Q3 2022 First Foundation Inc Earnings Call
Greetings and welcome to first Foundation third quarter 2022 earnings Conference call.
Today's call is being recorded at this time all participants have been placed in a listen only mode and the floor will be open for your questions. Following the presentation. If you would like to ask a question at that time. Please press star one on your touched on phone if at any point. Your question has been answered you may remove yourself from the queue by pressing Star then two we ask that you. Please.
Pick up your handset to allow optimal sound quality.
In today will be Scott Kavanaugh, first Foundation's Chief Executive Officer, Kevin Thompson, Chief Financial Officer, and David to Pillow present.
Before I hand, the call over to Scott. Please note that management will make certain predictive statements during today's call that reflect their current views and expectations about the company's performance and financial results. These forward looking statements are made subject to the safe Harbor statement included in today's earnings release. In addition, some of the discussion may include non-GAAP financial measures.
For a more complete discussion of the risks and uncertainties that could cause.
Actual results to differ materially from any forward looking statements and reconciliations of non-GAAP financial measures see the company's filings with the Securities and Exchange Commission and now I would like to turn the call over to CEO Scott Kavanaugh.
Good morning, and welcome. Thank you for joining our third quarter 2022 earnings Conference call.
The results we reported this morning reflect the strength of our core businesses and the meaningful relationships that we have built with our clients that said there is no question. The fed's actions over the last six months have had a notable impact on the banking sector.
It is against that backdrop that I am pleased to report our earnings for the third quarter were 29 million or <unk> 51 per share.
Total revenues were $99 9 million for the quarter, a 5% increase for the second.
From the second quarter of 2022, and an 11% increase year over year.
Our tangible book value per share ended the quarter higher than $15 96.
We also declared and paid our third quarter cash dividend of <unk> 11 per share.
Our fundamentals remained strong with excellent credit quality.
NIM for the quarter was $3 one zero percent for the quarter, we continued to experience a steady pipeline across banking wealth management and trust services.
Our clients' success is our success.
We are grateful for the trust they continue to place in us.
Our strategic focus heading into the fourth quarter is centered around protecting the balance sheet building liquidity competitively pursuing deposits and their continued retention of valuable clients.
Our lending activity for the quarter was strong with loan originations coming in at $1 6 billion.
<unk> remained low at 14 basis points for the quarter as our lending team does a fantastic job maintaining our high credit standards.
We have established a balanced loan portfolio continues to perform well.
As we look ahead for the next few quarters, we intend to bolster liquidity and preserve capital by strategically managing our loan growth going forward.
With that I must emphasize we anticipate loan growth will be slower in the coming quarters than what we have experienced in recent record quarters. This is a prudent decision.
Giving the macroeconomic cycle and it is certainly not a reflection of our clients the industries, we serve or the products we offer.
Dave will touch more on the current composition of the loan portfolio later in the call.
Looking at deposits and as I have mentioned before it's tough out there and we recognize it's a dogfight.
There is no question there are outflows in the overall banking sector. However.
I'm proud that our team has been able to maintain our base of $9 5 billion and we are continuing to fight to attract new clients through some very attractive channels, including online retail and commercial.
Our wealth management and trust business continued to provide meaningful contributions to the firm we have been successful in retaining existing clients and attracting new ones.
It's times like these when the market is most volatile that clients turn to us for guidance, we have been proactively communicating with them and strategically managing their portfolios as necessary.
As a result, we are seeing strong client retention across our entire wealth management platform.
Assets under management ended the quarter at $4 6 billion.
Whether portfolios, we manage for our clients performed relatively well with respect to their benchmarks, even as the S&P 500, and the NASDAQ composite saw significant declines during the quarter.
Let me take a minute to discuss our responses to hurricane and which made landfall and our newly acquired locations in Naples, Florida.
First learning about the storm, we immediately activated our business continuity and disaster recovery plans I am pleased to report there.
We performed extremely well once all of our employees were accounted for and safe. Following the storm, we reopened our locations with the exception of our fifth Avenue branch in Naples.
Which will be closed for the foreseeable future as we repair from the damages.
As it relates to our clients.
We do not expect to see.
A meaningful impact to our portfolio and our only setting aside small provisions for potential loan losses.
Our initial assessment looks good.
We want to be helpful to any clients who might have been impacted.
Along these lines, we have also been in contact with our deposit clients to assist with any way, we can while the community rebuilds.
We have been touched by the outpouring of generosity, among our employees clients and within the local community.
And we are fully resolved to help navigate the road to recovery.
To conclude my opening remarks, I want to reiterate that this leadership team has been through many economic cycles, including a rising rate environment.
Like the one we're experiencing.
Many interest rate environments, although I believe where the fed fund actions are the most aggressive that we've perhaps ever seen.
Our business model of offering clients financial solutions whenever they might be in their financial journey is designed to deliver results in any market conditions and finally at.
I want to take a moment to note that this month marks the 15th anniversary of first foundation and over that time, we have established a great group of talented and dedicated professionals committed to serving our amazing clients and building a valuable business. It continues to be an honor.
To lead this organization now.
Now let me turn.
The call over to our CFO Kevin Thompson.
Thank you Scott.
As mentioned earnings per diluted share was <unk> 51 in the third quarter. The return on assets was 98 basis points with a return on tangible common equity of 13, 2%.
During the third quarter the balance of loans held for sale was transferred to loans held for investment as we no longer intend to sell the loans due to the current rising rate environment.
Metrics remained strong in all of our loan portfolios the allowance for credit losses for loans decreased by 265000 in the quarter to $32 9 million, primarily as a result of the release of specific reserves related to purchased credit deteriorated loans from prior acquisitions offset by increased loan balances.
The reserve ratio decreased from 37% to 32 basis points of total loans.
The net interest margin declined eight basis points to three 1% in the quarter.
With the unprecedented increases in interest rates, our cost of deposits increased 36 basis points to 0.64%, while our average loan yield increased 21 basis points to 4.07%.
Our net interest income grew 7% to $87 7 million customer service costs also increased from $4 6 million to $13 6 million in the quarter due to the increasing rate environment.
Our noninterest income for the quarter was $12 $2 million driven primarily by wealth management revenues of $6 8 million $2 1 million in Trust administration, and consulting fees and the balance in banking related fees wealth.
Wealth management revenues decreased 900000, as a result of lower asset under management balances.
Our advisory and trust divisions achieved a combined pre tax profit margin of 11% in the quarter, excluding the $313000 expense related to a trading error. The profit margin would have been 14%.
Noninterest expense was $60 3 million up $11 5 million from the second quarter.
Service costs increased by $8 $9 million due to the increase in the earnings credit rate rates paid on the related deposit balances.
Compensation and benefits expense increased $1 $9 million, primarily due to a decrease in deferred loan costs as a result of lower loan originations in the quarter.
Efficiency ratio for the quarter increased to 60% primarily as a result of the higher funding costs.
Finally, our effective tax rate decreased to 26, 6% compared to 27, 9% for the prior quarter. We are just beginning to realize benefits from our tax strategy that should continue to grow over the next several years.
I will now turn the call over to David <unk>.
Thank you Kevin.
As Scott mentioned, a loan originations were $1 6 billion for the quarter.
Looking at the breakdown of the loans that we originated during the quarter as the percentages are as follows.
Commercial including owner occupied commercial real estate, 43% multifamily, 46% single family 6%.
And construction of 1% and 4% other.
Contributing to loan originations during the quarter, our commercial business division funded $688 million of new commercial loans during the third quarter of.
Of which 45% were adjustable commercial revolving lines of credit.
C&I originations comprised of $196 million of public finance loans $115 million of commercial term loans $29 million of owner occupied commercial real estate loans and $39 million of equipment finance loans.
As mentioned last quarter, the heightened originations in the public finance channel that we experienced in July of 180 million normalized in August to our historical run rate of about $15 million a month.
It's always important to note that we accomplish this without changing our underwriting standards and our NPA fell to a low of 14 basis points at the end of the quarter.
Speaking more specifically about loan yields we achieved a weighted average rate of 463 on originations, which increased substantially from the second quarter, which was $3 73.
This quarter, we have started to see the impact of higher yield.
Yields on our loan originations due to increase in the long end of the yield curve.
And prior lower yielding read thoughtful and set largely funded out of our pipelines.
As of September 30th.
Our loans held to maturity include 49% multifamily loans, 33% commercial business loans.
7% non owner occupied commercial real estate, 10% consumer and single family loans, and 1% land and construction.
Looking at deposits deposits held steady at $9 5 billion for the quarter.
Deposit growth was tempered as we are experiencing the effects of excess liquidity, leaving the banking system and as Scott referenced there is an increased competition across all deposit channels.
All our teams across the bank are working hard to bring in deposits. The reality is that we anticipate selling loan production going forward to balanced funding growth and to bolster liquidity given the economic uncertainty.
Our loan to deposit ratio measured month, 108% as of September 30. This represents an increase from historic lows experienced during the last few quarters, but it's still in line with our pre COVID-19 levels, given lower levels of all production going forward, we plan to actively manage this ratio.
While there is economic uncertainty our credit quality remains a key focus heading into the fourth quarter.
And to reiterate Scott's comments I am very grateful to our teams dedication to delivering excellent client service when it matters. The most at this time, we are ready to take questions.
I'll hand, it back to the operator.
The floor is now open for questions if you'd like to ask a question at this time. Please press star one on your Touchtone phone if at any point. Your question has been answered you may remove yourself from the queue by pressing Star then we ask that you. Please pickup your handset to allow optimal sound quality. Thank you. Our first question is coming from Matthew Clark from Piper Sandler.
<unk>.
Hey, good morning, guys.
Good morning.
Yes.
Just on the loan to deposit ratio and the outlook there.
You mentioned, you're planning to manage it I guess.
How should we expect that ratio to trend here over the next couple of quarters is there an internal limit and.
What are you looking to get that back down to 100% or sub 100% I'm just trying to get a sense for.
Kind of your outlook for that.
The pace of slower loan growth in deposits.
So what I would say is.
108 is.
Already up to a level.
Which is why we're giving a much more cautious approach.
To our lending.
I don't know that Theres, an internal limit, but I would say that we already feel like we are either they're very close to it.
Last quarter, when we did our earnings announcement I was confident that our pipeline was pretty full.
In terms of deposits that we had on tab and I got to say that pretty much 100%. What we thought we had in the pipeline did not come to fruition.
That being said we've already taken.
Great strides to continue to.
To operate on it, but I think what youre going to see us.
Just a continued.
Slowing loan growth over the next several quarters to the point.
We will get it back under 100% is our goal.
Yes.
I would say that.
We're looking at between 100, and 105% kind of operating range.
<unk> future.
As noted in previous years, we do have some cyclical outflows in the fourth quarter related to some of our larger.
MSR clients.
Texas.
Do during the periods.
News is we're starting to receive.
Pretty decent inflows from.
Some of the channels that Scott had mentioned before specifically retail and online to offset some of that.
That being said, we're selling production on a relative basis.
Current plan is to.
You won't be in the <unk>.
Three three to $3 $5 billion range down from $6 billion.
Run rates that we're currently on.
Slightly ahead of what we.
Our historical run rate.
Two 5% to $3 billion range. So, although we're slowing loan originations at least on a planned basis.
On a relative basis, it's still.
And it represents.
Pretty significant.
Originations for us going forward.
And one thing I will add is during a time of rising rate environments, you often see as expected prepayments decreased drastically we still have a portfolio that turns over even in a rising rate environment over time, However, I think a lot of.
Borrowers have taken a pause to see where the federal reserve goes so our prepayment speeds slowed drastically and we expect them to increase over the next several quarters as things stabilize somewhat people get a clue.
Where the federal reserve is headed and we start on that treadmill again, so between that the seasonal outflow of deposits the slowing of prepayments. The good production. We had this quarter. We believe this is the height of our loan to deposit ratio for the foreseeable future.
Agree.
Our next question comes from Gary Tenner from D. A division of Davidson.
So to follow on the on the loan growth conversation, David I, just wonder if you could kind of put into context for us the mix of the loan growth you might see from here, obviously, you've been growing the commercial business lending piece quite a bit.
But you know is that as you actively slow loan growth where is it going to come from.
That's a good point.
We're going to have an emphasis on commercial loan growth.
At least in the foreseeable future.
The majority of that will be in variable rate.
Software based.
Part of the issues, we face in the income property channel is.
We're originating at four and a half that seems like a good rate until the fed increases and then five and a half seems like a good rate until the fed increases and now.
Kind of settling in the high fives and low sixes.
And we're not sure that's going to be a good rate depending on more of the feds moments going forward. So we are connecting.
Can that continue to support.
Our franchise, however, there will be a less less of an emphasis on income property growth and more of an emphasis on C&I growth. So.
Sure.
We are going to have 60% growth.
And C&I and about 40% in other channels.
So what we're forecasting.
<unk> is still extremely high.
On the commercial side, there's still a lot of.
Free cash flow and all companies are doing very well so.
Oregon, Nintendo focus more on the commercial.
Sure.
Originations until we can get some guidance from the fed.
When theyre going to.
Moderates their pace.
Thanks, David.
And then a question on.
On the customer service charge expense slide I, just wanted to clarify that because of the increase there was bigger than than we had and I think probably expected, but is there any sort of cap as to where that goes as the fed raises or do those fees.
Org cost basically participate all the way through.
As far as if I guess.
Okay.
Interesting client I think.
Most of us.
That are participating in that space have been.
Pretty much riding dollar per dollar as the fed increases and in some cases somehow.
Increase beyond.
So more than 100% beta for some clients.
Not necessarily related to us.
The our expectation are those will continue.
That increases to.
Close to 100% beta on the larger clients.
But we do anticipate at a certain point.
Given that most people are kind of temporary and moderating.
Their growth that.
That data should start slowing down but.
Due to the.
I think the evaporation of liquidity in the system.
Banks have been very protective around these books because they take up.
Years to establish them now.
Jay.
Our valuable clients that unfortunately.
We're going to continue to probably have to ride with them until the third one.
Uh huh.
Moderates the increase but.
Gary I would say that basically you've got a heightened awareness from clients.
Higher the fed goes with rates.
And talking to my peers out there.
We're experiencing.
Demand from clients for our higher deposit costs and I think it's just starting to permeate throughout the industry.
So.
I think.
We're trying our best to keep betas as low as we can.
But when you're talking about retention.
Or.
Going backwards in terms of your deposits.
As I said, it's a dog fight out there.
And.
I think it's becoming more accentuated.
Yes.
Yeah.
Oh, sorry.
In past rate cycles.
We've seen we've had more time to adapt.
The beta spend slower clients haven't push quite as hard.
The dog fight as Scott mentioned between banks Hasnt been as hard, but we're seeing it even in this rate cycle. The money center banks pain really high betas on these types of sophisticated clients to maintain the relationship.
As a reminder, most banks our size don't have the sophisticated systems and processes to be able to support these types of clients and we do and they're great clients that we want to retain eventually the fed will stop and we'll be glad that we retain these these great clients, but for now it's time to hunker down and be prudent.
So one of the other comments, we would make as well.
Aren't anticipating significant growth in <unk>.
That channel and are pivoting into.
Our retail online and other channels to kind of make up for.
The higher costs, we're seeing.
Through the commercial deposit service.
Channel, So I think youll see it.
Pivot more towards online and retail in the next few quarters.
Yeah.
Thank you.
And once again that is star one if you'd like to ask a question. Our next question comes from Andrew <unk> from Stephens.
Hey, good morning.
Good morning, good morning.
I've got several questions.
On the margin, but maybe just kind of starting starting at the top I think it would be there's a lot of moving pieces, though.
It would be helpful. Do you guys have just a range of where you think the margin settles out in the fourth quarter.
It depends on several items as you know it depends on what the how the fed acts here in February in December .
As we've talked about we are strategically managing our loan growth and so we'll focus on really high quality higher rate loans, we have a deposit strategy that we're working on as well to ensure that we're bringing in lower cost funding and maintaining our high quality deposit portfolio.
And it depends of course on prepayments as well. So we're currently working on our budgets for next year and that will include the fourth quarter of this year, we'll know more soon but I do anticipate will dip below 3% in the fourth quarter.
Yes.
Echo that and the fact that we do have.
Fundings in the fourth quarter that are still.
Because of rate locks.
At rates below the current market rates as such shifting almost daily.
We've seen the middle end of the curve push up so.
Some of the funding out of the current pipeline, even though it's significantly higher than even last quarter.
We will still have.
A little bit of impact into the fourth quarter and then.
The larger we get even with large significant fundings at the margin.
It's harder to impact the margin due to the size of the deal.
Overall balance sheet.
Yes.
I will I will just add one thing.
These issues are I would say short term issues as we talked about these are unprecedented times with.
With the fed raising rates, we don't have as much C&I as maybe some banks have where those their rates are adjustable immediately we have about $1 billion on our books that is just full immediately so it takes a little bit of time to turn the ship and to get loan production. So over time, we actually anticipate the benefit from this rising.
Rate environment once everything the dust settles and we're able to get our loan production up to date with our deposit betas.
Got it okay. So maybe some some near term near term pressure, but.
Expanding kind of from there okay that's right.
Do you have the the spot deposit costs, either interest bearing or total at the end.
In the third quarter and then on the <unk>. So you guys added in the quarter I guess, just given some of the commentary around.
Deposit growth in the fourth quarter would you expect to reduce any of the FHL fee position going forward or should it be relatively consistent.
The spot rate on interest bearing deposits is 125%.
And in terms of <unk>.
We are strategically managing the funding portfolio in some cases <unk> is less expensive and more flexible that we have other access to broker deposits and other wholesale funds and of course, we're looking at our branch deposits as well. So we are every day looking at the best way to fund our business and being really smart.
And strategic about it.
We do anticipate.
Phil needing to use some wholesale funding over the next while we'll probably use more broker deposits and bring down <unk> funding to lock in some rates and I would expect to see the home loan bank advances.
Decline over this next quarter.
Yes.
We're pretty much forecasting that.
Despite the high level for advances for us and we're still about 97% core funded so we have some room for us Kevin mentioned to bring in some ladder.
Broker deposits to kind of solidify some of the.
Rate environment until we see where the fed ends up but yes, I would say this is probably up a high point for us.
Yes.
That's very helpful. I appreciate it.
Maybe just if I could sneak one more and just on the efficiency ratio overall I know that's kind of.
Talking last quarter selling it could be pressured near term I guess as we think about kind of going into the fourth quarter should we expect a similar kind of.
I guess magnitude of pressure on the efficiency ratio quarter on quarter, and then is it fair to think about the efficiency ratio kind of holding the same trajectory as what youll see from a margin standpoint, where it can be pressure over the next couple of quarters, and then kind of rebound from there.
Yes, that's correct.
Really two areas that have impacted us.
Obviously, the higher deposit service costs as the most material.
However on the.
SaaS fee deferrals piece.
Our average loan size is spin.
Probably double of what we've historically experienced sooner.
That's b deferrals spin.
Impacted because of that so.
Okay.
You can kind of anticipate if they move in November and potential in December at all.
At least on the customer service costs up some near term impact.
Okay. Thanks for taking the questions and ill hop back in the queue.
Our next question comes from David Feaster from Raymond James.
Hey, good morning, everybody.
Good morning, Dave.
Could you just help US just following up on that expense question. That's a good point I guess as you kind of take this all together, including the likelihood for November and December hike.
How do you think about the run rate in 2023, if we do have this slower slower pace of originations, which leads to less.
<unk>. We also got some inflationary pressures just just curious how you think about expenses, especially as we as we start looking into 2023.
Yes.
We've already started.
Looking at our overall expense profile.
The hard part is relatively lean as an organization.
Obviously, the customer service costs has had a dramatic impact to our increased costs.
It impacted our efficiency ratio. However, we're looking at every areas.
Bank.
Including.
Potential delay of.
Initiatives.
Uh huh.
A material impact to our G&A structure so.
I think what Youll see is R O.
Overall comp and benefits and other lines sustain relatively stable maybe even down.
We're not really necessarily seeing huge significant impacts in areas of cost and our structure that have been impacting us. So I think it really boils down to two areas.
One is deferral and the other is customer service.
The deferral ebbs and flows we expect over time, even though we will have lower volumes. The average size of the loans may normalize back to lovely.
I've seen historically.
On a relative basis, it's a much smaller number so it's really managing the customer service line at some point that will level out and stabilize.
But the rest of our cost structure I think we've been very thoughtful and maintaining a relatively efficient operating platform and don't expect a significant cost impact.
Just over the foreseeable future.
Okay.
Helpful. And then you touched on it on an interesting point about talking about the portfolio continuing to reprice higher I guess, just just based on the current backdrop and fed forecast when would you expect the NIM to trough I mean is that a a mid 2023 year late 2023 of it or is that more realistically 2024.
At some point around there I think I think it's a 2023 event and probably in the first half of 2023.
Okay.
Okay. That's good and then could you you talked in the in your prepared remarks about having a good pipeline in wealth management and Trust services. Obviously, there is some challenges in the market just given.
Valuations and everything, but just curious how youre seeing growth there, especially in the new markets are Florida, and Texas and the opportunities on that front.
Well.
Florida is coming along actually fairly nicely.
We've had.
Some trust people and some investment management people join us.
Unfortunately, we seem to fight through things like Hurricane Ian.
Dealing with the community rebuilding.
Which is first and foremost I think at this point I am pleased to say that the referrals over on that side have been fairly significant even given the challenges.
Going through a major event like that text.
Texas, we still have an added either addressed or in investment management, we continue to look.
But what I would say is here.
With the staffing that we've had on that side, we've already achieved $600 million of new client assets. This year.
Or it's between five and 600.
So.
We've had not only strong retention, but we've had quite a bit of new assets coming into the system.
And that's great but.
Also at the same time, you've got a backdrop, where the S&P down 20, some odd percent.
So every time, we take in a new dollar Unfortunately assets under management have also declined.
Losses.
On the $5 $7 billion, we used to have.
Has the impact of this to the point that I think we ended at four six.
But I think.
I'm very optimistic.
With the client at this time I would say in past events when we have.
Ben in a rising interest rate environment and the cycles have been extremely tough.
<unk> had way more outflows than we have this time around so I think our folks are doing an incredible job of maintaining those relationships getting in front of our clients talking through with the issues are.
And all I can say is they've done a tremendous job in terms of retention.
Okay.
And interesting phenomenon that happened in the early two thousands when the market was so good as you saw an outflow of wealth advisory clients from the banks to the brokerage houses then one of the great financial crisis happened. After that you saw that flow back to bank's customers wanted to work with our customer there theyre trusted bank with someone that they felt.
It was more conservative I suspect, we may see that kind of flow back to two banks again, our portfolio has outperformed the S&P 500, because of our conservative approach our clients appreciate that and it may be a really good time as a bank to be in the wealth advisory business.
That's great.
David.
The trust side.
No.
We're garnering a lot of attention.
And a lot of referrals from Cpas attorneys.
Bigger firms.
As you know our assets under management most of them are custody that Schwab we have.
Unbelievable relationship with Charles Schwab.
And are in constant communication with them. So I am very hopeful and believe that the trust side.
<unk> continue to garner that attention.
It's taken years to build.
That's great if I could just squeeze one more in.
I was hoping you could give us an update on the multifamily market I've spoken with some investors that are a bit cautious on multifamily and I think theres just some misunderstanding on regional dynamics may be across the country. I was just hoping you could give us an update on the competitive landscape just the health of multifamily on the West Coast and then they have Oh.
Other overall insights or thoughts on on that space.
Sure David.
On a competitive landscape.
Uh huh.
It's kind of interesting.
There is the same regional players.
We have really been active in the market.
We've noticed Jpmorgan chase's.
A little more competitive than they have been in the past on a relative basis.
So there is still the market leader in them.
And a few others.
Our.
Continue to service the market well there is relatively strong demand.
In the market however, with the long end of the curve moving up so quickly.
Some of the.
Demand has slowed due to the kind of the rate shock by borrowers. So what we're seeing is there's still high demand for refinance for individuals who about fixed.
Fixed rate.
<unk>.
Rolling over and they need to refinance so it's more of they have two versus.
Playing the rate environment also people are kind of scurrying to market trying to lock in rates because there's a fear that maybe rates will continue to go up.
So there is still demand there, but there has been somewhat of a disruption in the market.
Due to the rate shock you have seen over the.
Last three or four months, especially.
Especially in the last month, or so where rates have accelerated.
Yes.
Sale activity is still relatively strong from a performance standpoint.
At least in California.
Market demand is extremely high rent appreciation is still.
Outpacing inflation at this point, we haven't seen any weakness in any of the markets that we serve.
Predominantly serve workforce housing so.
And even the pricing that we see on sales has them.
I have seen any impact at this point so.
From our borrowing base.
The durability of cash so is extremely high.
Our expectations are as has the consumer starting to weaken.
Certainly seen that in.
Other aspects of the economy.
As there are savings get depleted in cost start to impact.
There will be some impact down the road, we believe an overall rents over time, so which we actually feel it's a good thing.
We want to see certain levels of moderation in rent growth over time.
That being said.
What it tends to lead to us.
Individually assignment to double up in the occupancy as affordability continues to erode so but from a cash flow performance standpoint, our portfolios are as strong as they've ever been we don't see any econometric modeling that would show any weakness in the <unk> average.
Joe.
Sorry, Dave.
Average LTV is 54% and I think people get confused as Dave said, we do.
Workforce housing, which.
Is the average <unk> probably out there not the upper end rents.
And.
Rents are holding firm.
And you have to know that as prices go or interest rates go up on housing affordability continues to decline.
And especially in the state of California.
That bodes well.
Four.
Rents on multifamily do we think that theyre going to moderate yes, because theres got to be a tipping point.
That.
Rents continue to go up at the same time and cost for food and other things are going up as precipitously as they are.
We are.
Seen anecdotally in some of the.
Other markets, we don't necessarily participate in throughout the United States.
There is some farm out Brian concessions coming back into the markets.
Oh.
Are you seeing a hallmark of sensors around are active.
Portfolio management, and not necessarily aggressively going out and buying a lot of these markets.
We'd say over accelerated.
Jeremy.
Kind of a rapid growth period so.
There is some pockets of weakness in some of the Sun belt States that.
We've seen on a relative basis, it's it's fairly immaterial, but.
It's.
We're going to have a little bit of impact on some of those markets. Fortunately, we have very little exposure.
Little to none of them a lot of those markets. So we're going to continue to support the high demand markets, where the supply and demand imbalances.
The peer to.
Going to continue for the foreseeable future. He just they can.
Create enough supply to satisfy the demands so.
And as.
Residential real estate has become less affordable obviously because of interest rates. It has pushed potential owners back into the rental market. So as the economy weakens multifamily typically.
Does extremely well in times, where our affordability on residential real estate tense.
<unk> two.
You don't push them into that market. So we're still very bullish on it I think the biggest issue for us is not.
Relative to performance it's more of.
Trying to find a.
Sweet spot to blend aggressively again without worrying about.
Where the feds going in their next meeting so we're going to.
Take a more cautious approach more around.
Right Yeah.
Versus expectation of market performance.
That's great color thanks, everybody.
Thank you thanks.
Our next question comes from Matthew Clark from Piper Sandler.
Hey, sorry about that culture.
Back to the.
Customer service costs can you give us the average balances average deposit balances associated with those earnings credits.
They on average this quarter versus the second quarter.
Sensitized.
They are fairly flat at about $2 2 billion.
On average okay.
And is it fair to assume we had a 150 basis points of rate hikes in.
<unk> timing is a little different with the first one in July the second one in September . This time around we're gonna have November December a similar amount I mean should we expect a similar step up.
Customer service costs based on another 150 150 basis points of hikes or.
Plus or minus.
That is what we anticipate at this point and of course, we will work strategically to lower that as possible.
Okay.
And then just last one for me on.
Expenses I think in the first quarter you tend to have a <unk>.
A decent step up seasonally in compensation.
What are your thoughts in terms of the magnitude of increase this coming year in the first quarter.
Given inflation and given your desire to obviously manage expenses more aggressively now.
We do have the seasonal increase in the first quarter, we still anticipate that thats part of.
Paying bonuses and tax impacts et cetera.
However, we are seeing some sign in the inflationary pressure around compensation and so I think there are some strategic work. We can do there to ensure that we're not increasing too much as controlling expenses across the board and being very smart and of course with our strategic loan approach.
That helps us control expenses.
And in other areas as well, but that is offset of course by the lower loan production we have.
Less.
Our amount of loan deferral expense, so that will impact us negatively as well.
Got it thank you.
Our last question comes from Andrew <unk> from Stephens.
Hey, thanks for the follow up.
Scott I know, you mentioned and kind of prepared remarks.
One of the priorities one is bolstering our capital position.
I get some of that will be done by just a slower kind of pace of balance sheet growth, but I'm curious if you are.
If you could provide kind of a target of where you'd like to grow capital to and then do you foresee doing that all on an organic basis or.
Any kind of inorganic capital needs.
We're still evaluating that we're more towards the end of our budgeting process in the beginning but it still is.
Is a question mark as to whether or not.
We would.
I want to go out to the marketplace.
I think given the growth of.
Slower growth that we anticipate along with.
Fewer payoffs, but still having payoffs.
I think there's a reasonable chance that we could.
Im.
Grow capital.
Or accrete capital.
Without having to go to the markets.
But we're still evaluating that.
Okay makes sense. Thanks for the question.
Yeah.
This concludes our allotted time for today's question and answer session I will turn the call back over to Mr. Scott Kavanaugh for closing remarks.
Thank you again for participating in today's call as we entered the last quarter or 2022.
We are well positioned to end the year strong.
We have the right team in place the best clients in our markets and a strong business model that is highly competitive.
And have a great remainder of your day.
Okay.
Thank you ladies and gentlemen. This concludes today's conference you may now disconnect.
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Okay.
Okay.
Okay.
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