Q3 2022 PacWest Bancorp Earnings Call
Good day and welcome to the Pac West Bancorp third quarter earnings call. Today's conference is being recorded at this time I would like to turn the conference over to Bill Bullock. Please go ahead.
Thank you and good morning, and welcome to conquest third quarter 2022 earnings Conference call with me today are Matt Wagner CEO , Paul Taylor, our President Bartleson, CFO and Mark Jamar Cielo and the leader of our venture banking business before I hand, the call over to Matt.
Please note that we may make forward looking statements during today's call that are subject to risks uncertainties and assumptions for a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward looking statements see our company's SEC filings, including the 8-K filed yesterday afternoon, which is also available on the company's website now I'd like to.
Turn the call over to our CEO , Matt Wagner.
Thank you Bill.
Morning, everyone and thank you for joining our call today I wanted to start off by making a few comments about the overall business and operating environment overall business activity remains strong, but we are proceeding cautiously as we are thinking about and planning for weaker economic environments ahead.
We continue to focus our time and attention on our customers, making sure. We are there to serve them throughout the cycle.
We slowed some of our lending businesses.
Given the economic environment, and our desire to grow capital more rapidly while optimizing our balance sheet given the current economic backdrop a backdrop. We believe this is a prudent thing to do.
Credit remains strong and currently we do not see any negative credit trends and we continue to monitor the loan portfolio closely as part of our conservative approach to credit finally, but most importantly building capital as we did in the third quarter remains our primary focus and this will continue to be.
Key component of decisions, we make each day with that let me turn it over to bill to cover the key highlights of the quarter.
Thanks, Matt the third quarter was marked by a couple of key events first and foremost all of our regulatory capital ratios increased during the quarter, including CET, one which increased from $8 two 4% to eight 5% as we March towards our CET, one target of 10% by the end of 2023.
Our total deposits grew $228 million and importantly, after two quarters of decreases our venture banking deposits not only stabilized but grew $129 million to $12 2 billion.
Third credit quality remains strong with nonperforming assets only at 34 basis points and net charge offs for the quarter of three basis points. We continue to monitor the loan portfolio closely and I've not seen any significant signs of credit deterioration at this point.
Fourth our net loan growth remains strong and broad base across the businesses, but lower than the prior two quarters as planned and as previously communicated lastly on interest income on a tax equivalent basis was $338 6 million up three 3% from last quarter I'd like to now hand things over to Bart our CFO for some specific common.
Terry on the financial results before we go into Q&A.
Thanks, Bill and good morning, everyone I'm going to focus my comments on page three a new slide we added to our earnings presentation, which provides a condensed view of our financial results. As you can see here interest income continued to grow increasing 17% to $410 million during the quarter and up 41% from a year ago, driven by higher average balances.
Right.
Interest expense also grew during the quarter with our cost of deposits increasing to 70 basis points, driven by higher rates and higher average balances of wholesale deposits. As a result, this limited our NIM expansion during the quarter.
Turning to the provision the provision decreased by $7 million, primarily due to slower loan growth a decrease in COVID-19 related qualitative reserve offset by less favorable economic forecasts.
Our seasonal ratio ended the quarter at one <unk> to 3% still above our seasonal adoption level.
97%.
Moving down to noninterest income this was up $4 3 million due to the successful outcome of the litigation matter, which net of legal fees in 2022 added $5 5 million to noninterest income during the quarter.
Meanwhile, noninterest expense was up during the quarter by $12 million. This increase was attributable to a $3 $9 million increase in professional services primarily related to the credit linked note transaction.
$3 4 million increase in compensation related to an additional 68, FTE primarily related to civic and our digital and innovation strategy, along with one more business day.
Other contributors to the increase were a $1 5 million increase in FDIC insurance assessments as a result of higher wholesale deposits and QQ and <unk> and a $2 6 million accrual for a legal settlement, excluding the $7 million in nonrecurring items related to the credit linked notes and legal accrual.
Noninterest expense would have been $188 6 million.
From a balance sheet perspective, the only comment I would make is that we sold approximately $440 million of bonds at a net gain of 86000 as we continue to actively manage the investment portfolio.
OCI unrealized loss for the quarter went from a loss of $645 million at the end of the second quarter to a loss of $848 million at the end of the third quarter given the movement in market interest rates.
Lastly, if you are looking for our outlook on our fourth quarter I would point you to slide 11 in the presentation material.
This concludes our prepared remarks, operator could you. Please open the line for questions.
Yes. Thank you if you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again. Please.
Star one and we do have a question from Jared.
Please go ahead hi, guys.
Everybody good morning. Thanks.
Thanks for the question.
I guess, just maybe a little thought on how we should be thinking about beta from here.
I think accelerated into into the quarter.
Should we.
Be thinking that there is there is no more more room to go here as we move through the cycle or what's your thoughts on I guess beta through the cycle to start off with.
Yes, good morning.
The current ladies and current cycle rising interest rate environment, we're at 41 basis points for interest bearing and 26% for total deposits I'm looking ahead, our updated forecast.
That data is over the next 12 months is for that to increase.
50% for interest bearing deposits and 31% for total deposits.
Okay, Alright, Thanks, and then as we as we you mentioned the slowing outlook on loan growth.
How should we be thinking about the funding.
Funding of that is that.
Going to see a continued increase in loan to deposit ratio should we assume that that deposit growth is lagging that or.
Should we be thinking about that.
Deposits at that beta should should keep pace.
Well again the guidance that we have on deposits is <unk>.
Depending on that you're banking on predominantly.
So, we'll see where that goes from a deposit perspective, I think the slower loan growth is obviously part of that.
Loans.
We'll probably do some funding with wholesale obviously sp.
Deposits don't grow at the same paces.
<unk>.
Okay.
And I guess, maybe just finally for me maybe a bigger picture picture question for Mark on the venture side.
Good to see the deposit growth there, but you know maybe you'd be interested to hear your thoughts on sort of sentiment in terms of the.
The sponsors and in peso potential investment as we end the year and go into 'twenty three.
Hi, Jared yes, Mark.
Yes, I would say our R. R.
Our lookout.
Had been debt transaction exhibitors start picking back up your end of Q3 and.
Again, a little bit more robust into Q4.
The numbers are all for the broader U S venture market transaction levels did come down meaningfully in Q3 part of it aided by the summer.
Seasonal slump, we are expecting to still $290 billion of dry powder notes named the number has been restated 160 billion of it is estimated to be used for new investments out of that dry powder. So we do think the vcs will be under some pressure here to put them later work before year end. So you know we continue to believe.
Leave that transaction activities should come up into Q4, but again, it's not going to be 2021, or 2020 pandemic year transaction levels, it's going to be more like pre pandemic transaction levels, but aided and assisted by the tremendous amount of dry powder in the ecosystem.
So we continue to be cautiously optimistic here into Q4.
And we'll see where we end up here.
Great. Thanks very much.
And our next question comes from Christopher Merrimack.
Yes. Good morning wanted to ask about the percentage of core funding of the balance sheet do you see that changing further as we go into next year and just kind of curious on sort of job I guess on the same line can help dda's may play out as well.
Yes, I mean, I think the quarter funding again.
Debenture.
With that and so I think.
The guidance, we have we think flat to up depending on venture. So I think from a core perspective, that's going to be.
Really the key driver I think we expect community bank too.
We continue to grow saw some decrease in the third quarter.
But yes, we expect that to grow as it typically does.
And is the wealth management.
Instead of off balance sheet.
Data on that materially different from what we see at the bank overall.
Well, it's off balance sheet, so thats not in our numbers right.
So it has no bearing on what those betas would be.
So we had initiatives Chris this is Matt to bring a wide berth pardon me back on balance sheet project Boomerang I think we call it.
We're having some good success with it but of course, we're paying up for that money.
Great.
That's what I just wanted to start with so thanks, Matt for that and then just a final question for me is on.
On the expense guide that you gave us for the fourth quarter, how applicable is that for the first part of 2023 is that a good number to kind of read through to the early part next year I know budgeting is still going on.
Yes.
Yes, I mean, the budgeting process Youre right. It is going on we're in the midst of that right now it's probably a good jumping off point, but we are taking a look at our expenses closely as we go through the budget process and.
So that'll be a big focus for us.
As we got through that but I think from a jumping off point that probably a good guide.
And Chris some of the some of the businesses that we're in.
You can logically.
I am not going to name names necessarily but its activities youre going to youre going to slowdown.
<unk>.
Pretty dramatically you are like a lot of fixed rate lending.
And those kinds of things and if you slow down activity you need less people.
So youll see some initiatives coming from us.
We don't have I guess I wouldn't call it necessarily a formal hiring freeze now, but every every new hire including a replacements are heavily scrutinized before we go forward with that.
Great. Thank you Matt Thank you Bart.
Yes.
And our next question is coming from Matthew Clark.
Hey, good morning.
Wanted to start on <unk>.
Deposit costs could you have do you happen to have the spot rate.
On the spot rate at the end of September on interest bearing deposits to give us give us some visibility going into next quarter.
Yeah, the spot rate was 85.
Uh huh.
Okay I thought it was $1 15, this first quarter, but okay.
To circle back on that.
<unk> 85 in total.
Matt The 85 is below total thank you okay.
Got it.
And then in terms of.
It came down this quarter should we assume that they continue to come down and as it relates to the wholesale deposits youre willing to take on.
What rates are you seeing relative to the duration.
We're willing to do.
Yeah on the borrowings I mean, thats going to fluctuate a little bit again, just with.
While demand growth and how we decided to find out whether we do with borrowings or whether we do wholesale.
Going through the third quarter wholesale was cheaper than overnight, but that that gap has narrowed.
And so I think when you look forward I think we probably have a little bit of wholesale in there.
And then you said that overnight as well so I think it will be a mix.
It really just depends on what the rates are we did during the third quarter and throughout the wholesale process that we did do the latter.
Third.
And so we'll continue to do that.
And let's see where it goes but it's.
It's probably in the three and a half.
<unk> range on the wholesale.
Depending on the duration.
Got it.
And then just on the guide for slower loan growth in the fourth quarter are we talking low.
Low to mid single digits, and how should we think about overall, earning assets would be flat from here or flat to down.
Well, if you were trying to hold the loan side of the balance sheet more towards flat there will be some growth in the fourth quarter and looking out into 2023 again, I think youll see seen little grow.
But there will be some growth.
Yes, Matt I would just add to that that we've talked about for the last couple of quarters of optimizing the earning asset mix and migrating the overall balance sheet and I think the comments that Paul made as more of the net balance of that Theres, obviously going to be ebbs and flows.
Different things that will grow with different things that may come in and out but the net result of that shouldn't be a flattish loan portfolio with a flattish balance sheet 'twenty correct.
Yes.
Okay, and then just on your guide around modestly higher NII.
<unk>.
From here.
Is that is that assuming youre going to get some additional lift in the NIM or do you feel like the diamonds.
Near a peak.
No I think we expect NIM to continue to expand I mean it was.
<unk> limited.
Limited expansion this quarter because of the deposit cost, but I think we see the loan yields continuing to rise.
Deposit costs will will rise.
Things that will be expansion in the data.
Looking ahead, yes.
I think it's a mixture of basically the higher rates.
And the Remixing of earning assets on a flat balance sheet.
Okay I'll step back thanks.
And our next question comes from Gary Tenner.
Thanks, guys good morning.
I just wanted to ask and I think you may have addressed this in part by talking about a flattish loan portfolio in 2023, but as it relates to your 10% CET one goal.
Obviously, you had a 30 bps. This quarter 20 of that was the <unk> transaction can you talk about any additional transactions or strategies, you're thinking about in terms of growing that beyond just internal capital generation.
As we look out over the next several quarters.
Yes, I think.
We're looking at everything.
To make sure that we are.
Meet or exceed the 10% CET one by the end of 'twenty three.
So I think youll see the company.
Go through.
Process, we'll be announcing things and looking at everything we can to improve capital.
Gary everything is kind of up for grabs this is Matt.
Things like you know, obviously, we're going to have amortization of our multifamily loans.
And of course, you're also going to have some activity there were loans youll properties will be sold out.
In the normal course of business, maybe not as quicker velocity as you would have.
The rising rate environment, because theyre not doing refis youre going to have the same with our <unk> portfolio youre going to have amortization and youre going to have people youre not going to have the refi activity, but you're going to have people move sell their homes and that sort of thing.
Just.
And the nature of Pac West and Youll see this quarter, we had payoffs and Paydowns of approximately 2.25 billion I think wasn't embark yes, yes.
Which is down somewhat from our more average which was like two and three quarter Bill year on a quarterly basis, it's paid off and these are things like.
Construction projects a lot of which.
We do.
Majority is multifamily coming to completion certificate of occupancy is issued and long term lenders stepping in and taking us out and we still see that kind of activity and we don't expect that to slow down. So when you think about the portfolio in general you've got about between eight and 10 billion.
Dollars and natural runoff.
On an annual basis, which is 30% of our portfolio more than third.
So we.
We still have to be out there making loans.
Making a mature customers are customers that provide us core deposits, yes, we will continue to do that.
I'm not going to be like we're going to be sitting around flat footed.
In order to keep the balance sheet in check we still have a lot of work to do.
Thank you thanks for that color and then just to make sure that I'm clear on as you were talking about.
Optimizing the balance sheet as you think of the asset side, if you're kind of not growing loans or the balance sheet. Overall is it more of optimizing the mix within the loan portfolio or as you look at the broad categories of loans securities and cash.
Shifting that mix more from where it is right now.
With that.
We're not selling our securities portfolio off unless we can do it.
Neutral level so yes.
As.
What is our monthly maturities are.
$40 million, Yeah, it's gone down it was about that during the quarter, but forward looking at around 30 $30 million just run off the securities portfolio.
Yes, I mean, it's optimizing what we want to do I mean.
Our loan portfolio.
We know rates are going to continue to go up at least through probably the first quarter of next year. So why would you possibly make it.
Be making a fixed rate loan now.
I mean, we still have some flow and we still have some commitments in Q3 that we had done a runner, particularly for our good customers that are also large depositors.
That pretty much flushed its way through the system. So you won't see much more of that.
So.
I'm pretty optimistic.
I'm also happy to see the deposit flows improving particular adventure.
And I think that.
It's not going to be like 20 to 21 again as Mark said, but I think it's it's kind of stabilized.
The community bank deposits, which are our other big chunk of deposits R. R.
Continue to grow although they never it's never been an exciting growth.
The low single digit kind of growth.
Yes, the one thing I would add to that is that when I think you look at it optimizing the balance sheet is not necessarily optimizing assembled part of it is optimizing the whole.
So we're really trying to manage the balance sheet for capital and liquidity and an overall long term views of it so the ebbs and flows of one part of the balance sheet are less important to me than they are in the hole and I think what we're talking about optimizing it it's not necessarily loans will be that or this will be that it's really trying to maximize the overall balance sheet and.
We have to keep in mind that the balance sheet runs off about $2 5 billion.
So we're going in.
Looking at all of our types of loans and going with the lowest profitable best loans that we can to fill that $2 $5 billion bucket.
And Thats and Thats why when we talk about upfront and then it also gets back into the capital side of it and that's how we can see the clear path to the CET one of 10% by the end of next year I mean, if you look at it Gary on the CET one.
You were at $8 55.
145 that we've got it yet at 29 basis points a quarter can you achieve that absolutely I mean, the profitability is certainly there.
Just a matter.
We can't grow the balance sheet at $3 billion.
Order and do that.
But it's not likely that youre going to see that.
Guys know im a very customer centric.
I was talking to a lot of people in them.
West Coast today too.
See other customers and people are pulling back can meet projects projects that made sense at 4% interest rates.
Aren't going to make sense, seven and a half.
And that sort of thing so naturally the <unk>.
<unk> is naturally slowing down I think you'll see that throughout the country with the banks.
Yes, So I think you just.
You just keep an eye on everything.
Again.
You got to be there for your best customers, our best customers are.
Our deposit customers.
Again, I emphasize it's often in these kind of calls.
If you take a look at our venture businesses I think our loans came in just a little over $2 billion for the quarter of which a huge chunk of that capital call lending, we've never been a giant capital call lending just a pretty moderate one.
But our deposits related to those businesses.
The Tech life Sciences in capital call lending are $12 $2 billion. I mean, that's just remarkable more than six times and we've got to take care of those customers and we will be out there mark and his team are we're seeing a lot of lending requests from those those groups because they.
Don't want to raise capital right now because they probably be looking at a down round.
So.
It's a dynamic environment.
Great. Thanks, guys I appreciate it.
And our next question is coming from Bryan Keane.
Hey, this is Brandon.
Sure.
Curious about great yes.
Yes, I wanted to get a update on civic loan production I know it was pretty strong in the quarter.
In giving you know.
Interest rates affecting housing demand and lower house prices I'm just curious what your outlook is for that if they can keep up this pace or if you're expecting slow down from there as well.
Hey, Brandon it's bill so you've seen higher higher rates start to translate through throughout the balance sheet and adequate civic IRA is naturally slowing production, you'll see that happen in the fourth quarter and that ripples through youre seeing a.
A maturation of the portfolio of some of the payoffs are starting to kick up and so I thought you saw good production good solid credit stats, our underwriting has remained relatively consistent.
For the past couple of years and I think overall.
The net growth will obviously slow as rates go up and payoffs kick up.
Yes.
Bill.
Since you brought up <unk>, you might want to touch on Florida.
Sure. So obviously with the types of natural disasters that we've had.
We went through a deep dive of the entire portfolio of both within civic and externally.
The overall amount of prop.
<unk> that were severely damaged.
A little more than a handful.
Low low single digit million.
Exposures, all properties, where we have insurance policies in place.
So a really nice.
I would tell me in terms of the team doing the work and having a quick diligence to jump on the followings.
Obviously, a horrible disaster, but I think our teams did a great job in the face of a really tight timeframe.
So we're pleased with the underwriting and the structure there.
Got that.
Add to that that includes other lending that the bank does in Florida.
John and it looks really good and in terms of yield I had to step out just really quickly there we had a nice bump in yield for the civic production.
September a jumbo.
34 basis points at 747, which is quite good.
Hopefully that trend continues they have raised their their advertised rates and we still have a nice inflow of business. What you are.
Seeing there.
In terms of the pipeline is is that the pipeline from origination to fund to kind of creep it through the balance sheet numbers that Matt mentioned.
We're going to keep creeping up there.
<unk> continues to flow through the pipe, yes, there were I mean these deals often are committed 30 days in advance right Bill.
I don't know if we call them a rate lock, but it's almost a moral obligation to do what we said we were going to do and we don't like to re trade deals and so some of that is still working through the pipeline. It work through the pipeline in Q3, but I don't think we have any more of that really in Q4.
Civic or in the core bank.
Got it got it.
And then lastly, I wanted to touch on credit I mean charge offs have been very low for a while now and I'm curious now that we're kind of going into an economic downturn as kind of a general consensus what do you think net charge offs could go to kind of.
More normalized level in a slower economic environment.
It's really it's really tough to peg that in a bank like ours.
Not very actuarial, we're not very consumer ish.
But we continue to do deep dives in all of our portfolios focusing on things that are more hot buttons and headlines like office properties and things like that.
We're pretty optimistic on what we see within our portfolio and for that matter to the banking industry overall.
Again.
I think.
Great lessons were learned in the great recession, and the banks are very.
We're much more conservative in their underwriting and lending and I think pretty optimistic about that so I.
I don't see any real.
Ugly patches ahead, Bill do you have anything to add to that yeah, yeah, what I would say to that Brian is that the the past five years to seven years inside of this company.
Really in my mind played itself out in terms of the stated numbers Youre seeing classifieds criticize special mentioned non accruals really be at the lower end of our historical range and I don't think Thats, a fluke I think thats a direct result from all the work that's done and the composition of the balance sheet is materially different than it's ever been and I think when you look out.
Could you see it like a bump here or there in terms of an individual credit for sure, but I think the overall loss content as I think we've continued to prove out quarter in quarter out.
I think it's very very manageable. So I don't think youre like I know that there's historically been some some thoughts of the credit here and I would point to the fact that the non accrual numbers had been.
The lowest that we've ever had.
All the other metrics Jive with that special mentioned classifieds criticize so the intense scrutiny that Matt talked about we are doing on a daily basis as our job. That's what we get paid to do and I think youre going to see it continue to show up in some pretty strong loan.
Credit metrics I mean Bart.
Adventure for instance, what is our charge offs been for the past three years I think net zero, yes, it's been very very well, which is pretty damn right.
Great job.
We're not recovery of about $1 $2 million through this year.
Yes.
Yes, I mean and that's.
But I mean, if you like the previous two years Mark.
We were net positive to I think in recoveries, yes.
Barbara <unk> 2021 whereas volume.
Yeah, it's pretty remarkable.
That's a business that as you know.
<unk> and life Sciences, if something goes wrong methadone. It I mean, it goes to zero now, we often can recover money, but youre not recovery, but at a high level, but I think our people have done a great job and we've been able to keep the customers and more most importantly, keep that $12 5 billion 12 2 billion.
And deposits.
Got it got it thanks for all the color and thanks for taking my questions.
You bet.
And our next question comes from Chris Mcgrady.
Hey, good morning.
On the NII guide.
The slow growth or a modest growth in Q4, if I put the pieces together for next year, but down ish flattish balance sheet.
I heard your comments on margins do you think.
NII can grow from that fourth quarter number into 2023 or is it going to be some pressure on that.
We think it will grow in 2023.
Okay. So grow off the Q4 correct.
And then second within the venture book I think you said it was 12 point a $2 billion.
What where does the composition of that in your deposit portfolio, how much is interest bearing versus noninterest bearing.
Yeah.
Yes.
I don't know if I have this breakdown handy.
Mark do you happen to have that.
I don't have that breakdown for venture specific get back to you on that Chris.
Okay.
And then maybe lastly.
Go ahead.
Nobody can go go from that.
The majority is going to be interest bearing plant.
Money market.
Yes.
I mean, you're over $50 million and Theres a lot of depositors in that population that are over 50, but do you have the overall, what's the read on the overall portfolio.
Two Patrick.
It's 93 basis points.
Yes, yes.
So it's more expensive.
It leads.
It's more driven by the 50 and over depositors for obvious reasons, they're big deposits theyre going to put their hand up.
With interest rates.
For clothes, they don't really care.
Got it and just to make sure here, Chris as well I mean, the betas for adventure Bank, specifically have been tracking against other upgrade cycles too. So there's no anomaly here in that sense.
Yep Yep got it thanks Mark.
Just one on the expenses for next year I think I think there's an assessment for the industry FDIC assessment that is going to go through is that.
How should we think about the magnitude of that for you guys.
Yes, I mean, we haven't calculated that out I mean, we've gone through the budget process now and looking at the assessments, obviously like I mentioned, we found uptick this quarter because of the assessments being higher at wholesale so that had an impact on the Q2 assessment and that will have an impact on Q3 assessment.
So we'll see how that continues to play out based on where those deposits go.
And then we'll look at the increase I've read through.
Chris It looks very modestly.
But we will have to calculate the go ahead.
Okay.
Understood. Thank you.
Yes.
And our next question is coming from David long.
Good morning, everyone.
I wanted to circle back on the credit side of things and.
A lot of your peers have been building reserves here ahead of any pressure despite seeing no sort of Kingston the armor at this point what would it take for you guys to really start building that reserve level is it something that you need to change.
Changed their forecast Okay got it.
I mean, you have to issue debt to see classifieds going up dramatically and you have to see some real.
Waves out there, but I mean, if you go down and look through the components of our portfolio.
See a lot of risks risks there I mean, our multifamily portfolio has held up.
And across the country and it really has I mean.
Multifamily portfolios have held up really well.
Yeah.
I don't know if there has to be a big wave of change I, just don't see it happening.
Maybe I'm an internal optimist.
What do you believe you've got the comment or Paul no. What I would say about that is like look like we're preparing for whatever gets thrown at us we're not seeing it today and that's just capital and reserves.
It's not singled out towards one of them.
You've got to keep in mind, our NPA ratios at 34 basis points.
It's pretty low.
When you think about we're still <unk>.
<unk> is still above our seasonal adoption.
Slightly.
And you have to think about where it's going to I mean, we're as I think about it is every day to tell you it's true.
Are the hotspots can be.
Leveraged finance, we're not I.
I think the consumer is got a lot of it.
There's trouble I had in my mind for the consumer I mean, there is true inflation.
I don't spend a lot of time at the grocery store, but I get a lot of comments from my from.
My spouse about.
How much more everything costs.
What I do understand is when we go to a restaurant I, usually pay the bill and I'm looking at it and it's dramatically higher.
Costs that sort of thing I look at our bank, we're giving people raises.
Yes.
Much higher rates than we have in the past due to inflation and thats here to stay.
There's real inflation out there so I think.
The consumer isn't keeping up with it we hear that every day.
You listen to the news.
5% raise is going to keep up with what's going on with gas prices food costs and that sort of thing so theres going to be there.
There's going to be paying out there I just don't think it manifests itself in a portfolio like patent less so much.
The other thing that Scott.
Is your non bank lenders had been much more aggressive when you're looking at a large real estate projects, which are commonly see.
Senior debt, which as a bank is.
Anywhere from 50% to 60% leverage and then there is 20% of Mezz after that and the Mezz is charging them probably double digit rates and then the equity I mean, youre nonbank lenders as the guys that have the big risk, whether it's office or any kind of CRE in mind Brian .
So I think youre going to see it the other thing a bank can do and you guys have probably all heard me say this over the years when times do get tough and a borrower gets stressed and that we even went through that as most recently as the pandemic, particularly as it related to hospitality, we can be flexible with our borrower we're not <unk>.
Yes, we're not as structured CLO or whatever and we can we could back off the rate for a while looking to fight another day in and maybe getting improving loyalty from that customer.
We give up some income in the short term.
You could you can keep from having a problem and I've been in this business for decades, I've seen that happen in that as a CEO I've been involved in those kinds of transactions.
It's really worked out well, that's a weird way to go about it.
No that's great color and a testament to the way that you guys treat your customers. So.
The I appreciate the update on the.
On the yield the underwriting yields on civic.
You guys have a specific reserve for that part of your portfolio.
We do yeah sure it's treated like every other loan asset class.
So it has its own its own reserve based on the history, both inside and outside.
When you think about that business than I do.
Not as much as build this project.
When you think about that business. There is there is decent down payments on these properties and again, our average loan size of $355000 and Theres real equity in those deals and there is still just a huge need for affordable housing out there.
Just kind of get tricky I mean, you know.
Again, a lot of these would be considered the starter homes and our people in that category going to go out and pay up 657% for our mortgage maybe not.
Out of this business could end up fixed two brands of which we have a sizable portfolio of that today too.
And that could be where it ends up in the short term.
So, but I'm still pretty optimistic I mean, we have much higher delinquency rates in that portfolio we have.
As a percentage, we have higher non accruals and that sort of thing, but in the end, we don't take a loss.
We have other people that are willing to step into those properties to finish up or whatever it might be.
I'm still pretty optimistic about it.
Florida thing is going to be fascinating because theres going to there is clearly going to be rebuild and Florida people want to be there.
Yes.
Some of these some of the most desirable areas in that state got Hell kicked out of it.
And they're going to rebuild it may not be the person that lives at home today, but that person may be selling whats left to their house for land value and something better will be built there I think I think you've seen it the all natural disasters.
Somebody said that fluids yesterday.
Trina I mean, they build back better by far and it.
Isn't that a pricing go down this.
Setback, but anyway.
So I mean, I think that youre going to see that.
Going way back to the North Ridge earthquake and.
In California, you definitely saw that.
So anyway.
Got it. Thank you thanks, guys I appreciate the color.
Yes.
Yes.
We had a question come in through the web chat.
No.
He was asking for an update on the HMA acquisition. So bill maybe you want to sure about that yeah.
So the HOA business has been a great add for US we spent the vast majority of 2022 integrating the platform into the bank as well as starting to combine our legacy business.
With that business into one HOA business.
Overall deposits have been stable and I believe somebody was asking about the betas. There are beta is in that group are amongst the lowest in the bank in terms of.
Of that so we feel good about where we are.
Plant was get it get it integrated and then look for growth in 'twenty, three and beyond while I wouldn't say that that's that was the plan and that's what we've produced so we feel really good about the diversity of funding what it gives us for the bank.
And we think it's.
Like we're really excited about all the hard work that our team has done let's put it together and we're excited about what's to come there.
We're going to.
We're going to really concentrate on the staffing there and tried to really ramp it up I love that business.
I want to see.
It took our time to integrated is.
Effectively as possible and not lose customers, which we have it.
And now it's time to grow it.
Yeah.
And the other operator are there any more questions.
And once again, if you'd like to ask a question. Please press star one and we will take our next question from John Armstrong.
Hey, good morning, guys spoke pretty.
Okay.
Can you.
Talk a little bit about momentum and your production yields I know you touched on a little bit it sounds like but you've got the 592 average for the quarter, what does that look like today.
Sure.
Thanks Mark.
So what I would say is is that you are seeing the illuminate.
The loan production yields move up pretty significantly we talked about it a lot in the second quarter about how.
Both higher rates and mix shift is going to continue to help that I think youre going to continue to see that.
And a lot of that is going to be a lot of the same stuff, we've talked about higher rates or mix shift.
Incremental production going to a higher yield because all of those things are going to contribute to that I. Just think if you look at where our variable rate loans are just.
Just awful spreads compared to how much LIBOR sulfur has moved youll see that incremental yields will continue to keep creeping up from there.
It's super hard to be specific because it will depend on the type of loan.
That is in there because you can see pretty wide variances between asset classes.
But we feel is going to continue to creep up.
Okay that was a big step up in the quarter.
And just a couple of cleanup Bart what's left to do on hiring.
You talked about flattish expenses, but what do you feel like you have left to do.
Well you know we.
As Matt mentioned.
We're looking at every new hire whether it's new.
We add or replacement.
Process around that that we implemented in September .
We still are committed to our digital and innovation strategy, our vision 2025, and so they had a slow start.
Beginning of the year that there was going to be investment in this area a very slow start in the first quarter saw the ftes ramp up in Q2, Q3 Q3 was down from Q2.
We still have some hiring to do in that group as we get to wherever they want.
Think the pace slows.
Through the combination of the people they've already hired.
And just taking a hard look at just FTE overall, but I do think there is probably a little bit more there that we'll see in the fourth quarter and then we'll see where that goes next year I know Paul can add to that yes.
That's an area, we're looking at very seriously and we are going to get more aggressive on that as we stated a couple of times during that call on this call.
I have a <unk>.
I look at every new hire and every replacement VP and above and then I've got a sign off on it in order for it to be filled so we're getting very serious on ftes. That's been a lot of the increase.
Civic is fully.
Build out in terms of Ftes, so there'll be no more city Creek, that's been about half of our FTE.
FTE increase so again, we're going to get very serious about expenses here.
Okay.
Last question just got it.
I think we're not going to be the lone Rangers in the industry I mean, you've got to look every nook and cranny right now.
Okay.
Okay last question.
I hate the question, but I'm actually kind of interested in the answer.
But just.
Matt can you touch on Paul, but just the quality of deals that you're seeing in competitor behavior.
Some people say a larger banks are pulling out of CRE.
Other banks.
Some of your peers are putting up 8% to 10% annualized loan growth, but I'm just curious what your assessment is.
Of the competitor.
I think Brian about the quality I think so.
Yes, I think the deal flow first of all.
We've really curtailed or deal flow with the exception now.
Very large deposit customers and I think the deal flow has been good and the underwriting has been good.
You got a lot of guys pulling out.
No.
Maybe that was somewhat summer.
But you've got a lot of guys.
Sure.
I mean, the rates are better.
And not just the rates or spreads.
Where we were looking at we were facing sofa plus.
275 on certain kinds of projects those are clearly up 1%.
So from 375.
But we've seen no real decline in the quality of the deal. So again, we're trying to has slowed a little bit we had tremendous growth in the first half of the year.
And we've got a we've got to rebuild capital here, but also we've got a prepare for I mean, we I think we most of US believe theres some rocky waters in front of US too. So I think by slowing down that's going to help insulate us from potential losses too.
Okay guys.
See I don't see competitors being beam Willy Nilly.
<unk>.
Overly aggressive right now.
Okay.
The aggressiveness, we've seen but it's not it's not specific to this year hi, John if somebody wants a product pages priced away right, it's not structured.
Correct.
So very little decline in underwriting as you know we got it we got a couple of deals that we have special mentioned on we've got a big hotel, that's being taken out by a debt fund.
And I'm.
I am very happy about it I mean, we didn't see a loss potential in it anyhow.
So we just found that out this week, which is good news and there was one other deal like that to at.
Once again it was identified.
Listen you're going to pay up if you go into a gadfly.
Because theyre going to give you more leverage that's generally why they wanted to do it.
Okay. That's good news alright, well, thanks, guys I appreciate it.
Thanks, John Thanks, John .
And I have nothing I will start on that.
Okay, great well, if there's no further questions. We really appreciate everybody's attendance and we look forward to speaking with you next quarter. Thanks. Thank you very much.
Yeah.
Yeah.
This concludes today's call.
You for your participation and you may now disconnect.
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