Q3 2022 Hilltop Holdings Inc Earnings Call
Thank you for your patience the Hilltop Holdings third quarter 2022 earnings conference call will begin shortly.
[music].
Hello, and welcome to the Hilltop Holdings third quarter 2022 earnings Conference call. My name is Alex and I'll be coordinating the coach day, if you'd like to ask a question at the end of the presentation that you can press star one on your telephone keypad. If you like to withdraw your question you May Press Star two.
Yeah, Hi, Erik Yohe from Hilltop Holdings, Eric. Please go ahead.
Thank you operator.
Before we get started.
Please note that certain statements. During today's presentation that are not statements of historical fact, including statements concerning such items as our outlook business strategy future plans financial condition allowance for credit losses, the impact and potential impacts of inflation stock repurchases and dividends and impacts of interest rate change.
As well as such other items referenced in the preface of our presentation are forward looking statements.
These statements are based on management's current expectations concerning future events that by their nature are subject to risks and uncertainties.
Our actual results capital liquidity and financial condition may differ materially from these statements due to a variety of factors, including the precautionary statements referenced in our presentation and those included in our most recent annual and quarterly reports filed with the SEC.
Please note that the information presented his preliminary and based upon data available at this time.
Except to the extent required by law, we expressly disclaim any obligation to update earlier statements as a result of new information.
Additionally, this presentation includes certain non-GAAP measures, including tangible common equity and tangible book value per share.
Reconciliation of these measures to the nearest GAAP measure maybe found in the appendix to this presentation, which is posted on our website at IR Hilltop Dash Holdings dotcom.
With that I'll now turn the presentation over to President and CEO Jeremy Ford.
Thank you Eric and good morning.
For the third quarter Hilltop reported net income of $32 million or <unk> 50 per diluted share.
Return on average assets for the period was <unk>, 8% and return on average equity was six 3%.
This was an excellent quarter for Plains capital Bank.
The bank generated $64 million in pretax income driven primarily by a 44 basis point increase in net interest margin from Q3 2021.
In the quarter average bank loans grew by an annualized rate of 8% as growth in commercial our core commercial loans and repayment of prime lending originated mortgages more than offset elevated pay downs and the expected decline in our mortgage warehouse business.
And talking with our bankers this quarter, our overall sentiment remains positive because they believe the economy is strong and are continuing to invest in finance new projects.
As such our pipelines remain elevated and above pre COVID-19 levels across almost all products and geographic markets.
However, we are beginning to see the impact of elevated rates and inflation on new deals in particular elevated costs and rates are often leading to higher relative equity requirements in new construction projects.
And the area, where we are starting to see pullback among clients is in single family residential.
Yeah.
As homebuilder clients have appropriately slowed lot take downs and look to move inventory quickly as demand slows.
Overall, there is still high level of competition in major Texas markets and as a result yields and structure are under pressure, although asset quality remained strong we will continue to maintain our high credit standards and ensure our lenders are putting their best foot forward on quality opportunities.
Total average deposits decreased by $852 million or 7% quarter over quarter.
Our noninterest bearing deposits, which tend to be stickier operating accounts declined by only 2% linked quarter and remained elevated compared to Q3 2021.
And our correspondent and money market accounts, we have seen some run off as more rate sensitive clients have reacted to the sharp rise in rates.
We expected this run off and are continuing to be on track to our 50% through the cycle beta which will is going to address later in the presentation.
Overall, our strong excess cup core funding position has allowed us to remain disciplined on pricing and realized strong margin expansion.
Importantly at the end of the third quarter, the bank's loans held for investment to deposit ratio remained favorable at approximately 67%. We believe we have ample liquidity and core funding to support continued loan growth also our ability to utilize sweep deposits from hilltop securities as core funding would provide for.
Liquidity to the bank, which we believe is a differentiator in this environment, where liquidity and funding potentially become more scarce.
Moving to prime lending, while rising interest rates have been accretive for the net interest margin at the bank they have adversely impacted our mortgage operations.
Rising mortgage rates in conjunction with declining housing affordability and current inventory challenges continued to negatively impact mortgage volumes.
As a result mortgage origination volumes declined by 46% from Q3 2021.
Gain on sale of loans sold to third parties has declined by 37% down to 227 basis points.
For perspective volumes for the industry are expected to decline approximately 55% over the same period per the mortgage bankers Association.
The current mortgage market has shifted dramatically towards a pure purchase market.
Refinance volumes in the third quarter made up only 7% of originations compared to 29% in Q3 last year.
While our business model is more purchase oriented the shrinking pool of purchase homebuyers and the immediate need of competitors to generate mortgage volume will continue to put pressure on the organization.
After two consecutive years of originating $23 billion in mortgages the business has reset towards a lower volume market for the foreseeable future.
<unk> initiatives underway include better aligning production support operations and back office head count towards lower volumes.
Over the past 12 months, we have reduced head count in the business by 23%.
And we will continue to monitor closely to ensure we are aligning production targets with appropriate staff levels.
Additionally, the business is assessing our real estate business development professional services and all other fixed costs as we prepare for sustained higher mortgage rates and lower volumes in 2023.
This is a challenging time in the mortgage industry and it has come suddenly following multiple record years.
That said, we feel good about the leadership and overall team we have at prime lending and their ability to navigate us through this cycle. So that we come out a stronger growing and more profitable organization on the other side.
During the quarter Hilltop securities generated $17 $5 million of pre tax income on net revenues of $114 million or a pretax margin of 15%.
Pretax profit improved slightly compared to last year's third quarter, Despite a 10% decline in revenues.
Pretax contribution mix shifted as public finance and structured finance both declined versus the prior year, but were largely offset by improvement in wealth management and fixed income.
Revenues within fixed income services increased by 2% over prior year as trading activity within the securitized products.
Picked up.
So the overall fixed income trading environment continues to struggle due to the expectation of rising rates.
Wealth management improved compared to prior year, despite lower fees from a decline in the equity markets.
High margin revenues from sweep deposits continued to move up with fed rate increases and we continue to add strong advisers in this business.
While we feel positive about the momentum hilltop securities made in the quarter and the position they are in across our <unk>.
Our lines of business, we do believe the trading environment remains volatile and expect to maintain lower levels of trading inventory until the market stabilized.
Moving to page four.
During the quarter hilltop returned $10 million of capital to shareholders through dividends.
At this time, we do not have a new share repurchase authorization to report and as of now the plan is to evaluate this as part of our annual planning process with our board at year end.
Despite earnings pressure in our mortgage origination business and a decline in the value of our available for sale securities portfolio from rising rates consolidated profitability from our diverse business model and significant share repurchases over the past two years has supported our tangible book value per share and <unk>.
Drove the increased modestly in the third quarter.
In summary, this is a challenging market, but we remain focused on delivering profitable growth every quarter.
We have strong experienced leaders in each business, who have been through cycles and tough times.
We are continuing to work with our clients and employees and in every market to understand the evolving dynamics and how we best can support and partner with them.
As we anticipate a higher rate environment through 2023, we plan to rely on the strengths of Plains capital Bank and hilltop securities, while prime lending realize its business to weather this mortgage cycle.
With that I will now turn the presentation over to will to discuss the financials.
Thank you Jeremy I'll start on page five.
As Jeremy discussed for the third quarter of 2020 to hilltop reported consolidated income attributable to common stockholders of $32 million equating to <unk> <unk> per diluted share.
Moving to page six during.
During the third quarter credit quality remained solid as nonperforming loans remained stable at low levels compared to the second quarter of 2022 during the quarter the outlook for the U S economy improved modestly as reflected in the Moody's <unk> scenario.
The improvement to the economic outlook resulted in a reduction in ACL of $3 6 million in the quarter, which was largely offset by growth in the portfolio, coupled with modest risk rating migration across the book.
As of September 30, the allowance for credit losses was $92 million, yielding an ACL to total loans <unk> coverage ratio of one.
6%.
Additionally, excluding mortgage warehouse broker dealer and PPP loans, the ACL to total bank loans Egfr ratio equates to $1 two 5%.
While we remain constructive on the current state of our credit portfolio. We continue to believe that the allowance for credit losses could be volatile and the changes in the allowance will be driven by net loan growth in the portfolio or the migration trends and changes to the macroeconomic outlook over time.
Certainly industry provided economic forecasts are reflecting an increased likelihood of economic recession in future periods.
We'll continue to monitor the current environment as well as broad set of economic forecast during the fourth quarter to determine what impacts if any updated outlook may have on the allowance for credit losses in future periods.
Turning to page seven.
Interest income in the third quarter equated to $123 million, including approximately $3 million of PPP related income and purchase accounting accretion.
Net interest margin expanded by 44 basis points versus the second quarter of 2002, 2022 to 319 basis points, driven primarily by higher yield on excess cash loans HSI and loans Hff's.
Further while we continue to rigorously manage interest bearing deposit cost in the face of increasing competition and customer expectations for higher rates the cost of interest bearing deposits rose in the quarter to 70 basis points, an increase of 42 basis points from the prior quarter.
Continue to believe that the through the cycle deposit beta will averaged 50% increasing from the current 25% to 30% level.
During the third quarter, new commercial loan originations, including credit renewals at an average book yield of 625%.
Which moved higher by 177 basis points versus the second quarter levels.
In addition, we retained a $129 million of residential mortgages during the quarter, yielding an average interest rate of five 6%.
I'm turning to page eight.
In the chart in the upper lift we highlight the asset sensitivity of hilltop, assuming parallel instantaneous rate shocks, which represented asset sensitive position of approximately 7% in the up 100 basis points scenario.
As we evaluate asset sensitivity and interest rate risk, we assessed a number of potential scenarios of note. If we ship the analysis from an instantaneous parallel shift to a gradual increase over the course of the next 12 months, you're up 100 basis point asset sensitivity bowls to approximately 3%.
One factor impacting future asset sensitivity will be our loans currently at or below their floor levels.
As of September 30, hilltop had approximately $720 million of loans remained at their contractual floor levels.
Of these loans $151 million will reset above their floor levels over the next 12 months.
In addition, $2 $1 billion of variable rate loans currently above their rate floor levels are scheduled to reset over the coming 30 days.
Lastly for 2022, we expect the impact of Pvp related fees and interest which were approximately $22 million in 2021 and purchase loan accretion, which was approximately $19 million to.
<unk> declined by a combined $25 million to $30 million versus the 2021 levels.
Moving to page now.
Total noninterest income for the third quarter of 2022 equated to $207 million third quarter mortgage related income and fees decreased by $144 million versus.
Versus the third quarter of 2021, driven by the ever evolving environment in mortgage banking, which has moved quickly to being purchased focus.
Versus the prior year quarter purchase mortgage volumes increased by $1 1 billion or 28% and refinance volumes declined more substantially decreasing $1 4 billion or 87%.
During the third quarter of 2002.
Reported gain on sale margins declined sharply to 218 basis points down 128 basis points versus the same period in the prior year margins.
Margins were negatively impacted by price reductions across the markets as well as customer preference to pay more in origination fees through rate buy downs versus paying the prevailing interest rate in the market.
We expect full year average margins to remain under substantial pressure during 2022 as mortgage volumes normalize from the historically high levels seen over the last two years and the competition for that lower volume drove tighter margins.
Through September gain on sale margins for loans sold to third parties as average 263 basis points and we expect by the year end the full year average to be between 250, and 270 basis points contingent on market conditions. Additionally.
Additionally, we continue to execute bolt sales of MSR during the third quarter. These sales resulted in realized losses in the quarter of approximately $650000.
Further we maintain a fully hedged position against our MSR asset and as a result had no significant net valuation more activity in the third quarter of 'twenty two.
During the quarter the structured finance business at Hilltop Securities benefited from two items of note first block volume increased during the quarter related to those clients that reside in states that provided additional subsidization downpayment assistance through the allocation of additional government sponsored loans.
The business benefited from the outperformance of certain hedges in the mortgage book realized hedge gains equated to $13 6 million for the third quarter.
Further the structured finance business reflected a $4 million.
Unrealized positive valuation Mark as of September 30.
It remains important to recognize that both fixed income services and structured finance businesses can be volatile from period to period as they are impacted by interest rates overall market liquidity volatility and production trends.
Turning to page 10.
Noninterest expenses decrease from the same period, the prior year by $67 million to $289 million.
The decline in expenses versus the prior year was driven by decreases in variable compensation of approximately $55 million.
Largely driven by private lending, which was linked to substantially lower fee revenue generation in the quarter compared to the prior year period.
Additionally, non compensation variable expenses, particularly mortgage production related expenses decline as volumes declined versus the prior year.
Lastly, hilltop recorded $1 3 million of severance in the quarter, which was principally incurred in our mortgage segment.
Looking forward into the fourth quarter of 2002, we continue we will continue the work of repositioning our mortgage business to reflect the ongoing market dynamics through currently present, while continuing to focus on investing in the business for future growth. Once this portion of the cycle begins to ease.
As Jeremy mentioned, we've taken definitive steps to reduce the costs of originating loans over the last few years and that work is proving beneficial as we continue to focus on our target productivity levels over the coming quarters.
While we remain committed to the mortgage business as it is core to our franchise, we do expect that the headwinds facing this business will continue into 2023.
Further we expect that inflation will continue to impact compensation occupancy and software expenses, resulting in elevated fixed cost within the businesses compared to prior periods.
To help mitigate some of these headwinds we remain focused on continuous improvement leveraging the investments we've made over the last few years to aggressively manage increased productivity across our front.
Middle and back offices.
And while these inflationary pressures do exist, we are continuing to further streamline our businesses and accelerate the adoption of our digital capabilities to support client acquisition and overall business productivity.
Moving to page 11.
Average <unk> loans recorded a $7 9 billion in the third quarter, increasing by approximately $397 million from the prior year levels.
During the third quarter commercial lending in.
In particular commercial real estate was solid as both closed production and our forward pipeline remains robust.
While commercial loan growth has improved over last few quarters, we expect that the full year average loan HSI growth, excluding mortgage loans retain A&P PPP loans during 'twenty two will be in the 1% to 3% range as competition remains very intense for newly funded loans and mortgage warehouse lending.
Outstanding balances have continued to move lower throughout the year.
Further given our current liquidity position, we expect to continue to retain one to four family mortgages originated prime lending at a pace of between 25 and $75 million per month for the remainder of 'twenty two.
Mortgage marketplace has shifted towards hybrid adjustable rate products and we prefer holding these versus the longer duration fixed rate mortgages that made up the preponderance of the oil is retained in prior periods.
Turning to page 12.
The graph in the upper right. We show the ongoing progress made in reducing NPA as overall credit quality remained stable across the portfolio.
During the third quarter annualized net charge offs to total loans was elevated at 15 basis points versus the prior periods.
<unk> well below normalized run rate loss expectations.
The charge offs in the period were not related and we currently do not expect any systemic exposure emerging across the portfolio at this time.
As shown on the graph on the bottom right of the page the allowance for credit loss coverage of the bank into the second quarter.
In the third quarter of 'twenty, two at one point to 1%.
Turning to page 13.
Third quarter average total deposits were approximately $1 7 billion and have decreased by approximately $243 million or 2% versus the third quarter of 2021.
As well as provided an earlier outlook, we have expected the deposits would trend lower throughout the year and that has been the case overall.
Overall deposit flows were in line with our expectations and reflect certain client movement to achieve higher rates.
While other clients are putting their capital to work in projects show required more equity now than in past periods.
We are seeing movement of deposits internally into treasury or ladder bond funds over to hilltop securities and within the private banking <unk> capital.
We continue to monitor the in and outflows of deposits and anticipate adjusting our pricing in the future to remain competitive, but not market leading from a deposit yield perspective.
As noted earlier given the expectation of additional rate changes from the Federal reserve, we do expect to see deposit costs continuing to rise later in 'twenty, two and into 2023.
While deposit levels remained elevated it should be noted that we remained focused on growing our client base and deepening wallet share through our treasury products and services.
<unk> been successful in 2022, and we expect that they will continue to accelerate into 2023.
Moving to page 14.
We are updating our 2022 outlook to reflect current market conditions expectations for future performance and actions, we will be taking to support profitable growth over the coming quarters. It should be noted that we expect ongoing volatility in the capital markets and the overall economy and that this volatility could materially impact our results and change our expectations.
In the future.
Such we will provide updated outlook where appropriate during our quarterly calls.
Operator that concludes our prepared comments and we'll turn the call back to you for the Q&A section of the call.
Thank you.
If you'd like to ask a question at start one on the telephone keypad.
A lot to withdraw your question you May Press Star two please and show you Unmetered lately when asking your question.
Our first question for today comes from Brad Millsaps from Piper Sandler Brian Your line is now open.
Good morning.
Good morning.
I appreciate all the color and thanks for taking my questions.
Just.
I'm curious will on the balance sheet can you talk a little bit about how you.
Do you plan to kind of manage it going forward you still have some existing liquidity.
How you're thinking about the bond portfolio and then maybe finally, how quickly do you think it will take.
To get to that 50% deposit beta through the cycle deposit beta that you guys.
You talked about just kind of wonder I appreciate.
How competitive it is there.
Versus elsewhere.
So we'll take those in parts from a balance sheet perspective, we expect as we've said the investment portfolio likely drift higher.
We're not looking to grow the investment portfolio on an outside basis, but.
Certainly with where cash cash yields are on excess cash to bid.
So it's.
It's going to be a slow growth kind of drift higher from current levels as I mentioned on the call. We're going to continue to retain mortgages certainly the adjustable hybrid arm product that we are.
<unk> able to originate today.
We will do that at 25% to $75 million level.
For certainly the remainder of this year and likely into the first half of next year.
And then from a from a balanced rebalancing perspective, we're looking to evaluate the deposits and deposit flows again, it's been right in line with our expectations in terms of what we would otherwise expected.
As it relates to your question of when do we get to the 50% beta.
We would expect to be there.
Within a couple of quarters after the fed actually reaches its terminal rates. So it takes the way we the way we expect to see this as we'll pass through what we think to be a reasonable amount to clients as those fit as it is fed increases come through and then after the fed generally stops what normally occurs is.
We see deposit rates in defying gravity in the market settles in from a competitive perspective, and there is some leveling that will need to occur and that generally is the last leg that moves us towards that towards that 50% beta so.
Not a definitive date as to when that occurs understanding is 100% clear when the fed.
When the fed pitfalls.
Great great. Thanks for that color and then maybe a follow up question for me just on the broker dealer I think I heard you correctly.
There are about maybe 17 5 million of marks that.
Helps you guys this quarter, which.
Obviously those are hard to predict and can go either way.
But if I just take those out you would have basically kind of broke even broken even.
On a pre tax basis at the broker dealer I think my math.
Correct.
Jeremy you guys didn't change your guidance there, but you kind of you also comment that you expect it to kind of lean into the broker dealers as well as the bank.
With the mortgage headwinds that are out there.
Without those marks can you talk about.
Where do you think it could improve to kind of get you over the hump of kind of that breakeven level.
Will do you want talk to the marks for yes. So let me first the $13 six and you're spot on in terms of add them together in terms of Mark the $13 six and Thats normal trading activity in that book and we've we've historically been favorable we've had some obviously we've had some negative marks but although you can back the whole thing I don't think you back to <unk>.
Matt I called it out and we wanted to disclose it simply because it is larger than they have been historically.
Would you have been closer throughout the year to $5 million to $6 million a quarter versus versus kind of the $13. Six. So I don't think you can you can back it all the way out the $4 million of unrealized that I mentioned again.
That's all that's on the existing book that existed at September 30, and again, there is volatility and that's why we call that volatility out so I wouldn't necessarily.
We expect to kind of pull all of that initial 13 six out of trading gains, but it is out it was outsized in the third quarter, Yeah, and so that's the case there and then I guess just kind of from an outlook perspective on hilltop securities.
First we have this sweep deposits that right now have a run rate of pretax profitability of.
$10 million to $12 million.
A quarter.
So thats good backdrop, and then I think that the public finance business.
Good.
Improve.
<unk> seasonally in the fourth quarter fixed income has been low for some time I think when the market stabilize.
That a rate level that that will improve.
So that will that will counterbalance what the structured finance business can have struggled through this mortgage market.
Thanks, Thanks, guys I appreciate the clarity on those on those marks will I'll start I'll step back in that Keith. Thank you.
Thank you.
Thank you. Our next question comes from Thomas Wendler of Stephens, Inc. Thomas Your line is now open.
Hey, good morning, everyone and thanks for taking my question just.
Just looking at the.
Mortgage segment.
The midpoint of your 2022 guidance points to material volume deceleration it looks like 20% linked quarter.
What do you what are you seeing so far in <unk>, that's giving you kind of caution there.
Well I think.
I think we've seen the deceleration.
Really all year certainly.
Further in the third quarter I mean, we we originated about $3 billion, you see that step down pretty substantially from Q1 and Q2.
Theres, a handful of things going on in the fourth quarter first.
<unk> have continued to move higher 30 year mortgage rates.
High <unk> low sevens and Thats starting to become a more consistent reality, if the fed does move.
That's going to put additional pressure on that the 10 year. Now is has moved above 4% and therefore, a handful of days and so that's also going to continue to put pressure upward pressure on mortgage rates, then you move it into the seasonal window of Thanksgiving.
The year end holidays Christmas and alike.
So thats just generally a seasonally weak period and when we would normally expect to see volumes pull back pretty materially during the second half of second half of December . So it's a combination of the market dynamics continue to.
Move against mortgage origination and then obviously the seasonal period would also cause it to be depressed.
Alright, Thank you and then.
Moving back over to the broker dealer it.
It looks at you had a pre tax margin around 15% in <unk>. What do you what are your expectations for a pre tax margin there and <unk> in 2023 as we move forward.
I'm, not really going to able to give guidance there I would just say for the fourth quarter.
We still see strength in the sweep deposits and that provides.
Good.
Comp ratio for the wealth business, there and we're hoping that versus the third quarter. The fourth quarter. The public finance business should seasonally pick up however, we're cautious about structured finance and what our trading activity will be there.
Alright, that's great. Thanks for answering my questions guys.
Thank you.
Thank you.
Next question comes from Colin Devine of Raymond James.
Your line is now open.
Sure.
Hi, Thank you good morning, calling in for Michael Rose. Thank you for taking my question.
So sure.
Starting with the prime lending with the efficiency ratio at 124 also on the slides as mentioned that head count was down 22% on a year ago.
How should we thinking about profitability there going into next year, given the rate environment and also the expectation for India for their declining originations next year.
I believe you mentioned some additional levers you may have and so he can take it.
That would be helpful.
So I think from a.
From an outlook, we're not going to give 'twenty three outlook here, we'll give that in our.
January call.
But as we think about and as we said in our prepared comments, we expect Q4 will remain challenging.
And.
I think I think we'll be in a net pre tax loss position. We're working diligently. The team is working diligently every day to try to drive in a.
Drive us to a position, where we move closer to breakeven or profitable results, but again.
The market has moved quickly is very dynamic and so from our from our current perspective.
It would lead us to believe that Q4 will be will be in a net loss position.
As we noted in our prepared comments, we expect 2023 will remain a challenging challenging environment, but again, we're not going to give financial guidance on that as we sit here today.
And I think what we're trying to say on the cost initiatives as we're trying to do everything we can this year to position ourselves next year.
To weather through it.
Okay.
You for that.
Now moving on to deposits.
I guess it would be.
<unk> express itself in the mix.
My House I understand that you have on your capacity.
Low loan to deposit ratio.
Can you have any expectation over the next couple of quarters for <unk>.
Larger than usual decline in perhaps some low cost deposits that may be related to the mortgage business.
Ali.
No nothing necessarily related to the mortgage business from a seasonality perspective, I think what we would say that we've got here on our deposit slide.
We've been very pleased with the performance of our noninterest bearing deposits. They are $4 5 billion at the end of Q3, they were $4 for Q3 of last year.
Moved up and down but at the end of the day.
Very stable and we feel very good about that we think it reflects the ongoing work our bankers are doing from a relationship management perspective, as well as the efforts that we've made around our treasury services and product sales over the last last few years that said that could we could we could and do expect to see some some migration.
Out of noninterest bearing as rates continue to move higher I think from an interest bearing deposit perspective again, we've seen deposit outflows, but we've seen them at the pace. We expected I think a couple of couple of items to note about $180 million of the decline kind of quarter to quarter Q2 to Q3.
We are driven by two things one our broker deposits that we are continuing to allow to run off because we put those on.
Out of an abundance of caution during the Covid COVID-19 window.
Those those were just letting letting runoff and sending back and then the second second thing is our sweep deposits from.
From Hilltop Securities you can see there in the chart dropped from about 800 million. So to remain so that was another approximate $100 million. So if you think about our overall deposit flows we're seeing expected.
Expected outflows from customers as they seek higher yields and so nothing nothing there from a from a loss customer perspective that we wouldn't have otherwise expected and then we have seen some what I would say manage deposit flows.
As we've as we've continued to kind of manage the portfolio overall liquidity position.
On the balance sheet.
Alright. Thank you well. Thank you for answering my question there'll be all for me.
Thank you.
Thank you.
Next question comes from Woody lay of <unk> with <unk>. Your line is now open.
Hey, good morning, guys.
Good morning.
Based on the NII guidance, you gave it implies a pretty wide range for NII expectations, just for the fourth quarter.
Do you think it's fair to assume that in our NII continues to increase from here given.
The assets in asset sensitivity in the margin should expand from here.
Do I mean, I think as we said in the third quarter here $123 million worth of net interest income.
Some of that some of the.
The widening there is based on.
What is the fed into fed fed ended up doing.
But if the fed continues to move higher we would expect we'll continue.
To expand in the run rate will continue to improve in their state.
Stable from here, then we would expect that we'd start to level out.
This perspective, so I think those are the those are the real drivers our current outlook assumes.
The fed funds rate of $4 50 to 500 basis points. So I think thats thats, a big driver, but we do.
If the market is right in the Covid continues to move higher which we expect they will we would expect to see NII continued to grow.
Into 2023 likely peaking early in 2023.
Got it.
And if I'm looking at the other average earning asset line. It says interest up about a couple million dollars, so and yielded 24% any color you can give on what that line item is representing.
Okay.
He is a pretty small number.
We'll circle back and get that to you.
Alright, and then just lastly for me I mean, it sounds like.
The pipeline is continuing to grow.
The cash position of the company is well set up I mean, do you think the growth opportunities in 'twenty three.
Could outpace 2022.
I think we're more cautious I think.
There is like I said FID strength in Texas and constraints on our pipeline I think what we are also trying to tell you is that our pull through rates are lower because of competition and we do think were.
And a pivotal period, where interest rates are rising costs have risen so it will be interesting to see.
What our clients want to do from a development perspective.
Got it alright, that's all from me thanks, guys.
Yes.
Thank you.
Next question is a follow up question from Brian Millsaps of Piper Sandler your.
Your line is now open.
Hey, Thanks for taking the follow up was just I know this will come out in the Q soon but just curious if there any marks in the mortgage business MSR pipeline Mark anything.
It kind of swung that one way or the other that you thought might.
Help you out or May go the other way next quarter.
I mean marks are difficult to predict just given kind of where they are a very point in time kind of end of period of evaluation. So it's it's difficult during the third quarter, though as we noted in our comments MSR, we've got fully hedged. So we don't expect.
<unk> normal circumstances wouldn't expect any meaningful gains or losses in that regard. We are have continued and we would expect to continue to kind of execute bulk sales when the market warrants that so that could yield.
Some modest gains or losses, depending on depending on the execution, there and again from structured finance, we talked about those again those March are evaluated at the end of it.
The end of every quarter.
And we'll be kind of co determined by.
How the yield curve shifts in how the performance in different coupons from a from a hedging perspective.
Are impacted as rates move in valuations or adjusted.
And we'll in terms of your variable comp in the mortgage business because that is kind of a percentage of production pretty much hit a floor I think it was around 145% this quarter.
If we had found much higher obviously, a much higher production levels, but is there room to take that ratio lower or is it pretty much.
Kind of at a floor at this point.
It will only drift lower as kind of the right car as folks kind of falling lower positions ricard. So as volumes decline. So just a reminder.
Those that variable compensation is based on volume not profitability. So as volumes decline, we would expect that rate that rate necessarily could.
Could move.
Good could move modestly lower but it's pretty it can be reasonably stable at the current level.
Okay, great. Thank you guys.
Thank you we have nice set up the questions for state. So that concludes today's conference call. Thank you for joining you may now disconnect.
Okay.
Okay.
Yes.
[music].
Sure.