Q3 2022 Mercantile Bank Corp Earnings Call
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Good morning.
Welcome to the Mercantile Bank Corporation third quarter 2022 conference call.
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I would now like to turn the conference over to Julia Ward Lambert Investor Relations. Please go ahead.
Good morning, everyone and thank you for joining mercantile Bank corporations conference call and webcast to discuss the company's financial results for the third quarter of 2022.
Joining me today are members of mercantile management team, including Bob Kaminski, President and Chief Executive Officer.
Personnel.
Second our vice President and Chief Financial Officer, and Ray Reitsma, Chief operating officer, and President of the bank.
We will begin the call with management's prepared remarks and presentation to review the quarters results then open the call to questions.
Before turning the call over to management. It is my responsibility to inform me that this call may involve certain forward looking statements such as projections of revenue earnings and capital structure as well as statements on the plans and objectives of the company's business.
The company's actual results could differ materially from any forward looking statements made today.
Due to factors described in the company's latest Securities and Exchange Commission filings.
The company assumes.
No obligation to update any forward looking statements made during the call.
If anyone does not already have a copy of the third quarter 2022 press release and presentation deck issued by mercantile today, you can access it at the company's website Www Merck Bank Dot com.
At this time I would like to turn the call over to mercantile President and Chief Executive Officer, Bob Kaminski.
Thank you Julia and thanks to all of you for joining us on the conference call today.
Today, Our company released in September 30 financial results. We are pleased to report another very successful quarter with no worthy resolved several important performance metrics.
Yes.
Strong profitability driven by an increase in net interest margin trending to a more normal trend into a more normal level or level over the past few years.
Continued growth in many of our fee income categories.
Continuation of steady loan growth in both commercial and retail portfolios with consistent strength in our loan pipeline is strong asset quality.
And diligent expense control.
For the third quarter mercantile posted earnings of $1 one per share on revenues of $49 6 million.
Earnings per share for the first nine months of 2022 or $2.48.
This morning, we also announced a cash dividend of <unk> 32 cents per share payable on December 14.
Rand Chuck will provide the details on the various aspects of our performance for the quarter and their comments coming up shortly.
As we have discussed during our communications over the past many quarters. The mercantile team prides itself, a nimbleness, which allows us to skillfully adapt very quickly to various external forces and conditions.
As we demonstrated throughout the pandemic mercantile management and employees were able to assess the condition and then pivot to seamlessly transition to serve the needs of our clients and appropriately manage risks to ensure strong performance of our company for our stakeholders.
Now during the current environment, we and our clients and business partners are diligently working to continue positioning ourselves for optimal performance and results should economic strains emerge as a result of the actions taken by the fed to slow the high rate of inflation.
Currently however, the most common experience remains supply chain delays and disruptions and this is in addition to the mismatches and unemployment supply and demand.
As of August 31st Michigan's unemployment rate fell 1% to four 1%.
Over the past 12 months, Michigan has added 135000 payroll jobs and the unemployment rate fell by one nine percentage points from 6%.
Well ours employment gains have come from a professional business services manufacturing leisure and hospitality and education and health services.
Throughout 2022, the mercantile strategic planning team has continued its focus on near term tactics as we maneuver through this dynamic economic environment as well as our long term vision and accompany the company's strategy for the future.
Aimed to enhance our sustainability, it's a high quality growth oriented organization.
Affectively craft, an official and deliver best in class financial products and services to its clients.
Our highly talented staff.
We build and develop relationships with clients and prospective clients with the resources and tools that our company provides.
Yeah, the analytics help our team assessed planned knee.
Craft strategies to meet those needs through the deployment of digital channels to assist in the delivery of products and services at the customers' convenience.
Identification of mercantile caliber talent existing and new markets. It seems to be a strategy a strategic priority for our management team as we look to grow the company through the creation of new opportunities.
This people first approach is an important aspect of how we grow our company organically as we seek to enhance our penetration in our mature markets as well as gain a stronger foothold in our newer markets.
Finally, I'd like to thank the mercantile team for their stellar efforts once again in the third quarter.
The company's performance has been strong from 'twenty to 'twenty two.
Look forward to finishing the year with a solid fourth quarter, which will position us well for a successful 2023 and beyond as we continue to build and enhance shareholder value.
Most of my prepared remarks, I'll now turn the call over to Ray.
Thank you Bob My comments will center around dynamics in the commercial and residential mortgage loan portfolios and noninterest income.
We reported annualized core commercial loan growth of nearly 10% for the third quarter and 11% for the first nine months of 2022.
This growth has been possible due to the efforts of our commercial lending team and their focus on relationship building in the community bank value proposition and was achieved despite payoffs related to asset sales or planned refinancing activities of $158 million a year to date.
Our commercial backlog remains consistent with prior periods as we continue to fund this impressive level of growth the pipeline for construction commitments that we expect to fund over the next 12 to 18 months totaled $169 million.
Presently line of credit utilization is 36% compared to 33% a year ago. However bank commitments in aggregate have increased $459 million over the past year.
The portfolio is also well positioned for rising rate environment is 64% of the portfolio was comprised of floating rate loans up from 50% at March 31, 2021 accomplished largely through our swap program.
Asset quality is pristine with nonperforming assets of 2.8 basis points of total assets and nominal amounts of past due loans there were no additions to nonaccrual loans and nonperforming assets during the quarter.
While we are proud of our strong asset quality metrics, we remain vigilant and are monitoring efforts to identify any sign of deterioration in our loan portfolio our.
Our lenders are the first line of defense to recognize emerging areas of risk a risk rating process is robust with an emphasis on current borrower cash flow and our rating model, providing sensitivity to any challenges evolving within our borrowers finances.
All that said our customers continue to report strong results to date and if not begun to experience impacts of a potential recessionary environment. We continue to closely monitor our concentration limits within our portfolio.
The mortgage business has slowed due to the rising rate environment and lack of available housing inventory in the markets we serve.
Higher rates have led to more demand for adjustable rate mortgages and the lack of inventory has led to more construction lending activity.
We hold each of these types of loans on our balance sheet and as a result residential mortgages have increased 63% over the prior year compared to a gain on sale event and immediate recognition of income Ah portfolio alone takes about 24 months to generate an equal amount of income.
We continue to pursue share in the purchase market with originations in the third quarter decreasing just 2% compared to the third quarter last year. Despite the increase in mortgage rates since that time.
Availability under our residential construction loans has increased to $84 million this quarter compared to $54 million one year ago.
Refinance activity is just 20% of last year's comparable quarter.
Noninterest income for the third quarter is down 53% compared to the third quarter of 2021. The primary contributor to the overall reduction was the previously described decrease in mortgage banking income was 73% and a reduction in swap income of 86%, which more than offset the 19%.
Kris and service charges on accounts of 29% increase in payroll services income and seven a 7% increase in credit and debit card income.
The optimization of our branch network as an ongoing endeavor that has yielded seven figure annualized savings.
Utilizing tools such as appointment banking limited service branches like ATM machines and branch consolidations complemented by investments in our remaining facilities resulted in them and nominal deposit attrition of less than 1% in the impacted markets that concludes my comments I will now turn the call over to Chuck.
Thanks, Ray and good morning to everybody as noted on slide 10. This morning, we announced net income of $16.0 million or $1.01 per diluted share for the third quarter of 2022, compared with net income of $15 $1 million or <unk> 95 cents per diluted share for the respective prior year.
Period net income during the first nine months of 2022 totaled $39 $3 million or $2.48 per diluted share compared to $47 $4 million or $2.95 per diluted share during the first nine months of 2021.
Higher net interest income stemming from an improving net interest margin and ongoing strong loan growth combined with continued strength in asset quality metrics and increases in several key fee income revenue streams in large part mitigated a significant decline in mortgage banking revenue as industry wide originations come off that.
Levels of 2020, and 2021, which were driven by lower mortgage loan rates and result in refinance activity.
Our earnings performance into 2021 period also benefited from lower loan loss provisions, reflecting improved economic expectations.
Turning to slide 11 interest income on loans increased during the 2022 periods compared to the prior year period, reflecting an increase in interest rate environment and growth in core commercial and residential mortgage loans are third quarter loan yield was 59 basis points higher than the second quarter and 40 <unk>.
Basis points higher than the third quarter of 2021.
The yield on loans during the first nine months of 2022 was relatively similar to that of the respective 2021 period as the increasing interest rate environment impact didn't start in earnest until the second quarter of 2022, and the 2021 period was significantly impacted by a P. P. P net loan fee.
Accretion.
Interest income on Securities also increased during the 2022 periods compared to the prior year period, reflecting growth in the securities portfolio to deploy a portion of the excess liquid funds position and the higher interest rate environment.
Interest income on other earning assets a vast majority of which is comprised of funds on deposit with the federal Reserve Bank of Chicago.
Increase as well during the 2022 periods compared to the prior year periods generally, reflecting the higher interest rate environment.
In total interest income was $12 $2 million and $17 $1 million higher during the third quarter and first nine months of 2022, when compared to the respective time periods in 2021.
We recorded a relatively small zero point $1 million increase in interest expense on deposits during the third quarter of 22 compared to the third quarter of 'twenty one in large part, reflecting the recent increase in interest rate environment.
In comparing the first nine months of 2022 until the respective time periods. In 2021, we recorded a $1.3 million decline in interest expense on deposits is lower deposit rates more than offset increased interest bearing deposit balances.
Interest expense on other borrowed money increase towards the 2022 periods compared to the prior year period in large part reflected in interest costs associated with $90 million in subordinated notes issue between December 21, and January of 'twenty two.
In total interest expense was $1.0 million at $1.1 million million dollars higher during the third quarter and first nine months of 2022, when compared to the respective time periods in 2021.
Net interest income increased $11.3 million and $16 $1 million during the third quarter and first nine months of 2022, respectively compared to the respective time periods in 2021.
We recorded a credit loss provision expense of $2 $9 million and $3 $5 million during the third quarter and first nine months of 2022, respectively compared to a provision expense of $1 $9 million during the third quarter of 2021 and negative provision expense of zero point $9 million.
During the first nine months of 2021.
The provision expense recorded during the 2022 periods, mainly reflected allocations necessitated by net commercial and residential mortgage loan growth increase specific reserves on certain commercial loans and a higher reserve on residential mortgage loans stemming from our projected increased average life of the portfolio.
Which were not fully mitigated by the combined impact of reduced COVID-19 environmental allocation.
Net loan recoveries and continued strong asset quality metrics.
The third quarter of 2022 provision level was also impacted by increased allocations associated with forecasted economic and business conditions.
Continuing on slide 13 overhead cost increase zero point $5 million during the third quarter of 2022 compared to the third quarter of 2021.
And were up $1 $9 million during the first nine months of 2022, when compared to the same time period in 2021.
Excluding a second quarter 0.5 million dollar contribution to the mercantile Bank Foundation overhead costs were relatively unchanged during the 2022 periods compared to the prior year periods.
A large part increases reflect higher compensation costs.
Continuing on slide 14, our net interest margin was 3.56% during the third quarter of 2022 up 68 basis points from the second quarter of 2022, and up 85 basis points from the third quarter of 2021.
The improved net interest margin is primarily a reflection of increased yield on earning assets in large part, reflecting the increase in interest rate environment, thus far in 2022.
As I noted earlier, we recorded increased interest income on loans during the 2022 periods compared to the 2021 period.
Which was achieved despite a significant reduction in P. P P loan fee accretion.
During the first nine months of 2022 P. P. P net loan fee accretion totaled $1 $1 million compared to $8 $5 million. During the same time period in 2021.
Our average commercial loan rate increased 156 basis points during the first nine months of 2022.
A significant increase in our loan portfolio that averaged about $3 billion during that time period.
Our net interest margin continues to be negatively impacted by excess liquidity. However, as in the second quarter the impact decline during the third quarter in large part to a lower volume of excess liquidity, reflecting balances used to fund loan growth.
The negative impact on our net interest margin from excess liquidity equaled seven basis points during the third quarter of 2022.
Compared to 23 basis points during the second quarter of 'twenty, two and 40 basis points. During the first quarter of 'twenty. Two we expect the trend to continue to decline as excess money has continued to be used to fund future loan growth.
Given the asset sensitive nature of our balance sheet, which includes 64% of our commercial loan portfolio comprised of floating rate loans any further increases in short term interest rates would have a positive impact on our net interest margin and net interest income.
Our cost of funds has not increased meaningfully during 2022, increasing four basis points during the third quarter and 10 basis points during all of 2022 compared to the respective periods in 2021.
Despite the increasing interest rate environment, our deposit rates and those of our competitors were not meaningfully raised through the end of the third.
Third quarter, which we believe reflects a relatively low level of competition for deposits given the excess liquidity positions of most financial institutions. However, as interest rates continue to rise and excess liquidity positions decline, we believe deposit rate betas will ultimate return to historical levels.
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We remain in a strong and well capitalized regulatory capital position, our total risk based capital ratio and all of our banks regulatory capital ratios were augmented this past December and January with an aggregate 90 million issuance of subordinated notes.
Of which a vast majority of the funds were downstream to the bank as a capital injection.
As of September 30, our bank's total risk based capital ratio was 13, 4% and was $150 million above the regulatory minimum threshold to be categorized as well capitalized.
We did not repurchase shares during the first nine months of 2022, we have $6 $8 million available in our current repurchase plan.
On slide number 18, we share our latest assumptions on the interest rate environment and key performance metrics for the remainder of 2022 with the caveat that market conditions remain volatile, making forecasting difficult we.
We're forecasting continued net interest margin expansion due to loan growth and the interest rate environment. During the fourth quarter with fee income overhead costs and our tax rate to remain relatively consistent to that of the third quarter.
This forecast is predicated on several expected additional increases in the federal funds rate, including a 75 basis point increase in early November and a 50 basis point increase in mid December .
In closing we are pleased with our operating results and financial conditions through the first nine months of 2022 and believe we remain well positioned to continue to successfully navigate through the myriad of challenges faced by all of us.
Those are my prepared remarks, I'll now turn the call back over to Bob. Thank.
Thank you Josh.
That concludes management's prepared comments and we'll now open the call up to the question and answer session.
We will now begin the question and answer session.
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At this time, we will pause momentarily to assemble our roster.
And our first question here will come from Brendan Nosal with Piper Sandler. Please go ahead.
Hey, good morning, guys how are you.
Remember that.
Okay, maybe to start off here on kind of the near term margin outlook I guess, just digging a little bit more you know it looks like fed funds will likely increase by a similar amount in the <unk> versus the <unk> at least on a quarterly average basis. It looks like you're assuming a good bit less margin expansion in the fourth quarter versus the third quarter.
I guess just to start off what what are the deposit pricing assumptions, you're using in the fourth quarter for your margin Guide and then maybe just help us understand deposit pricing dynamics more broadly as we move through this rate environment.
Yeah. This is Chuck I'll I'll take a swing at that one I think and I'm sure you're hearing out with all the banks as you know the cost of funds remains one of those big unknowns.
Think that along with provision expense.
Yeah, I think we definitely have gone through a very unique time period, where we have seen interest rates increase quite dramatically and for virtually all banks are most banks for sure Havent, we havent seen much of a increase in deposit rates and as I mentioned in my prepared remarks, I think we think a lot of that has to do with the excess liquidity.
<unk> that we.
Pat now clearly we are with the industry or are using I had been using those funds to fund some strong loan growth, which we appreciate but we believe that we're getting to the point, where there is gonna be a significant increase in competition for deposits, especially of banks continue to grow like they have.
So as I mentioned in my comments again, we do think that the betas will ultimately return to historical levels, which for us is somewhere between a 40% and 60%.
<unk> shipped with the change in the prime rate.
Dependent on deposit type of course, but really up until the first week of October here, we really didn't do anything significant do our deposit rates throughout the entire year. There are certainly certain types and some large customers that we were that we have been taken care of but from a broad standpoint, we didn't meaningfully increased deposit rates.
On a bank wide basis until here early in October and looking at our our rate comparisons. It appears that we basically have been doing what all the other banks and are competitive from a competitive standpoint in our markets.
I've been doing.
So I think from a from a forecast standpoint, we're projecting a 20 basis point increase in our cost of funds in the fourth quarter compared to the third quarter of this year, which I think we were only up about barely 10 basis points for the entire year. So I think that's.
The beginning of what we'll see as we go into 2023.
But again I think you know competition as it always is is going to be a big driver of deposit rates and as you know right now it's just hard to hard to forecast exactly what that's going to look like.
But again, we certainly expect the deposit rates to increase but.
But the benefit that we have is both ray and I discussed you know, we do have as they call it an asset sensitive balance sheet.
You know a 64% of our loans, which as you know almost 90% of our ASUR or 85% of our assets are floating rate.
And so we will continue to take advantage of.
Further increases in interest rates on the yield side and we'll just see how things play out on the cost of fund side, but I think the question. We get often is at what point do we think our margins are going to peak and I think the answer to that question is the quarter in which the fed is done raising interest rates.
And as you know deposit costs are always lagging if for anything because of the C. D product, but I think that we will seize our deposit rates increase after the fed is done.
Increasing rates on their behalf.
Yeah. That's fantastic. Thank you Chuck for them for all of his thoughts in that color.
Perhaps one more for me just turning to capital.
You folks have avoided the worst of the OCI marks experience so sitting on both strong regulatory capital and tangible common equity today versus I think a lot of the space, maybe just update us on how you think about kind of putting that capital to work over the next couple of quarters or a year or so whether it's you know the buyback dividend and organic growth.
For M&A, just kind of walk us through those various uses.
Yeah, I think first and foremost we want to use the capital to continue our growth.
As Ray mentioned, our pipelines are really strong we've got quite a bit of construction funding. Yes that remains so we are we're looking forward to some strong net commercial loan growth with the markets. The way. They are we think that will continue to see growth in the residential mortgage portfolio, maybe not quite as much as we saw through the summer gives.
The typical seasonality that we have here in Michigan and in the Midwest.
But first and foremost we want to use that excess capital.
Fund our loan growth as long as we can prudently underwrite our understanding the changing economic environments that we're gonna have to keep an eye on.
You know clearly we think our stock I think every CFO is going to tell you their stock is underpriced, especially in today's environment.
We have not bought back our stock this year and really it's it's again, mostly because we want to use you know every dollar if you will to fund that loan growth.
We wanted to make sure that we keep our cash dividend at a meaningful level as we have but we also want to be somewhat defensive as well you know clearly.
There's the expectation that the economy was slow clearly that's what the fed wants to happen.
And just how that plays out is a big unknown. So if we want to keep some dry powder, there and the capital base just to weather any storm that may be coming our way.
We're in an excess capital position, we'd like to be there and we don't want to do things to our capital position that puts us in a in a more difficult position.
If the economy.
It becomes more negative than what we all hope this is Bob I'll add to that.
About 10 months ago, and that we did our subordinated debt offering.
For the purpose of being able to support our our pipelines and our growth which has continued to be extensive and that really hasn't changed obviously the concern about the economy is one that.
It makes us a covered our strong capital position that we're headed into a potentially rocky a rocky waters as far as economic conditions, but we feel really good about it we were able to deploy our capital with our growth and continue on a very strong position.
Yeah.
Fantastic. Thank you for taking it.
Youre welcome.
Yes.
Our next question will come from Daniel Tamayo with Raymond James. Please go ahead.
Good morning, guys.
Got it.
Just.
And I guess more on the on the deposit side the loan to deposit ratio is back up over 100%. I know you guys are are comfortable on that level, but if you. If you don't mind, just reminding us where.
You're comfortable kind of taking that up to.
I guess I'll leave it there and then I'll follow up thanks.
Yeah, Dan This is Chuck I'll take that one.
Yeah, I think historically, we've been comfortable around the 100% to 105% you know one of the things that we always include internally is the sweetener suite product, which is the repurchase agreements, which is average is around $200 million that to us is deposit money. It has strong relationships that we have that obviously are swept.
And to that repurchase agreement, so that that knocks the ratio down to about 95% or so but clearly we see that the loan to deposit ratio is higher.
Than typical but it's a ratio that really reflects the opportunities that we have in the lending side.
And I'm, just kind of that balance as to how we fund that that that potential and growth that we see day in and day out how we use our federal home loan Bank advances you clearly that's the opposite that's going on there.
We use that in a very meaningful way, obviously, not only to fund the asset side of our balance sheet.
But to make sure that we are managing our interest rate risk position from the longer term, which I would say its five years commercial real estate fixed portfolio that we've got one of the things that I think as you know over the last couple of years, we've been diligently engaged in our back to back swap program.
Graham you've seen everybody has seen the swap income that results from that which is great.
But really the impetus behind that is to make sure you're going to eliminate those five year seven year fixed rate commercial real estate loans.
<unk> put them into a floating rate loan obviously the back to back swap program that benefits to our customer wanting the fixed rate.
But what that means is we don't have to utilize FH I'll be advances to manage that longer term interest rate risk.
But truly freeze a freeze us up from doing some things on the deposit side that maybe we wouldn't otherwise want to do so lots of different things you know a lot of different ingredients going into the soup there.
But the short answer to your question is 100% to 105%, we feel comfortable with and that's where we endeavor.
To kind of cap out at that level.
That's a great answer I appreciate that.
And then maybe.
On the on the credit side, you know if we could just talk I mean, you know the numbers are really strong in the quarter.
If.
If we could just dive into a little bit like where what categories, you're watching I mean, it looks like you know even when the in the slide deck. When you broke it out by categories. There's not much in terms of early indicators, but.
Clearly, where we're potentially going into a recession here, so where are you guys watching most closely.
In terms of our loan category.
Yeah. This is ray it's almost reflects the answer that with hotels and restaurants, that's been the answer for a long time, there showing any signs of.
Stress at the moment as you implied in your question as a matter of fact are the hotels that are refinanced have actually done quite nicely.
But as the economy and the consumption in the economy moves from goods to services and manufacturing.
<unk> portfolio is something that we're watching closely as they adjust to that so.
So far so good there are also you know the impact of disruptions.
It would be felt there first in the.
The supply chain and the availability of goods and the like in <unk>.
Puts and then and then finally the.
Dynamics around the markets that are have office buildings in them are highly individualized, but are we are watching those closely and we believe we have the right sponsorship groups there to withstand the changes that are coming there as firms come back to work or don't.
So those those are the primary areas that we're watching.
And again, no overt signs of stress as you've noted from our from the stats, but nevertheless watching them very closely.
Okay. Thanks, and then lastly, just relatedly on the reserve build a small reserve build this quarter. You mentioned there is theres still a COVID-19 factor in there.
Just thoughts on what would be the biggest drivers I think last quarter you talked about unemployment you mentioned in your comments that Michigan unemployment went down again. This this quarter, but just thinking about how what might be the impetus for reserves to build going forward. Thanks.
Yeah, Dan It's Chuck again.
We looked through our models and I thought the other banks you know.
They're dealing with their forecast and their models. It appears that you know and it makes sense that the unemployment rate is by far the biggest factor.
Factor when it comes to overall economic growth or lack thereof.
Clearly if people are working they have monies and disposable income if they're not working then the.
The vast majority if not all of their money goes to just making ends meet so.
We're in a very strange environment that are you know the unemployment rate has stayed very very steady at a very very low level, which of course is causing all kinds of issues, including wage inflation and difficulty not only for banking industry, but all all the industry is finding the talent and the people that they need.
I think so I think it's really that unemployment factor that we continue to look at I think that looking at our seasonal solution that is one of the primary drivers.
We did see a little bit of an uptick in the unemployment rate.
In our forecast that we use a couple of forecast that we use and we also saw some slowdown in GDP, which would make sense.
So I think that was the impetus of the increase.
In our in our reserve to provision expense in the third quarter.
Which was about $1 million of the of the 2.9 almost $3 million that we provided so about a third of our provision was related to just the forecast and the economic conditions that are there I think that Oh, well, obviously continue to keep a look at on the economy, we continue to use our forecasts.
Per our policy and per accounting guidance.
But we do have in our back pocket, we understand that we are more localized in the state of Michigan, Although obviously our industries are impacted globally, but you know, we'll look at the economic forecast, which is for the country.
But we'll continue to look at it kind of per Ray's comments, we'll continue to look at our portfolio our markets to see how they're performing relative to our the.
The national forecast and if we see a more of a protracted slowdown in our numbers and our expectations. You can certainly add to the reserve. In addition to whatever the actual forecast is providing for them.
Alright, Thanks, Chuck I appreciate all the color that's all for me.
Welcome Thanks, Dan.
Our next question will come from Erik Zwick with hefty. Please go ahead.
Good morning, guys.
Alright.
First just wanted to start I guess with a question on the commercial loan pipeline. If you could quantify that balance at the end of September and how that compares.
Two the June 30th balance and then also if you are able to provide any commentary on T D.
Specific geographies or industries that are maybe contributing more to that strength and growth.
Yeah, Eric This is Chuck I can do it from a number standpoint, let ray give more color on more of the specifics numbers.
But when we look at putting our acute together and we've got to disclose our commitments to make loans, which is basically any bottom five commitment that we have made a that has not been closed yet we are actually seeing quite a bit of an increase from where we were in June I think are in June . It was about 210 $220 million that we have.
Reported in our June 30th two as of June 30th we're.
We're looking at a number that's just a little bit over $300 million added September now clearly you know theres nothing theres negotiations going on there.
You know some of those credits are being competed with other banks, we certainly don't expect to get all of them by history does show us that we get a large majority of those.
And then you know that we would expect those to fund over the next 12 to 24 months clearly there was some construction loans in there, but you know the new merit from a numerical standpoint, the different ways that you can measure our pipeline.
Just to be very strong as we said and really for the you know compared to where we were at the end of last quarter has actually grown.
In terms of color multifamily is a very popular product and our in loan demand right now Kent County came out recently with a study that are indicated they needed about 9000.
And it's of housing over the next couple of years and others are the delivery pipeline is like 2000 to 3000 units. So there is a perceived shortfall there that our developers are jumping into it and we're following them carefully into that.
Secondarily I'd say the general C&I bucket is very robust.
And in many different forms you know a decade plus of building relationships in those areas is paying results.
And Oh.
Defies categorization by industry.
Industry or S. I C code, but I think that general bucket describes it fairly well.
That's helpful. I appreciate that maybe one quick follow up on that C&I bucket. If you could remind me where the C&I utilization rate is today and then how that compares to what you would consider a more normal level.
Oh, It was <unk> 36, compared to a 33% the prior quarter and our I think normal is maybe high thirties.
And so we're just a little bit under I think that reflects some requests by our customers to have more credit availability as they watch the prices of their imports are moved skyward, and so I think our customers and us together are positioned to deal with their needs and the <unk>.
Immediate future say over the next six months to a year.
Thanks, I appreciate the follow up there and then moving to I guess slide 18, and your thoughts for some of the performance metrics in <unk> just looking at your expectation for average earning assets. It would seem to indicate relative to <unk> that they'd be flat to down a little bit. It sounds like you know loans will be strong and likely growing so just curious about you know.
The offsets there.
You know cash liquidity or maybe the securities portfolio.
How do you get to that number.
Yeah I think.
What we're projecting is a continuation of what we've seen throughout the year is using that excess liquidity, primarily the funds that we have on deposit at the fed and putting that into the loan portfolios.
You know primarily the commercial as well as the residential.
On an overall basis, we're just kind of moving money.
Around the assets and not expecting much change on the liability side.
So I think we continue to look for a growth of around 10% and when we look at you know put the pencil to that we've got the funds on hand at the fed.
To get us through that without any meaningful deposit increases.
But having said all that I want to make sure that everybody understands we have always been out there looking for deposits.
And actually we've seen some good deposit new deposits come into the bank.
This year overall, excluding the one deposit relationship that we've talked about before on an overall basis deposits have stayed relatively stable clearly we have seen some of our depositors some of our borrowers using funds that they had on on deposit at the beginning of the year or the early part of the year, but we've also seen some really solid.
Deposit growth as well.
Especially with the you know the C&I customers that we've been bringing on.
They come over with some meaningful deposits and some of them are just deposit only customers as well have shown have reflected some increases in their deposits as well. So while we have the moneys at the fed to fund loan growth this quarter as we had the previous quarters.
You know were full guns, a blazing you know looking for any opportunity that we can bring in new deposit relationships and increased existing relationships here at the bank Yeah I got it.
As far as the point that Ray made about the the volume was C&I type of relationships that are in the pipeline right now and that will continue to call on because those are the relationships that tend to read off of a larger deposit.
Hum.
Accounts and will help to partially fund that growth at AR that we are enjoying on the pipeline.
It's also worth noting that those accounts tend to be noninterest bearing and and our commercial concentration leads to probably a greater than normal proportion that our noninterest bearing deposits on our balance sheet.
If I could add that's a good that's a great comment that Ray just made it in and I Should've mentioned that when we were talking about the cost of funds earlier.
You know, having about 40% or so of your funds being noninterest bearing clearly pays dividends in an environment that we are in today and again all of those deposit related on C&I relationships not only do you get the deposits, but then that.
Of course goes into our ability to provide other treasury management.
Products and services as well, which we've talked about have shown some strong growth and I think that was strong growth in those categories not only reflects the opportunities we have in our existing deposit base and borrowing base reflects the success, we have in cross selling those products when we do bring in new C&I customers to the bank.
So yeah, the C&I customers they they paid dividends in many different ways.
You know throughout the income statement.
Thanks I appreciate the complete answer there one last topic for me just curious about the specific reserve for the distressed commercial loan relationship.
I'm just curious is this a new situation or something you've been monitoring for a while and here, but can provide any color on today.
What kind of business or our industry and then what what changed in <unk> to prompt a specific reserve.
Yes. This is this is one C&I relationship that are.
Hit our radar earlier much earlier this year that we've been working with and as we do any type of distress situation.
Working with the borrower and its management team to.
Figure out what the issues are and try to put some corrective actions in there. It is a performing T D R.
The company is still viable and they're still operating but it did get to the point, where it did hit the TD our guidance for us and with the TD our guidance from an accounting perspective means we need to kind of if you will treat it as a non accrual. So when we look at our collateral that's available we do some you know as we always do some pretty heavy discounting.
On valuations, we do see the need to have a meaningful a specific reserve against that credit.
But I would again stress it as a performing T D or is that not on nonaccrual.
So those TDI rules would go away if it was a year from now we wouldn't be talking about a large specific likely a large specific reserve with the TD ours rules going away, but nonetheless, we do have a reserve against that credit. We are again, obviously working with that borrower to get them in a better position, but looking at other options as well.
Well to look to either obviously.
Obviously reduce that exposure that we have here at the bank.
Got it but it's definitely a quick follow up it go ahead.
I was just you know from a relationship standpoint, it's a one off as far as the overall credit situation with that borrower compare to the rest of our portfolio.
Yeah. Thanks, I guess my my fault I was going to kind of be along those lines in terms of if it's a company specific issue or there is a if it's related to some of my bet industry pressures supply chains or anything like anything else like that that we're all kind of tracking.
I will say that I guess my reaction is that it shows you. The overall strong quality of the portfolio. If we're talking about one change in our long grade a reserve that.
That is a purely one off situations so.
I appreciate the question about it but.
It's not reflective of a trend that we're seeing this a one off situation that there's a plan in place to make sure the situation gets corrected.
Understood that's great to hear thanks for taking my questions today.
You bet.
Yeah.
Ken to join the queue you May Press Star then one.
Our next question here will come from Damon Delmonte with K B W. Please go ahead.
Hey, good morning, guys hope everybody's doing well today I appreciate all the color and insight on the and the loan pipelines and the outlook. There just kind of wondering are your commercial developers you know kind of pulling back at all are hesitating, given the rapid rise in rates and especially if we see like another 125 basis points of increased by by year end do you think that.
Got to kind of weigh on sentiment at all.
I think that it depends on the product type you have one in particular in mind.
I know just you know commercial real estate development.
If you're kind of planning out the you know the budget process for a project you know and all of a sudden rates are going up a lot faster than maybe they thought like does that kind of give them pause to put the project on hold.
I mean, obviously that all goes into the calculus of a project and.
Where that will create a slowdown is where the rents are less robust than not on an upward trend and multi family. They certainly are on an upward trend and so the rates are and the income have moved up.
Fairly well in parallel with some tightening but.
That's kind of reaching I think a climax ware.
We're getting to a point where much more increase in long term rates will begin to have a dampening effect.
We've seen a lot less demand.
Actually a notable lack of demand and product types like retail or office buildings and as a result, the activity as you know very minimal there only for the strongest sponsors or maybe somebody who has an existing low leveraged project. So.
That's kind of what the landscape looks like for us at the moment.
That's great I appreciate that color and then on the expense side, you know the guidance for the fourth quarter kind of keeps you know if you look at the mid point of your range. It is relatively flat to where you are what are what are some of the levers you guys have accessible to to help combat the inflationary pressures that we're seeing.
I wish I had a lot more levers than I do but clearly clearly you look at our bank's income statement and you know our compensation and benefit costs are the big key there and like every everybody in every corner of the country or world. As you know there was a lot of inflation out there so.
We obviously need to make sure that our employees are paid well paid relative to what the market's paying in and obviously trying as best we can to help offset the impacts of inflation that they've got.
So all of that goes into the mix and it basically means that you know we're going to as we have we're going to continue to see robust inflation hit our salary compensation and benefit costs. So.
We're going to we're going to do what we have to do there.
As we always have and we'll look to other areas of the income statement, whether that'd be margin management provision expense, you'll see income.
Look to that to help offset the pressures that we have in those overhead costs.
Break it back me up on more specific cost totals, but our branch optimization projects that we've been working on for the last several years been able to consolidate or close a number of branches that have helped us upgrading those expenses right to the bottom line in terms of savings so.
While there may not be a plethora of levers where we're looking at every every car that we can make sure that we're sufficiently run as we can be but at the same time, making sure that we take care of our employees, who are what will enable us to do the things that we're able to do.
Got it Okay, and then I guess, just lastly on the fee income side.
Do you feel like the mortgage banking.
Our income has kind of leveled at this point or is it has reached the bottom or do you think that there's still more more downward pressure on that line item.
I think on the overall basis I think we feel like we've kind of hit a bottom if you will our production numbers not clearly we have seasonality when you're when you're when you're most of your product is coming from home sales.
Not refinances, clearly you're susceptible to seasonality and you know theres not a lot of like in your neighborhood Damon Theres not a lot of house buying and selling going on in January and February . So right. I think I think we would expect to see some normal seasonality there, but I think from an overall standpoint.
Feels like we've hit some level of bottom here.
Got it Okay I thought I had thanks, a lot appreciate all the color.
Thanks, Tim.
Yeah.
This concludes our question and answer session.
To turn the conference back over to Bob Kaminski for any closing remarks.
Yes. Thank you very much for your interest in our company and we look forward to speaking with you next at the end of the fourth quarter just call is now concluded.
Yeah.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.