Q3 2022 Banc of California Inc Earnings Call
[music].
Hello, and welcome to back with California third quarter earnings call.
Thanks, Paul.
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Today's call is being recorded and a copy of the party will be available later today on the company's Investor Relations website.
Today's presentation will also include non-GAAP , Michelle Berrey destination for these and additional required information is available in the earnings press release, which is available on the company's Investor Relations website.
The reference presentation is also available on the company's Investor Relations website.
Before we begin we would like to direct everyone to the company's Safe Harbor statement on forward looking statements included in both the earnings release and earnings presentation.
I would like to now turn the conference call over to Mr. Jared Wolff Ankles, California residents and Chief Executive Officer. Please go ahead Sir.
Good morning, and welcome to Banc of California's third quarter earnings call.
Joining me on today's call is Lynn Hopkins, our Chief Financial Officer, who will talk in more detail about our quarterly results.
During the third quarter, we continued to capitalize on the core strength of our franchise, which is our ability to deliver on clients' needs in our markets in an exceptional way.
This enables us to consistently add new commercial clients and expand existing relationships, which resulted in growth of noninterest bearing deposits. Despite a rapidly rising rate environment that has put a premium on low cost deposits.
The rapid increase in rates and expectation of further rate increases has made it very challenging operating environment, but our core earnings power demonstrated our ability to continue to drive earnings. Despite a slightly smaller balance sheet, which was primarily a result of lower warehouse balances.
Our strong earnings power combined with the actions we took during the first quarter to mitigate the impact of rising rates on our investment portfolio resulted in growth in tangible book value per share this quarter, excluding the impact of the deep stack acquisition and even as we continued to implement our stock repurchase program.
We recorded another quarter of core double digit annualized loan growth excluding warehouse.
At the start of the quarter, we continued to see the same level of business development momentum that we experienced in the second quarter.
During the latter part of the quarter. However, we experienced a pullback in loan demand as the expectation of further rate hikes weighed on economic activity.
While this resulted in the pipeline slowing in our overall loan fundings coming in below the level, we had experienced in the first half of the year.
Our loan production was at higher rates and the repricing on our variable rate loans, resulting in a 19 basis point increase in our average loan yields compared to the prior quarter.
Leading both warehouse and any FSFR purchases, we had annualized commercial loan growth of 11% during the third quarter, which reflects our continued success in growing the core areas of the portfolio.
As expected mortgage warehouse line utilization continued to decline.
Which we were able to partially offset with purchases of high quality <unk> loans through the relationships with our warehouse clients.
Further our warehouse unit is best in class and they continue to manage our portfolio very well.
With one third to a half of our warehouse portfolio of self funded with low cost deposits remains a very profitable business unit.
I'm, particularly pleased that on an adjusted earnings basis, we were able to or about the same amount of money as the prior quarter. Despite a smaller balance sheet.
This is consistent with our stated plans to diversify our lending without a decline in earnings.
Further while our margin was flat for the quarter. Our margin is expected to expand based on our asset sensitivity to further support earnings growth going forward.
The strength of our deposit franchise continues to show through as noninterest bearing deposits held at 38% on average for the quarter and grew to 40% at the end of the quarter.
We continue to attract new commercial clients to the bank.
During the third quarter, we increased noninterest bearing accounts by $117 million or 17% annualized.
This was fueled by continued increase in the number of commercial accounts for eighth consecutive quarter.
We highlight this information and a new slide in the investor deck.
As we have added new clients, we have exited certain deposit relationships and products with higher rate expectations.
Particularly those that are pegged to the fed funds rate.
This resulted in a decline in interest checking and money market account balances that we had this quarter.
Going forward, we will look to continue to replace these types of relationships with continued growth in noninterest bearing deposits, while balancing our overall funding needs to support future loan growth.
We also added some longer term fixed rate funding in the form of FHA advances in time deposits.
Strategically lock in some of our funding costs going forward as interest rates continue to rise.
While this had the effect of increasing our cost of funds in the third quarter, we were still able to keep our net interest margin consistent with the prior quarter and we believe it puts us in a better position to realize margin expansion over the next year as we expect to see higher earning asset yields and noninterest bearing deposit growth.
While our loan to deposit ratio remains around 100%.
We're able to manage our balance sheet efficiently as we observed the net interest margins starting to expand in the latter part of the quarter.
As I mentioned earlier, our warehouse business influences our loan to deposit ratio based on the variability of line utilization and the level of funding provided directly from this business line.
On average approximately a third to half of our warehouse lending is self funded.
We fund the rest of it with core deposits and a flexible short term sources that we utilize to match the remaining outstanding balances.
For the third quarter, one warehouse loans and deposits are excluded our loan to deposit ratio would decline from 100% to 96%.
While the economy is showing signs of slowing to.
To date, we have not seen any impact on our asset quality.
We have stress tested our portfolio under a number of scenarios involving rising rates and lower valuations with a particular focus on credits that were underwritten three or four years ago that will be coming up for renewal in the next 12 months to 24 months and a much different environment.
And due to the conservative approach, we take an initial underwriting the stress tests indicate that our asset quality should remain strong even in adverse scenarios.
While we continued to deliver strong financial results for our shareholders in the third quarter. We also took another significant step in building long term franchise value with their acquisition of deep stack technologies and entry into the payments processing business.
We closed the acquisition on September 15th and we have made good progress on integrating <unk> technology into our internal platform.
We remain on track to complete the integration by the end of Q4 or early Q1 at which point, we will begin ramping up our business development efforts and growing the client base in targeted verticals.
That we expect will make this a high margin business that also attracts noninterest bearing deposits.
Now, let me hand, it over to Lynn, who will provide more color on our financial performance then I'll have some closing remarks before opening the line for questions.
Thanks, Jared please feel free to refer to our investor deck, which can be found on our Investor Relations website as I review, our third quarter performance.
I'll start with some of the highlights of our income statement and then we'll move on to our balance sheet trends.
Otherwise indicated all prior period comparisons are with the second quarter of 2022.
Our earnings release, and Investor presentation provide a great deal of information.
Well limit my comments to some areas where additional discussion is warranted.
Net income available to common stockholders for the third quarter was $24 2 million or <unk> 40 per diluted share.
Our adjusted diluted earnings per share totaled 44 cents for the third quarter, when net indemnified legal costs acquisition costs and net losses on investments in alternative energy partnerships are excluded.
Our net interest margin was unchanged from the prior quarter and 3.58%.
Overall, earning asset yield increased by 29 basis points and our total cost of funds increased by 30 basis points.
Our interest, earning asset yields increased to $4 33, due to higher yields on both loans and securities during the third quarter.
Our average loan yield increased 19 basis points to $4 54, due primarily to higher average yields in our core C&I and warehouse portfolios.
The average yield on securities increased 70 basis points to 338, due mostly to the CLO portfolio resetting and reflecting the 125 basis point fed funds rate increases that occurred in May and June .
But the additional increases in the fed funds rate during the third quarter, we expect to see further increases in the yields on earning assets during the fourth quarter.
Our average cost of funds was 79 basis points and our average cost of deposits was 47 basis points for the third quarter.
Both have 30 basis points compared to the prior quarter.
The increase in our average cost of deposits was primarily driven by rate increases in our money market and interest bearing checking accounts as well as the Cds that were added to lock in some longer term funding offset by the positive impact of maintaining average noninterest bearing deposits at 38% of the linked quarters.
Our noninterest income decreased $1 5 million from the prior quarter due mostly to lower income from equity investments that increased our other income by 2.1 million in the second quarter.
This decrease was offset by higher loan servicing income, which we anticipate will continue at this increased level in the near term due to the purchase of mortgage servicing rights at the end of the second quarter.
And the impact of the higher rate environment on such earning assets.
Our adjusted noninterest expense increased 247000 from the prior quarter with the largest contributor being occupancy and equipment expense.
At the end of the third quarter, we consolidated a branch, which is our third branch consolidation this year generating an estimated $1.5 million in annualized cost savings.
Looking ahead to the fourth quarter, we expect our noninterest expense to be in the range of $48 million to $50 million, including approximately $1 million related to deep stacks operations.
The effective tax rate for the third quarter was 29, 1% slightly elevated from the prior quarter's rate of 27, 9%.
The higher effective tax rate decreased third quarters net income by approximately 500000.
We continue to estimate our annual effective tax rate for 2022 to be approximately 28%.
Turning to our balance sheet, our total assets decreased by $133 5 million in the third quarter to $9 4 billion and total equity increased by $2 9 million.
The increase in total equity was due mainly to the 24 million in net earnings for the quarter, partially offset by higher net unrealized losses in the investment portfolio and capital actions.
Our capital actions included common stock dividend and the repurchase of $13 million in common stock under the program, we announced in the first quarter of 2022.
At September 30, our tangible book value per common share was 13 79.
<unk> to 14 O five at the end of the second quarter.
The reduction in the tangible book value per share was due mostly to the following three items.
<unk> 22 cents related to the change in a OCI, resulting from higher unrealized losses in the investment portfolio.
34 cents from the impact of the deep stack acquisition, including the issuance of common stock.
And four cents related to our stock buyback program.
Our noninterest bearing deposits remained strong averaging 38% for the quarter.
We intentionally exited certain high cost deposits in the money market and checking categories, which were replaced in part by longer term fixed rate funding those FHL be advances and wholesale Cds, which we believe will help us better manage our cost of funds in a rising rate environment.
This is hilton overall deposits decreasing 278 million during the quarter. Despite the growth we had in noninterest bearing deposits and the Cds, we added in the quarter.
The growth in noninterest bearing deposits and the change in our deposit mix had the effect of increasing noninterest bearing deposits to 40% of our total deposits at the end of the third quarter.
Our credit quality remains solid in the third quarter with nonperforming loans, decreasing 1.8 million to $42 7 million at the end of the third quarter.
At September 30th 66% of our nonperforming loans.
We're either in a current payment status, but were classified nonperforming for other reasons or have an SBA government guarantee.
We did not record a provision for credit losses in the third quarter, given the lower loan balances and favorable trends in asset quality, which offset the impact of weaker economic forecasts.
Our allowance for credit losses at the end of the third quarter totaled $98 8 million and our allowance to total loans coverage ratio stood at 1.36%, which is a bit higher than the end of the prior quarter.
Excluding our warehouse loans, which have a lower relative risk level in our reserve methodology. The ACL coverage ratio stood at 1.47%.
At September 30th.
Our ACL of the nonperforming loan ratio remained healthy at 232%.
At this time I'll turn the presentation back over to Jared.
Thank you Lynn.
Through the first nine months of the year we.
We have already delivered on the goals and strategic objectives that we set for 2022.
We successfully integrated the Pacific Mercantile Bank acquisition and exceeded our projected level of cost savings.
We've continued growing our targeted areas of lending, which has resulted in a loan growth excluding warehouse that has already exceeded our expectations for the full year.
We have a strong core deposit franchise with stable and growing non interest bearing deposits from commercial clients that continue to increase as a percentage of total deposits.
We've capitalized on our asset sensitivity and realized significant expansion in our net interest margin since January and expect our earnings to benefit from further rate hikes that.
We've been able to effectively manage expense levels, while continuing to add banking talent expanding attractive verticals and invest in our technology initiatives.
We've optimized our use of capital through the redemption of our series D preferred stock and returned more capital to shareholders through the implementation of our stock repurchase program, while still growing our CET, one ratio and TCE ratio on a year over year basis, remaining very well capitalized and well positioned to manage through economic slowdowns.
With the acquisition of deep stack and our entry into the payments processing business. We have advanced our goal of elevating the client experience and becoming the hub of their financial services ecosystem, while at the same time, adding a business that we expect to provide a consistent high margin source of fee income increased the diversification of our revenue mix.
Non interest bearing deposits enhance our business development efforts.
Contribute to further increases in our level of profitability and franchise value.
And in an environment when banks have struggled to grow tangible book value per share excluding our use of capital for the acquisition of deep stack. We've continued to show our ability to protect it and grow tangible book value, even as we complete the share repurchase program.
It's already been a very successful year from a number of perspectives and I want to thank all of our colleagues at banc of California for their extraordinary efforts.
The uncertainty in the economy, we expect earnings growth I had fueled by strong and a stable base of non innerspring deposits.
Solid core loan engine and asset sensitivity.
We continue to add new client relationships that should contribute to further growth in our core loan portfolios and under sparing deposits.
And over the next year.
We believe our payments business will become a meaningful contributor providing another level to fuel our growth.
Based on everything we have accomplished this year, we are optimistic about the opportunities to continue profitably growing our franchise in the coming quarters and years ahead, and creating additional value for shareholders.
Thank you for listening and with that operator, let's go ahead now and open up the line for questions.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up with handset before pressing the keys.
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Our first question comes from Timur <unk> with Wells Fargo. Please go ahead.
Hi, good morning.
Good morning.
He just starting on balance sheet size can you give us your expectations for mainly loans and deposits going forward.
How much more of a drag should we expect warehouse to be here in the next couple of quarters and then similarly on the deposit side I know you guys took some initiatives to get some hotter money off the balance sheet. This quarter, what should we look at ER or where should we look for on the deposit side as far as size as well.
Thanks, Timur well.
Look I think it's hard to know where warehouses kind of settled down.
We had the ability during the quarter to continue to fuel loan growth, but we just were.
I guess, we were pretty conservative in the second half.
Borrowers honestly, we're hesitant as well with rising rates and.
Certainly in the real estate side, there was a little bit of a pause, but we have the opportunity to plenty of loans. We just decided it was better to be a little cautious and I think that's going to be a posture through the end of the year.
It's hard to see the balance sheet shrinking at this point because it feels like things have leveled out obviously, we're all expecting another rate increase in November .
Looks like things have stabilized a little bit so I.
I don't know how to predict where we're going to be other than I think we can probably keep the balance sheet pretty flat, but.
I wanted to be clear I mean, we see ourselves, making more money going forward.
Pretty close there is obviously a good opportunities in the investment portfolio.
So.
It feels like we can stay flat if not grow.
Okay, and then on the deposit side I mean, that's really impressive what you wouldn't it what you've been able to do on DDA.
40%, how sustainable is that and we've heard from other banks this quarter, even those that have been able to grow DDA that the few that have that theres. Some seasonality built in and it's unlikely that those balances kind of remain you're talking about growing DDA is that reasonable in this environment is there any pressure to that youre seeing from them.
Your client base I'm, either looking to move money elsewhere, or wanting some sort of ECR or some sort of other alternative for rates there.
So it is a challenging environment and I'm really pleased with what our team's been able to do.
We have it front and center in terms of our deposit growth plans.
The key for US, we do expect balances to flow out.
And we do.
Do you expect you know as the economy <unk>.
<unk>, a little bit which is what the fed intense.
That balances will get us and maybe not replenish which is why one of our focus is on.
Bringing in new relationships in the back.
We added that slides into that because you probably saw that shows a fairly dramatic change.
The company in terms of bringing new commercial accounts and relationships to the company.
And so that's our focus you cant control the balances within your clients account.
If you are continuing to bring new relationships with the company, which hopefully that demonstrates we've been doing it very successfully over a very long period of time.
That our overall, we expect our deposit balances to grow.
I wanted to be really clear, but I've said this before.
We are not about looking at what's going to happen quarter to quarter. We are very focused on what our trends are over the course of the year.
Which is why in the end of my prepared remarks, I talked about all the things that we've done over the course of this year already.
Look I think we had a really solid floor.
Standard our noninterest bearing deposits we.
Protected our tangible book value, which I think doesn't get enough credit given what we've done relative to others.
We kept our NIM flat, even though we locked in some long term fixed rate funding, which as we said we expect our NIM to expand.
It was pretty solid overall.
Yes, we did not hit your earnings expectations for the quarter.
Due to a slowdown and decline in warehouse that again.
Remaining earnings relatively flat on a smaller balance sheet shows that we are improving our quality of earnings.
And so.
Going back to your specific question is.
Is it fair to expect us to continue to grow.
Non interest bearing deposits or low cost checking I think we will do it.
I can't tell you quarter over quarter that it won't decline or increase a little bit I just don't know.
Over the course of the year, we will continue to have positive trends because all of our momentum is moving in that direction.
Okay, and then maybe one last one if I can just you know.
Looking at warehouse, specifically loan balances have gone down it seems like the deposit side of that relationship has been quite resilient are you seeing kind of those deposits that were brought in during peak warehouse balances are those all still sticking around or are you seeing that kind of one third to one half funding on the newer.
Our base and then you know to the extent that they are sticking around how much of a risk is that for them to actually exit the system and what type of scenario what would.
It would drive that type of an event.
Yes, no. Good question I mean, we have a very resilient.
Warehouse.
Business, we have a very strong warehouse team.
We continue to expect our warehouse business to be funded.
Third to a half by balances edibles, there's movement inside of those balances but.
There seems to be very good stability for us and those balances whether they are from existing clients or new relationships that were bringing on.
It's obviously all fungible money, but you don't have any expectation for that to change. So if the business grows we expect it to be a third of the house funded with its own balances if it shrinks, we expect it to be.
How funded with its own balance is that we expect to continue.
I hope that I hope that answers your question.
Thank you I'll step back.
Yeah. Thanks Mark.
The next question comes from David Feaster with Raymond James. Please go ahead.
Hey, good morning, everybody.
Good morning, and their I just wanted to touch on deep stack. You you guys gave a little bit of color talked about when the integration is expected and maybe a little bit on the expense front I was hoping maybe you could just could you just walk us through as you step back and thinking about what is your roadmap for this business. What are you guys working on.
Currently and what what do we need to do in order to really get us.
To the point, where youre going to generate the revenues that you think you can generate in can you can you help quantify the revenues in and that that could come out of this and maybe talk to the pipeline of clients that you're talking to today.
Yeah. Thanks, Thanks for the question David So the.
<unk>.
The roadmap that we have is where we are in the process of integrating.
Deep stack into our company currently all transactions are being processed through a third party bank.
We are finishing the integration with our own bank. So that we can process transactions.
On our own pipes.
We're doing what's called a soft launch this quarter.
With the expectation that will flip the switch.
And do like open the pipes wholly.
Early next quarter.
<unk> point, we will be able to start bringing on the clients that are in our pipeline.
And bringing them on directly.
The hard part for me in terms of providing numbers to you.
Yes.
Obviously, I don't want to set expectations.
It's just the wrong way.
And it all for me is timing dependent we have a pipeline I know what it looks like what I can't tell you until we flipped the switch is.
He is one of those clients will be brought onboard.
So I can't today tell you those clients are going to be brought on board.
In the first half of the year or the end of next year, because we're not live yet.
Once I know rely it'll be very easy for me to kind of figure out.
What the sequence of events will be and we'll be prepared to give some some sizing around it.
We'll obviously be very conservative at first.
Sure that we're not.
I'm guessing there.
But that should be the first in the first quarter.
Okay.
The opportunity with Destock again is really meaningful first of all some solution that really we believe.
It's going to be very valuable to our existing clients I had a call. This week with one of our existing clients was pretty excited too.
You keep that.
And then obviously, we think that Theres, a whole landscape of new relationships that we can bring to the bank that will go after.
Providing these services to Isps and we think that their end clients will also be attractive ones for a bank and it's obviously.
The opportunity is fee based but there's also plenty of deposits that we think will follow.
Given the nature of the transaction so.
That's the roadmap we have there's a second level to our payments roadmap that includes some other products that we will be talking about in the first quarter.
But right now thats the specific roadmap of feedstock.
When do you think you could start seeing some of the deposit growth growth from that if revenues start you know mid to late next year or is it really a 2024 event. When you can start getting the no no no no. We don't it'll be it'll be it'll be absolutely in place with three of them will start showing some deposits that will come.
Come over without as we bring on clients because there'll be the average balances for the transactions as they flow through it will obviously build but we'll start seeing some impact it'll it'll be obviously dependent upon how successful we are how quickly.
There will be some impact next year.
And then maybe just touching on on demand and kind of how the pipeline is trending I'm. Just curious what are you seeing across your footprint and and it sounds like the slowdown in originations was was more strategic rather than higher rates kind of decelerating demand just kind of curious what.
What you're seeing on that front and what what do you expect to be the key drivers of growth kind of given your more maybe a bit more cautious outlook do you think it will still be multifamily and single family.
Rajiv near term.
So I don't see us in.
In the market to buy a single family anytime soon or yeah, we feel like our book is fairly full there and it served its purpose to stabilize the balance sheet as warehouse on the brand down so what we got.
In the last quarter.
Was a reflection of the things that we've committed to.
I would say fairly good pricing.
It was what we felt was a good goodbye when we did it.
Surprisingly you know in the markets, where we operate things are pretty resilient.
Health care deals continue to go through we've got some really good momentum on the entertainment side, where deals are still happening.
Kind of a film.
Event.
Two weeks in L. A where we're presenting on a panel and it's just there's a lot of activity in that side Theres a lot of bridge real estate.
We are just being super cautious in areas, where we think we've done a lot of stress testing our portfolios.
Just being very cautious I mean I'd be worried about.
<unk>.
On the manufacturing side.
The light distribution side inventories, having built up right because people bought extra inventories at.
At the time when supply chains were limited.
So they were trying to shore up their inventories and now the economy slowed and are they sitting on extra inventory or you got to be worried about businesses, where receivables aren't coming in as fast and then they are drawing down their lines of credit to bridge liquidity.
Can you just got to be really careful and so this is not a.
It is heading for the economy to slow.
It's absolutely happening, we still see signs of borrowing and people wanting to borrow.
We just think the smart thing to do this quarter is to be really careful to protect the franchise for the long term. This is absolutely a long term game, where we.
We're not looking as I said, we're really not focused quarter to quarter as much as I.
I don't want to disappoint.
We're trying to really build on.
Franchise for the long term, which is why I'm. So proud that we've done a great job and Linda and her team has done an exceptional job of protecting your tangible book value.
We really have not had to use IMAX and went through the numbers about what impacted our tangible.
Tangible capex for the quarter, but for deep stack, we would've continued to grow electrical cloud.
But we chose to apply some of our capital towards towards the future. So.
I think in terms of where loan demand is coming from it there is no loan demand in every sector.
We're being very very cautious and obviously at a 100% loan deposit we have we wanted to do that.
The environment is helping us do that but there is we could fill our loan pipelines.
Youre stuck with it.
Okay.
Good and then maybe just last one for me just touching on hires you guys have done a phenomenal job hiring new producers.
Over the past several quarters and expanding into new verticals. Just curious you know given where we are and what you guys have going on with deep stack. How do you think about hiring new producers.
And what's the market like are you still seeing that.
A talent magnet and continued opportunities to hire new producers.
100%, we that's an active part of our of our business. It's an active part of my job I had lunch yesterday with <unk>.
Somebody who is at a competitor just to make sure we were.
In front of in front of each other and talking about opportunities together.
I do that frequently we will continue to hire talent.
Because we have the ability to absorb it and you have a very talented team, but for a producers and high quality people, we will continue that.
Right. Thanks, everybody.
Thank you David.
Our next question comes from Gary Tenner with D. A Davidson. Please go ahead.
Thanks, Good morning.
Good morning, Jared Duane Hey, Jay.
Hey, good morning. So if you said a few times that you know what kind of back half of the third quarter of loan growth.
It was pretty intentionally.
Slowed.
Ex warehouse.
As you think about fourth quarter and even early next year given the I'm.
I'm sorry on the environment, I mean does that translate to.
Low single digit loan growth ex warehouse for a couple of quarters as you're kind of replacing run off and bridge loans with some new production or where do you think that.
The kind of just the organic strength of the business results and something better than that depending on how conservative.
Look.
I don't think there is it's hard for me to know right, but I don't think that's unreasonable I mean, the economy is coming to a halt. So if you like if we grew double digit annualized loan growth next where that would surprise me.
I think.
Low single digits or even flat is probably not unreasonable.
But then again.
Loans are repricing at a higher rate environment. So you don't need to be growing your balance sheet to be making more money.
You can you can be flat and redeploy it to the securities portfolio that now can give you opportunities that that didn't exist your margin should expand as ours at least you see it expanding.
And we see that expansion being incremental right, it's going to it's not like I get it all in one quarter its going to just like everything we do it's going to be incrementally better quarter over quarter as things move down the road.
So we're not looking for some massive jump in any particular quarter, we see the trends getting better and better and better for us.
As we as we continue to just kind of move the ball down the field. So I don't think it's unreasonable to think that loan growth next quarter. It could be on a net basis could be flat, we obviously youre, making loans all the time.
Runoff has slowed as well.
But just.
We can make.
Good money not growing as fast and I think that's prudent right now.
Hard to see what's around the corner.
I saw him.
I saw 111 economist report yesterday.
That was projecting that we're going to hit a recession pretty quickly.
The fed was going to drop rates at the end of next year. So.
I don't think is consistent with what others are saying, but it was one of the major banks.
And.
If that's the case then.
Everybody is trying to play defense four nine.
Nine months or this is this rate hike is going to be over pretty quickly.
But who knows but I don't think it's unreasonable to think that loan growth on a net basis could be could be flat or low single digits.
Okay I appreciate that and then in terms of given that in your prior comments about you know maybe the balance sheet is basically flat from everybody makes more money as you think about kind of run off in the securities portfolio.
Given where rates are now would you.
One to reinvest some of those cash flows or you know what do you think about taking some pressure off the funding side, yeah, just broadly thoughts on it.
Yeah, I mean, all of that I mean, we've been going through that analysis for a while then what are you what are your thoughts there.
Oh, Yeah, I mean, you know I think I'm on the securities portfolio side with the higher rates you know prepayments speeds have slowed there as well, but to your point I think there's opportunity for the cash flow that is coming off to go back into the securities portfolio and I think further to Jerry's point I think there's opportunity for cash flow that's coming.
Off of maybe other parts of the loan portfolio.
To deploy into the securities portfolio for attractive yields Hum and then I think strategically you can also take down some higher cost variable rate deposits as we continue to grow our noninterest bearing deposit base. So all of those things I think point to yeah.
Margin expansion.
There's always yes.
Got it.
Hey, Jerry.
The opportunity to sell some.
Securities that are lower yielding.
To take a hit and then offset it with something that's significantly higher yielding that benefit you in the long term. So we're looking at all of those things to look at what will benefit investors over.
Over the long term as opposed to just quarter to quarter.
Got it I appreciate that and sorry for cutting you off.
Last question for me just in terms of capital and buyback. Obviously you remained active this quarter.
You've got around $19 million or so left in the authorization with the stock here, obviously, a lot of banks down quite a bit a bunch couple of days, including today.
General and the <unk>.
$15 range.
How do you think about given the uncertain about the environment you know your capital is strong.
Is it a time that you would press a little bit more on the buyback or.
Are you cautious enough that you wouldn't want to.
Use of capital at this point for that.
We have.
We have a lot of capital and I don't I wouldn't have any problem using it to buy back our stock at highly attractive valuations.
I wanted to be careful about.
Yes.
Not just limping in and not really making a dent. So if you if you can't contribute enough.
Toward a program, it's probably not worth doing it.
But we have a lot of other uses for capital reinvesting in our company.
And improving our technology.
Improving.
Assistance for our teams.
Bring them on products for our clients. So we have a lot of uses for capital that we think will generate a very high return.
And.
Including buying our stock and our stock is clearly at a value were buying it is attractive I was talking to one of our larger investors. This morning. It was.
Just I guess pleased with a temporary dip.
He told me he bought some more so.
Look I don't want our stock would be down at those levels, but when it is certainly something we have to look at very carefully.
Thank you.
Got you.
The next question comes from Kelly Motta with <unk>.
Uh huh.
Hi, yes. Thank you thanks for the question.
If we could circle back to to funding you mentioned you layered in some longer term fixed rate.
Funding, some broker Cds and that's H L b.
Could you just provide more color on what specifically you added in terms of rate and and the term on that.
Lynn you want to take that.
Yeah, I mean, let me start so it was it was a combination of our brokered deposits, which we show separately as well as putting on some S. H M. B a term advances I think during the quarter there was a little bit more in version to the yield curve.
So at this point, yeah, I look at the combination that to them and we have maybe just under $1 billion, maybe about $900 million and these wholesale funds.
A portion in brokerage Cds and unfortunately, they told me advances.
The FHA advances have a longer duration, there I'm more closer to about three years and I think the average rate is just under 3% Kelly the stuff that was added in the quarter was a five year term.
At about 370.
Got it over a million dollars.
Brokerage Cds, we've taken a little bit shorter view on those so they have a little bit shorter duration and I think their average rates.
It's a little bit a little bit.
Lower.
Let me see here durations around one year, so it's about $2 70 as well.
Okay got it and and that allowed you to roll off some of the hotter money do you think that.
After the actions you took this quarter to really refocus on the core deposit base that most of that that hotter right money is is gone in and you're kind of good with what you have or is that going to.
Maybe roll into the fourth quarter as well.
Paul.
I think I don't think I think really a few things happened that gave us an opportunity to reset some of our funding base, so with the pull back and with the higher rates and the pullback on the warehouse balances and knowing that we.
Have some core funding, but then we match fund a portion of it we were able to let go of some higher costing deposits. But then also looking out over you know or crystal ball kind of the yield curve expectations.
Then to transition some of the other variable rate money into term money. So I think there's good opportunity for us to keep what we have and then grow core deposits and then manage our our balance sheet Crows kind of what we've been talking about on the loan front end you know being cautious.
And judicious there so.
So long answer the short answer is I think there's an opportunity there to continue to grow it with the core deposit base.
Got it.
But let me, let me add to that.
I think.
I just want to make sure we're not cutting off for me be clear like if there was an opportunity to lock in some.
Some fixed rate funding again, I think we would do it if we saw that it made sense and.
Lin did mentioned a specific opportunity and one that we've talking yields curve is sufficiently inverted that it made sense, but.
That's not to say that there wouldn't be another opportunity to do it going.
Going forward.
Got it. Thank you maybe a last question for me I think in your prepared remarks, he said that margin exited the quarter higher than with them than the average rate do you do you have a.
Is it do you have like a ending spot name on that or any any numbers had around there.
So we didnt publish it because then likes to say a quarter doesn't make it right.
And so and nor does a month nor does a month right. So what we saw we think was stable and we think well.
Is the reason why we know we know we're asset sensitive everything we see shows were asset sensitive.
Neuro rerun says, we're going to make more money as rates go up.
The pace at which that happens is hard to predict.
So.
I said that I thought our margin would continue to expand and we believe that that's the case.
We just don't we didn't want to put out.
The September margin as a prediction of where our margin would be going forward because while we think that's the right trend and we think it's going to be that or better.
We just weren't Kaufman.
And so we didn't want it improperly guide on them on that dose.
Got it. Thank you I'll step back and try to be cautious trying to be cautious yet. Thanks.
Yeah.
Yeah.
As a reminder, if you have a question. Please press Star then one can you tell me.
Our next question comes from Tim Coffey with Johnny Please go ahead.
Great. Thank you morning, everybody.
Good morning.
Oh yeah.
Just got a question on the allowance I mean, given kind of where it is right now.
In conjunction with your outlook on on the credit market and as well as the structure of your non accruals.
Safety and as you have there do you feel like this is a sufficient level of allowances that right now or do you think it needs to be taken out here.
No we definitely feel sufficient right now I mean, we've as I mentioned, we've done all the stress testing.
We don't see pickups.
Going forward, even as rates go up.
So.
Is it right now.
The economy was strong and the fed is trying to create slowdown I think one of the things that primarily concerned about us is wage growth and how that affects inflation and so they're obviously trying to slow things down dramatically, but there is this is nothing.
Charged by credit concerns. So then the question becomes as rates go up and the pace at which they go up how does that does that in any way, causing any credit concerns I outlined a couple of areas, where we would be cautious and why.
We do not see any.
Credit hiccups.
Right now.
Through our portfolio, which we view as very well underwritten and very secure and so we believe that our allowance is very healthy.
Okay.
And then prior comments on the efficiency ratio I think you know I forget exactly exactly where we left it but I think there was expectations are incremental improvements has the the trajectory you know straight up in interest rates change that at all.
Lynn.
Yeah, I would say.
I think there's room for improvement and I think with our guidance that we've provided with our investment in deep stack them.
And with with the higher interest rates, you know I would expect our efficiency ratio to be at where it is now or a little bit lower.
Okay.
Those are my questions. Thank you very much.
Yeah, Thanks, Tim I apologize I got disconnected at the end of Kellys questions. So I didn't join back in with him.
Hi, Brian .
Yeah.
Okay.
Our next question is a follow up.
Yep.
Or is he loves it.
Hi, Thanks for the follow up just one more for me it looks like the spot rate on deposits isn't too different than the reported a 47 basis points or 56 basis points spot rate versus the 47.
Is that any kind of indication that that some of the higher deposit costs were kind of implemented earlier in the quarter and then beta slowed throughout the quarter and how should we be thinking about the pace of deposit betas here into fourth quarter, and then you know through 'twenty three.
With that let me let me start am I did great question and observation you know I think that with the rapid increase in interest rates and how we've managed our deposit base with a growth in non interest bearing and then exiting some of our variable rate.
Deposits it did moderate our deposit betas, yeah, we're around 25% and then we had that last rate hike in September . So yeah, I think if I as I look at it going forward given the shift into some of our longer term fixed rate funding and I think that the deposit.
Betas would probably remain around the same level its a little difficult to predict with guest facing potential rate hikes of call. It 75 plus 75.
But I think that with 40% in our noninterest bearing yeah being in that 25% to 30% 35% range.
Yeah, it's a pretty good indication and to your point our spot rate at the end of the quarter.
No very similar to our average for the quarter.
Great.
For the clarification.
Thank you.
This concludes the question and answer session and the conference is also now concluded. Thank you for attending today's presentation. You may now disconnect.
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