Q2 2022 Horizon Bancorp Inc Earnings Call
Good morning, everyone and welcome to the Horizon Bancorp conference call to discuss financial results for the three months ended.
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Before turning the call what did the management. Please remember that today's call may contain statements that are forward looking in nature.
These statements are subject to risks uncertainties and other factors that could cause actual results to differ materially from those discussed.
Including those factors noted in the slide presentation.
Additional information about factors that could cause actual results to differ materially is contained in the horizon cutting dengue and later filings.
In addition management refer to certain non-GAAP financial measures that are intended to help investors understand horizon business.
A reconciliation for these measures are contained in the presentation.
The company assumes no obligation to update any forward looking statements made during this call.
If anyone does not already have a copy of the press release and supplemental presentation issued by Horizon yesterday, you can access it at the company's website.
W. W Dot horizon bank's dot com.
Are you presenting horizon today are chairman and Chief Executive Officer, Craig Dwight.
EVP and Chief Executive Finance yourself, it's up modestly cigar.
E V N Senior operations Officer, Keith you Dread Huh.
EVP and Chief commercial banking Officer Lane Goldberg.
E V B and senior retail and mortgage lending officer Marino.
At this time.
I'd like to turn the call over to Mr. Duane. Thank you I know what you said.
Thank you Jacob and good morning.
Thank you for participating in the Horizon Bancorp second quarter earnings Conference call.
Our comments today will follow the Investor presentation and press release that we published yesterday July 27.
Horizon is pleased to report the continuation of record earnings for the second quarter and solid momentum going into the third quarter with strong commercial and consumer loan growth and the pipelines. The plans to close an additional seven offices in 2022, and the continuation of our excellent asset quality.
We're very proud of our associates at horizon.
We have successfully implemented our growth strategies.
Starting on slide four the company highlights horizon completed the second quarter reporting record earnings of 57 cents per share, which compares favorably to the 54 cents recorded in the first quarter and 49 cents reported in the fourth quarter of 2021.
This represents a quarter over quarter increase of five 6%.
Are there notable financial metrics for the quarter ended as reported pretax pre provision net income up 29, 1 million, which represents a 13, 1% increase over the prior quarter's pretax pre provision net income.
A 3% reduction in our efficiency ratio to 55, 6% a.
Our return on average assets of 133, and a return on average tangible equity of 19.9% overall.
Overall, just an outstanding quarter Horizon Bancorp.
Driving the first quarter's results annualized double digit organic commercial and consumer loan growth additional revenues from the acquired offices cost saves achieved from last year's branch closures and an increase in net interest margin.
Given the size of our balance sheet highly efficient operations talented workforce and solid recruitment efforts. We believe <unk> is well positioned to capitalize it it's been organic and strategic growth opportunities within our attractive Midwestern markets.
So why invest in horizon.
Our investment thesis is simple horizon continues to report superior returns with a lower risk profile due to our diversified balance sheet excellent liquidity and low cost core deposits.
Located in attractive Midwest growth markets.
Considerable regional infrastructure improvements, you're tracking record inflows of private investments, Indiana, and Michigan and include the commuter rail line expansion in northwest, Indiana that no. One has a double track and waste West Lake County extensions.
The accretion the duration of the regional transportation Bill Mcdermott has focused on promoting transportation oil development in the region.
Alright universities or partnering with local communities to promote and enhanced quality of life.
There is continued investment in quantum communication wise between Chicago Lafayette in South Bend, and then yesterday the Senate approved the chips and fights act, which is anticipated to provide additional support to this quantum communications corridor.
The American rescue plan dollars are just beginning to be spent over the next two years you'll include considerable infrastructure.
If youll go region.
Indiana has a $6 billion state surplus with plans to increase infrastructure spending over the next couple of years and finally relocations continued to accelerate Ottawa, Illinois into our attractive markets due to quality of life affordability and lower taxes.
Both Indiana and Michigan are ranked the top fortunate for manufacturing outfit output and we are seeing considerable investment rolling back the manufacturing as they creatively manage through supply chain and labor force availability challenges.
Hawaii gas increased earnings outlook for 2022, which we believe will provide us additional opportunities to favorably distinguish rising from its peers.
Today Horizon considered both a growth and value stock with an attractive dividend up three 7% as of June 30th.
To further support that we are growth company horizons compounded annual growth rate in 2002 through 2021 were 13% for total assets and 20% for net income.
Horizon has historically outpaced the change of GDP for the past four years, we grew 4.9 times the change G. D. P. There's clearly demonstrates our ability to target market share and attract talent.
In addition, horizons ability to grow earnings faster than total assets illustrate the company's ability to efficiently increase the bottom line.
Moving on to digital transformation Horizon's key advantage of that technology over community banks.
Include our in house, CRM and core platforms due to lower cost per transaction than our peers the ability to expedite the onboarding of new Fintech partners index flexibility and data management.
Why not relying on a core service provider Horizon's able to select technology partners based on best in class and who can deliver strategic products and services.
Rice and with optimum flexibility.
Our in House core strategy has also proven very effective when we integrate acquisitions, including last fall's 14th branch deal.
In addition, our Fintech partners are nimble and concern.
Biddable resources focused on improving the customer experience and allow horizon to be an active voice in future developments as we have representatives on most of these entities advisory boards or user groups.
Can see in slide 11, phrasing more than doubled the proportion of total tech spend devoted to strategic customer and employee facing applications.
For years as.
As a result of our investments in technology Horizon has improved as CRO productivity as measured in assets per employee from $5 4 million in 2016 to $8 seven.
And that's as per employee in 2021.
Our digital transactions increased from 44% in 2018 to over 75 or six 2021.
We increased online consumer deposit account openings from 12%.
Last year to over 19% year to date, and finally, 80% 86% of online chats are now answered by our programmed box.
Horizon's technology plan over the next two years will continue to see an increase in our annual spend to enhance the customer experience and make our model ever more scalable.
As in prior years, we intend to offset these investments by continually improving efficiencies in our retail network and throughout the organization even with these technology investments. For example, we continue to target noninterest expense, what was that 2% or less average assets for the full year of 2022.
Verizon Vantages and deploys capital efficiently.
As evidenced by our recent acquisition of 14 branches in the fall of 2021 and dividend yield at three 7% as of June 30th a dividend guidelines increase dividends in line with earnings growth and an effective deployment of capital through organic growth initiatives.
Rising interest rates has increased investment in the analysts focus on accumulative other comprehensive income and the mark to market adjustments occurring in the bank's balance sheet as a result of unrealized losses reported in the investment portfolio.
Horizon's unrealized losses losses appear to be comparable to most natural holding companies based on recent reporting.
As a result of the unrealized loss Horizon D. C. He declined to 6.48% at quarter end June 30 up from $6 94 per cent.
As of March 31st.
Due to the bank's strong capital position and quick payback period on the OCI dilution.
We believe that we still have significant flexibility to continue to pursue our organic growth strategies.
In addition, Verizon has a consistent dividend policy have you fully expect to continue our 30 year plus.
Interrupted quarterly cash dividends.
As announced in June a six 3% increase our quarterly dividend from 15 to 16 cents per share again, our dividends are aligned with earnings growth.
Now for the financial update it's my privilege to introduce to you horizon Bank's executive Vice President.
Financial Officer, Mark C core Mark.
Thank you Craig.
Horizon reported its second consecutive quarter of record net income as a result of strong loan growth and improving net interest margin.
We are very pleased with the results achieved in the second quarter as they reflect solid core earnings without noise and with continued momentum going into the third quarter.
Starting with slide 15, the company's strong results in the second quarter was primarily driven by the increase in interest earning assets with annualized total loan growth of 24, 6% during the quarter disciplined deposit pricing increasing deposit costs, only one basis point and expense control.
The 10, 6% increase in adjusted pretax pre provision income compared to the first quarter of 2022 demonstrates the successful strategies put in place to increase interest earning assets.
Long with maintaining an asset sensitive balance sheet, which are driving core income growth.
Yeah.
Comparing to the second quarter of 2021 the second quarter of 2022 absorbed a reduction of $6 8 million in revenue from P. P. P gain on sale of mortgages and mortgage servicing net of impairment revenues, while increasing adjusted net income by nine 1%.
Slide 16.
As we continue to focus on increasing net interest income and with more rate increases we wanted to provide a few more details on our balance sheet.
As of June 30, we are more asset sensitive compared to the previous quarter in with a 12 month GAAP ratio of 1.16% that includes approximately 2 billion of adjustable rate assets of which 1.2 billion would move with a rate change to their index.
As a result of our deposit betas lagging as interest rates rose helped to increase the margin and the growth in interest earning assets during the second quarter.
Base case for net interest income increased $21 million.
With our higher margin growth in earning assets along with growth in adjustable rate assets at a 100 basis point increase as of June 30, we would generate an increase in net income of approximately 3.13% or $7 million.
Contributing to the increase in net interest income in the model or they expected the potter deposit betas used for rising rates, which currently range from 4% for consumer deposits to 45% on money markets and public funds with an average beta of 35%.
The actual data for the second quarter from rising rates was 3% for total deposits.
Well below what is it mean model we will continue to use these more conservative betas in our model as we anticipate more pressure to increase deposit rates and short term rates continue to increase.
But this initial ability to lag increasing deposit costs will continue to support the margin.
Slide 17 the.
The adjusted margin increased 19 basis points during the quarter due to rising interest rates the growth in higher yielding assets and disciplined deposit cost management.
With more short term rate increases anticipated the margin is expected to continue to expand during 2022 due to our asset sensitive balance sheet.
Slide 18, the investment portfolio was $3 1 billion at quarter end no change from the end of the last quarter.
We started using the cash flows from the portfolio to help fund loan growth during the second during the quarter and expect to continue this through year end.
The portfolio had a book yield of 2.26% and effective duration of $6 nine years at quarter end and cash flows of approximately $400 million are expected over the next two years.
Slide 19.
Unrealized loss on available for sale securities in the second quarter reduced tangible common equity 46 basis points from the end of the first quarter.
Because we have the ability and the intent to hold these investments to maturity. These losses are expected to recover over time as investments pay down and cash flow was reinvested at higher rates.
The impact of rising rates only recognizes certain items like unrealized losses on available for sale investments and not the increase in the value of liabilities like core deposits when the entire balance sheet as value to our economic value of equity increased in the second quarter compared to the end of 2021.
With this decrease in tangible common equity we believe at the bank's capital is strong and sufficient enough to fund growth and will not restrict our ability to consider merger or share repurchase activity in the future.
Slide 20.
By maintaining a disciplined approach on increasing deposit right rates. The total cost of deposits only increased one basis point during the second quarter.
This allowed the increase in the yield on earning assets to positively impact the margin by 24 basis points offset by a four basis point increase in the cost of interest bearing liabilities.
The actual beta for the quarter was 3% and was due to the ability to lag raising deposit rates from the rate increases. We do expect that this beta will increase with additional rate increases are targeted beta is around 20 to 25 per cent for total deposits if short term rates.
Reach reaches 3.25% or higher.
However, the ability to lag our deposit rates initially well maintain our spread on interest earning assets.
We believe that our valuable low cost core deposits will provide significant opportunity and flexibility going in to this rising rate environment.
Slide 21.
Core operating expenses were slightly down compared to last quarter. As we continued to leverage our core expenses noninterest expenses were $1 95 per cent to average assets for the quarter and now at 1.99% year to date, achieving our goal of 2% or less.
We achieved this goal by growing core net interest income and absorbing the reduction in P. P. P. In mortgage related revenue, increasing deposit service charge and interchange income and controlling core operating expenses.
We do anticipate additional increases in salaries and employee benefits and incentive compensation plans will need to reflect the positive results in loan growth and overall performance.
Last quarter, we announced plans to consolidate seven branches in 2022, which will continue to help manage expenses.
This one time charge hadn't anticipated payback of approximately six months.
We also continue to make investments and tax credits.
To support to support our effective tax your tax rate.
Now Craig will provide an update on our lending activities.
Yeah.
Thank you Mark now for a quick loan uptake, we reported strong commercial loan growth for the second quarter and year to date, excluding P. P. P unsold participate.
Actual loans reported $108 million of growth for the quarter.
At an annualized growth rate of 19, one 7%.
As we continue to see loan growth across most business sectors.
Contributing to the commercial loan growth as you increase the number of loan officers and increase in wider credit Outstandings rebounded Midwest manufacturing and regional infrastructure investments. In addition, we have good momentum going into the second quarter with the commercial pipeline of approximately $150 million, which is comparable to the second.
Where does the pipeline of 106.
In addition, we reported excellent consumer loan growth first quarter.
At a pace of 50.5% annualized and loan balances as we continue to experience strong consumer loan demand for home equity car loans and increase in line of credit balances. We are pleased with our second first quarter consumer loan production of 195 billion and 147 million respectively.
Which compares favorably to the total production for the entire year of 2021 at $397 million.
Given the low unemployment in our markets, even with high inflation rates, we expect consumer loan demand to remain robust in the third quarter.
Mortgage loan production year to date is down 29% over the prior year period, which compares favorably to Fannie Mae's mortgage bankers Association's forecast a reduction of 41 and 39% respectively.
Loan revenue constituted only five 6% of right in the second quarter total revenue.
Overall asset quality remained strong in the first quarter as evidenced by loan net charge offs and nonperforming loans and a solid credit loss reserve total loans at 1.33%.
To summarize rising Baker's key franchise highlights horizon as a growth company as evidenced by a 20% compounded annual growth rate for net income and 13% compounded annual growth rate for total assets over the past 19 years.
Our balance sheet has a diversified loan portfolio, both in product mix and geography with ample liquidity and cash flows to fund future growth, which provides for a lower risk profile than many of our peers.
The combination of Horizons high returns on tangible capital at 19, 9% and lower balance sheet risk profile is a sweet spot for investors, especially given the volatility related to rising interest rates wage inflation and supply chain disruptions.
Horizon is positioned well for earnings growth in 2022, and 2023 as a result of an increase in commercial and consumer loan demand. Our recent acquisitions of 14, new branches and expanded footprint low operating cost discipline.
That's made in our commercial and consumer lending teams, our disciplined approach to branch rationalization.
As noted on slide 28, and given our second quarter solid production results horizon as being five to six metrics, we announced in December of 2021 and increased our outlook in the second quarter of this year.
Corporate core commercial loan growth, excluding PPP and participations.
So is that an annualized growth rate of 16.9%, which exceeds our target range of 10 to 14 consumer loans year to date annualized broke is reported at 33, 7%.
Our targeted range of 10% to 14%.
Return on average assets year to date, 132% exceeds our target of 130 return on average equity of 14.01% exceeds our target of 12, 5%.
We're all just an outstanding quarter for Horizon Bancorp.
This concludes our prepared remarks today and now I'll ask the operator would you. Please open the lines for questions. Thank you.
Thank you.
We will now begin the question and answer session.
Ask a question you May press Star then one on your telephone keypad.
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At this time, we will pause.
Momentarily to assemble our Russia.
The first question is from the line of Macquarie.
Okay great.
Hey, good morning, everyone.
Good morning, Jerry.
Maybe the first question the seven branches that are scheduled to be consolidated could you just talk about the cost savings whether they'll fall to the bottom line or if you plan on using that to invest in the in the business and if so where we're across the bank would you plan on making those investments.
Jerry The branch rationalization really is to help fund our investments in technology to better serve the customer and their experience and we are adding to our technology team both in software in and people and that's where we see just a transfer that cost over to that side of it.
Bank.
Mark do you want anything else there.
No I think that's a that's the the goal and similar to what we did last year as we've seen technology spend we know they keep our expenses are more flat with having the cost saves from the branches as we expand.
Perfect and then as a follow up the total deposit beta just 3% last quarter.
Versus the 35% more model and Mark I, just wanted to clarify the 20 to 20, 20% to 25% beta that you mentioned in your prepared remarks was that where you see betas training by the end of this year or or was that still a longer term figures. So I guess my question is what do you see betas are doing in the in the second.
Half of this year.
Yeah that is that wouldn't be when we're looking at the 3% for the quarter, which.
We were just able to lag we started to feel pressure with some of the larger accounts come towards the end of the year ended the quarter. So the 25% guidance would be what we're targeting for the year as rates.
We continue to go up as we saw yesterday and we expect a couple more and we do anticipate that we will have to increase our deposit costs and so that's the range for that for the year.
Understood I appreciate that thank you both.
Thanks, Thank you.
Thank you.
The next question is from the line of David long.
Raymond James Please go ahead.
Good morning, everyone and thanks for taking my questions. Craig you mentioned, a strong loan pipeline still remains in place.
Coming off a 20 plus percent loan growth annualized in the quarter, what kind of sustained loan growth do you see here in the third quarter and maybe in the fourth quarter as well.
Jerry both the consumer and commercial pipelines are cabos last year. So we expect comparable production in the third quarter fourth quarter. There it starts to flow into the seasonality discussion that consumer side.
And I'd like to have a win in Norway jump in since they are to hit our commercial and consumer side and then any additional.
How much.
Sure good morning.
And as Craig mentioned, our pipeline projections has been holding yeah, we'd saw quite a pick up.
Third and fourth quarter of 2021 and that has really held and both of our projections and actual originations and the first and second quarter of this year.
As we mentioned our third quarter projection is very consistent with the second quarter and when we do those projections. It is based on our anticipated approved and closed loans. So we feel pretty good about that.
Of course with the interest rate environment and are in the rates are increasing you know there could be some fallout from that we're just not sure how much at this point.
We're now looking more ahead, the Q4 really where there you know there's possible impact at that point.
Yeah.
Got it. Thank you for the additional color there and then with the with the loan growth.
When you dig dig down what's really driving it is it have you isn't that a.
Hiring some veteran bankers from some of your peers as it winds from the PPP coming through or is it simply just you know market share gains.
Horizon really doing well and in its markets what how do you how do you how do you view the growth amongst some of those categories and what's what's really driving it.
Where I'm going with the question.
Well I'll speak to commercial I think it's a combination of factors really first as you know, we we did expand our lending team in 2020. One those lenders are very experienced and well known in their markets.
And I feel that we're benefiting from those relationships and their business development efforts.
You know, particularly we've added in west, Michigan and Troy.
And also in Central Indiana, and we're seeing the benefit of that Additionally, there's been strong demand in the market.
I think that some customers you know, they're looking at the interest rate environment and there are like if we're going to do a project you don't now's the time to make that happen with the rate forecast.
And then candidly, there's some market disruption with a few of our competitors are in some of our markets and we've been benefiting from that.
Yeah.
Alright. Thank you and then just tariffs just Oh go ahead.
I don't know I, just wanted to add on the consumer side and Echo some of the same sentiments.
Sure.
We've got some strong buyers and regionally expanded our footprint.
And I realizing those gains so one angle that same sentiments on the consumers.
Got it thank you yeah.
Yeah, David This is Craig Dwight.
We have advisory board members than.
Every county that we do business and we host.
In our meetings with the group and get feedback in the local economic outlook and the overall very positive, including some things that.
Improved there are less concerned about supply chains the biggest.
Eric also further expand and some delays in getting construction project started because of the.
General contact crashes are so busy so overall very positive from our individual advisory board members.
Got it that's a lot of color. Thanks, thanks, everyone appreciate it.
Okay.
Thank you.
Yeah.
Thank you.
Next question is from the line of Nathan race with Piper Sandler. Please go ahead.
Yeah, Hi, guys good morning.
Hey, Nathan.
Question, just kind of an overall balance sheet dynamics going forward you know, we saw a little bit of deposit outflows this quarter.
So I'm just curious, perhaps mark how you're kind of thinking about just overall flows in the back half of this year. Obviously you guys are operating with ample liquidity augmented by the branch acquisition.
Last year, So I guess, where you guys have anticipated kind of stable balances on the earning asset mix.
The earning asset base and a whole stable from what we saw here in the second quarter.
Yeah.
No.
Thanks for the question Nate.
First on deposits, we hadn't seen a deposit stay fairly flat, there's some seasonality with municipal and tax money comes in and out. We are we have seen a little bit and not anything significant a little bit of a decline in deposits here.
This is months, but nothing significant so but we have the loan growth has outpaced what we would've anticipated from our guidance. So we are borrowing and two to fund that growth. The other thing I mentioned is that we will were bringing back the cash flows that we can get it back.
Back from the Port from the investment portfolio and we started that in the mid later half of the second quarter. So we will start to use some of those dollars to help fund the loan growth.
But our loan growth.
Loan growth will be funded by.
Deposits. We we are looking to try to you know look for deposits at this point because of the loan growth.
So that is a strategy that's out there also.
Understood. That's helpful. And then just kind of thinking about the overall margin going forward it sounds like.
<unk> discussed.
Loan growth outlook remains pretty solid into the back half of the year. Despite some of the uncertainty that may increase.
Increase perhaps in the fourth quarter relative to you know relatively strong production outlook for the third quarter. So I guess, how are you guys kind of thinking about the potential for additional margin expansion.
Ex accretion should we expect a similar degrees from what we saw here in the.
The second quarter with you know around 40% of your loans being variable rate and I'm just given the deposit beta are trending kind of lower than kind of what you guys are forecast at this point.
Yeah.
No.
We should still see the margin expand I do think it will slow because of the deposit the funding cost side, because we were a little lag. So much here at the beginning of this year, we are going to pick that up as I said debated we anticipate for the year would be 20% to 25%. So I think that will slow some of the March.
<unk> growth from what we saw this quarter, but it still should continue to move upward as we reprice, our earning assets at higher rates and put on loans.
Right.
Okay.
Got it understood and if I could just ask a one more for Craig graphs, just curious to get an update on the search for a president succession.
You continue to hold that title on an interim basis are you guys exploring both internal and external candidates or kind of where does that process stand today.
Yeah, Nathan the Board search committee is continuing to move it forward and.
We are planning to have an announcement here in the third quarter. So.
Okay, Great I'll step back and congrats on a great quarter and thanks for taking the questions.
Thank you.
Yeah.
Thank you again, if you have a question. Please press Star then one.
The next question is from the line of Damon Delmonte with <unk> W.
Please go ahead.
Hey, good morning, guys hope, you're all doing well today.
Just wanted to start off with on the credit side of things I mean, obviously your credit trends remained very strong for you guys, but this quarter. We did see the reserve come down you know probably in light of the.
Combination of the size of the provision and then the growth in the loan portfolio.
How are you thinking about reserving going forward and kind of how does that dovetail into the you know the the view of we could be going into a recessionary environment and broader macro issues. Despite strong trends in your markets.
Good morning.
Oh good luck.
Okay.
Well just a few thoughts on the reserve we did do a little bit of change in mix in the reserve. This quarter I'm you know we had some special allocations related to our hotel portfolio.
That were rather significant through the pandemic and over the last two quarters. We felt that we could start to release those we've seen very positive performance in our hotel segment.
On the recent Star reports had very high occupancy revpar them, if not on par with pre pandemic numbers and in some cases, even above pre pandemic numbers. So that segment of our portfolio is performing really well and that is driving some of the change in mix in the allowed.
It.
Offsetting that we had some additional allocations for macroeconomic conditions. The inflation, you know fuel impact on wages and real real disposable income.
Continuation of geopolitical and supply chain, so there's a little bit of a mix going on are in the reserve, but I would say our overall philosophy on it is a consistent.
And we feel that the reserve amount and the ratio is appropriate for our portfolio analysis and and metrics at this point in time, So I don't know that I see that changing dramatically its going to be more reflective of the general macro economic conditions and our credit quality.
Great. That's great color. Thank you. So it's fair then to assume that the perfect you know what kind of hope keep the the current reserve level in the low one thirties at that level.
I guess said differently, you're not going to let that drift down into the one twenties.
If you feel good about.
This quarter.
Yeah again I go back to my comments regarding the general economic conditions and you know, we're gonna be watchful of that and I think that'll be a key driver as we look at the reserve amount.
Got it fair enough that's great. Thanks, and then a question for Mark on the on the expense outlook can.
Can you provide a little you know a little more color around the expectation for the back half of the year and if you take out the Ria you know the three or $400000 of nonrecurring charges. This quarter. It puts you close to the 36 million is that a core number you think you're kind of hold that line or does it trend up a little bit from here.
Yeah, I think it's a good core I think where we might do as I mentioned, we probably will trend up as in some of the the benefits side that are there'll be some some increases here going into the third and fourth quarters.
But by and large the the rest of the categories are are should be fairly stable.
Got it okay great.
And then I guess, just lastly on the tax rate.
What do you what's your expectation for the back half of the year.
Yeah. It should maintain we are you know with the investment in an apartment investment portfolio of municipal and then we also are active in the solar credit low income housing credits. So we are we would anticipate that.
The effective tax rate should be a good through the year.
Alright, great. Thank you very much.
Yeah.
Thank you.
The next question is from the line of Brian Martin with Janney Montgomery. Please go ahead.
Hey, Good morning, guys, Hey, Mark just one follow up to the effective tax rate to what rate are you guys expecting just to be clear on the second half of the year on that.
Should be in that 14% to 15% range.
Okay Perfect Gotcha, and then maybe just a couple for me maybe Mark just one more for you on the margin just in general is if we see rate increases begin to taper off as you get later in the year and kind of think about next year. If you just kind of think about next year's outlook I mean is that betas pick up.
Is your thought process today that that margin begins to stabilize you know maybe you know I don't know.
In the first quarter of next year is that just high level, how you're thinking about it based on kind of what the balance sheet is doing and growth outlook here.
Yeah, I think that would be accurate, Brian you know, we'll continue to see your assets repricing, which will help to our network.
Our rates, which will help the margin.
And we should see after we get through these rate increases we should see the funding cost kind of stabilize.
So but that might be into next year before you see that.
Okay.
Gotcha, Okay that seem to make sense and then maybe just on a touch on the mortgage for a moment.
I think it's a mixed performance by banks this year, but just you guys had some success here with <unk>.
A little bit of a change in some of your strategies, but.
It is this quarter kind of a baseline for how to think about mortgage or is it still on the higher side or on the lower side. How are you thinking about mortgage and kind of your outperformance relative to others. So far.
Thank you for the question I'll go ahead and take that this is knowing here.
I believe that we are seeing a.
Production in the pre pandemic mode I think we'd go back to 18, and 19 and what we were able to accomplish.
It's going to level off and it remained.
The same trend that we've seen if you go back to those years.
So we're going to remain consistent.
And in in that outlook.
Okay. So in no way does that kind of referring to that that the dollar amount of the production like the two and a half million dollars in mortgages that you're saying that's kind of a consistent level just to be clear with your comment.
Do I do that is more consistency that we're going to see them moving forward.
Gotcha, Okay, and then maybe just one for me lastly on the loan side you know.
Certainly the strong production this quarter, how it payoffs been trending relative to originations I mean has this had if payoffs really been muted and it's just really strong originations or have there been payoffs in there kind of.
Masking some of it they are not asking it but.
They can't sell.
We haven't seen payoffs have remained a to our historical trends, we do monitor that very closely.
So those continue.
So the demand is still there for consumers. So we are seeing payoffs.
But I think overall our performance has continued to shine through overall.
Yeah, Okay that makes sense and maybe one last one if I can sneak it in for Craig just Craig your comments about capital and you're not to restrict your ability for growth and potential M&A I mean, given market conditions today.
M&A still on the table given some of the dynamics that are out there today or is it in the short term its not and just kind of your take on <unk>.
Market conditions today in M&A.
So I.
Thank you for the question, Brian first of all.
Horizon three year plan looking out a pretty robust without M&A. So to look at a transaction. It has to be won a very attractive market that complements our growth strategy or to a very low cost them a day.
Transaction, So I would say M&A is not the higher priority today is true.
They can.
Converting those investments to loans, which is a.
Strategy for the next couple of years, that's a primary school.
Gotcha, Okay. Thanks for taking the questions guys and nice quarter.
Thank you Brian .
Thank you.
Yeah.
This concludes our question and answer session.
I would like to turn the conference back over to Mr. Craig Dwight for any closing remarks.
Thank you Jacob and do all that joined our call. This morning, and we look forward to speaking with you again in the near future and hopefully continue this record pace of earnings. Thank you have a great day.
Okay.
The conference call has now concluded.
You for attending today's presentation, you may now does.