Q3 2022 Enterprise Financial Services Corp Earnings Call
Good day and welcome to the Enterprise Financial Services Corporation third quarter 2022 earnings Conference call. Please note today's conference call is being recorded all lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a.
Question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question Press Star followed by the number one again. Thank you at this time I would like to turn the conference over to Jim Lally President M. C. O. Sir you may begin your conference.
Well, thank you Erika and good morning.
Welcome everyone to our third quarter earnings call I. Appreciate all of you taking time to listen and joining me. This morning is Keene Turner, our company's Chief Financial Officer, and Chief Operating Officer, and Scott Goodman, President of Enterprise Bank and Trust.
Before we begin I would like to remind everyone on the call that a copy of the release accompanying presentation can be found on our website presentation.
Presentation and earnings release were furnished on SEC form 8-K yesterday.
Please refer to slide two of the presentation titled forward looking statements and our most recent 10-K 10-Q for reasons why actual results may vary from any forward looking statements that we make this morning.
Please turn to slide three for our financial highlights for the third quarter.
We're very pleased with our third quarter results as they reflect the cadence of consistency that we established since the beginning of the fourth quarter of 2021.
These earnings are a product of the diversified franchise that we're building with a laser focus on establishing long term relationships with privately held businesses, while building a culture of operational excellence.
For the quarter, we earned $1.32 per diluted share, which compared favorably to the $1 19 that we earned in the second quarter.
Our patience with respect to our loan and investment portfolios, coupled with our low cost deposit base allowed us to take advantage of the rising interest rate environment.
For the quarter, our net interest income increased to $124 million. This represented a 13% increase over the linked quarter and was bolstered by our net interest margin of 4.10 persistence.
Our return profile improved as well.
Pre provision return on average assets was 196% versus 173% in the second quarter and 1.81% a year ago.
Return on tangible common equity also improved increasing to 19% compared to 17%.
At 630 22.
Scott will provide much more detail on how our markets and specialty businesses fared during the quarter.
At a very high level loans increased 5% annually net of PPP and deposits remain north of $11 billion decreasing modestly by 13 by $35 million.
At the end of the quarter, our loan to deposit ratio stood at 85%.
With DDA, representing 40, 42% of our total deposits.
He will spend much more time on capital, but I just wanted to comment.
But our TCE to total assets was stable at 748, 6% despite.
A OCI pressure in C. A T one was 11%.
Even with the pattern that we established several quarters ago, we did increase our dividend per common share for the fourth quarter to 24 cents from 23 cents.
Our asset quality remained very solid at quarter end.
While our portfolio portfolio statistics remained pristine, we do understand while the impact of rising interest rates and a prolonged recession could have on our loan portfolio.
That in mind, we have conducted segmented internal bone exams and have stress test.
And we stress tested larger floating rate portfolios and potentially higher loss portfolios and feel very confident about the resiliency.
This segment is testing will continue for the foreseeable future.
It goes without saying, but we are looking for the proverbial cracks in the portfolio, what we have yet to see it.
I would like to provide some color on the themes I'm hearing from our clients and my most recent meetings with several of our C&I clients I'm hearing that orders were strong.
Balance sheets are good, but labor and supply chain still remain a bit challenging that being the case for the most part they feel confident about their performance to plan for fiscal 2022 and their ability to continue to perform at this level into 2023.
And into early 2024.
We're also preparing for a mild recession in early 2024, but think this will be short lived as things will rebound by the end of that year.
When speaking with our key sponsors related to our sponsor finance business. They too are confident about their portfolios.
Feel really good about near term performance and the resiliency of the balance sheets of the portfolio companies should a recession lasts longer than anticipated.
Finally, I will say that some of our larger developer clients are being cautious about new projects that are still on the drawing board, but the recent rise in interest rates. These projects have difficulty, Pennsylvania. So this will obviously have an impact on new development projects that will likely close in mid to late 2023.
Our formula for success for the remainder of the year is relatively simple.
Slide four lists the sampling of our focus.
We need to continue our strong momentum in both organic loan and deposit growth.
And doing this with our relationship focus while keeping discipline on both pricing and credit quality.
Credit and capital is always a focus for us, but given the current climate will remain especially vigilant and both of these areas and finally times of change and uncertainty are typically ideal for us to add good talent everywhere in our organization as we always do we will do this with an accretive mindset.
We especially think that there are very good opportunities or newer markets like southern California, and Dallas Fort worth.
I would like to turn the call over to Scott Goodman, President of Enterprise Bank <unk> Trust.
Thank you Jim and good morning, everybody.
As you heard from Jim and as shown on slide six we posted solid loan growth of $122 million for the third quarter, resulting in a trailing 12 month growth rate of 8% net of Triple T changes.
Despite Q3, typically being a somewhat seasonally soft period for a number of our specialty business lines in general we're very pleased with the overall growth in this portfolio being successful conversion of our regional C&I and CRE pipelines and continuing steady execution of new opportunities within the specialty businesses.
Loan details by segment are outlined on slide number seven and eight.
And year over year growth is being contributed by nearly all segments of the business.
Reduction in the residential real estate portfolio, mainly reflects the addition of these loan types through the first choice acquisition.
And our subsequent intentional shift away from short term bridge or fix and flip lending in the California market.
Most of this reduction occurred in prior quarters.
For the third quarter, the largest contributors to growth were within our regional commercial banking units in general C&I and commercial real estate categories.
We have been able to successfully win a number of new larger C&I relationships during Q3 across most of our geographic markets.
Selecting a steady and consistent sales process.
Overall, C&I originations increased nearly 14% from the prior quarter and are up nearly 65% from the same quarter last year.
We also continue to see good activity in our real estate pipeline, particularly with our existing investor clients and within the western geographies.
New development loans have slowed somewhat as developers consider elevated project costs and some shifting economic factors, but our existing construction portfolio continues to fund and perform well.
A number of these projects are moving to a stabilized status and remaining within our portfolio, which is partially contributing to the reduction that you see in construction development category and the increase in CRE investor owned balances.
The change in tax credit balances also reflect some shift in categorization. This quarter as projects that are aged past their qualification periods move into a more permanent category.
Moving to slide number nine.
Please note that we have consolidated our metro markets into geographic regions as outlined in the footnote.
The specialized lending units continue to perform well and have shown some level of immunity to the shifting economic conditions growing in Q3 by $46 million.
Life insurance premium finance grew by $30 million in a seasonally softer time of the year due mainly to elevated activity from newer referral partners.
The California market has presented an opportunity to more fully introduce our expertise in this niche to CLI is within this targeted segment and we are getting introductions to new <unk> from our existing insurance partners as well.
Practice finance, which is a new team for us in 2022 has hit the ground running that continues to perform well contributing $25 million to growth this quarter and $73 million for the year.
Sponsor finance, which was essentially flat for the quarter.
Which is not uncommon for this time of year.
Deal flow and pipeline have begun to regenerate following a midyear pause and look solid heading into Q4, which tends to be a more active quarter, leading up to year end closings.
In the SBA business, we did experience some decline in originations for new seven eight loans this quarter due to lower demand as well as competition from conventional bank lenders.
We were able to offset much of this impact on the portfolio through efforts to proactively retain and extend existing.
Extend existing SBA loans, with payoffs and paydowns diminishing to roughly 65% of levels experienced in the prior quarter.
We have also recently bolstered our traditional owner occupied floating rate product.
With fixed options as well as extending our SBA capabilities to target other business purposes in an effort to elevate production.
Within the Midwestern region, St. Louis and Kansas City, both had good growth quarters, resulting from landing a balanced mix of new middle market C&I relationships and commercial real estate opportunities.
In the southwest growth was modest this quarter, we did onboard a number of new C&I relationships in Arizona, Las Vegas, and new Mexico, as well as some momentum of fundings from CRE and construction commitments flows throughout the year.
Net growth was lowered somewhat due to payoffs related to the sale of a large Arizona C&I business to private equity and the sale of Investor owned properties in Arizona and New Mexico.
In the West region, the portfolio declined slightly by $10 million due to mainly to lower advances on existing lines of credit.
On a positive note we are seeing good activity from new talent brought into this market over the last year and our California pipeline is building heading into Q4.
Payoffs there continue to moderate relating to our decision to move away from the aforementioned residential fix and flip business with total payoffs at roughly half the level experienced last quarter.
Moving to deposits covered on slides 10 and 11.
As the market has placed more emphasis recently on deposits.
And competition increases our focus continues to be on retaining our existing low cost and relationship based funding.
While leveraging specialty channels and new commercial relationships to attract additional balances.
Year over year deposit balances have risen $230 million or roughly 2% primarily driven.
Driven by an increase in new noninterest bearing accounts from the specialty deposit lines and new commercial relationships.
For the quarter overall balances were relatively steady compared to the prior quarter down just $35 million.
Areas of decline were primarily in interest sensitive consumer and time deposits, while commercial business banking and specialty deposit channels remains strong.
Average DDA balances per account continued to move down as businesses spend through stimulus dollars and excess liquidity.
We've been able to offset the impact of this trend now through sourcing new relationships and expanding existing ones with the current annualized growth rate of deposit accounts, just under 9% in the quarter.
On a regional level, which is displayed on slide number 12, we saw growth in all areas with the exception of the Midwest.
This was primarily due to the movement of balances from one large commercial client in Kansas City, which was acquired in the quarter.
Specialty deposits profiled on slide 13 grew by $19 million in the quarter with the largest contributions coming from the community associations and property management segments.
These continue to be an efficient and low cost source of funding now representing 22% of total deposits.
Across our markets, we had positive net new accounts in the quarter with higher average balances than in our closed accounts and at attractive rates as our average open interest rate for the quarter was well below our peer average.
In general we're pleased with our ability to hold relationship balances to originate new accounts and to maintain an attractive blended deposit costs.
Now I'd like to turn the call over to Keene Turner for his comments on the quarter Kim.
Thanks, Scott and my comments begin on slide 14 of the webcast, we reported earnings per share of $1.32 in the third quarter on net income of $50 million.
Earnings per share expanded 11% sequentially due to 8% growth in operating revenue, which totaled $134 million or <unk> 20 per share sequential increase.
This growth was driven by a 13% expansion of net interest income while noninterest expense expanded it in a more controlled rate, resulting in a 35% marginal efficiency rate for the third quarter.
Turning to slide 15, net interest income for the quarter was $124 million.
Compared to $110 million in the second quarter or a $14 million increase.
Net interest income was favorably impacted by an improved earning asset mix, including higher average loan and investment balances along with the benefit of rising interest rates driving asset yield higher.
The increase in net interest income was primarily driven by a $16 million increase in loan income despite a $1 $1 million reduction from PPP income.
With the composition of our balance sheet as of September 30, we expect the full impact of the existing interest rate increases will result in quarterly net interest income in the range of $130 million to $132 million.
We estimate another 100 basis point increase in interest rates will result in an additional $5 million in quarterly net interest income.
As noted in the earnings release, approximately 20% of the variable rate loan portfolio re prices on the first day of each quarter and did not benefit from the third quarter interest rate increases.
Moving on to slide 16, net interest margin on a tax equivalent basis was $4. One zero percent, an increase of 55 basis points from the linked quarter. Our balance sheet has been positioned to be asset sensitive and accordingly, and continue to benefit from an increase in interest rates.
As a result asset yields improved 71 basis points, which included 59 basis points of yield improvement and investment yield improvement of 14 basis points.
New loan originations in the quarter were five at a rate of five 7%.
And we invested at a rate of three 7% in the investment portfolio on a tax equivalent basis.
Additionally, the increase in fed funds rate led to improved earnings on our interest bearing cash balances.
Net interest margin was also aided by an enhanced asset mix as we continue to fund growth in loans and the investment portfolio, while reducing excess cash.
The cost of interest bearing liabilities increased 30 basis points from the second quarter, driven mainly by higher deposit rates and variable rate borrowings.
The loan portfolio remains our largest driver of asset sensitivity at 63% of loans are variable rate more than 60% of those have interest rate floors and essentially all of those floors are nonexistent there the rate is about before.
We ended the quarter with nearly $750 million of cash on the balance sheet and that affords us the opportunity for favorable asset remixing.
And liquidity defense in upcoming quarters.
Our deposit portfolio remains more than 40% interest bearing balances and we have less than $500 million total transaction accounts, formerly tied to an index with ample liquidity, our expanded footprint and strong low cost deposit generation through our specialty verticals, we've been able to maintain our beta below 20% and the current size.
<unk>.
While we expect this lag in deposit pricing to abate, we believe our ability to control deposit costs through this rising rate environment is greatly enhanced versus prior interest rate cycles.
On slide 17, we demonstrate our credit trends, our asset quality metrics improved in the quarter as both nonperforming loans and assets declined.
Nonperforming assets were 14 basis points of total assets and nonperforming loans were 19 basis points of total loans.
Realized credit losses continued to be very low and net charge offs were only two basis points in the quarter compared to one basis point recovery in the prior quarter.
Slide 18 presents the allowance for credit losses, each of the economic forecast factors, we use in our seasonal model deteriorated as expected during the quarter the impact on the allowance for credit losses from the worsening forecast and loan growth in the quarter was partially offset by a favorable shift in the risk composition of the loan portfolio.
Certain loan segments that have a higher reserve levels declined while other categories with lower alert reserve percentages increased.
And some of these moving pieces resulted in a provision expense of approximately $1 million in the third quarter.
The allowance for credit losses was stable at $141 million compared to the end of June and represents 150% of total loans when adjusting for government guaranteed loans. The allowance to total loans was 167% the end of September .
As you heard from Jim we are diligently monitoring and credit risks in the loan portfolio and to continue to believe that our allowance coverage of both warranted and sufficient to address those risks.
On slide 19.
Third quarter fee income was $9 $5 million. This was a sequential decline of $4 7 million and was led primarily by a $4 8 million dollar reduction in tax credit income as rising rates in the quarter had a negative impact on tax credit projects that are carried at fair value.
Tax credit income will continue to be seasonal and subject to further interest rate movements. However, fair value adjustments that reduce tax credit income are more than offset by higher net interest income in a rising interest rate environment.
Card services revenue also declined by less than $1 million in the quarter, primarily related to the durbin impact on debit card transactions, which went into effect for us for the third quarter.
Turning to slide 23rd quarter noninterest expense was $69 million, an increase of $3 million compared to $65 million in the second quarter Comping.
Compensation and benefits increased $1 million in the quarter, principally from new hiring and an increase in performance based accruals incentive accruals sorry.
Other expenses were $2 million higher than the third quarter, primarily related to an increase in deposit servicing expenses that have continued to be impacted by higher interest rates.
The third quarter's efficiency ratio was 51, 5% an improvement of 130 basis points compared to the second quarter. This reflects the momentum in operating revenue outpacing the rise in noninterest expense during the quarter.
The expense trend during the quarter continues to be driven by customer analysis analysis expense, which increases as rate increases increase.
So incentive and bonus accruals as well as fewer open positions than plan resulted in the sequential increase to employee compensation and benefits.
Looking to the fourth quarter, we're expecting noninterest expense to be in the range of $71 million to $73 million. This is principally due to an expected increase in head count and higher deposit costs from an expanding specialty deposit base as well as higher interest rates from the federal reserve actions.
As I previously mentioned, we continue to expect that the increase in customer analysis and other expenses will be more than offset by higher net interest income trends as rates continue to move upward.
Yeah.
Our capital metrics are shown on slide 21, the near record earnings we generated in the third quarter of $50 million offset the $45 million decline in accumulated other comprehensive income.
From the continued impact of rising interest rates on the market value of our available for sale investment portfolio.
Despite the headwind in the investment market value.
Change in tangible common equity this year, our tangible common equity ratio has now expanded for two consecutive quarters tangible book value per share was relatively stable compared to the second quarter.
Our strong capital Foundation is reflected in the common equity tier one ratio of 11% at the end of September .
Common equity tier one does not include the effects of unrealized losses of $153 million and accumulated other comprehensive income at September 30 that will be returned to equity over the life of those securities and derivatives portfolio.
Given the strength of our earnings and the capital position, we announced another increase to our dividend for the sixth consecutive quarter.
While we repurchased over 700000 shares in the first half of the year, we did not repurchase any shares during the quarter. We have 2 million shares available under our board approved program, but we do not currently plan to execute on our repurchase plan until we see more build and our tangible common equity ratio.
Overall, we had a very strong quarter and we've been pleased with our performance. So far this year as Jim mentioned, we delivered a 19% return on tangible common equity and a 2% pre provision pre provision return on assets during the quarter.
We have taken the steps to position our balance sheet to capitalize on the current interest rate environment, while prudently deploying our liquidity and managing our credit risk profile.
I. Thank you for joining the call today, and we will now open the line for analyst questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
Again, the Star then the number one to ask a question.
Your first question comes from Jeff release with D. A Davidson.
Thanks, Good morning.
Morning, Jeff.
Wanted to.
Sort of unpack the tax credit.
Okay.
Line items.
A number of.
$3 $6 million loss is so I just want to understand is there a was there a fair value adjustment that offset.
Actual revenue and if so could you could you tell us what the revenue associated with it.
Or if that's maybe not thinking about it correctly.
Jeff This is keene youre thinking about it correctly. So there is a portfolio of credits as we originated into this type of business that we fair value to work through some of the expenses and.
What I'll say than prior to the third quarter, and then maybe a more normalized interest rate type.
Tightening environment, we expected to always be able to at least mitigate out that expense with with how aggressively specifically 10 year. So for moved up right at the end of the third quarter and with the fact that closings on projects with fairly minimal in the quarter, we took about 12 million.
Fair value decline, our negative adjustment and then the resulting delta.
It was offset by by some new projects and sales and things like that so that gets you to that essentially that minus $4 million for the quarter.
And moving forward.
I think with with what's happened so far in.
In the year I think we're prepared for anywhere from.
Call. It a negative of another couple million dollars in the fourth quarter or two potentially.
Zero or a positive.
As we move forward here, Jeff rates have moved on the long end of the curve I guess more than than we thought and.
We probably should have given some some sensitivity to you guys in advance of this.
Okay, but as you said.
Gains on the top line more than offset that but just.
So I guess that kind of look at that is.
Breakeven or maybe a slight loss in the.
Coming quarters or one to two I mean any visibility on how long that goes out until it resumes to I mean.
Tough question, but yes, yes.
Yes, it's going to depend on what your view on interest rates are and also how much long longer term rates, specifically 10 years or so for move up as we get the fed moving the short end of the curve I think as we look out to.
Call It 2023 that numbers.
Unfortunately, if we get more rate increases that might be kind of zero to something.
And thats, probably shy of the $10 million, but I think the opportunity here is as we've revalued. These credits all I'll say on the way down.
With the idea or in the back of our minds that maybe at some point there is a recessionary impact later in 'twenty three are early in 'twenty, four and maybe the fed moves down from where fed funds and.
This can also then be a hedge to maybe some slight declination of net interest income or higher provisioning or both of those so.
I know thats, probably not as much clarity as as you'd like but it.
It's going to be a more modest contributor to <unk> to.
<unk> to 'twenty, two and 'twenty three than we originally thought but I think net interest income is far outstripping that and I think we'll take that trade is as operating revenues strong so maybe more color than an answer but hopefully that's helpful.
No that is.
It is.
Good detail there.
Yeah just.
Jump into that.
The top line discussion.
Just curious do you have a September monthly average on margin versus the quarterly average of 410, yes. So based on the September balance sheet and rates.
I think we think net interest income is roughly.
Just north of $130 million with net interest margin right around 435%.
That includes the quarterly resets, we talked about predominantly on the SBA portfolio and then call. It another 10 to 15 basis point increase in deposit rates base.
Based on where we sit today and what we've done with with sheet rates an exception pricing.
Okay. So the maybe the $4 35, an NII north of $1 30, that's kind of a Q4.
And then you also sort of outlined additional.
Rate hikes would lead to.
Could you.
Yes sure.
Please go ahead, yes, so another 100 basis points, which is I think what what it seems like it's lining up for in the fourth quarter.
It's going to generate roughly $5 million of extra net interest income per quarter and we are using.
Like just under a 50% beta on earning assets in like a 35% interest bearing deposit beta for that.
That's good detail Asaf setback. Thank you alright, thanks, Jeff.
Okay.
Again, if you would like to ask a question. Please press Star then the number of line.
Your next question comes from the line of Andrew Liesch with Piper Sandler.
Hey, guys good morning.
Good morning, Andrew.
Question on the loan growth guide here some optimism.
In some areas, but also some cautious in others.
So I guess.
Single digit this quarter is that the right way to think about growth say over the next two.
Months, maybe we get a little bit stronger growth here with <unk>.
Sponsor finance book, but if we're looking out 12 months from now with mid single digit is the right place to be.
David This is Jim I would tell you, we're very comfortable with the mid to high single.
On a go forward basis.
The production levels have been solid.
We're very pleased but we're not going to expand the credit window to get that reach but we're very confident about our ability to continue to perform in that mid to high single going forward.
Got it.
And then just one housekeeping question here on the margin how much discount accretion was in that $4 10 number.
Andrew the discount accretion that's in the form 10 is pretty negligible.
All that out of there.
But at this point, we had a fair amount of burn off in the SBA portfolio.
I think in the quarter, it's less than a penny.
So it's not not moving the needle either way.
Got it alright, my other questions were on the fees in the margin so I'm going to go I'll step back. Thanks, so much awesome. Thanks, Andrew.
Your next question comes from the line of Damon Delmonte with K B W.
Hey, good morning, guys. How are you doing today.
I joined a little late so I apologize if you addressed this in your prepared remarks, but can you just give a little color on the on the provision outlook.
I don't know that you talked about the puts and takes for this quarter, but how do we kind of think about the reserve level any expertise for loan growth and kind of what youre seeing on the credit front as you try to kind of model out our provision level.
Yes, David I think in the quarter when we look at it sequentially. I mean, we did we did provide for growth and I think the coverage right now is like $1 50 that obviously includes.
Loan loan deterioration and substandard loans, which are still minimal but.
So I think provisioning on new loans of call. It right around that 110 to 125 basis points, depending on what category. It then and then I think with the recovered the coverage ratio at $1 50, and 170 <unk> sort of.
Total and on guaranteed.
I think based on where we sit today, we feel like we're well positioned if we see.
The horizon or the environment deteriorating further and we get some of that data in the economic forecast that we can be further responses to it and.
Deal with those provisions over the coming quarters fourth quarter, and then into 'twenty three.
But we also feel like we're conservatively conservatively positioned given what the portfolio looks like and what all of the credit quality indicators are so.
Again, I think we're at a point here, where if when we start to get some.
Less aggressive moves from the fed and that looks more like a softer landing.
I think we think that $1 50 is a good number I think if it continues to be aggressive tightening.
Our view.
B and from a safety perspective that we probably go a little bit heavier on the provisioning and maybe move coverage up to account for higher interest rates.
In the portfolio and higher than they've been in recent years.
Got it okay.
And then just to circle back on the on the margin.
I didn't get your prepared comments on this but did you say the to answer the one of the questions.
Was this was a commentary around $130 million of NII in the $4 35, NIM is that we are forecasting for the fourth quarter.
Correct, that's based on everything Thats happened today.
Right, that's not increased any future increases that's essentially.
The increases that we have in place hitting the repricing on October one for certain certain loans.
And then also what we've rolled out in terms of deposit pricing on commercial.
Our consumer customers.
Yes, so thats the fourth quarter number at 131, and then $4 35 NIM.
And so I'm, giving you numbers and obviously, that's you've got to apply your your level of.
Boundaries on those and then.
Another 100 bps in the first fourth quarter would give us roughly another $5 million of net interest income quarterly thereafter, and again, we're using.
47% beta on earning assets, 735% beta on interest bearing deposits.
Okay perfect I appreciate that color. That's all that I had everything else was asked and answered. Thanks, a lot appreciate it alright. Thanks Dan.
Your final question comes from the line of Brian Martin with Janney.
Hey, good morning, guys, sorry, I joined a bit late so just wanted to ask one last follow up Keith on the margin just when you see the fed pause I guess I guess can you talk about how you think the margin behaves then I mean, I guess, what youre expectation deviation, maybe say a little bit of a decline in the margin, but the dollars of NII going up because of the growth is that.
Kind of how youre thinking about it today.
Yes, I think it's certainly the directional trend.
Posit cost lagged quite a bit they are certainly continuing to move I don't know that theyre necessarily catching up but they are moving an asset rates wouldn't move up much more beyond it I think some of it Brian depends on.
When the pause com. So if for example, you got.
Seven two more 75 basis point increases and then there was a pause obviously, we'd get much more rapid expansion of net interest margin and net interest income, but then there would be slight margin compression.
From there and I think the question is just can you out earn that with growth in dollars quickly enough.
You are still.
I think our view is that margin.
Just on where we think rates are going to go here at <unk>.
For the rest of 'twenty, three alright, sorry, 'twenty two.
Even if you got some of that compression wed be.
Well north of 4% net interest margin, even when it comes back down.
And if our hope is that you get sort of one more bold fed action and then we start to move back to like 25 basis points and that will help create some stability, while we earned through the shorter quarter days.
<unk>.
In early 2023, and then also can can layer into some growth and have strong net interest income grow from from there on out so I think that would be ideal I am not sure.
Taking a position one way or another on whether that's going to happen, but I think that generally is how we expect the balance sheet to behave.
No. That's helpful. I appreciate it Canaan and then how about just on <unk>.
I think you guys probably covered a fair amount of that.
Tax credit, but just the outlook just in for that business.
And if I heard the tail end of it right.
Outlook for the tax credit in 2003 is maybe just a modest contribution at this point is how youre thinking about the world and then we'll see where rates change out rates change.
Yes, I think thats right.
I think if.
If we stopped having interest rate moves at the end of 2022, then I think next year you can have some expect some net contribution from tax credit I think if rates continue to move particularly boldly.
It could be a zero or negative so I don't think I'd be surprised next year, unless we got some material decline in longer term rates that the tax credit business would be kind of a $10 million or more that we thought it was going to be this year.
And I think that.
That's sort of.
I think if youre thinking about in terms of how to model. It you have to pull it out of net interest income and put it into the fee line item.
Vice versa, I think theres sort of mutual neatness of mutual parity there.
Got you and the rate that we should be paying attention to us when you stable if rates are going to change.
What rate is it more sensitive to when we think about it.
Outlook. So for every 10 basis point increase or decrease in 10 year Sofa, that's about just roughly a $900000 impact on fair value of tax credits.
Okay perfect. Okay, and then just the last one for me was just on the it sounds like the loan growth is I guess.
Are you getting.
It doesn't appear that there is a lot of.
Cautiousness among your borrowers if the outlook still seems pretty favorable from what you said, Jim as far as mid to high single digit growth is that us any slowdown from what you were expecting earlier, just given kind of what we're seeing and how the economy may play out next year or is that pretty consistent largely this brendan.
Yes, the only area that I would say that.
We're already starting to see it is in the larger developments clients where the.
Mac just isn't working.
So those projects.
Political women they don't start funding up until.
Six months down the road anyway, So I would tell you that business is impacted.
Mid to late 2023 from a C&I perspective.
Our borrowers certainly recognize what's happening in the economy, but business is still decent businesses. Good order books are growing.
And we'll go ahead and.
Purchase equipment as needed.
Need working capital and things of that nature. So.
We feel good about.
And the other thing too is the diversification of the book so not any one region not any one business has to operate at full tilt to reach these numbers it's about <unk>.
Each of them doing what they can do and we did a deep dive with the teams and feel comfortable about where we're headed not only at the finished this year, but into 'twenty three.
Yes, Okay I know it seems positive.
And then just the last one was just on the deposit so it looked like the <unk>.
Activity from last quarter slowed and it was more stable. This quarter just your outlook to fund the loan growth on the deposit side. How are you thinking about the deposit growth or stabilization from here.
Hey, Brian It's Scott I can take that one if you remember last quarter we had.
A large client in the specialty deposit business that moved out and that was really the main reason for the decline that quarter. I think you saw a little more consistency this quarter, but I think when you look at how our deposits are spread across channels commercial specialty business banking.
A lot of that cash is used in the business needs to be accessible I think we feel good about what we're seeing from a behavior standpoint, and the ability to retain and grow that and then.
As we bring on new relationships through C&I, obviously that brings new deposits as well I think specialty also is somewhat immune to what you see going on externally with chasing rates. So all of those things I think bode well, we feel good about being able to fund the growth.
Okay, and the deposit beta Scott I guess you're thinking.
What is the deposit beta shake out as you get a couple more rate hikes here in the in the fourth quarter, Yes, Brian This is keene.
I think what we said so far deposit beta has been roughly 20%. Obviously there is some lag in there so that that helps the optics of it.
In the guidance I gave on another.
For the fourth quarter and then also for.
Moving forward with further increases.
Like a 35% beta that we're modeling that we think is a good number and I think over time.
And 35% converge and the asset base strong at 47% and we still have.
North of 40% DDA. So we think that that's a really good recipe and equation and we've gotten off of as you remember back to the question about second quarter deposits.
We've largely gotten away from fed funds plus funding that we had in the last cycle.
And we've been willing to move deposit rates as necessary to defend the relationships.
And keep keep those intact and with the way the balance sheets position I think we're in good shape to continue to maintain and grow net interest income and margin and we'll probably give up just a little bit in terms of the deposit costs accelerating in these most recent quarters, but starting from north of a 4% net.
Interest margin and growing so we feel good about the earnings profile and being able to preserve that.
Yes, no I appreciate it thanks for taking the question guys.
Welcome. Thank you.
There are no further questions at this time I will turn the call back over to management for any closing remarks.
Thanks, Erica and thank you everyone for joining us today.
Thank you for interest your interest in our company and we look forward to speaking to you at the end of next quarter have a great day.
Thank you for participating you may disconnect at this time.
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