K third quarter 2021 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During this session you will need to press star one on your telephone as a reminder, today's program is.
Supported I would now like to introduce your host for today's program, Tim Hicks, Chief credit and administrative officer. Please go ahead Sir.
Good morning, I'm, Tim Hicks, Chief credit and administrative officer for Banco Z K. Thank you for joining our call. This morning and participating in our question and answer session in today's Q&A.
Being <unk>, we may focus on forward looking statements about our expectations estimates and outlook for the future. Please refer to our earnings release management comments and other public filings for more information on the various factors and risks that may cause actual results or outcomes to vary from those projected in or implied by such forward looking statements.
And I said.
Joining me on the call to take your questions are George Gleason, Chairman and CEO, Brian <unk>, and Hamlin, President, Greg Mckinney, Chief Financial Officer, and Cindy Wolfe Chief Banking Officer.
We will now open up the lines for your questions. Let me ask our operator, Jonathan to remind our listeners how to queue in for questions.
Certainly one.
If you have a question. Please press Star then one and if you wish you remove yourself from the queue. Please press the pound key our first question comes from the line of Ken Zerbe from Morgan Stanley. Your question. Please.
Alright, great. Thanks, good morning, everyone.
Starting off in terms of interest bearing deposit costs, you guys have done a great job of.
Once again, bringing those down over time I was just kind of curious what the pace is further.
Interest bearing deposit cost reductions from here. So if you get another 13 basis points and fourth quarter. I mean is that is that even possible.
Thanks.
Hi, Ken Thanks.
Yeah.
<unk> of that is going to slow obviously, we've had some really good.
Improvements in it we do have.
As is outlined in our.
Document, we've got several more quarters.
<unk> that.
Reasonable volumes of those.
At somewhat higher rates, but.
The.
Big gains have been gotten there I think there are more gains to come.
Probably the more important.
Aspect of that whole story is the work that <unk>.
Sandy and Carmen Mclamb.
And then Avi currently and the other people on our retail and deposit teams are doing really well.
Working to grow.
Noninterest bearing longer term core counts.
<unk>.
The benefit of that should be.
When we get in a rising rate environment.
Our deposit betas.
Should if we execute their strategies well be much less.
In a rising rate environment than we experienced in the last rising rate environment. So we're working hard in the.
Plan on running to get further improvement in the.
The long run too.
Improve the quality of that deposit base. So it just performs better in the next cycle. So.
But that I think is our view on it at least.
Okay No that's helpful. Thank.
Sure just as a follow up question.
A provision expense a lot of banks that have reported this quarter definitely made a lot of <unk>.
So getting closer to their seasonal day, one ACL ratios.
I know you guys seem to be slowing the pace of reserve release at least this particular quarter are you seeing anything in the portfolio.
And then that.
That would justify a sustainably higher reserve ratio than your Cecil day, one reserves on a go forward basis.
No.
I'm not seeing anything in and I'll let.
Tim and Brian and also comment on that but.
Portfolio point of view on this is is conservative.
There was a lot of uncertainty in the economy. There is a lot of uncertainty.
Fiscal policy monetary policy landscape and supply chain issues and.
Yeah.
Our Permian <unk>.
In the kitchen in Washington trying to.
Create policy.
Change in social structures in our country and so forth.
The risk of unintended consequences from Washington is always a factor.
So you have to keep in your mind when you got as many people trying to do as much as.
Is trying to be done in Washington, now from as many different directions.
It just creates a lot of risk for unintended consequences for example, the big push for an infrastructure program.
Well you look at.
The.
Supply chain disruptions and material in the.
LIBOR market disruptions and labor availability, and we see that having incremental cost increases in all of our projects and yet there is a massive.
That for a big infrastructure program.
Washington that can't do anything except.
Aggravate that.
Already challenging situation. So we're just wanted to say some of these cards play out.
And we're going to take a fairly conservative.
Push view on future economic conditions until we see more things.
Develop that give us just greater confidence that.
Some unintended consequences don't tip is back in an adverse direction on the economy.
Understood. Thank you very much.
Thank you. Our next question comes from the line of Brock Vandervliet from UBS. Your question. Please.
Brock you might have your phone on mute.
That's right.
Alright, good morning.
Good morning.
Just following on Ken's question on that on the deposits, particularly time.
I can appreciate it if you don't want to share the goal with this but one I guess do you have a goal for the percentage of.
I do of time deposits, even if it's an internal one.
Thank you can get to looking at that category of dropped $3 billion or so.
A nice remix I'm wondering where are you where you think that could that could go if you have any insight.
Brock we don't.
Have a specific goal on that.
Our goal is to just do everything that we realistically unreasonably can too.
Continuously rig mix and improved the mix of that now.
Obviously.
Part of our ability to remix.
At lower than that.
Price Cds at a lower rate and let a lot of those.
Cds run off.
Particularly the higher cost or brokered or our public funds say days.
As a product of the fact that we've had a lot.
Spam repayments.
And little or no or even somewhat negative loan growth in recent quarters.
So as we get into much more.
Positive growth environment, which we hope today.
And I think is a reasonable thing to do.
Lot of lung will probably.
Need to augment our growth in core counts with some growth in <unk>. So I don't think it's.
A constant downward trajectory on the.
CD book, but we hope that at the same time that we're achieving good balance.
Growth in needing to add some Cds that were also adding a lot of core deposits that R. R.
Our mixing that in a favorable way that is.
Keeping our deposit betas that are relatively tolerable level, when we get in a rising rate environment, assuming we do get.
She has been right empowerment so.
We're working hard on it every day, but we don't have a specific mix when we realized the CD book will probably grow.
So to some degree when we get in an environment, where we're getting a lot of loan growth, which we hope will.
Yes.
It just is.
A follow up on the.
You've done a lot in terms of.
Refocusing the branches on gathering core deposits.
That template fully in place at this point and.
And it's now just about execution or are there.
Will occur more changes pending there.
Well.
I'll, let Cindy Wolfe take that question, if you don't mind Sandy.
Sure I'm happy to do that thank you for the question. The template is in place broadly. So now we're in a refinement mode of that the biggest.
There are more pieces of the playbook are in place and we're seeing some nice.
From that in the mix as George said, we don't have a goal and of course. The story is it tends to be the Cds right now but.
And the things we put in place in the retail bank are arent quick fixes are short term things that are really foundational things.
Yes, they're all to position us for the long term. So we'll continue to refine those but the biggest pieces that are in place, including a lot of the new talent that we've recruited.
We're happy for the early signs of success of that and then in the mix and.
And the effect, it's having on.
And not only the mix, but the service charges and we just expect that trend to continue.
Great I appreciate the color. Thank you.
Thank you. Our next question comes from the line of Tim more Brazilian from.
Wells Fargo. Your question please.
Hi, good morning, Thanks for the question.
Okay.
Maybe starting on our ESG.
Pay down activity.
<unk> data a little bit in the third quarter.
As a comment.
Management, whether that some of that was pushed out into the fourth quarter. I guess can you quantify how much of that was pushed out in the fourth.
Quarter, and I know youre still expecting payoff activity.
2019 levels.
If it were to imagine it would still be a linked quarter reduction in the fourth quarter. So can you maybe quantify how much you expect payoff activity to top 2019 model or a little bit further into.
Well I'm going to let brannon Hamlin.
That question, but I will tell.
Tell you, we're not going to be able to give you a tam an exact number because these are.
Big Chunky loans on our ESG portfolio.
Moving around a month or two is met.
Nothing unusual.
It does make it hard to.
Precisely predict as a payoff going to occur in December or January or February pay off for them. So there is a lot of movement, but.
Brandon can give you some good color on.
All of that.
So Brandon.
Sure sure Tim Thanks for the question and good morning.
George's answer is accurate.
As we've as we've got it from quarter to quarter.
As George said, the loans are quite chunky and.
The market is pretty active right now.
Now.
That's.
Good news for our origination side, but.
There are a lot of people trying to get a lot of transactions closed.
After.
And I guess, a quieter year in 2020, and so it's not going to be unusual for loans to move.
Move in.
I could even if I told you what I thought in Q4 because of the size of some of the loans that are paying off it really can matter.
Around what the final result is so it's.
I've said this before and we're just.
Points, you again too.
Our.
Sort of vintage chart.
That points to the origination trends and those are going to guide you pretty well on repayment trends and as we move into.
The 2018 19 vintage that those loans are going to be coming to us and as we've guided.
That's that's.
That's going to affect our.
Q4 numbers in 2021 is going to be.
I believe a record year I don't think we will have that much push that we don't achieve that but.
At any rate there is nothing unusual around that pushing its just timing of a lot of transactions in the marketplace trying to get.
Get accomplished.
Okay, I appreciate that color and maybe on the other side of the equation on the production side impressive quarter I'm. Just wondering was there any pull forward.
On that production anything that you thought was going to close in the fourth quarter that got pulled into the third quarter and then to your comments that the market is active right now is that kind of a reasonable.
Oil production rate here at least for the near term kind of $2 billion plus.
I alluded to the fact that the.
Heavy transaction volume out there is affecting both the repayment and the origination timing that our guys have done a phenomenal job.
In this market really.
<unk>.
Getting new business with new customers.
Expanding product type.
But we really like in markets that we really like and.
We've got a healthy portfolio.
I think you asked if anything pulled forward from Q4 into Q3.
I don't.
Don't see a lot of that happening.
It's generally taking.
Longer to close transactions.
And thats affected pay off and it's affecting originations and we've got a we've got a healthy pipeline I would tell you that.
Mark.
I wont predict too far in the future, but I think we've got a very good shot to meet or beat.
What we did in originations in Q3, so looking forward.
We're we're seeing good volume good loans that fit our criteria.
So.
That's.
The guidance I would give you there.
Okay. Thank you and then maybe one more if I can just looking at the Securities book This quarter and then pairing that with.
The comments on adding a veteran investment portfolio officer.
So your bench I guess what.
Is the outlook for securities and is that indicative of maybe getting back.
Kind of some of the lost balances from the third quarter and the fourth quarter, especially when it's coming up a little bit I guess, how should we think can be thinking about the bond book and where you'd like to see that as a portion of total assets.
That's a great question, Tim and I will take that.
<unk> had almost no purchases I think $150 million purchase in the bond book in the quarter just ended that.
That number might not be exactly right, but it was very minimal purchases.
So as in the quarter and of course the.
Portfolio is short and even the mortgage backs and it are pretty short duration with a lot of cash flow. So.
The bond book did shrink in the quarter and that was fine with us given the.
Less than compelling reinvestment opportunities.
<unk>, certainly <unk> seen a little bit of lift in.
Sure.
Rates more recently.
Which is getting us closer to an area, where we can do.
Some reinvestment.
We are very pleased to have added another veteran team member to.
Our investment team.
In the quarter.
This guy has a lot of experience I've done business with and known them for 30 years probably.
So I think that gives us some more horsepower to get into some niches of investment where.
Where we can.
Unlock some room by you that.
Requires a little more.
Research and understanding and so forth to appreciate the value and the quality of some.
Some investments so.
We'll we'll see that portfolio.
Shrink our increase depending on what market conditions are forward, but it does seem like we are getting toward I, such Washington, with our new team member more likely to see some growth in that portfolio.
Not in Q4, then maybe Q1 and Q2 of next year.
Then more more new purchases.
More positive trend than we saw in the last quarter.
Got it thank you.
Thank you. Our next question comes from the line of Michael Rose from Raymond James Your question. Please.
Hey, good morning.
Thanks for taking my questions just wanted to touch on expenses and Theyre up a little bit you sided wage inflation and obviously you're hiring in some areas as we think about next year can you just frame kind of the investment.
Options that are out there both in terms of talent.
Anything else and if you could take a stab at what expense growth.
It looked like given some of those initiatives that'd be great. Thanks.
Greg you want to take that.
Yes, I can George and then surely add color.
Michael.
We have.
We completed our annual process of going through the entire composition.
<unk> of our personnel.
Yes.
We've evaluated what we need to be effective for our business, what do we need to support growth to support our operations to provide the service we need to provide to our customers.
Clearly the the nationwide worker shortage is.
As having significant impacts on pretty much every company across the country us included.
We do expect there to be.
You have to see some some increases in our salary and benefits line items as we move into 2022.
We've commented that.
Yeah.
We think that our run rate for the for the third quarter is somewhat indicative of what we would expect.
In the future quarters, Youre right at or maybe slightly above the $110 million. So.
I think thats, a pretty good baseline as we think about.
The.
Our thoughts.
Into 'twenty two.
We are as everybody is trying to feel certain positions that.
We need to make sure that we can effectively serve our customers and.
Run our business the timing of our ability to fill those positions you may have some impact.
<unk> own salary cost and when that salary cost makes its way into the P&L, but.
I think that our run rate in Q3.
As a fairly indicative run rate of what we would expect as we move into at least the first part of next year.
<unk> even in the.
The fourth quarter of this year so.
I think I think I would look at that and then.
Certainly you've got to keep in mind.
Just the net the worker shortage and how that might impact in our ability to hire and replace.
As we have those needs.
And Michael I'll give a little more color on that.
Spot on.
But then I'll give you a little detail we started on July 19th with our annual salary budget process and just completed it earlier this week so.
I have personally.
The various department heads and all the way down to individual team member supervisors been through every employee in the company.
And that process setting their pay rates for the next year.
In light of the worker shortage situation.
With the units that we reviewed in our last.
Couple of weeks of July a lot of those rights as most of those rates were effective in early August.
Units, we reviewed in August most of those wages were effective in September what we reviewed in September or predominate.
The only effective 10 one.
What we finished up now is going to be 10 or 11 one.
One one and our other early next year rises so.
We accelerated the review process by about 90 days this year.
Dominic too.
Sure.
Respond to labor market shortages and conditions.
Wage escalation there.
We made those raises in many cases effective sooner than we would have previously.
So you see some of those.
Wage increases in Q3, you'll see a chunk of them in Q4 and of course.
As our management comments document.
Mentioned, we had in our <unk>.
Noninterest expense line item, we had a couple of million dollars branch closing costs in Q3 and about eight.
Those.
Costs related to.
Early redemption of higher interest rates subordinated.
Note that we paid off on July one so that created close to $3 million of.
Noninterest expense it was sort.
Sort of.
Pay typical items and.
In Q3, we think that plus the salaries.
We recognized in the last quarter, probably give us the room that we need to or close to it.
Hundreds to absorb the.
Wage increases that we're going to see in Q4, and filling unfilled positions and so forth there is a little bit of plus and minus and all of that but.
Greg said in his comments and he drafted this.
Language in our management comments that sense of that.
$210 million sort of noninterest expense looks like a good run rate for the next quarter or two.
Again, there's a lot of.
Wage pressure out there and we're trying to hire.
Quite a few people so the impacts that wage pressure.
The timing of those hires can have a little impact on that but.
The 110 number.
Seems like a pretty good starting point for Q4.
That's very helpful guys and just as a follow up it looks like you used a little more than 12% of the buyback George.
<unk> in Knoxville here at about one five of tangible just help us frame.
How we should think about utilizing that as we move forward just given it appears loan growth is picking up.
Just how we should think about it thanks.
Well I'll offer one comment on that and then I'll turn it over to.
Tam who is really managing that program for us.
My comment is it's the first buyback we've ever done and when it was approved.
Last quarter, we we took a fairly conservative approach to it since it was our first time out with added slide driving a new car you don't want.
See how fast it will go to you I'm sure you.
No what it kind of stair and operate so Tim you can give our thoughts about where that goes.
Yes, Thanks, Michael.
We do expect to be more active this quarter, it's going to be dependent on.
Our stock price.
Want to go throughout the quarter clearly.
But we will have it outstanding for the full quarter as opposed to just part of the quarter.
The last quarter and two to Georges point, we were.
Making sure that.
We were aware of all the parameters in.
As we operate as well so.
It's hard to predict a number and give you a number what we're what we'll do in Q4, because it's going to be dependent on on our stock price reacts as we go throughout the quarter.
But but do plan to be to be active.
Okay. Thanks for taking my questions.
Thank you.
Thank you. Our next question comes from the line of Catherine Mealor from <unk>. Your question. Please.
Thanks. Good morning, just wanted to follow up on a question about the origination volume, which you have.
Really encouraging level and looks like we will see the same level or something close to that next quarter.
As.
As we think about the timing for those origination funnel.
Is there.
Just think about some of the headwinds within that environment today with an adequate liquidity that's in the environment and the supply chain.
Ryan you mentioned that it is kind of taking it to close loans.
<unk> is in this.
Glioma is is the timing from origination to funding.
Maybe a wider gap than it has done in the past and how should we think about kind of what that timeframe looks like thanks.
Catherine This is Brandon and thank you for the question. Good question relevant question.
I would tell you that.
And then on the whole as we sit here today.
We're not seeing a material impact there.
There are a lot of things that impact the timing of funding on our loans.
And a lot of it depends on.
Where the project is when we close whether there.
An initial funding that may be.
Material against a very conservative.
Land loan to value.
And how many of those loans we do.
Some markets tend to see more of those than others.
And.
There is product mix as well I would say that.
A lot of the delay.
In closing some of the loans today is.
A real sharpening the pencil as it relates to project cost tying down contracts.
There are a lot of different.
Sources of equity in the market today that.
Our.
And especially on some of the larger loans.
When you have.
More.
Players in the equity stack.
We wanted to make sure those numbers are tightened.
And then the degree to which they have moved over the last 12 to 24 months.
So thats playing into some of the timing around slower closing, but also gives you more certainty around you've got contracts locked in and.
Don't have delays there in the future now doesn't answer the supply chain issue.
<unk>.
Quite fully.
And Thats one that.
As we stand here today has not yet had a material effect, but as George.
Note. It earlier in the call there are a lot of things that are.
Being discussed in.
You could have further impact on that and it's one of those things, where we're watching to understand but.
I know your question is predominantly about timing of funding. We also want to make sure that we've got.
Great reserves, and all those sorts of things and contingencies, which we have.
Noise will work hard to do in our loans so.
I guess the bottom line is hard to say at this point in time, if it has a material impact havent seen it so much yet post closing but were.
<unk>.
Okay.
Thank you.
<unk>.
The delays that we've seen.
So far on new loans are mostly freight cost of this thing and not post closing because.
People are working really hard to tie down those costs before they close because I've experienced a lot of variability in cost.
And the last.
Over a year or two so.
It's making it harder to get things closed once you get them closed by Dave already seem to have done the work too.
Keep the things on track and as Brandon said, unless you're just totally unexpected supply chain disruption.
Okay. Okay understood. Thank you so much.
Thank you. Our next question comes from the line of Matt Olney from Stephens. Your question. Please.
Thanks, Good morning.
Wanted to ask more about loan yields I think last quarter, we talked about higher levels of miscellaneous fees even outside of.
Last PPP by way of extension fees amendment or fees that were heavier than normal.
I am curious what these levels were in the third quarter.
Versus more normalized levels.
Yes.
You have something that bounces around all over the place Matt its hard to describe what normal is but.
I would tell you the degree of unusual fee.
Apart from pay they pay that we specifically carve out disclosure on NR.
And our management comments, the other prepayment penalties minimum interest short term extension phase in.
Three.
Sure.
More typical of what we would think of as a normal level then.
More elevated levels of phase in.
In Q1 and Q2 so.
That number will bounce around in.
Q is not any sort of.
Particularly elevated level that you need to account for other than the PPP impact.
<unk> contributed about I think six basis points, both in the quarter and for the first nine months of the year or two our net interest or are.
Sure.
Okay, Great that's helpful.
And then also wanted to ask about.
Interest rates and the bank's sensitivity to rates I think the market is now assuming fed tightening sometime in kind of late next year.
Thank you.
Alongside some great disclosures around loan floors, and it looks like the level of loan floors is moderating.
How should we be anticipating over the next year.
Better prepared the bank for higher interest rates.
Well, where we look at that all the time and we are.
The more the.
You guys from a portfolio.
Seasons at the current interest rate levels.
Less those floors impede our ability to.
Right right loans that were originated three years ago in a higher rate environment to have higher floors.
And hence.
Writes after rise more before those loans get a hit the floor and get off the floor and the actual write on the alone.
Keeps increasing but I appreciate the fact, you've been paying attention to our graphs, there and if noted that.
Percentage of loans.
Don't adjust until we get up to.
Higher rate levels has been steadily trending down.
Sure.
As all of our loans pay off and newer loans were placed around the floors on those newer loans are much closer to the current contractual rights, which means those newer loans.
We will adjust more quickly as rates rise so.
Every quarter, we stay here it makes us more rate sensitive.
In an upright environment, so we're working hard too.
Kill off what we'd call the dead zone alone the difference between where the.
<unk>.
Formula right, ignoring the floor would be today and.
The actual rate on the loan to the floor of that difference would call for that because.
The rate is that doesn't adjust until you hit that floor. So we're working hard continuously to reduce and kill off the dead zone in loans.
Alone.
Hi.
Mature without giving up yield.
Every quarter.
The combination of <unk>.
<unk>.
And.
Hi, Alex that situation gets gets more favorable.
We think it's wise to be.
Preparing for.
Hi, rising rate environment, particularly with the level of.
Deficits.
The fact that timeframe of monetary stimulus is likely to be necessary or occur at some point in the future. So.
We're working hard.
Prior to that and it's not just.
Preparing on the loan side, but it's also.
Sandy talked about earlier really on sort of the same day.
Quality of that deposit base.
Beginning to extend a little bit of duration into.
Deposit base is.
Well on the CD side, so we're nibbling away on all of those initiatives to try to improve that.
Mix in a rising rate environment.
Thank you.
Thank you.
Thank you. Our next question comes from the line of Stephen Scouten.
For Sandler your question please.
Hey, thanks for taking the call.
I wanted to circle back around and maybe this is more of a brannon question or George your comments as well would be nice, but on the <unk> kind of the product mix and what you guys are seeing on new projects can you give some color about.
Sure.
What types of projects those are coming from is it more condo office is it mixed and are there any types of projects that you're more wary about I know some banks have been hesitant on office, but it looks like you guys did a couple of those projects here this quarter and new originations. So just some color there on mix would be great.
Brandon.
Sure Steven.
Stephen Thanks for the question I sure can give you some color so in Q3.
We continue.
Lot of originations in multifamily that was probably at the top of the list, but as we had been telling you we're seeing more and more.
The mixed use projects come to market in.
We had.
Strong strong pipeline there.
Not as many loans are about dollar volume more than multifamily and then.
You noted office that was that was also a big big part of it those were the three sort of largest component.
<unk>.
From a market perspective.
Again, great diversity, a lot of what you would expect in the south southeast.
But also activity in the northeast Midwest and West So the guys really across the platform.
Our finding good opportunities in terms of what we're wary of.
And this market we continue to just.
Make sure that.
We're finding the right sponsorship on the right deals and there are a lot of deals out there coming to market that you got to.
Pick between and make sure Youre getting this stuff that fits our or our.
Our box.
The guys as I said had done a phenomenal job of doing that and finding new great sponsors that we haven't done business with in getting that first.
Good loan with them in some of those are already working on second.
So.
By product type.
We are.
We're careful obviously hospitality as a product type two that everyone's watching carefully havent seen as much there, but I would expect that we will see some in that world again, it's it's not a program it's.
It's where it is what it is and who needs it and who is building it and we're looking at it.
Okay, great that makes a lot of sense and then I guess, maybe an extension of that is a lot of this.
Projects that are getting picked back up that were maybe started prepaying.
Pandemic are you seeing real.
New projects coming out of the ground and coming like being formed today and becoming lendable opportunities today.
Well yeah.
Yes and of course again.
These projects and some of them have size take a long time to put together and so on.
<unk>.
Youre asking about what's new with the fact of the matter is our guys have been tracking some of these things.
For literally years, so its not so new to us, but things have come together such that it makes sense.
Move forward and and then and then you have those that are more.
Geographic trends in migration trends.
Trends that we've seen this year, obviously, Texas has.
We'll say a bit more space to build new apartments on then perhaps Manhattan just by way of an extreme so there are definitely new projects that are responding to very current.
Current.
Demographic trends.
<unk> trends as well so you have a little bit of everything in the mix there.
Got it Okay and maybe just one last quick question from me is deposit service charges were really strong in the quarter and it's been trending that way for a while.
That just indicative of the progress you guys have made with your <unk>.
Positive mix and account growth or is there anything.
Unusual to note there.
Cindy you want to take that.
There really isn't anything unusual it is indicative of the shift in the quality and quantity.
As core although there is the usual movement in NSF annuity.
NSF.
The income is not a focus of ours in terms of.
Central to our strategy our service charges strategy that it does follow the.
Spending as you know and so spending will.
Go up and down with Covid and the variant and so we see some of that is.
Part of the increase just full disclosure some of that is.
Simply a function of the <unk>.
The movement in the economy, but underneath that we do see fundamental changes to the good.
The.
The sustainable growth.
The real service charge income that were going for.
Appreciate the question.
Yes, that's fantastic thanks, guys and thanks for all the color and congrats on a really great quarter.
Okay.
Thank you. Our next question comes from the line of Brian Martin from Janney Montgomery. Your question. Please.
<unk>.
Yeah.
Just I guess one one.
Follow up to the last question just on the new production, maybe more for Brandon, where you George but just the the new production can you break out how much of that if any was really contributions from kind of the new initiatives. You guys have have put in place from the new lending teams you've talked about it's one on this quarter on the equipment finance, obviously in that part of it but the ABL another.
Other ones.
Is that what kind of gives you confidence on the sustainability of this production continuing.
Brian Let me, let me, let me respond to that and then I'll let.
I'll, let brannon add some additional color but.
We've not seen any growth yet.
Out of.
Either our ABL team or our new leasing.
Team, which as you know.
Freshly freshly minted.
Those guys seem to be making good progress and they are looking at things and we.
We hope to have some.
Closings in those units.
In Q4, or Q1, or hopefully both quarters, but that's not contributing yet.
Our indirect guys, which you didn't mention.
We continue to work with this new business model that environment has gotten.
Very competitive so it's slowed.
Load our ramp up buyer.
That to a positive net positive we're still having net negative growth in that indirect portfolio, but.
I spent quite a bit of time on the phone with those guys over.
Over the last week 10 days, and we're making a few tweaks.
Investments to their model that we.
We think we'll get their growth up next year. So we're expecting positive growth out of that and our community bank.
If you take out the net originations and net paydowns on PPP.
Our community bank groups have been positive.
For the full year to date nine months and the.
The quarter slightly now theyre negative when you net out the net effects of PPP paydowns, but those guys have gotten a little bit of positive.
Momentum.
And our corporate and business specialty group this last quarter got a little bit of positive momentum in our ESG is looking at some great pipelines if we can.
Bringing all of those things to closing so.
We're we're failing.
Reasonably positive.
About our ability to.
Continue to generate loan growth across multiple fronts.
In 2022, now Q4 will be.
Paydown challenged quarter I believe.
We're pretty optimistic.
Mystic about.
Our ability to put up some really decent growth numbers in <unk>.
2022, so brannon add whatever you want to add to that.
Well.
I would just agree with it you hit all the bases I was just referring to our ESG before.
Ryan but.
The guys in these other groups are starting to see some traction as George said.
I am hopeful to.
To have an origination on the ABL side and in.
The members from our Cvs G group, even included some reduction in the snake portfolio for the.
Quarter so.
Again, I think we've got some some good things coming next year.
No that's helpful and just last one or two follow ups, maybe for Tim I don't know just given all the positivity on organic loan growth I mean, I guess I know M&A has been you've talked about it being a little bit more of a focus it seemed like maybe.
The last quarter, a quarter ago, but just kind of where things went dialogue stands in that front or how youre thinking about that today any changes.
No changes we are still very interested in doing M&A, it's hard to predict when we could do a deal certainly we are looking at those.
We're going to be very disciplined financially.
I want to make sure it is.
It hits hits, our financial hurdles.
And we're pretty conservative on those as well, but we're certainly very interested in looking and will continue to be active in looking at M&A opportunities. We do have robust capital levels. So we can.
Can do we can do organic growth, we can add business lines and we can do M&A.
So we're focused on all of those items.
Gotcha, Okay and the last one was just on the margin. If there is it sounded like last quarter. When we talked it was kind of peaking out and just wondering if there's any change in your outlook. There and then maybe just when you think.
The non purchase.
Loans may be able to stabilize the <unk>.
Pressure that's out there you've talked about earlier.
Yes.
We're certainly having good results in improving our core spread I think for.
About five quarters in a row now in a couple of quarters of mass.
Trends in our net interest margin.
We are originating we are going to be.
The real story with you about this we're originating loans at rates that are noticeably lower than a lot of the loans that are on the books and paying off today. So there is some.
Future downward pressure on loan yields buyer.
We're going to mitigate as much of that as we can with continuing to improve those deposit costs, although that that gets harder as we get lower and lower deposit costs.
But.
Our investment book is a bit of a wildcard there how that impacts all of that so there are a lot of moving pieces.
We probably.
Probably are.
In the current environment.
At or near.
On top we can get to on our NIM and our core spread.
Maybe we can bring in.
Bit more of improvement out of that in the short run but.
As the loans, we're originating today is stark funding next year, they'll blend our loan yields a bit lower.
Go.
Forward.
Gotcha, Okay. Thank you for all the color and taking the questions.
Thank you.
Thank you. This does conclude the question and answer session of today's program I'd like to hand, the program back to George Gleason, Chairman and CEO for any further remarks.
Thank you.
Your time and attention today, we appreciate you being on the call and we look forward to being with you again in about 90 days have a great quarter. Thank you.
Thank you, ladies and gentlemen for your participation in today's conference. This does conclude the program you may now disconnect good day.