Q2 2022 Old Second Bancorp Inc Earnings Call
Good morning, everyone and thank you for joining us today for old Second Bancorp, Inc. 's second quarter 2022 earnings call on.
On the call today is Jim anchor the company's CEO , Gary Collins, Vice Chairman of our board and the company's CFO Brad Adams at this time, all participants have been placed on a listen only mode and the floor will be open for questions and comments after the presentation.
I will start with a reminder, that old second's comments today may contain forward looking statements about the company's business strategies and prospects, which are based on management's existing expectations and the current economic environment. These statements are not a guarantee of future performance and results may differ materially.
Those projected management would ask you to refer to the company's SEC filings for a full discussion of the Companys risk factors.
On today's call. We will also be discussing certain non-GAAP financial measures. These non-GAAP measures are described and reconciled to their GAAP counterparts and earnings release, which is available on our website at old second dot com on our homepage under the Investor Relations tab.
I am now I will turn the floor over to Jim Packer.
Or is yours.
Good morning, everyone and thank you for joining us I have several prepared opening remarks and will give you my overview of the quarter, then turn it over to Brad for additional color.
I will then conclude with some summary comments and thoughts about the future before we open the floor up to questions.
Net income was $12 2 million or <unk> 27 per diluted share in the second quarter of 2022.
Net income adjusted to exclude west suburban acquisition related costs and net gains from branch sales was $13 8 million.
Or <unk> 31 per share in the second quarter.
On the same adjusted basis return on assets was <unk> nine zero percent.
Returns on tangible common equity was 15, 94%.
On the efficiency ratio was $62 six 9%.
Earnings in the quarter were favorably impacted by an increase in net interest income of $4 million, but offset by a minimal MSR valuation mark to market gain.
Appeared to last quarter's MSR, mark to market gain of $3 million and net losses on mortgages sold due to the sharp increase in interest rates.
The second quarter of 2022 continued to reflect the positive impacts of the west suburban acquisition in our financials.
I will say at this point, we are outperforming our own expectations on both cost saves and revenue that we had set for ourselves internally.
More importantly, we have made substantial progress in rapidly expanding our loan origination capabilities with new teams, adding substantially to our results this quarter.
In regards to the west suburban the systems conversions and branding were successfully completed.
Early in the second quarter with no significant customer disruption.
Overall, we could not be more pleased with where things stand today from both a balance sheet positioning and operational standpoint.
Second quarter also reflected the highest quarterly loan growth we have ever produced excluding acquisition impacts, we had $222 7 million or six 6% of net loan growth quarter over quarter or approximately $230 million exclusive of PPP runoff.
As we had hoped prepayments did finally slow somewhat and allowed continued strong origination activity to impact the balance sheet.
Activity within loan committee remains very strong and line utilization remains materially unchanged during the quarter.
Recent hires really starting to hit their stride and the cultural fit has been fantastic, we're seeing significant pipelines in CRE healthcare leasing and importantly sponsor finance.
We are busier than we have been in many years.
The net interest margin expanded substantially this quarter moving to a tax equivalent net interest margin of three 8% for the quarter compared to a tax equivalent NIM of two 8% in the first quarter.
The bulk of the margin benefit resulted from balance sheet mix improvements and the impact of rising rates on the variable portion.
The loan portfolio and full quarter effects from the first quarter balance sheet growth.
Tier two we consider ourselves ahead of schedule and the trends underneath the surface that are much more positive than the bottomline indicates.
The stabilization and improvement that you've seen thus far and the margin are primarily more of a product of liquidity deployment and an upward move in rates.
The story going forward will be very different in the quarters ahead.
I'll, let Brad talk more about that in a minute.
Nonperforming loans increased by $4 million compared to the prior quarter with downgrades to a couple of credits.
We recorded net charge offs of 250000 in the second quarter compared to 293000 in the first quarter.
Total classifieds increased $36 6 million to $103 2 million from $66 6 million last quarter.
Five larger credits were downgraded from sub standard or from a watch to performing standard and we continue to monitor the cash flows and financial condition of these borrowers.
Overall, we remain confident in the strength of our loan portfolio.
Other real estate owned decreased set.
750000 in the second quarter, primarily due to three property sales.
The allowance for credit losses totaled $45 4 million at the end of the second quarter, which is one 3% of total loans, which is consistent with the total ACL as of March 31.
At quarter end $1 3 million of provision for credit losses was recorded which was offset by an $800000 reduction of reserves for unfunded commitments based on our review of line utilization trends.
Our outlook is cautiously optimistic as the underlying economy appears strong, albeit with significant uncertainties.
We believe that we are more than adequately reserved under base case scenarios, but continue to modestly overweight more pessimistic scenarios given the high degree of uncertainty.
Expense discipline continues to be strong and we are far ahead of schedule and cost saving targets announced with the acquisition.
Total merger related costs of $3 3 million were recorded in the second quarter.
Which would then reduced by net gains on branch sales of $1 1 million.
All pretax.
The branch sale gains are recorded as a contra to occupancy expense net adjustments to GAAP net income totaled $1 6 million after tax or <unk> <unk> per diluted for fully diluted share.
As we look forward, we will continue to focus on deploying liquidity in order to more fully leverage the quality of the deposit base by building commercial loan origination capability for the long term.
And making prudent investments in the securities portfolio in the short term that do not carry excess spread or credit risk.
As we've said before the goal is to obviously build back towards 80% plus loan to deposit ratio.
In order to drive the returns on equity commensurate with our recent historical performance I think we've made some solid strides in that regard this quarter.
Brad will provide additional color in his prepared comments Brad.
Thank you Jim net.
Net interest income increased $4 million relative to last quarter, and $23 3 million from the year ago quarter.
Margin trends increase due to the loan portfolio growth as well as due to the increase in security in loan yields due to market interest rate increases.
In addition deposit cost decreased one basis point quarter over quarter and the total cost of interest bearing liabilities remained unchanged at 24 basis points in the second quarter of 2022.
I would point out that loan yields did not meaningfully helped the margin in Q2 due to the timing of the rate increases and less PPP benefit.
I would note that the June only margin was $3 46 versus $3 18 for the full quarter.
There is a significant amount of upside that remains to the extent that loan growth remains as strong as it has been in balance sheet mix continues the margin should meaningfully outperformed.
The second quarter itself saw a significant move in rates. In addition to a widening of credit spreads all along the curve, but none more dramatic than the under three year portion of the curve.
Lager portfolio as an old second's would've seen relative outperformance to ours, given the sharpened version from the two year portion of the curve.
The Mark on the Securities portfolio recognized through OCI went from a $9 million gain at December 31 to $35 5 million unrealized loss at March 31.
And was $64 7 million unrealized loss to June 30th.
A decrease in portfolio value of over 5% since year end.
We'd like to remind investors that we have been exceptionally cautious in deploying excess liquidity.
Portfolio duration effective duration was two eight years at June 30th.
<unk> average life was four five years and over one third of the entire portfolio is variable.
Our fixed rate MBS exposure is and was many multiples less than peers and our absolute exposure to fixed rate issues is and was also extremely short going into this move.
While it's not fun to see the impact this move was exactly what we were preparing for it.
Wouldn't change much with the benefit of hindsight.
When the other two year portion of the curve gaps like it has even exceptionally cautious portfolios can initially looked dislocated.
I am confident in my belief that we had the right positioning in the relative conservatism will serve us well.
Obviously impacts tangible capital levels, but a recession scenario would likely serve as well as a lower rate assumption would not need to bleed very far out the curve in order for us to recapture significant tangible book value.
The rest of the balance sheet looks fantastic.
Posit base as you May know is extremely granular and insensitive to rates on the loan side, we do have some latency, but existing balances feature high concentrations of variable rate structures and relatively short duration on the asset side bar.
Barring a change in current macro expectations old second will transition quickly and to a higher rate world with a rapidly improving profitability profile.
On the expenses front, we're performing better than I expected, but this is the first full quarter impact following annual performance reviews and wage pressures remain very real in our markets. Additionally.
Additionally, volume related expenses have an impact given the level of activity that we're currently seeing which is unprecedented in our history.
And the last several quarters, we are welcome talent talented new executives and operations credit administration and human resources.
These new leaders bring with them significant experience for much larger banks and strong track records of success.
We remain active on this front and believe we have a compelling story to tell perspective addition, so I'm hopeful we'll be able to spend some of the upside and the cost savings to both strengthen strengthen old Second's Foundation and also enhance the core asset organic growth rate.
When you grow like we have through acquisition there are challenges in upgrades that need to be made to increase the level of sophistication of the organization and the overall talent level I'm exceptionally proud of what we've been able to accomplish and the people that we've been able to welcome. This is a much better bank than it was 12 months ago, There's a much better bank than it was 18 months ago.
The rapid increase in talented people.
Deposits declined a bit from first quarter levels, primarily from municipal accounts seasonality, but some parked funds did exit and a modest impact from rate sensitive acquired accounts existed as well.
The resulting remax and improvement in the loan to deposit ratio clearly benefited the margin.
Margin trends from here will be a function of loan portfolio repricing, which we expect to pick up meaningfully following the recent 75 basis point hike confidence is high and we have seen positive developments in C&I and utilization rates as well as Jim mentioned, we do feel quite a bit better on the loan growth side of things.
I would not expect a repeat of this quarter's performance given the magnitude of it I don't think we've ever done anything like this.
What trends are clearly very positive.
The end result is that margin trends are expected to trend strongly in the right direction.
The forward curve is accurate the first two rate hikes will benefit us, but not to the degree of any subsequent moves would.
Noninterest income decreased from last quarter with a decrease of $2 9 million quarter over quarter in MSR mark to market gains.
As well as net losses on residential loans sold of 262000, obviously, a very disappointing quarter in residential lending.
Losses on the sale of mortgage loans resulted from significant ramp up in fallout and hedging that underperformed.
Our mortgage business is strictly legacy old second and operates largely in the lower income brackets and that demographic is having a very difficult time with the level of inflation inflation that exists and basic necessities.
We are still working to penetrate legacy west suburban markets into page County to further diversify this business.
This negative impact to noninterest income was partially offset by card related income increase of 398000 and service charges on deposit increase of 254000 wealth management income remained strong at $2 5 million for the second quarter.
Provision for credit losses on loans of approximately $1 3 million were recorded during the quarter and our economic outlook slightly declined slightly quarter over quarter with an unemployment rate projection increasing to approximately four to five 5% through June 32023.
And over the remaining life of the loans. This is an increase from the approximately $3 75 to $5 25 estimate from last quarter.
I would expect loan growth to outpace provision growth over the near term, though that could change with significant worsening in the macro environment.
We recorded a provision for credit losses reversal of approximately 800000 on unfunded commitments due to review of our funding utilization rates on commitments.
We are pleased with how credit has performed and then although total classified loans increased this quarter. We continue to consider credit metrics is stable and excellent.
We have said previously that it's unlikely credit gets better for better from here and we have adopted a cautious stance and are monitoring credits closely.
Expenses are difficult to manage this year and mid single digit increases in salary and double digit increases in benefits, reflecting wage inflation in a difficult environment to hire we.
We are managing through this and are thankful for the flexibility and opportunities for synergies that exist for US right now are.
Our efforts in the coming quarters will be to finish delivering on the synergies continuing to bring additional talent onboard, helping our customers and funding quality loan growth with the expectation of an improving margin.
We need to build that capital a bit following the investment in west suburban.
But we'd look to be on track in all major strategic initiatives with that I'll turn the call back over to Jim. Okay. Thanks, Brad in closing, we remain confident in our balance sheet and the loan growth opportunities that are ahead of us.
Rising interest rates will certainly be beneficial to our bank.
Profitability in the second half and we're playing close attention to credit and expense line expense line items.
We believe our credit and underwriting has remained disciplined and our funding position is strong.
Today, we have the balance sheet and liquidity to take advantage of a rising rate environment.
And have the financial strength to wait for this to occur.
So that concludes our prepared comments. This morning, so I'll turn it over to the moderator. So we can open it up to questions.
Certainly the floor is now open for questions. If you have any questions or comments. Please press star one on your phone at this time, we also while posing your question. Please pickup your handset with listing on a speaker phone to provide optimum sound quality. Please hold just a moment, while we poll for questions.
Your first question is coming from David long with Raymond James. Please pose your question. Your line is live.
Good morning, everyone.
Hey, Dan Good morning, Dave.
Last quarter, you talked about a downtick.
Before moving higher I know you talked about some of the wage inflation pressures, but some of the other line Tad big jumps when the wages and compensation didn't seem to be materially higher in the quarter just wanted to walk through what changed into quarter and is this the right run rate or do we need to take take the 35.
After the noise and then add on a little bit for for wage inflation from that point. Thanks.
So let's talk first about what's nonrecurring in here, it's not entirely clear just looking at the breakdown of that we've got a little over 900 grand in salaries and benefits that's nonrecurring.
Net $756 $756000.
Benefits and occupancy $1 $7 million charge and commuter computer and data processing.
50000, legal expenses and 220000 other.
So the sum total of that is $2 $1 million.
And that puts us.
Basically kind of.
At run rate, we do have some volume related expenses that are very high here and I expect some mortgage related expenses to come out beginning in the third so are we modestly a bit higher than what I would've expected this quarter yeah.
I'd say wage increases for us are very real.
If we'd have had this conversation a year ago.
We would've had relatively few people above the $15 an hour right at the bottom of the pay scale.
Now everybody is above that level.
There are banks paying $20, an hour and our markets are not far from our markets.
It is difficult to.
To maintain employment levels.
In terms of.
Where we are I still think kind of that base.
Basically $35 million number feels right.
Maybe 34 and a half after we get the mortgage expenses out that sort of level going forward.
Okay, great. Thanks, Brad I appreciate that.
On the deposit side of things understanding you had some great great loan growth.
I'll go back in the queue and let someone else to ask about that I'll hop back on but on the deposit side of things.
Balances were down a bit in the quarter, just walk us through what what happened there in the quarter with the deposit balances and your expectations for the back half of the year.
So we're down $200 million roughly 50 of it is time deposit roughly $50 million of it is parked liquidity within legacy old second that we knew was going to exit.
It was never a permanent.
About $35 $40 million acquired rate sensitive money.
And the bulk is just seasonality on municipal the bulk of the remainder is this seasonality in municipal deposits.
It is not a rapid bleed out from here our strongest deposit quarters are always in the first quarter and then we ticked down over the next two when we get a pick up at the end of the year.
So it was flat.
The only thing that's really different in terms of what we would've expected.
On a go forward basis is about $35 million on a rate sensitive run out.
Yes.
The.
The go forward from here feels a lot more stable.
Got it thanks, Brent our I'll hop off on someone else jump in from here.
Your next question is coming from Nathan race of Piper Sandler. Please pose your question your line is live.
Yes, hi, guys good morning.
And a question just kind of on the loan growth outlook, both near term long term Jim It sounds like.
Pipelines remained strong entering the third quarter and.
I'd be curious to kind of hear some of the drivers in terms of the growth that we saw here in <unk> I imagine, it's mostly market share gains and just given that you guys have added a lot of <unk>.
Commercial banking talent over the last few years now, particularly.
More recently.
How are you guys kind of think about more of the longer term loan growth outlook. Obviously, we have a macro slowdown, but I imagine a lot of your growth is going to be coming from share gains. So within that context, I would be curious to hear kind of kind of what inning are we in in terms of a lot of those bankers that you've added in terms of kind of bringing over the balance of the <unk>.
Their portfolios from their private from their previous institutions.
With the exception perhaps of the sponsor finance team that I believe is still operating under.
<unk> competes or solicit.
Yes, good question.
Obviously very pleased with with performance with asset generation in the quarter. It was it was very broad based with contributions up and down.
The commercial bank significant contributions from sponsored finance.
After after really not producing anything in the first quarter.
While they are bound by non compete.
<unk> unique ability to generate new opportunities.
Without a doubt.
Violation of their non compete so they perform well healthcare had a great quarter middle market C&I group.
Did as well.
Our commercial real estate group and equipment loosen equipment leasing group also had a good quarter, so almost clicking on all cylinders here.
The pipelines do remain.
Strong, albeit not as strong as.
Last quarter, but.
We do expect.
Another good quarter in the third quarter, barring any material prepays or paydowns.
Beyond the third quarter Natus, it's pretty difficult to know.
What's going to happen in the fourth quarter certainly this rate hike.
Could potentially choke off new loan demand, but we are we're pretty bullish based on what we're seeing in loan committee today.
Certainly seen low double digit loan growth. This year is certainly.
Realistic.
Gotcha, and just as we think longer term about the loan growth opportunities in your markets and with the teams that you've added or are we still kind of in the early innings in terms of a lot of those bankers, bringing over the balance of their relationships and portfolios from previous institutions.
Yes, I would say early innings Natus is fair and we really we really like the fact of a lot of them are operating.
And nationwide markets here, so we're not.
Really not subject to local market conditions.
Gotcha Okay.
And then just maybe thinking about the margin outlook with the near term loan growth outlook remaining pretty strong Brad just kind of any thoughts in terms of kind of where the margin trend.
Trends into the third quarter.
Ex accretion just given a lot of the repricing characteristics that you alluded to earlier in terms of the.
The floating rate nature of the book, which I believe is around 50% or so and then also just with.
Over a third of the Securities book repricing as well on the short end.
So I would say it assuming a normal level of accretion.
Which would be kind of in the neighborhood of 900000 to $1 million.
I think it's certainly foreseeable that we would see a margin above $3 50 in the third quarter.
The size of the bleed potentially sizable so.
Do you have that accretion number for the second quarter.
$1 9 million in the second quarter, which was flat to first.
Okay, Great and then just kind of thinking about the overall fee income run rate from here.
It sounds like some of the.
Items that impacted the mortgage gain on sale line or hopefully not likely to repeat going forward. So and it was nice to see kind of the card.
Deposit service charge.
Revenue increased in the quarter as well it guys kind of thinking around like a $10 million.
Run rates going forward kind of plus or minus in the back half of this year.
I would like to do better than that I would like to see mortgage at around 1 million and a half level.
Okay got it.
Appreciate all of you on sale portion.
Understood.
Okay, Great I will step back thanks for taking the questions and all the color.
Thanks, Nate mix thing.
Your next question is coming from Chris Mcgratty I <unk>. Please pose your question your line is live.
Hey, guys.
Thanks for the question maybe you can just start with Brad you talked about the spot margin.
<unk> of $3 46, do you happen to have the spot.
Loan yield and also the spot.
Interest bearing deposit costs.
So interest bearing deposit costs are roughly equivalent to the average that you see.
There has been surprisingly little movement in our markets by anybody we compete with.
The loan yields the spot loan yields a difficult question to answer because it's highly driven by the accretion.
But I think it's safe to say that were double digit basis points higher than than than where we were in the in the full quarter basis.
Okay.
Great.
It's probably early to ask but I'm going to ask it anyway.
Some of your peers are taking steps to take down rate sensitivity.
By adding swaps.
Other adjustments to the balance sheet.
Maybe philosophically what are your thoughts on the forward curve is pricing in cuts at some point.
How do we lock in the margin.
Yes.
So.
I think thats right I think that anybody that has shown meaningful loan yield improvement. This quarter has done so by putting on received fixed swaps.
Have not done so up to this point.
Obviously, it would have been best to do it a month ago.
Before the recession started eating down the curve.
But I think it's safe to assume that you can expect to see us start that process in the third quarter.
We're going to leg into it.
It's something that.
It's also possible, we'll start to add some duration in the bond portfolio, although I'm hesitant there.
It's tough to know what's going to happen, but I would say, it's likely that youre going to see us carrying $100 million to $200 million and receive fixed swap position on the loan portfolio as we talk next quarter.
Okay.
Awesome.
And then maybe just turning to credit could you give a little bit more color on the on the handful of loans that you moved.
Maybe sector size any reserves against some industry type anything we can get comfortable with.
Yes, Chris.
The the migration to from special mentioned the problem really was concentrated in the five kind of Lumpier credits.
Three office too.
And the city pretty good locations.
One of the.
Western suburbs.
<unk> market and then to two healthcare credits.
I would say all all five credits, Chris where we're affected by Covid related challenges experiencing lower occupancy.
Your cash flow.
We are.
Good guarantor support behind most of these but.
<unk>.
These credits are going to require a market recovery to get a more solid footing, we have taken appropriate reserves.
As needed for all of them of loan to values are still.
Good shape, 80% LTV or better.
For the five.
But as of now we don't see significant losses, given default at this point, but we are monitoring them very closely.
And beyond those five credits.
Rest of the portfolio.
It didn't move a whole lot.
And just to clarify one point, it's not high rise office, it's low rise office.
<unk>.
So not downtown.
Thanks.
Was the provision taken this quarter or since they've been on the watch did you do previously.
Yes, it was taken.
This quarter this quarter.
Yes.
Okay.
Great.
Thats all I got was suburban credit we had an allocation, but yeah. It was this quarter.
Great. Thank you.
Your next question is coming from Manuel novice at D. A Davidson. Please pose your question your line is live.
Hey, good morning.
And then well.
Hey.
Just thinking about the new lending could.
Could you give a little bit more color in terms of how much.
Of that is variable versus fixed rate and kind of the yield on new loans.
Yes, good question Matt.
Our sponsored finance group.
In healthcare generally.
Generating almost exclusively variable rate credit.
We like that a lot.
Commercial real estate group generally is.
Sponsoring fixed rate credits and that our community banking and C&I groups, probably a little bit of a mixture of both.
So, we're probably seeing 50% of our asset generation.
As voting today.
That's helpful.
Is there any part of your recent.
Commercial lending team build out that has yet to start performing.
Any extra color on what teams are still to come what teams.
Any more specifics on how much sponsor finance for example, booked this quarter that would be great.
Yes, so I would say first off broadly that fall all of our groups are performing as expected or better.
Our sponsored.
Finance group has generated over.
Over $100 million in production in the second quarter alone, we saw similar levels and our commercial real estate group.
Little bit of a lesser extent in healthcare in the middle market C&I. So.
<unk>.
Almost $475 million in total production in the quarter compared to about $300 million and the <unk>.
First quarter.
This year so.
We expect that to tail off a little bit in the third quarter, but we are certainly seeing.
Pretty robust loan committees at this point.
Is there any update on the.
Yeah.
The book didn't expect it to run off from from USD.
I think it had a little bit of elevated runoff.
First quarter or is that.
Does that slow significantly.
Yes, it has slowed I mean, we had.
About $15 million.
And the purchase participations book that ran off in the quarter in that.
That is largely by design.
But the legacy book.
Has hung in there in fact.
Legacy West suburban lenders.
Had a very solid quarter and new originations as well. So we're very pleased with that performance.
Okay.
Thank you. Thank you for that I appreciate it.
Thanks Noah.
Yeah.
You have a follow up question coming from David long of Raymond James. Please post your question. Your line is live.
Thank you.
You just talked about the sponsor finance business and it was a good quarter in originations or do you have the June 30 balance.
In the sponsor finance portfolio.
I'd rather not go there.
I would say that they are performing very well and above our expectations. The balances today are two X what we assumed for the full year in terms of when we made the decision.
To model it out and what our return expectations were.
It's a great team.
Fit well.
Everything is going very well.
Got it got it okay understood. Thanks, Brian and then.
A follow up the loan to deposit ratio are still sub 70% you talked about getting that back above 80%.
What is your appetite to use wholesale funding if the deposit flows don't don't work in your favor here in the near term.
Not opposed to it at all I think it's fine I mean, certainly that would if the main concern for old second is as a world where rates fall, obviously that would provide leverage to that so it's not something that we'd shy away from.
I think that that.
We had as a $3 billion bank, we traditionally added $200 million to $250 million overnight borrowing position for.
For the bulk of 2019.
There's nothing inherently wrong with it.
I think that certainly we are carrying a much higher securities portfolio than we traditionally have so there is ample room to continue to fund loan growth both from from continuing to Sop up what excess liquidity remains which is substantial.
Funding out of the securities portfolio, as well as increasing our borrowing position.
If you'd asked me today.
Where that loan to deposit ratio could be.
If I answered it last quarter I'm getting to 80% I think I said three years.
Or something like that.
Obviously has the potential to get there much faster.
This level of loan growth and some level of deposit attrition.
But.
Our profitability profile should change quite quickly.
In all respects.
Got it thanks again, Brian Thanks, guys.
Okay.
I would just I would just close with Theres nothing structurally different about old second today versus.
A year ago or two years ago. During the last tightening cycle I think at that point, we peaked out at around a 425 margin before the fed decided to cut rates.
So it's just a question of growing the right, earning assets taking care of the deposit base.
And staying diligent on credit and those are all things that we're very much focused on.
Okay.
Your next question is coming from Brian Martin with Janney Montgomery Scott. Please pose your question your line is live.
Hey, good morning, guys. Thanks for taking the question Jim I. Just can you just give any color on just the hiring pipeline. It sounds like things are great with the teams you have in there and moving business over and kind of all of that.
What is the hiring pipeline goes is that still pretty robust today I know you guys talked about actively continuing to look at just kind of seen with SaaS today.
Yes, Bryan we certainly would be open to additional hires although.
We've been obviously very busy.
Closing and integrating.
West suburban.
As I mentioned our production this.
This quarter was exceptional.
We certainly are open minded to that we have constant.
Dialogue with.
With with new folks.
So yes, we will be we will be in the market to continue that.
Got you, Okay, and you talked about the sponsor financed is that are those balances. We said about $200 million. I think you said $100 million. This quarter is that kind of the general ZIP code of where that's at today.
No it's not that high.
Okay.
They are they are exceeding expectations at this at this point Brian .
We couldnt be more pleased with the with the group.
Yes, gotcha, Okay, alright, so I'll make sure I was clear and then.
Brad just maybe one question on the on the margin outlook and just kind of it sounds like obviously its going to be a very rapid increase here. When you think about kind of the out year as far as once the betas begin to pick up a little bit can you just talk about how you think the rate increases that are in the curve today occur over the next.
By the end of the year kind of how that how you expect the margin to behave when it begins to stabilize as you get through the benefits from your asset sensitivity.
So we will move we will move deposit rates this quarter.
I would expect that.
You'd probably see CSP out at an overall cost of interest bearing funds.
Somewhere in the 50 basis point range.
Yeah.
Okay and as far as when you start to see some stabilization in your expectation would be is that kind of early next year mid next year.
Even beyond that based on the timing of.
Stabilization in terms of what Brian .
The margin percentage, Brad so when it was a beta start to increase.
When they are in the loan yields are.
If they're not continuing to raise rates just kind of when you start to see.
Some stabilization from the rapid increase we're going to see here in the next couple of quarters.
Difficult question, but I would say if say they get to $3 50 fed funds at the end of this year.
Which is difficult to imagine.
And we're having this conversation about second quarter next year I would expect a $4 50 to five loan yield and a <unk>.
50 basis points overall cost of interest bearing liabilities.
Ken.
I think that there is.
As I said earlier, there's nothing structurally different in this balance sheet that can't support a four to $4 25 margin.
Yes, I think Thats, where we had assuming that we don't step on a rake broadly from a macro perspective, which we always seem to do.
B I D.
I want to be too optimistic people know me as a bit of a pessimist I am sure Theres, a rake out there in the yard somewhere.
That's right well, we're not asking about the tax rate in there Brad So just maybe the last one for me it was the.
The new loan yields kind of where are the new loan yields coming on today.
Yes, we have.
We proactively.
Move those move those levels up Brian and added floors were appropriate, but we're certainly.
We're up 75 to 100 basis points from from the trough maybe at the end of the year.
Got you Okay perfect well. Thank you for taking the questions guys I appreciate it.
Thank you Brian .
Your next question is coming from Nathan race Piper Sandler. Please pose your question your line is live.
Thanks for taking the follow up so just a question on the reserve trajectory from here I know, it's difficult to predict and the seasonal framework and with all the macro uncertainty out there today, but.
Is the expectation that kind of hold stable here kind of absent.
So macro adjustments or how are you guys kind of thinking about the need to provide growth relative to a 125 reserve today and with charge offs not expected to rise substantially anytime soon.
So.
With all other factors held constant in terms of a macro perspective and.
Continuing to come down a little bit on the unfunded commitment I would guess that we would probably reserves somewhere between 75 and 100 basis points with loan growth.
That feels right to me right now but.
<unk>.
If something happens tomorrow jobless claims, it's hard to predict but that's kind of what it feels like in a stable world right now.
Okay got you and then just on capital ratios.
The total risk based ratio came down in the quarter, but obviously you guys are going to be generating.
However, profitability with higher rates going forward.
Any updated thoughts on opportunities to optimize the.
Capital mix.
At this point in the interest rate cycle, or how you guys kind of thinking about.
Those opportunities today.
I believe we have more than adequate capital.
Thinking back on this it it wasn't that long ago. When we were getting questions about what we're going to do with all the excess capital.
And we were reporting a 10% TCE ratio.
That included a $50 million to $60 million positive mark on the bond portfolio.
I never considered that to be core capital and I don't consider the $50 million to $60 million hit right now to be not capital.
The way I think about things we're above seven right now we're going back to a.
Relatively short order.
Obviously, we're reporting a number that somewhat below six.
But.
Given where we are on the curve and the speed of which that that can be recaptured.
Even if nothing else changes if were absolutely flat in terms of the curve and it doesn't move one iota too.
Two years from today have that Mark has gone.
So it comes off that quick given how short the portfolio is.
I would our.
Our comparability to others might be a little bit obscured as well because we haven't moved a dollar into held to maturity. So what you see is actually what the portfolio looks like.
And the intrinsic value of the balance sheet.
Very proud of what we've done here, we've got ample amount of capital and we're going to generate it fast.
So everything feels fine on that front I don't see any reason to start moving things around.
Okay great.
Thanks again.
Thanks Nate.
Once again, if you do have any additional questions or comments. Please press star one on your phone at this time. Please hold the moment, while we poll for questions.
Do you have an additional question from Manuel.
Your line is open.
Hey, I'm sorry. My question has been asked already I am good. Thank you guys.
Thank you.
There are no additional questions in queue at this time.
I would like to turn the floor back over to Jim <unk>.
Thanks Kelly.
<unk> our meeting this morning, we look forward to speaking with you again next quarter Goodbye.
Thank you ladies and gentlemen, this does conclude today's conference call. You may disconnect. Your phone lines at this time and have a wonderful day. Thank you for your participation.