Q3 2021 First Foundation Inc Earnings Call
Greetings and welcome to the first Foundation third quarter 2021 earnings Conference call. Today's call is being recorded at this time all participants have been placed in a listen only mode and the floor will be opened for your questions. Following the presentation. If you would like to ask a question at that time. Please press star.
And then one on your Touchtone phone.
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We ask that you please pickup your handset to allow optimal sound quality.
Speaking today will be Scott Kavanaugh first Foundation's Chief Executive Officer, Kevin Thompson, Chief Financial Officer, and David to Philip President before I hand, the call over to Scott. Please note that management will make certain predictive statements during today's call that reflect their current views and expectations about the company's performance and financial results.
These forward looking statements are made subject to the safe Harbor statement, including in today's earnings release. In addition, some of the discussion may include non-GAAP financial measures for a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward looking statements and reconciliation.
As non-GAAP financial measures he's the company's filings with the Securities and Exchange Commission.
And now I would like to turn the call over to Scott Kavanaugh.
Hello, and thank you for joining us.
Would like to welcome all of you to our third quarter 2021 earnings Conference call.
We will be providing some prepared comments regarding our activities and then we will respond to questions.
We had another strong quarter as each of our businesses contributed to our success.
Our earnings for the quarter were $37 2 million or <unk> 83 per share.
Total revenues were $89 9 million further quarter.
25% increase from the second quarter of 2021.
Our tangible book value per share ended the quarter higher at $14.96.
Representing an 18.3% return on tangible common equity year to date.
Our efficiency ratio continues to improve and was 41, 9% for the quarter.
We also declared our third quarter cash dividend of nine <unk> per share.
While we wait for final regulatory approval on our acquisition of first Florida integrity Bank, which we still expect to receive in the fourth quarter.
We are making excellent progress on our expansion efforts in taxes, including opening our L. P O in Irving, which.
You had talked about last quarter, and our retail branch office in Plano, which we anticipate opening early next year.
There is so much opportunity for first foundation and taxes and we are grateful for the warm reception.
We are actively recruiting in the area and speaking with bankers wealth managers and others, who want to join our Texas team as we ramp up the presence across the state as well as our corporate location in Dallas.
Being located in Texas also affords us the opportunity to look at expansion into new regions, we experiences for Florida.
And we are now confident we can serve clients in other states.
He used to say our expansion was focused in the region from the Rockies to the west, but now with our presence in taxes and certain Florida, I feel like our opportunities to expand just got larger speak.
Speaking in Florida, we are very excited about having the employees of first Florida integrity bank join us and help lead our growth efforts in the state.
Similarly taxes, there are great opportunities across the state of Florida.
Once the merger is complete we anticipate the core system conversion in the second quarter of 2022.
We are also seeking trust powers in both Florida and Texas.
Expanding into business friendly states, such as Texas, and Florida as well.
Really proven to be a successful strategy for our next phase of growth that said, we remain committed to our operations in California, Nevada and Hawaii.
We recently expanded our presence in Los Angeles with the opening of our Sherman Oaks branch in that location has proven to be very successful.
Even amidst the challenging business environment in this day, our teams in California have done an incredible job.
<unk> deposits funding high quality loans, and offering top performing wealth management and trust services to our client.
Hawaii in Nevada also continue to play an important part of our story there are great opportunities for us to serve businesses and individuals in these regions and our trust offering helps set us apart for many of the other firms in the area.
I mentioned last quarter that the transformation of our business model has really taken shape and the diversification of our offering is only strengthened our position as a regional commercial bank.
This is evidence yet again by another strong quarter of high quality, C&I originations, which accounted for 43% of the 802 million total we originated this quarter.
We also saw contributions from our equipment finance offering and our builder finance team, which is officially up and running and beginning to bring in new business. We're really excited about having this as part of our offering.
We accomplished all of this.
While our single family and multifamily lending teams continue to be strong generating $79 million and 357 million in loans respectively.
Our ability to generate high quality loans is something I'm very proud of and our underwriting team has done an incredible job to ensure our M. P. As stay at industry, leading levels coming in at a low 24 basis points for the court.
We had another successful securitization of 419 million of multifamily loans.
These loan sales continued to be an important part of our business model and afford us the opportunity to meet the high demand for our lending solutions in the markets we serve.
Dave will touch more on the current composition of our strong loan portfolio and pipeline.
Looking at deposits are core funding accounts for 98% of our total deposits why our cost of funding continues to be favorable and deposit costs decreased 15 basis points for the quarter.
This attractive deposit profile is attributable to a significant reduction in our brokered deposits and an increase in more business related operating accounts.
We continue to have zero federal home loan bank advances while at the same time, our loan to deposit ratio remains at 85% at the end of the quarter.
This important offering which includes investment management wealth planning and trust services provides meaningful value to our clients and generates additional sources of revenue for the company.
The wealth management business is also proving to be a profitable business for us as the combined pre tax profit margin for trust and wealth management was 19% for the quarter. This is the third straight quarter, we have experienced scale at this level.
We continue to pursue the crypto currency offering through our collaboration with Knight dig and Pfizer to bring bitcoin into banking, we're closely working with our regulators on the scope of our solution and we believe this is on track to launch in the coming months with the official rollout.
Q1, we are grateful to have partnered with industry, leading firms such as nine dig and Pfizer on this initiative.
Speaking of our partners our investments in technology allow us to offer best in class security and fraud prevention solutions for our clients.
Whether it is in the branch or online our teams remain vigilant about any security threats to our clients.
We leveraged the strictest industry protocols for secured technology, and we supplement this with education for both clients and our employees.
All of what I've mentioned, our services, our expansion and our commitment to technology position us well as we see to best serve our clients as I have said before our business model is designed to help clients wherever they are in their financial lives and today's results indicate.
That our model is working very well across the diverse and dynamic markets we serve.
I want to conclude my opening remarks by saying how pleased I am with the entire team at first foundation.
We have a great group of people, who are very committed to serving clients and building a valuable business that we are committed to making this place.
The best place to work for each and every one of our employees. It is truly an honor to be able to lead this organization I'm very excited about our future.
I will now turn the call over to our CFO Kevin Thompson.
Thank you Scott.
Earnings per diluted share of 83 cents in the third quarter included 384000 of expenses related to our acquisition of T J our financial.
The return on assets was strong at 1.88% with a return on tangible common equity of 22, 9%.
Related to the multifamily loan securitization of $419 million in this quarter, we booked a gain of $18 1 million, including associated mortgage servicing rights of $2 7 million.
As has been our practice in the past, we purchased 201 million of the resulting Freddie Mac securities with an approximate yield of one 4%.
The net interest margin decreased to 3.07% in the quarter, which was largely due to higher average cash and cash equivalent balances in the quarter.
We maintain discipline in loan production with the average loan funding yield increasing 11 basis points to 3.46% from last quarter.
We provided a new schedule in the earnings release detailing our loan fundings.
Excluding the securitization loans would have increased $219 million or three 6% compared to the prior quarter.
Our cost of deposits continued to decrease in the quarter dropping from 20% to 15 basis points.
We earned 750000 net P. P. P fee income in the quarter and we have $1 2 million of fees from $51 million of PPP loans that remain.
The allowance for credit losses for loans decreased by $1 2 million in the quarter to $21 million as a result of lower loan balances related to securitization activity.
This was offset by an increase in the allowance for credit losses for investments of $1 million, which was a result of the low interest rate environment and faster than expected prepayments that impacted the projected cash flows on fsp's interest only strips securities.
We also recognized an 825000 valuation allowance on mortgage servicing rights in the quarter due to the same reasons.
Asset management fees were strong with revenues of $9 3 million and as Scott mentioned, our advisory interests divisions achieved a combined pre tax profit margin of 19%.
Noninterest expense increased $2 8 million to $38 4 million in the quarter. This was largely from compensation and benefits that increased to five 3% increase in FTE in the quarter higher Commission accruals due to strong year to date production in wealth management and other divisions and lower.
Deferred expenses due to seasonally lower loan production.
The efficiency ratio was very strong at 41, 9%.
I will now turn the call over to David the pillow.
Thank you Kevin.
As Scott mentioned the transformation of our balance sheet continues to develop nicely and today, we are well positioned as a premier regional bank servicing a diverse client base.
And in some more detail to that I would like to reiterate that our commercial business lending accounted for 43% of our originations for the quarter totaling $346 million in C&I loans.
That's been a key to the transformation of our balance sheet that we have disclosed and continues to help us diversify our loan portfolio.
Overall as mentioned, we generated $802 million in loans in the third quarter, but this is still a very strong number it is slightly off from our record highs we experienced last quarter.
We believe this quarter. So on production reflects the typical slowdown we see in the summer months, we anticipate higher fundings for the fourth quarter and expect to close the year at or above our annual projections.
Consistent with last quarter at 52% of our C&I loans that were generated this quarter were largely adjustable commercial revolving lines of credit.
Which is a strategic move.
For us as we continue to shift the balance sheet tomorrow rate neutral.
The remaining C&I loans were comprised of $77 million of commercial term loans and $40 million of public finance loans $28 million of owner occupied commercial real estate loans and $21 million of equipment finance loans.
They're all high quality business once that generate strong yields while continuing to diversify our loan portfolio.
No we had no new PPP loan fundings during the quarter looking more broadly at the $802 million of loans that were originated in the third quarter. The percentage breakdowns are as follows.
C&I, including owner occupied.
Real estate, 43% multifamily, 44% single family, 10% and 3% other.
We continue to focus on originating high quality loans with high underwriting standards as mentioned, our Npa's remained very low at 24 basis points for the quarter.
Also worth mentioning that our loan forbearance and deferrals decreased to six basis points of total loans. So a total of $3 4 million from.
11 basis points, and $6 7 million in the prior quarter.
The loan pipeline remains strong heading into the fourth quarter, and we expect seasonal cyclicality over the summer months to taper and demand huge demand to continue to increase.
Speaking more specifically about loan yields as mentioned, we achieved a weighted average rate of three four per six.
And originations, which improved 11 basis points from the second quarter up 335%. This continues to demonstrate our ability to achieve strong volumes was still depending on the yield on our loan portfolio.
As of September 30th our loans held to.
Two maturity balances consist.
48% multifamily loans, 30% commercial business loans, 5% non owner.
CRE, 15% consumer and single family and 1% land and construction.
Our deposit business also continues to perform well.
Our deposit profile continues to be very favorable the $6 8 billion in deposits. We ended the quarter represents a combination of programmatic reductions in certain deposit accounts along with seasonal outflows. This programmatic reduction was done to improve our over overall deposit profile, including lowering our cost of deposit.
That's in making deposits less volatile and not subject to large inflows and outflows are.
Our noninterest bearing deposits accounted for 44% of total deposits the $262 million reduction in deposit share in the third quarter of 2021 included decreases in balances in the commercial deposit service group of $281 million offset by increases in the retail branches.
Commercial business deposits.
For our channel serving complex Treasury management customers and from our business banking customers served by our retail branches, where 74% of total core deposits as of September 30.
Core deposits continue to account for 98% of total deposits.
Our cost of deposits has continued to improve and reached another favorite below 15 basis points for the quarter as Kevin mentioned NIM was $3 seven during the quarter as excess liquidity drag slightly on the margin while loan funding yields are starting to trend up again, improving from last quarter, the additional excess liquidity will likely.
We continue to provide a drag on NIM into the next quarter.
And finally I wanted to touch on a few strategic projects we are working on.
Our project to enhance our consumer online and mobile experience is getting close to launching this will give clients the opportunity to access their accounts.
Whether most convenient for them and we will add benefit obscurity view and access accounts held at other institutions in one place.
Todd mentioned crypto currency project with <unk> and Pfizer continues to successfully move forward. We plan to have a very thoughtful offering for clients looking to access bitcoin within the traditional banking system.
Our data warehouse initiatives.
Been very important part of our ability to scale, we continue to leverage the data warehouse and connect new data sources to provide critical information for decision making.
We leverage the data to drive efficiency through dynamic processes and workflows with the integration strategy using API and AI technology.
Provides a more scalable digital experience for our clients any more effective delivery of service to our clients on an enterprise level.
Finally, the success of the quarter would not have been achieved without the great team that we have in place like Scott I am grateful for all the dedication and hard work at this time, we are ready to take questions I will hand, it back to the operator.
We're open for questions. As a reminder, if you would like to ask a question today that is star one and we will take our first question from Steve Moss with B Riley Securities. Please go ahead.
Good morning.
Hey.
Okay.
Maybe just starting with Dave you kind of touched on loan pricing improving here kind of curious what you're seeing there how youre thinking about.
Pricing. These days is the five years kind of call. It 40 basis points in the last month or so.
So it's kind of interesting as we've discussed in previous calls there is a little bit of a lag effect to the market.
It takes a while for the competition to adjust so we.
We kind of feel that we're in.
A little bit of a range bound level.
Especially pricing around the five and seven year.
Our expectations is we'll continue to see pricing either at or above the current level.
But as we see from time to time.
Competition can drive that slide.
Slightly lower but our expectation we'll continue to see.
Improving yields.
We mix.
Our percentage of C&I to real estate lending.
We are starting to see those levels modestly improve but I think one important aspect to that is one of those loans are variable. So as we see interest rates change we should get positive benefits on the short end and one that continues to move so.
It's kind of a mix across the board but.
I guess net net expectations are we should start seeing some additional improvement.
Dave I think that's an important comment that that Dave just touched on.
Only a couple of years ago, we were pretty liability sensitive today.
Based on some of the research that we've done.
We feel like that from an asset liability perspective were almost completely neutral.
And.
With the combination of TG RF or for.
First Florida integrity.
That should put us in a position where we believe we will be <unk>.
Asset sensitive.
So that's a huge transformation from just two years ago with the way the balance sheet locked.
Right absolutely.
That's that's fair and then.
Maybe just in terms of the.
<unk>.
Our loan pipeline I hear you you guys expect to achieve basically a $4 billion type origination target for this year kind of curious with how youre thinking about next year. If you have any updated thoughts there.
So we are forecasting.
We've we've included modest growth against our current origination levels that we expect this year. So we have.
And of that expected compounded growth.
We haven't factored in.
Some of the newer groups that have been coming on board a significant volume increases.
So what I would say is we still expect strong originations through the next few years and the upside is as these new groups come in as we've experienced in the past.
We will definitely should experience some lift from those groups as well.
Yes.
Okay, and then on those new groups I know in the release you guys mentioned FTE.
Ftes were up over 5% quarter over quarter, and I know you've had a number of higher releases over the last several months just kind of cures.
Curious give us.
Incremental color as to.
Geography, where you hire those people and the type of.
Okay.
Sure.
What business line, if you will.
It's kind of an across the board we've had a concerted effort, obviously in Texas to bring.
And standup our.
Funding operation in Texas.
I would say last quarter.
A significant portion where in the state of Texas, but as we've mentioned probably an equal amount where in new C&I groups Bolton.
California.
And as well as our <unk>.
Builder Finance group that we've hired and are starting to staff up in California as well.
It's kind of been I would say equal between Texas and California.
We are obviously as we scale up adding additional infrastructure into bolt operations to help support.
Programmatic unexpected higher.
Loan origination levels as well as some additional staffing requirements that we're going to have.
For a deposit services as well as we are.
Staffing up for expectation.
Compliance audit and other risk areas as we.
Complete the merger in back to go over the $10 billion Mark.
Great. Okay. Thank you very much nice quarter. Thanks.
Okay, great. Thanks.
And we'll take our next question from David <unk> with Raymond James. Please go ahead.
Hi, good morning, everybody.
Hey, David.
I just wanted to follow up on that last question and maybe just get a sense of how tax our production has been in Texas and the new L. P O there and it sounds like we're still in the early innings within the builder finance and equipment finance just any updates on those teams and.
What you think the production capacity is there and whether there's any other verticals that you are considering expanding into.
Well why don't we.
Start with the Texas group.
Starting to put numbers on the board last quarter, and we will we will see.
Or is coming.
I mean.
Certainly in the fourth quarter, So we would expect them to start hitting.
What we would consider a normal run rate for that group going probably first quarter of next year and.
Talking.
Our expectation at least from the group, we have is $100 million to $150 million a year.
Based on this.
Current staffing and then we're going to build from there.
We would say equally on the builder finance group they are starting to fund there.
First loans out now and I would expect.
Kind of a consistent number from them under $150 million their allowance will revolve quicker so the.
The natural balances won't quite build as fast as we see in the income property area.
Our <unk> group in the C&I area is starting to fund the loan side as well.
Our expectations are hopefully will have.
Pretty significant number from them.
As far as new verticals, we really havent strategically.
Strategically you looked at adding any other traditional financing products were getting I would say.
To a level, where we have a pretty holistic product offering.
We've had a little bit of expansion in our consumer lending area and there may be some opportunity.
Two expanding consumer, but I think what youll see is.
Consistent core growth in our C&I originations consistent core growth in our income property originations consistent growth in our residential mortgage and consumer products and then across our other.
Ancillary businesses within C&I or staffing and hopefully going to see growth in SBA continued growth in equipment finance and.
And again for the new groups that we've added so I would say that we don't see.
Any.
New business line that we expect to add at least in the foreseeable future.
I think it's more about geographic expansion at this point rather than.
Seeing expansion into new vertical lines I'm with Dave I don't know, what we would add to be quite honest.
Comfortable with the lines that we're in an and but I think we can.
Can continue to see some growth in geography, which I think.
It will be important for us as well.
Okay that makes sense and then just wanted to touch on the securitization just just given the strength that you guys are seeing does that change your appetite at all for additional loan sales near term and then just given the diversified production and the inclusion of <unk> and expansion in Texas, just curious your thoughts on Securitizations.
Going forward.
Dave.
Yes, certainly.
It's been our strategy in order to as Scott mentioned in his opening comments too.
Holistically balance our income property.
Pretty product offerings.
We have large clients that have a need that open far outstrip our balance sheet capabilities. So it's been a great valve for us too.
To make more loans to those customers as well as keep our CRE concentration somewhat in line.
So our expectations are as we will.
You too.
Originate and securitize, so about the same level of product at least thats, what we typically model going forward. There is great opportunity to deliver more but it really is a balancing act between.
Loan growth.
Net.
<unk> growth, which is how we make our core money certainly gain on sale is additive too.
Our our strategy and.
As we continue to expand into these other markets.
We could have an opportunity to increase the size of our securitization going forward. However at the same time, we are going to have a bigger balance sheet to make sure that we can continue to grow as well as.
We still are dealing with an overhang of good quality core deposits that we need to deploy into loans and start earning a what we would consider.
Our normalized spread.
<unk>.
Our margins getting a little impacted at least temporarily because of the overhang of cash so it's kind of balancing excess gain with normalized earnings going forward and.
I guess snap AD is kind of status quo going forward.
It really is just more a function of working with our regulators to make sure. We're staying within the commercial real estate guidelines that we've kind of discussed.
And as Dave said legal lending limit.
Any one group.
Don't want to.
Turn away business, because we don't have any more growth opportunities with the with the client.
Yes, Okay now I think it's important to appreciate the competitive advantage our ability to securitize is it's it's a process. It takes the entire year for next year's securitization and we're preparing now who will work really hard through the year. We have a number of people in the company, who will be involved in that and outside vendors that assist.
With that it is a very complex process that not every bank can pull off and having that ability to lever that process and our expertise I think is really it.
Appreciated competitive advantage.
That's a great point and kind of along the same lines I just wanted to touch on the crypto partnership.
Glad to hear that this is still on track to launch soon just wanted to kind of get an update on your thoughts on the timeline of the rollout.
And maybe what products you expect to be rolled out first and then just as you guys have gotten to know now.
And if I ask more and that partnerships deepened.
The scope of that changed at all and what kind of benefits you're expecting is this rollout occurs.
Yeah.
I'll give you a little bit of update and actually.
Our car provider fiserv would be upset if we didnt mention that it wasn't us but they are also working with <unk>.
<unk> as well.
Okay.
What we're really trying to accomplish is getting the first series.
Products to market and we had talked about our digital.
Delivery expansion, it really providing what we would consider modern day mobile app or what we would consider a consolidated wallet for our customers have a 360 view of their entire financial relationship as part of that it's giving them the ability to have execution with big COO.
Going to be able to execute with <unk> and.
And we will be the reporting entity that will provide that through our traditional bank channel.
It's really where our core focus is on delivering there is probably.
A dozen of other great opportunities.
Product delivery.
<unk> by serving I dig as far as.
Potentially down the road additional.
Currencies.
As well as rewards programs, but first things first we've got to get the first product delivery done make sure. Our regulators are obviously very comfortable.
With our products and delivery and then I think you'll see once that settles in.
Probably.
<unk> accelerated our launch products down the road.
All I'll add we believe it's very important.
For our mainstream clients for banks to be involved in digital assets.
The internet adoption in history, the adoption rate was 63% growth a year and digital assets are being adopted a 115% a year. It's the fastest adoption of technology and history. Our mainstream clients. We believe don't want to have to deal with exchanges. Some of the complex process they want to deal with there.
Rusted Bank adviser, where really a first mover in this area, but very conservative in.
And sticking with our knitting, just providing bitcoin investment opportunities within our environment for now and then add with the potential of adding more products and services over time in this industry.
That's great color. Thank you.
Thanks, David.
And once again as a reminder, that dollar and one for your question and we'll take our next question from Gary Tenner with D. A Davidson. Please go ahead.
Hi, good morning.
All right.
David you you've gone into this a little bit.
You're kind of talking through I think to deposit.
Portfolio a bit I'm curious on the noninterest bearing deposits I mean, some kind of wild swings I guess year to date.
Still up at September 30 versus March 31.
Up $1 billion, one in the second quarter on noninterest bearing and down 300 million. This quarter, you talked about commercial deposit services group.
Being a source of some runoff, but I just wonder if you could delve into that a little bit more because I don't recall, there being any discussion about expectations that second quarter growth was at least short term.
Kind of transitory.
Well, we unfortunately as we mentioned we consciously made a decision to look at some of our.
Larger depositors that have higher volatility and.
Effectively cap the amount of deposits that we would accept from them.
Because.
What we're seeing is tremendous amount of demand from great customers said were.
Continuing to board and as we.
You mentioned about 73% of all our deposits are good core business deposits.
And it's.
Our balancing act so we.
As mentioned, we made a conscious decision to exit some of those relationships and lower the limits of what we would take.
So those are noninterest bearing however, they do have.
Their service costs related to them so.
Focused on.
Limiting some of them by size and some of them by volatility and some of them by they were costing us a little more in.
Interest excuse me in earnings credits.
Our typical client so.
It's a big balancing act.
Yes.
And.
With the securitization we wanted to make sure that we didn't have too much in the way of outsized cash balances, even though they are higher than what we would like to see but.
As Scott has mentioned in the past it takes a long time to develop these clients and we want to make sure that we don't knee jerk.
Just cosmetically.
Lower balances to improve our financial metrics.
Because as we have.
Our expectations of a larger fundings down the road those deposits will be needed, but we would say that it was a conscious effort to lower it and then we had some seasonal runoff that we expect in this quarter is typically where we see the higher.
A run off of our.
DDA balances related to some of our larger MSR clients.
But we see no.
Slow down demand for deposits and we could obviously growing at a much greater rates than we are.
Yes, I think.
Honestly, if we wanted to we could pick up the pace a lot I feel like we're asking people.
To sit on their hands, a little bit with regards to deposits.
I'll be candid, we've had some ROE opportunities too.
Higher some people, especially here in Texas.
And.
<unk> been reluctant to do so just because of.
Yes.
We're hiring somebody and then asking him to not do anything.
So.
I think that it's a world class problem to have but.
That's kind of what's happening to us right now.
Okay.
Okay I appreciate that.
Say that in terms of your kind of active management of some of those higher balance or higher volatility relationships is that kind of settled out at September 30, or is there more work to do to work any of those out of the bag of off the balance sheet I would say that we're kind of done for now.
A couple of things going on obviously, we will have some rundown in the fourth quarter on our traditional MSR relationships. So that will help with some of the excess overhang of cash.
And then we obviously going into a closed with wood.
T G R R.
The.
They have.
Pretty large slug of excess liquidity as well.
But.
There is great demand for us to deploy that so we've kind of our.
Back in the market and just.
Booking relationships in normal course, so we don't expect much in the way of programmatic rundown.
Any color on that Scott from your perspective.
Yes, I think Youre right I think the bottom line is we have squeezed the blood out of the turn up about as much as we can.
I wouldn't expect to see deposit costs come down barge, we've already I think done an exceptional job of.
Getting deposits down and.
Now it's got to be that we continue to put money to work in.
Making sure that.
We keep our loan portfolio pipelines as active as we can and.
Very favorable on it.
I appreciate that and then second question for me in terms of.
Kind of the asset side and the first portfolio of some incremental investment there.
This quarter.
$800 million of cash and as you pointed out some more excess liquidity coming over with T. G. R.
No.
Obviously, I think we'd all expect your loan growth will be solid over the next year, but would you lean into the steeper curve with some more incremental <unk> investments at this point or is that portfolio kind of sized to where you want it to be.
Well look hi, Dave has done an incredible job of making sure our pipeline on the loan side is about as robust as we can make it.
But the reality is as we've been super successful on the deposit growth.
Yes.
And so we added $200 million of securities after securitization.
We have recently added some MBS as and have discussed.
Adding more.
As you guys know I'm, a plain vanilla guy when it comes to securities.
Don't like a lot of complex or things that don't have a lot of cash flow. So I E that means mainly mortgage backed securities that have a monthly P&I to them. So.
I would say.
It would be reasonable to think that.
We would probably add some more in mortgage backed securities to soak up some of the excess deposits that we have.
And let those run off.
Over a timeframe that allows dave to kind of catch up with where we are on the excess liquidity.
Yes, we will never run I think as high as.
A lot of banks do as the security portfolio it can be much larger.
As of our relative large balances in loans, but.
As Scott mentioned strategically.
Strategically.
Earning 20 basis points on cash or call. It one 5% on a security.
That certainly is a much more favorable yield and the.
The cash flows run fairly quickly on those so it's not too dissimilar from a strategy we used.
A few years back.
And just reinvested those cash flows over time into loans as they run off so.
But we don't expect to pay.
A significant portion to additional securities.
As we grow we will continue to bolster that portfolio.
The degree that we actually do that.
NIM improves.
Thanks.
A lot of people were net interest income as well, but I think some people saw our NIM compressed to three O. Seven this quarter and if they were thinking it was loan yields or anything else.
Largely not it's is really driven by the overhang of cash.
The successful.
Side of us and so I would say.
If we just deploy even a little bit to soak up some of the excess liquidity that should help drive NIM back out, which I would think would be favorable.
Alright, thanks, guys.
Thank you.
We will take our next question from David <unk> with Wedbush Securities. Please go ahead.
Hi, Thanks for taking the question and actually I will start off with a follow up on what you were just mentioning about putting a little bit of the excess liquidity to work it could help NIM and earlier in the conversation you mentioned about how excess liquidity may continue to drag on the NIM in the fourth quarter. So I was curious and <unk>.
It's tough to gauge, but should should we assume kind of a flattish NIM from here, given the push and pull or.
Or are you kind of leaning one way or another.
I think the.
For us as a stand alone were probably flattish or a little bit and then we start to rise, but we do have the acquisition coming in and they are sitting on a.
Larger cash balance so, we'll probably expect a little bit of drag from them.
At close depending on when it closes and then we will.
Our expectations that will gradually rise from there I agree Dave referenced the seasonal outflows of deposits, we have in the fourth quarter, which would benefit our NIM and we'll then you add.
So we will probably end up being a little bit flattish on a legacy basis, but you had T. Jr. Who is whose net interest margin is more in the mid <unk>.
Mid twos there'll be a little dilutive to us, but as as we dipped.
Deploy some of this cash in the large loan growth as we continue to.
Really.
Monitor and control our deposit portfolio, we actually anticipate next year kind of settling into the mid <unk> mid 310 to $3 20 kind of range.
Great very helpful. And then I had a follow up on the securitization and the gain on sale.
18 million I was curious is that margin the gain on sale margin and I.
Calculated to be like just over 4% is that how should we think about that as we look to next year securitization is that kind of the middle of the range is at at that at the high end, how should we think about that.
At the high end.
What I can say is we threaded the needle and every which way.
Spreads were extremely tight on securities.
The five and 10 year, we're sitting at pretty much the lowest levels that they had been and then all of a sudden we do this securitization price it.
And the 10 year moves out what 40 basis points or so.
We did not hedge the securitization this year, which is new and it really had to do with the fact that.
We were able to put on more current coupon.
Loans into the pool, which kind of dictated or said, we didn't see a reason to really hedge the pool early on and so I think you take all of that.
And it was very favorable if you look at prior years I would say.
I think we've kind of said, 1%, but I would say.
If you're not hedging it's going to be a little greater.
But it just was.
We threaded the needle this year.
Yes.
Just to add on typically we expect credit spreads to be somewhere around 1%.
So we've seen a tighter than we'd see to wider than that and then.
The current environment. They came in at call. It the mid twenties, depending on the tranche.
So significantly tighter three quarter three quarters of percent translates.
A few points and then as Scott mentioned.
<unk>.
The five year was I think a little over 80 basis points, when we locked in pricing on a gapped out over one so.
Thats, another 20 basis points there so.
1% of excess coupon that could be three points of execution.
Spending on the duration so.
If.
We never know going in that credit spreads are going to be wide or narrow and we just like Scott said, we didn't hedge because of the seasonality.
The pool was current.
We just hit a favorable environment.
Long story short, we think Thats probably high.
High watermark for game.
But.
We could be surprised.
One way or they might sell the entire portfolio, if we could get four points gain on sale.
[laughter].
We have a lot of capital.
Too much cash.
That's right.
Got it that's all for me thanks very much.
Thank you.
And this concludes our allotted time for today's question and answer session I will turn the call back over to Mr. Scott Kavanaugh for closing remarks.
Thank you again for participating in today's call I'm very proud of the results, we reported and I'm very proud of our employees and the job well done.
All of our business lines are doing well and I'm very pleased with the path that we're on as a reminder, our earnings report and Investor presentation can be found on the Investor Relations section.
Our web site.
Thank you and have a great remainder of your day.
Thank you and this does conclude today's program. Thank you for your participation you may disconnect at any time.
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