Q3 2022 Horizon Bancorp Inc Earnings Call
Good morning, everyone and welcome to the Horizon Bancorp conference call to discuss financial results for the third quarter of 2022, all participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on a touchtone phone.
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Please note this event is being recorded.
Before turning the call over to management. Please remember that today's call may contain statements that are forward looking in nature.
These statements are subject to risks uncertainties and other factors that could cause actual results to differ materially from those discussed including factors noted in the slide presentation.
Additional information about the factors that could cause actual results to differ materially is contained in the horizons current 10-K in later filings.
In addition management may refer to certain non-GAAP financial measures that are intended to help investors understand horizon business. Reconciliations for these measures are contained in the presentation.
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 press release and supplemental presentation issued by harassing yesterday you can access it at the company's website Www Dot Horizon Bank Dot com.
Representing horizons today are the chairman and Chief Executive Officer, Craig Dwight EVP, and Chief Executive Financial Officer, Marc see core pricing at Thomas frame, EVP, and Chief commercial banking Officer, Lynn Carper and E V P as senior retail and mortgage lending officer, knowing the HERA.
At this time I'd like to turn the call over to Mr. Craig Dwight Chairman and Chief Executive Officer.
Thank you for participating in the Horizon Bancorp third quarter earnings Conference call.
Our comments today will follow the Investor presentation and press release that we published yesterday October 26.
Horizon is pleased to report solid earnings for the third quarter.
Driven by a continuation of strong commercial and consumer loan growth.
The increase in net interest income excellent asset quality and robust capital ratios exceed the regulatory definition for well capitalized banks.
In addition, during the third quarter, we closed five branches with two more offices to close in the fourth quarter.
The offices closings will contribute to our objective towards achieving our targets of noninterest expense to average assets of less than 2% for the full year of 2022.
Starting on slide four of the presentation third quarter highlights horizon completed the third quarter with.
Order over quarter loan growth at seven 8% annualized excluding P. B P loans and sold commercial participation loans year to date total loan growth was 14, 5% annualized.
This level of growth was achieved in part from your.
Today in annualized strong commercial and consumer loan growth of 13, 8% and 31, 7% respectively.
Thomas frame, our president who will provide more detail on the horizon loan growth and just a few minutes.
Other notable financial metrics for the quarter and as reported include return on average assets of one point to 4% and return on average equity of 13.89%.
Year to date through September 30th Horizon's return on average assets was reported at 1.29% in our we are $13 97.
Given the size of our balance sheet, the fishing operations talented workforce and solid additions to our team.
And is well positioned to capitalize on significant organic loan growth to shift lower earning assets to higher yielding assets and continuation of disciplined expense control.
So why invest in horizon.
Our investment thesis is simple.
Horizon continues to report solid returns with a low credit risk profile.
Due to our diversified balance sheet excellent liquidity and low cost core deposits.
We are located in attractive Midwest growth markets, where real estate values are not as volatile as in other areas of the country.
[laughter] regional infrastructure and improvements are tracking record inflows of private investment into Indiana, and Michigan and include the commuter rail line expansion in North West, Indiana, No. One has a double track and waste West Lake County extensions, which is forecasted to have a $3 billion positive economic impact to northwest Indiana.
The recent creation of the regional transportation authority focused in promoting transportation already in development.
The investment in quantum communication lines between Chicago Lafayette insult done.
The recently enacted U S. Federal statute no one as Chip Science Act, which is anticipated to provide additional economic stimulus to the states of Indiana, Michigan, including the quantum communications corridor.
The American rescue plan X dollars being invested in new roads infrastructure support workforce housing and capital equipment for a local municipalities.
Indiana 6 billion dollar state surplus with a planned sue.
Invest $2 billion in infrastructure over the next couple of years.
The continued deceleration of our outbound migration by Illinois businesses and residents as they move into our attractive markets due to quality of life affordability and lower taxes.
Mine life.
He has a long history of successfully managing through varying economic cycles.
To support that we are a growth company horizons compounded annual growth rate from 2002 through 2021 were 13% for total assets and 20% for net income or <unk>.
Isn't has historically outpaced the change in GDP and for the past four years, we grew at four nine times the change in GDP.
Clearly demonstrates our ability to grow market share and attract talent.
Moving on to digital transformation.
<unk> key advantage in technology over other community banks, including our in house CRM core platforms, resulting in lower cost per transaction than our peers.
And the ability to expedite the onboarding of new Fintech partners and fixed flexibility and data management.
By not relying on a core service provider horizon is able to select technology partners based on the best in class and who can deliver strategic products and services at best price It was optimum flexibility.
Our in House core strategy has also proven very effective for integrating acquisitions, including last Fall's 14 branch deal.
In addition, our Fintech partners are nimble.
Have considerable resources the resources focused on improving the customer experience and allow horizon to being an active voice in future developments as well.
We have representatives on most of these entities advisory boards or user groups.
You can see on slide 11 horizon has more than doubled the proportion of total tech spend devoted to strategic customer and employee facing applications for the last four years.
As a result of our investments in technology.
Isn't has improved its productivity as measured in assets per employee from $5 $4 billion in 2016 to $8 $7 million in 2021.
Our digital transactions increased from 44% in 2018 to over 70% in 2022, we increased online consumer deposit account opening from 12% over the 12 months of 2021% to 19% year to date.
And finally, 84% of our online chats are answered by program at a box.
[laughter] Horizon's technology plan over the next two years will continue to see an increase in our annual spend to enhance the customer experience and make our model ever more scalable.
As in prior years, we intend to offset these investments by continually improving efficiencies in our retail network and throughout the organization.
[laughter] horizon manages and deploys capital efficiently.
As evidenced by our recent.
The acquisition of 14 branches in the fall of 2021, and continuing focus on organic growth in 2022 and 2023.
Rising interest rates has increased the market's focus on accumulative other comprehensive income and the mark to market adjustments occurring in the bank's balance sheet has resulted in an increase of unrealized losses reported on the available for sale securities portfolio.
Through the third quarter and Horizon Bank continues to report strong regulatory capital ratios, which exceed the regulatory definition for well capitalized banks.
Horizon's historical Dibnah increases are aligned with earnings growth.
Now for the financial update it's my privilege to introduce to you horizon bench of executive Vice President and Chief Financial Officer, Mark seek or Mark.
Verizon reported a solid quarter for net income and loan growth as interest rates continue to increase and competitive in the competitive landscape is changing.
The results in the third quarter were primarily driven by strong loan growth and the rising interest rate environment, which led to the increase in net interest income.
Annualized total loan growth excluding P V P loans and sold commercial participation with seven 7% during the quarter.
The growth along with a 34 basis point increase in average loan yields compared to the second quarter of 2022 drove the increase in net interest income which was offset.
My interest bearing deposit growth increased borrowings and a 35 basis point increase in cost of funds.
Due to the strategies management implemented to increase net interest income the third quarter of 2022 absorbed the $6 1 million reduction in revenue from T. P. P gain on sale of mortgages and mortgage servicing net of impairment revenues compared to the third quarter of 2021 while increasing gross revenues by $1 million.
Yeah, it's another rising rate cycles, when mortgage banking revenues decrease.
Lack of several quarters occurs before our countercyclical revenue streams begin to offset the slowdown, but our successful strategy over the last 12 months to grow earning assets continues to provide the increases in net interest income.
The company's adjusted net income was down $400000 in the third quarter when compared to the second quarter, primarily due to lower non interest income and higher noninterest expense.
Earnings per share was 55 cents down one cent per share from the second quarter of 2022 and up three cents per share from a year ago period.
Slide 16, as we continue to focus on balance sheet management, and increasing net interest income with more rate increases expected, we want to provide more detail on our balance sheet sensitivity as of September September 30, we are modeling slightly liability sensitive balance sheet as we have increased our deposit betas.
We expect the deposit rate environment to be more competitive.
In the first half of 2022 we held off raising deposit rates. However, due to the increase in loan demand and the changing competitive landscape deposit betas are expected to increase in the fourth quarter and into the beginning of 'twenty 'twenty three.
As a result.
Up 200 basis point parallel shock at September 30, we modeled a decrease in net interest income of approximately $6 7 million or 3.19%.
Contributing to these decreasing results or the expected deposit betas it used for rising rates, which currently range from 5% for consumer deposits, just 60% on money market and public funds with an average beta for interest bearing deposits of approximately 31%.
We continue to use more conservative betas in our models as we anticipate pressure to increase.
To increase deposit rates as short term rates increase.
We also utilize a non parallel rate model to reflect the expected yield curve and win rates are projected to move. The result of this model estimate an increase to net interest income of approximately $1 3 million or six 1% in an up 200 basis point rate moves.
Slide 17.
In the third quarter Horizon increased adjusted net interest income by $700000. Although the adjusted net interest margin decreased by four basis points, primarily due to the increase in core funding costs.
With the growth in average, earning assets being the primary contributor to increase to increase in net interest income dollars.
In short term rates and increased at a fast pace lagging deposit rate increases has allowed 880 point 180 basis point spread to the average fed funds rate compared to the spread in 2018 at 121 basis points when the fed rates were at similar levels.
With more short term rate increases anticipated, we believe that we can keep the margin stable by replacing asset cash flows into higher rate assets and continue to grow interest, earning assets to generate more growth and net interest income.
Slide 18.
The investment portfolio was $3 billion at the end of the quarter.
<unk> cash flows in the fourth quarter totaled approximately 48 million and $227 million in 'twenty two 'twenty three.
The Unpledged investment along with unused lines of credit provide over $2 7 billion in potential liquidity, which was a sound liquidity position for the company.
Slide 19.
The unrealized loss on available for sale securities in the third quarter reduced tangible common equity by six from 6.48% at June 30% to 6.25% as of September 30th which is a 3.55% reduction in T. C E.
When the entire balance sheet is valued in our model the economic value of our equity increased in the third quarter of 2022 compared to the prior year quarter.
The bank's regulatory capital is strong exceeds regulatory definitions for well capitalized and well continue to fund our growth and will not restrict our ability to utilize our capital to fund organic growth in the future.
Slide 20.
By maintaining a disciplined approach on increasing deposit rates. The total cost of deposits only increased 20 basis points year to date, while deposit account retention remains strong.
The actual data for the quarter increased to 23% due to loan growth, creating a demand for funding increasing competition from other financial institutions and from non banking sources, all of which are putting pressure on deposit rates.
We do expect that this data will increase with additional rate increases are 2022 target beta is around 35% for interest bearing deposits, which we believe to be a which we believe to be on target.
The uncertainty in the markets and the federal reserve banks in movies and May adversely affect our betas in the future.
We believe our valuable low cost core deposits have provided flexibility in this rising rate environment.
Slide 21, noninterest expenses were at 1.99% to average assets for the quarter and 199% year to date, achieving our goal of less than 2%.
This quarter increased employee health insurance costs drove the increase in salary and benefits.
Special fees and consulting fees were above our usual quarterly run rate, we expect those expenses to moderate during the course of next year.
Higher amortization of the dealer reserve asset from payoffs and drove the loan expense increase in amortization of our solar tax credit intangibles as we recognized our tax credits this quarter increased other expenses.
As we previously announced the closing of the seven branch consolidations planned cost saves and cyclical business models and continued branch rationalization will provide benefits to operating expenses in future quarters.
Now our president Thomas Brown will provide an update on our lending activities.
Thank you Mark and as Craig said, it was a solid quarter for our lending teams starting on slide 23, with the results of our commercial lending team that generated robust loan growth in the third quarter of $41 8 million or seven 2% annualized that's excluding P. P. P installed participations.
Commercial loan funding of 117 million was strong and it was well balanced our cogs, our business sectors and markets.
Commercial loan pipeline is approximately $126 million as we entered Q4, that's down from Q3, but several construction launch recently clause that will begin to fund in subsequent quarters. Additionally, we see future growth opportunities from highly talented new commercial loan officers, who joined over the last year increased commercial line utilization and continued economic.
Gnomic investment in our growing local communities.
As we look at consumer loans on slide 24, consumer loan growth was excellent for the quarter with $149 million in fundings that elevated our balances by $52 million or 23% on an annualized basis loan demand for home equity and auto loans continued to be strong even while rates were adjusted to reflect the increasing rate environment.
We produced positive growth both in our indirect and consumer lending segments with new production yields that were approximately 175 basis points higher than the payoffs and pay downs within the portfolio.
Additionally, our consumer lending credit metrics remain consistent with high quality borrowers limited underwriting exceptions, and low delinquency and net charge offs.
As we look at mortgage on slide 25 mortgage loan production adjusted with the industry trends in a rapidly rising rate environment. Our year to date production is down about 27%, which compares very well with the mortgage bankers Association results showing a decrease of approximately 46% year over year.
Linked quarter production was down 23% compared to the industry results down about 55%.
The mortgage bankers Association is forecasting further declines in Q4 and going into 'twenty 'twenty three as.
As we've seen in our Q3 results the revenue for mortgage gain on sales and mortgage warehouse represents approximately three 8% of horizon's third quarter total revenue, which limits our exposure to further market adjustments to production expectations. The mortgage team proactively adjusted the staffing model in Q3 reflective of the shift in client demand and anti.
The page further efficiency benefits in Q4.
The credit quality of the mortgage loans, we choose to on our balance sheet remains very consistent and aligned with our high quality borrowers in our consumer portfolio.
Transitioning to asset quality on slide 26, our credit metrics remained strong as evidenced by no net charge offs and low nonperforming loans in the quarter.
Wally we remain very well positioned in today's fluid economic environment with a solid allowance to total loans at one point to 8%.
Our transition back to Craig now for additional how it'll highlights.
Thank you Thomas and we're delighted to have you join the team.
To summarize Horizon Bay of course key franchise highlights [laughter] horizon is a growth company as evidenced by 20% compounded annual growth rate for net income and 13% compounded annual growth rate for total assets over the past 19 years.
Our balance sheet has a diversified loan portfolio, both in product mix and geography with ample liquidity availability and cash flows to fund future growth.
The cabinet combination of Horizon's year to date solid returns on average capital of 13, 9% and our diversified balance sheet has proven to be successful model in varying economic cycles.
As noted on slide 28, and given our third quarter solid loan production results horizon, either beating or unplanned for five of the six metric goals, we announced in December of 2021 and updated our outlook in the second quarter of 2022.
Year to date core commercial loan growth, excluding PPP in participations sold as an annualized growth rate of 13, 8%, which is the upper range of our revised targeted range of 10% to 14%.
Consumer loans year to date annualized growth was reported at 31, 7%, which far exceeded our targeted range of 10% to 14% year.
Year to date return on average assets of 1.29% is on target to achieve 130.
Year to date return on average equity at $13 97 per cent exceeds target of 12.5% and our annualized expenses to average assets at 199%, which is arent target of 2%.
Overall solid year to date performance for Horizon Bancorp.
This concludes our prepared remarks today and I'll open the.
As the outbreak or two Oh, please open the lines for questions. Thank you.
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 the handset before pressing the keys.
If at any time a question that's been addressed and he would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And our first question will come from Terry Mcevoy with Stephens. Please go ahead.
Hi, Good morning, everyone and Thomas welcome to to Horizon and in the conference call.
Thank you.
Maybe let's just start with the margin I'm I'm, hoping you can just help me understand the third quarter trends when it when I think about three months ago.
The comments I had in my notes, we're leveraging the company's asset balance sheet and it does appear bay does deposit betas of 23% and were kind of below the 35% expectations.
Yet the margin went down so even ex the four basis points of borrowings that still was kind of flat quarter over quarter. So three months ago I thought the message was a higher margin and it maybe just help me understand what what did not happen in the third quarter.
Yeah, Terry Thanks for your question.
What's driving the margin lower and I just first of all start with our net interest income actually increased about 400000 for the quarter.
But what drove the margin lower is our cash flows coming off the investment portfolio are in slight decline, which was a seasonal decline of 1% and our deposit portfolios where were not sufficient to fund the loan growth and our loan growth has far exceeded our expectations a year to date and therefore, the net GAAP.
Funding was through our borrowed funds, which is a beta tied to the market, which is a more expensive cost. We do expect the deposits to come back and play with municipalities in the fourth quarter and in betas to still be in the 35 basis point range by yearend.
Thanks for that and then as a follow up where there any branch closure related costs in the third quarter.
Are all those are taken in the second quarter and could you just maybe talk about your expense outlook given the branch actions you know on top of just the increase in inflation and wage costs.
For the branch fixed assets when and when it was approved the branches five of them as Craig said earlier five of them closed in August and two we're gonna be here closing this month, so not we haven't seen all of the cost saves yet from those.
But I don't have it.
It continues to help and fund the inflationary costs I don't know that youre going to see a.
Significant change other than helping us to maintain our expenses going forward.
Great. Thanks again.
Thank you Jerry.
Our next question will come from Nathan race with Piper Sandler. Please go ahead.
Yeah, Hi, everyone. Good morning, and welcome Thomas and Nick Congrats on joining the great team at Horizon.
Thank you.
Just going back maybe to Terry's question on some of the balance sheet dynamics and around the margin going forward.
I guess as you guys look out over the next quarter choose the cash flow that's coming off the securities book Gonna be sufficient.
To kind of fund you know that still kind of mid to high single digit loan growth outlook at least in the fourth quarter or do you guys see yourselves.
Going to tap some additional wholesale funding sources.
If deposit growth doesn't actually come through just given the increasing competitive dynamics that I believe Craig spoke to.
In the release.
[noise] Yeah, Nathan Thanks for the question we.
First of all we do expect loan growth to moderate in the fourth quarter as pipelines have diminished.
Slightly and then we have investment cash flows of over $50 million coming into the fourth quarter as well as retained earnings about you.
15 million after across to our system plenty that could be a future growth. So.
We would expect less reliance on borrowed funds in the fourth quarter and going into 2023.
We may we may oh by the way.
Triste deposits wholesale funding are longer term to reduce some debt so.
That's one option we're looking at.
Yeah.
Got you and just in terms of the wholesale funding sources that you added in the quarter. It may look to in the future you speak to just kind of the duration and cost.
Those sources.
A good percentage is overnight at this point as we have been funding our loan growth with it.
There are the duration would be wouldn't be over a year.
Not all of it together.
Okay, Great and then just on the securities yields are they're kind of they're flat from what I gather versus the last quarter is that just a function of just the structure of the securities that you guys largely put purchased in the fourth quarter of last year. Following the branch acquisition.
Or I guess, how should we kind of think about the securities portfolio yield.
Uh huh.
The context of maybe a flat to compressing margin, if I'm kind of putting all those items together.
Yeah, it should be fairly steady if I look at the rates of the cash flow coming off their very similar rates to what our what the portfolio book yield is.
So.
And we would you would expect it to be fairly fairly stable.
Mhm.
We're not putting it back in.
So okay.
And if I could just ask one other question just on kind of the outlook for loan yields going forward you know some nice expansion in core loan yields from the last quarter. I believe you guys have around 30% of your portfolio Thats floating rate is it fair to expect you know loan yield expansion to accelerate in the fourth quarter.
Just based on the rate of new loans coming on the on the books and just add these additional fed rate hikes work their way through the margin or.
Yeah.
Yeah Nathan.
Expect loan yields to continue to improve where we're booking the commercial loans last quarter are exceeding on average over 6% mortgage side is slowing down and that was probably some of the drag last quarter with yields in the 5% range, but.
But the consumer home equity were well over 6%. So we always expect it and those production results were strong in the third quarter with good pipelines go into the fourth but they have shrunk from the second and third quarter. So we do expect better yields coming on to replace somebody.
Some of the amortizing loans that are coming off in the threes quite regularly.
Okay understood and just I apologize one last one so just trying to put those pieces together.
It sounds like with the new liability sensitive position you guys are expecting maybe a flat to maybe a lower margin in the fourth quarter from the three.
<unk> 13 are recorded in Q.
Yeah, we're hoping to maintain the margin with some of the the asset repricing and the moves we're making and then but continue to grow net interest income.
Okay, Great I appreciate the questions and all the color I will step back.
Our next question will come from Damon Delmonte with K B W. Please go ahead.
Hey, Good morning, guys welcome Thomas.
And look forward to getting to work with you more so just to kind of follow up on the margin questions. Here. So mark your your last response to Tonight was that you're you know you're kind of hoping to maintain the margin in the near term, but based on the the the rate shock scenario.
What does that imply that you'd have more pressure, especially considering that we're gonna potentially up to 75 basis points in November followed by another 50 in December .
Yeah, David on a on a rate shock, but where where our results are more matching when I mentioned the non parallel.
I'm shocked that this is a little pressure on the margin to try to maintain it but we were able to increase net interest income and I think our I think what we're expecting as you know the yield curve is going to continue to be you know inverted as it is and I'm you know.
Rate shocks are going to happen you know.
Here in this month and then another one.
Not all at once so I think that that.
That makes that non parallel.
Ramp.
More of what we're seeing happening in our income statement, our net interest income.
Okay got it okay. Thanks, and then with regards to the outlook for expenses I know you called out a couple of key items that that contributed to this quarter's result, but is there a range or you know a growth expectation that we could kind of factor in from from this quarter as we kind of look out to the end of the year and into 2023.
Yeah, I think we're targeting you know.
So this quarter, what he said was high our controllable expenses.
Such as professional and consulting fees as we indicated those we anticipate to to not be at those levels going into 'twenty three.
I'm on a salary benefits, there's obviously going to be some some inflationary or in some uh huh.
Increased four married married increases going into 'twenty three.
So I think I think our goal and not to give a percentage.
What we think the interest expense.
And this is going to go up our goal is to maintain that under that 2% of average assets. So I think that that's the the best guidance we can provide.
Okay Alright.
By the way this is Craig.
To rationalize other costs here in the fourth quarter and transfer some of those to more productive areas of the company in some business lines just aren't hitting the numbers, we don't expect to hit the numbers next year or so there will be some additional rationalization taking place in this quarter.
So that basically shifting expense dollars from one category to another to try to get more revenue on the backend.
Basically I believe that's going to go into more of a.
Spread business with the commercial side, we're reducing costs in other business lines.
Got it okay.
Also and then just I guess the last question I got kind of going back to the security yields being flat on a quarter over quarter basis could you just while I am I must have missed but could you just walk through the dynamics as to why those why that yield change on the portfolio considering the the notable movement in rates during the quarter.
Well, we're not replacing any you know the vast portfolio so that wouldn't let us so where we'll be at the rates of what's out there right now and I.
I think it's going to be pretty steady.
Sure.
Got it okay. That's.
That's all that I had thanks, a lot guys.
Thank you David.
Our next question will come from David Long with Raymond James. Please go ahead.
Good morning, everyone and Thomas welcome all welcome you as well and looking forward to spend some more time with you to.
The with the you know a little more challenging funding environment does that impact your appetite to lend at all your availability of credit to customers and prospects.
This is Thomas Thank you. Thank you for the question. It does not I think is.
So we have a rising rate environment are there still a core mission is to help our local communities and be productive those communities I wouldn't say, we're pulling back on like lending segments.
I will stick to our knitting to their local communities, we have very seasoned lenders in these markets that can help us navigate the challenges that could be coming from a slow slow down the economy, but not I wouldn't say, we're we're taking our our our foot off the top of the Palo Europe , continuing to lend to high quality borrowers.
Okay.
Got it okay. Thank you and then picking.
Take another angle here on the balance sheet management side of things and maybe this is directed towards torchmark, but if you. If you look back to the beginning of the year and where we were thinking there would be some more asset sensitivity more upside to the NIM. In this backdrop is there anything that you could have done differently had you known.
Backdrop would be what it is today that that may have better.
Allowed the bank to take advantage of the higher rate.
Well it'd be nice to have a crystal ball wouldn't that force.
Uh huh.
Yeah, I don't I don't think we would I think we had we were very asset sensitive and in coming out of the branch deal and we have to see.
Change that we had to get them within policy and manage that asset sensitivity. So at the time that was the right decision I think what we didn't expect as we came into the rising rates is how quickly the competition was going to raise deposit rates.
Yeah, David we have invested the Tcf for branch acquisition.
No that was all okay, Alright, and then maybe just on the on the mortgage outlook can you provide any any sense then okay.
That was a step down this quarter, just kind of let's say a if this is kind of a sustainable level or do you think it's still going to go lower based on kind of the MBA forecast or what how you guys are the trends you're seeing currently.
Thank you for the question this is Noah.
Yeah, we expect that the mortgage outlook.
Will.
Ah stay in line of how we've been training to the MBA forecast, we will remain flat the pipelines are down but I think we still have as we mentioned earlier a very seasoned loan officers. So were embedded in the communities that we serve and I think that any opportunity that is presented we will take advantage of that but do you anticipate that a significant.
Will slow down.
Okay. So that gain on sale nobody should go down as well I mean, just if that if the MBA forecast is lower you would expect that the gain on sale revenue to moderate here as you go in the next couple of quarters.
That's that's expected as well and again, it's just that but it's a smaller portion of our total income earned what what we deliver to the bottom line. So I anticipate that it will fall in line yeah, Okay, I shouldn't make sure I understand your comment thank you and maybe just.
One last one in maybe for Thomas.
It was more of a maybe reliance coming from the growth aspect of the loan portfolio going forward the margins more stable.
Can you share it sounds like the commercial pipeline is still healthy a little bit down, but just kind of your outlook I mean, the level. We saw year to date that Craig outlined is pretty pretty significant just how youre thinking about the next two to three quarters on on loan growth on the commercial side. If you could give some outlook and I think he also talked about utilization I'm not sure.
What that did linked quarter or just how youre thinking about utilization are those two would be helpful. Thank you.
Sure.
First question on the overall loan growth I think as Mark and Craig alluded to our loan growth will probably be in line with our our cash flows coming out of securities portfolio retained earnings.
To maximize our benefit there.
We have a very diversified loan portfolio as you can see quarter over quarter very diverse markets and segments in the commercial side also you look at our consumer side, both from mortgage indirect auto and candidly a consumer lending they would get from our branch area. So it gives us the ability to have a growth in various parts of according to where we see the best opportunity is for our balance sheet.
I'll pass it over to Lynn around utilization and perhaps more color on on the commercial side.
Thank you Thomas.
As far as utilization our line of credit utilization has been increasing month over month, but it's still below our overall average.
And actually lower than our pre pandemic utilization.
We have been increasing about 1% per month.
So that is a positive trend.
We have been hearing from our clients.
The inventory and logistics and are you expecting to have some increased line of credit utilization.
So that we can expect that to increase here.
As far as forward looking and as mentioned in the deck and our pipeline is moderating a bit.
For fourth quarter and that being said.
We are still seeing opportunities with our clients.
Residential one to four family multifamily and senior housing we've seen a nice uptick in industrial activity are these all continue to be active sectors for us and we are watching residential development of course.
The impact on mortgage rates and home buyers. So we.
That's moderate.
And then lastly, I'll just say that this past year, we originated them strong construction lending and that is helping to support our overall pipeline as well. So we expect to see the benefit of that as we go into 2023.
Gotcha, Okay. That's helpful and maybe the last one for me just if I could for Craig was just you talked about reallocating. Some of the expense dollars are you know cause some areas maybe aren't performing as well as you'd like in other areas might be battery can you just talk about where directionally, where you know where do you plan to invest in these dollars you know as we think about the next you know.
12 months out with where the benefits may come from.
Well our.
Noninterest income is obviously under pressure, which is part of our design of our model and their their counter cyclical business lines mortgages in wealth management. So those are always going to see less investment in reduction as it were to transfer some of that to the commercial side as well as cost saves to Brian .
Thank you Brian .
Our next question is a follow up from Nathan race with Piper Sandler. Please go ahead.
Yeah I appreciate you guys, taking the follow up questions, just maybe I'm kind of like credit outlook and.
Provisioning going forward.
Stable.
<unk> versus <unk> in terms of sub standard M. P. A's and so forth charge offs are obviously pretty negligible I guess is there anything that we can't discern from the numbers that.
You guys are keeping a closer eye on or expecting any deterioration or I guess just.
I was kind of a commercial client sentiment, it's been lately and how do you guys just kind of thinking about where you guys want us to have the reserve trend over the next few quarters kind of absent any useful a qualitative adjustments.
Sure. This is Lynn cover.
Relative to credit quality as you are seeing a doctor our credit quality metrics have been performing really well.
Our past dues for this last quarter were extremely low.
And that has been a continuation of the trend that we've seen for the last year.
We meet regularly as a lending team management team to talk about our outlook and any concerns that we have we also subscribe to a variety of services.
You know provide analysis as far as you know at this point you know we were watching some sectors like hospitality are.
Retail restaurants.
Through the pandemic very closely and we had some special additional allocation during that time frame quite frankly, all of those sectors have performed exceedingly well and so as you can look at our reserve I'm you know theres been a change in mix as we release some of those.
<unk> allocations, so having that lead into the allowance itself as we unwound some of those allocations for those sectors.
That's been tempered with some additional.
The increases you know just related to the overall economic conditions right now.
So at 1.28 and feel that were appropriately reserved if you look at our peer group, we're just slightly above that and.
So I think we're well positioned and as far as our trends going forward them at this point I think credit quality looks good.
But with the probability of a recession et cetera of course that condition can change and we would have to reevaluate.
Okay, Great and then just maybe one last one for Mark.
Keeping on the on the tax rate, obviously had some solar credits that were utilized in the quarter. The tax rate go back up somewhere between 14% to 15% going forward.
Yeah. It is that this was a a lot of projects that got completed this quarter. So we recognize more of them.
And there's a little bit in the fourth quarter, but they'll go back to more normal normal levels.
Okay.
Okay. I appreciate you taking the follow ups I forgot.
This concludes our question and answer session I would like to turn the conference back over to Craig diet for any closing remarks.
Thank you, Matt and thank you for everyone who participated in today's call. If you have other questions or comments, please feel free to contact myself or Mark C Corp, but we always embrace additional comments or questions from our shareholders and analysts. So thank you and have a great day.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.