Q3 2023 ServisFirst Bancshares Inc Earnings Call
Greetings and welcome to the surface first Bancshares third quarter earnings call.
At this time all participants are in a listen only mode.
Brief question and answer session will follow the formal presentation.
Anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
As a reminder, this conference is being recorded.
It is now my pleasure to introduce you to our host director of Investor Relations. Thank you David you may begin.
Okay.
Good afternoon, and welcome to our third quarter earnings call.
Tom Broughton, our CEO Rodney rushing our Chief operating Officer, Henry Abbott, our Chief Credit Officer, and Bud Foshee, our CFO covering some highlights from the quarter and then we'll take your questions.
Now I'll cover our forward looking statements disclosure.
Some of the discussion in today's earnings call May include forward looking statements actual results may differ from any projections shared today due to factors described in our most recent 10-K 10-Q filings forward looking statements speak only as of the date. They are made and service first assumes no duty to update with that I'll turn the call over to Tom.
Thank you Davis and good afternoon, and thank you for joining us for our calls where we review the first quarter.
I thought I'd start by reviewing the current economic outlook.
You know going back to late spring the conventional wisdom, which included mine was that we were pretty much had it for a hard economic landy.
Much of that outlook was due to you know we'd seen rapid escalation in interest rates, we've seen bank deposit disintermediation for over close.
Close to a year at that point.
And in which the credit tightening by by most banks.
The demand for goods and services continues to be you know amazing consumer figures to be very resilient.
They're sort of hooked on live in large it seems since the pandemic started.
They were buying stuff when they are stuck at home and now they are consuming stuff. So.
It seems like we're in a little bit better spot than we've been in we have seen a slowdown in demand for credit both CRE and C&I.
It's probably a combination of our caution and higher interest rates.
With a customer last week.
He said the best way I can make a $16 million is to pay down $200 million of debt that O 8% up.
So that's the that's the best way for me to improve my Rns on Michael body more capital goods. So I think that's probably up.
<unk> Paul.
Our bike and others are watching for lifecycle credit cracks.
Henry Abbott I'll discuss a little bit more in a few minutes on the on the credit side.
We don't run our bank based on any kind of economic forecast because theyre all all wrong.
But it does appear we are paid for more of a soft landing and we envisioned a few months ago.
The recent addition version of the yield curve will be helpful to us.
We move towards a normal yield curve and really the higher for longer rate environment, We think benefits us our future earnings for the buying so.
That's sort of a brief overlook of where we are getting down into a little more granular information here.
I'll start talking about deposits, we have focused on building core deposits over the last four quarters, we've seen really fantastic results.
Our people have done an outstanding job they've done what we've asked them to do.
And very few banks can demonstrate the deposit growth we've seen.
Combined with zero Federal home loan bank advances in zero broker deposits.
Yeah.
<unk> have received significant COVID-19 funding.
This year it'll take a bit of time for that to be spent the most covered funds I know after be committed by the end of 2024 and spent by the end of 2026, but I do have faith that most politicians can spend it more quickly than that.
Our deposit pipeline is down a bit from the record level last quarter.
We are looking for is still it's still strong were looking for granular are new relationships that are sticky.
On the.
Correspondent side, Rodney Russian will give an update in a few minutes when I finish.
Our total new accounts were up 19% year over year.
Unknown Executive: Greetings and welcome to the Servis First Bancshares third quarter green calls. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation.
While our commercial accounts are up 20% year over year. This is indicative of broad based deposit growth.
Which is what we wanted we think our emphasis on deposit growth.
Unknown Executive: If anyone should require operator systems during the conference, please press star zero on your telephone CPAC. As a reminder, this conference is being recorded.
Over.
Liquidity.
We will set the stage for improved profitability in 2024.
We are seeing in cash on hand stay consistently at the $2 billion level in October .
Davis Mange: It is now my pleasure to introduce you to our host, Davis Mange, Director of Investors of Investor Relations. Thank you, Davis. You may begin.
We are pleased to have built liquidity this level during the industry disruption we've seen.
While it may reduce the net interest margin it does not affect net interest income.
So.
I'm very pleased with the deposit situation.
Thomas Broughton: Good afternoon and welcome to our third quarter earnings call. We'll have Tom Broughton, our CEO, Rodney Rushing, our Chief Operating Officer, Henry Abbott, our Chief Credit Officer, and Bud Boche, our CEO, covering some highlights from the quarter and then we'll take your questions.
Talk a little bit about loan demand, we did turn the.
Loan spigot back on a few months ago and it started with a trickle.
It always does after you shut off the tap our loan pipeline today.
Davis Mange: I'll now cover our forward-looking statements disclosure. Some of the discussion in today's earnings call may include forward-looking statements. Actual results may differ from any projection shared today through the factors described in our most recent 10K and 10Q files. Forward-looking statements speak only as if the date they are made and Servis First assumes no duty to update them.
He is up 74% over the prior quarter.
And that was not back to levels from early 2022. It is back to late 2022.
Level.
We have seen increased activity in the past 30 days and we also as loans grew $87 million in the month of <unk>.
Thomas Broughton: With that, I'll turn the call over to Tom. Thank you, Davis.
September .
We are seeing an increased confidence by borrowers.
Thomas Broughton: Good afternoon and thank you for joining us for our call as we review the third quarter. I thought I'd start by reviewing the current economic outlook. Going back to late spring, the conventional wisdom, which included mine, was that we were pretty much headed for a hard economic landing. Much of that outlook was due to, you know, we'd seen rapid escalation and interest rates. We've seen bike deposits and intermediation for over a close to a year at that point.
Both C&I and CRE.
Our liquidity position, we think gives us a significant competitive advantage in the industry.
On the production side.
We previously announced we added a great new team of bankers in the Montgomery region 40 bankers. There we had a total of five in the quarter.
From a head count standpoint, we were down three.
<unk> for the quarter, we are focused on adding the right people and right sizing our team. This year, we think that will be certainly coming to an end.
Thomas Broughton: And then we'd see credit tightened by most banks. You know, the demand for goods and services continues to be, you know, amazing. The consumer figures to be very resilient. You know, they sort of hooked on living large, it seems, since the pandemic started. They were buying stuff when they were stuck at home and now they're consuming stuff. So, you know, it seems like we're in a little bit better spot than we've been in.
We go towards the end of the year and we will have the right group here.
We will open our new Lake Norman office, and the Piedmont region soon and it'll be a community banking officer office is very similar to the offices in Tallahassee, Panama City in Ashville, North Carolina. These community banking offices do produce good granular and sticky deposits and have improved margin. So.
Thomas Broughton: We have seen a slow down in demand for credit, both CRD and C&I. It's probably a combination of borrower caution and higher interest rates. You know, I was with a customer last week and, you know, he said, the best way I can make $16 million is to pay down $200 million of debt that 08% of them. He said, that's the best way for me to improve my earnings. I'm going to buy any more capital goods. So, I think that's probably a prevailing thought. I know our bank and others are watching for late cycle credit cracks.
With that I'll turn it over to Rodney discussed correspond side.
Thank you Tom correspondent banking had a strong positive rebound in closing the quarter.
With total fundings just over $2 billion.
Positive growth at September 30 was 12, 3% for the quarter.
Most of that increase came from Tennessee, and a new Texas market expansion was just over 275 million in new deposit relationships coming from those markets.
Henry Abbott: Henry Abbott will discuss a little bit more in a few minutes on the credit side.
And <unk> also mentioned reminds you that correspondent balances are not hot or temporary funding sources.
Thomas Broughton: You know, we don't run our bank based on any kind of economic forecast, because they're all wrong. But it does appear we're headed for more of a soft landing than we envisioned a few months ago. The recent disinversion of the yield curve will be helpful to us as we move towards a normal yield curve and really the higher, for longer rate environment, we think benefits us our future earnings for the bank. That's sort of a brief overlook of where we are and get down into a little more granular information here.
Rates paid on market rates not rate specials.
70% of all correspondent.
As are tied to settlement relationships with ECM Street.
The division is well diversified in both correspondent bite sizes and geography.
Seven new bank relationships were opened during the quarter in five different states.
Correspondent participation loans and new relationship pipelines are strong for the remainder of the year and also in the.
Thomas Broughton: Start talking about deposits. We have focused on building core deposits over the last four quarters. We've seen really fantastic results. Our people have done an outstanding job of they've done what we've asked them to do and very few banks can demonstrate the deposit growth we've seen. Combined with zero federal home loan bank advances and zero broker deposits.
2024.
Our correspondent Bank credit card program has 15 need base in our pipeline.
They're in various stages of the sales process.
There are three new state banking associations, reviewing our American banker's endorsed agent credit card program.
Thomas Broughton: Our municipal clients have received significant COVID funding this year. It'll take a bit of time to be spent. The most COVID funds I know have to be committed by the end of 2024 and spent by the end of 2026. But I do have faith that most politicians can spend it more quickly than that.
Determine is safe with like participate.
We currently have no safe endorsements at this time.
This has expanded our reach and as the existing pipeline includes space in Connecticut, Virginia, Texas, Georgia.
Montana, Missouri, and New York.
An example of that.
Thomas Broughton: Our deposit pipeline is down a bit from the record level last quarter. We are looking for, it's still strong. We're looking for granular new relationships that are sticky.
Market is growing.
Correspondent deposits in fundings in summary.
Corresponding balances stabilize in early second quarter.
We had impressive strong growth as you can see for the third quarter.
Thomas Broughton: On the corresponding side, Rodney Rushing will give an update in a few minutes when I finish. Our total new accounts are up 19% year-over-year while our commercial accounts are up 20% year-over-year. This is indicative of a broad-based deposit growth, which is what we wanted.
And with that I'll turn it over to Henry added our Chief Credit officer. Thank.
Thank you Ronnie.
Service first had a very strong third quarter and we're pleased with banks results.
Past due loans to total loans were down to only eight basis points. This represents 45% reduction from the second quarter and a 50% drop from the first quarter.
Thomas Broughton: We think our emphasis on deposit growth over current liquidity will set the stage for improved profitability in 2024. We're seeing cash on hand state consistently at the $2 billion level in October. We are pleased to have built this liquidity level during the industry disruption we've seen. While it may reduce the nitrous margin, it does not affect net income.
Our asset quality continues to remain strong and I am pleased to say nonperforming assets total assets decreased from 16 basis points in the second quarter to only 15 basis points in the third quarter with the current economic outlook. Thanks, I'll take appropriate to maintain its a triple well to total.
Loans of 131%, which is consistent with the prior quarter.
Thomas Broughton: So, very pleased with the deposit situation.
Thomas Broughton: Talk a little bit about loan demand. We did turn the loan spigot back on a few months ago and it started with a trickle as it always does after you shut off the tap. Our loan pipeline today is up 74% over the prior quarter. And though it's not back to levels from early 2022, it is back to late 2022 levels. We have seen increased activity in the past 30 days and we also loans grew $87 million in the month of September. We are seeing increased confidence by borrowers both CNI and CRE. Our liquidity position we think gives us a significant competitive advantage in the industry.
AT&T as a percentage of risk based capital was 91%.
End of the third quarter and income producing CRE and ADC to risk based capital was 312%. Both of these figures are down from when we started 2023.
We had no material downgrades to the watch list in our CRE portfolio and we continue to focus on and monitor our D&C bucket.
We also review and stress our entire CRE portfolio via both internal and external sources.
He is an industry leader in commercial real estate data and analytics to help provide stress testing and real time data on the portfolio.
As a reminder, our CRE exposure is primarily in the southeast which continues to remain one of the strongest areas.
Thomas Broughton: On the production side, we previously announced we added a great new team of bankers in the Montgomery region. Four new bankers there. We had a total of five in the quarter.
No material downtown urban office exposure.
Our job for the quarter were 15 basis points, when annualized and year to date annualized charge offs were only 11 basis points.
Thomas Broughton: From a head count standpoint, we were down three for the quarter. We are focused on adding the right people and right size in our team. This year we think that'll be certainly coming to an end as we go towards the end of the year. And we'll have the right group here.
Charge offs for the quarter were not related to income producing CRE or any snakes.
I know that your items of interest and impacted the charge offs at some of our peer banks.
Thomas Broughton: We will open our new late Norman office in the Big Mark region soon and it'll be a community bank and officer. Office is very similar to the offices in Tallahassee, Panama City and Asia.
I continue to feel very good about our diverse and granular loan portfolio.
Firm performed in the third quarter with that I'll hand, it over to Victor.
Thomas Broughton: Mitchell, North Carolina. These community banking offices do produce good granular and sticky deposits and have improved margins.
Thank you Andrew good afternoon.
We're very pleased with the progress <unk> made in the third quarter with deposit growth liquidity capital and improving loan pipelines.
Rodney Rushing: So, with that, I'll turn it over Rodney and discuss the cost-monets side. Thank you, Tom. The course fund that banking had a strong deposit rebound closing the quarter with total fundings just over $2 billion. Our deposit growth at September 30 was 12.3% for the quarter. Most of that increase came from Tennessee and our new Texas market expansion was just over $275 million in new deposit relationships coming from those markets.
Noninterest bearing deposits were stable in the third quarter with the exception of $100 million in deposit run off related to Covid thoughts.
We were pleased with the total deposit growth of $854 million in the quarter.
We saw loans grow in a quarter after several quarters of decline or flat.
The key to improving EPS as loan growth entertainment focus on a more balanced approach to loan and deposit growth going forward.
Rodney Rushing: I need to also mention or remind you that course fund at balances are not hot or temporary funding sources as our rates paid are market rates, not rate specials. 70% of all course fund at balances are tied to settlement relationships with these downstream banks. The division is well diversified and both course fund at bank sizes and geography. Seven new bank relationships were opened during the quarter in five different states. Course fund at participation loans and new relationship pipelines are strong for the remainder of the year and also in the 2024.
We had to go of 1 billion in liquidity and we have exceeded that go with it $2 billion at quarter end.
Our loan repricing initiative will contribute to market expansion later in the year exam.
Examples of our repricing effort $390 million of loans, where the rate has been restructured.
Loans paid off early $104 million.
We have 188 million pending and loan refreshing.
Loan repricing is the best opportunity to improve profitability combined with loan growth loans that reprice or paid off in the third quarter were $276 million.
Rodney Rushing: Our course fund at agent bank credit card program has 15 new banks in our pipeline that are in various stages of the sales process. There are three new state banking associations reviewing our American bankers endorsed agent credit card program to determine if they would like to participate. We currently have nine state endorsements at this time. This has expanded our reach and as the existing pipeline includes banks in Connecticut, Virginia, Texas, Georgia, Montana, Missouri, and New York. Just for an example of how wide that market has grown.
Which combined with loan Paydown, some fixed rate loans totals $2 billion on an annualized run rate.
Cumulative effects of this re pricing will improve margin.
Overtime.
Net interest margin stabilized in the third quarter of $100 million in the third quarter versus $101 million in the second quarter.
89% of our new loans are floating rate and about 41% of total loans are floating rate today.
Our adjusted loan to deposit ratio at September 32023 was 85%.
Rodney Rushing: Course fund at deposits and fundings in summary. Course fund at balances stabilized in an early second quarter and we had impressive strong growth as you can see for the third quarter.
This ratio includes the correspondent fed funds purchase.
We saw improvement in core noninterest income in the quarter with improvements in both credit card and mortgage we.
Henry Abbott: With that, I'll turn it over to Henry Abbott, our key credit officer. Thank you, Ronnie. Service first had a very strong third quarter and we're pleased with banks results. Passed through loans to total loans were down to only eight basis points. This represents a 45% reduction from the second quarter and a 50% drop from the first quarter. Our asset quality continues to remain strong. I'm pleased to say non-performing assets to total assets decreased from 16 basis points in the second quarter to only 15 basis points in the third quarter.
We expect continued improvement over the balance of the year.
As a reminder, the second quarter non interest income included a death benefit of 890000.
Discuss a non interest expense, we have made an effort to hold line on expense growth in 2023.
We have experienced increases in noncore expenses.
Problem credit, which was primary legal expenses related to two credits.
Check fraud, and credit card fraud, and we had one case of 600000, new credit card fraud.
Henry Abbott: With the current economic outlook, the bank felt it's appropriate to maintain its A-triple L to total loans of 1.31%, which is consistent with the prior quarter. AD&C as a percentage of risk-based capital was 91% at the end of the third quarter and income producing CRE and AD&C to risk-based capital was 312%. Both of these figures are down from when we started in 2023. We had no material downgrades to the watch list in our theory portfolio, and we continue to focus on and monitor our ADNC bucket.
These items increased about $1 4 million from the first quarter.
2023.
We also experienced an increase in FDIC insurance 825000 from the first quarter.
We have built our staffing in our new offices and do not expect additional head count for any existing offices.
Our teams are performing quite well and are growing new accounts, 90% year over year.
We continued our growth in book value per share.
<unk> ratio was 10.6.
Henry Abbott: We also review and stress our entire theory portfolio via both internal and external sources. We use an industry leader in commercial real estate data and analytics to help provide stress testing and real-time data on the portfolio. To remind our theory exposure is primarily in the southeast, which continues to remain one of the strongest areas, and we have no material, downtown urban office exposure. Charge-offs for the quarter were 15 basis points when annualized, and year-to-date annualized charge-offs were only 11 basis points.
Six 9%.
Our tier one leverage ratio was 9.35.
Our capital continues to be a strength.
That concludes my remarks, and alternative program back over to John .
Thank you Budd.
If we made a list of the 20, most important metrics and managing our buying.
We are performing extremely well on almost all of those except for the one that's the most important which is earnings per share we've got to get our earnings back up to where they were going to take a.
A few quarters, we think but.
We will get there so.
Henry Abbott: Charge-offs for the quarter were not related to income-producing theory or any SNICS. I know those are items of interest and impacted the charge-offs at some of our peer banks. We continue to feel very good about our diverse and granular loan portfolio and out-from performance in the third quarter.
We think our performance in all of those other metrics will lead to improved earnings per share in the future. So we'll it open it up now for questions be glad to see.
See what you have to own your mind.
Thank you we will now be conducting a question.
Bud Boche: With that, I'll hand it over to Bush. Thank you, Henry, good afternoon. We are very pleased with the progress the bank has made in the third quarter with deposit growth, liquidity, capital, and improving loan pipelines.
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A confirmation tone will indicate your line is in the question.
<unk>.
Thank you.
I'd like to remove your question Amit.
Bud Boche: An honest experience, deposits were stable in the third quarter with the exception of 100 million deposit run-offs were related to COVID-19. We were pleased with the total deposit growth of 854 million in the quarter. We saw loans grow in the quarter after several quarters of decline or flat. The key to improving EPS is loan growth and our team is focused on a more balanced approach to loan and deposit growth going forward.
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One moment, please while we poll for questions.
Thank you.
Our first question comes from Kevin Simmons.
Please proceed with your question.
Hey, guys good afternoon.
Hey, Kevin.
Yeah.
Im just trying to.
Bud Boche: We had a goal of 1 billion in liquidity, and we have exceeded that goal with 2 billion at quarter end. Our loan reprising initiative will contribute to market expansion later in the year. Examples are a reprising effort. 390 million of loans where the rate has been restructured. Loans paid off early 104 million. We have 188 million pending and loan reprising. Loan reprising is the best opportunity to improve profitability and combined with loan growth.
I know theres, a number of contributors into your to the margin, but I'm just trying to unpack I think when we run the last conference call we talked about.
The NIM, maybe stabilizing in third quarter, and then beginning to expand in the fourth quarter.
It looks like there is maybe a couple of contributors here and maybe you can kind of go through that.
In terms of.
What contributed so it looks like on the one hand, you talked about repricing the loan and maybe that's going to help.
Earnings in the future, but it seems like that might have led to less substantial loan growth that you might have had otherwise and then coupled with paydowns on the funding side.
Bud Boche: Loans that reprised or paid off in the third quarter were 276 million, which combined with loan paydowns on fixed rate loans, totals to 2 billion on an annualized run rate. The amount of effects of this reprising will improve margin and EPS over time. Net interest margin stabilized in the third quarter, 100 million in the third quarter versus 101 million in the second quarter. 89% of our new loans are floating rate and about 41% of total loans are floating rate today.
You had a very successful quarter growing deposits.
And building up that liquidity, but I guess it comes at a cost to that ratio and I know you don't you talked about not necessarily managing to that ratio.
And then the loan to deposit ratio it looks like it.
Came into and so I'm just trying to like way all of those what was the.
Funding was that debt exceeding that goal, but bill you're.
Bud Boche: Our adjusted loans in positive ratio at September 30th, 2023 was 80.5%. This ratio includes the correspondence that funds purchased. We saw improvement in core non-interest income and the quarter with improvements in both credit cards and mortgage. We expect continuing improvement over the balance of the year.
So 2 billion was that more.
By product just the movement you saw.
In the correspondent network and elsewhere or was it a deliberate.
Hey.
Most banks you're talking about.
I'm not sure if you guys put it this way but really.
Loan growth being governed by the pace of deposit growth and in this case, we saw a big big Delta between deposit growth and loan growth. So I know thats a lot, but I just wanted to set up.
Bud Boche: As a reminder, the second quarter non-interest income included a death benefit of 890,000. Discussing non-interest expense, we have made an effort to hold the line on expense growth in 2023. We have experienced increases in non-core expenses. Problem credit, which was primary legal expenses for lending to credits, check fraud and credit card fraud. We have one case of 600,000 and credit card fraud. These items increased by 1.4 million from the first quarter of 2023.
Helping us understand where the margin goes from here. Thanks.
I'll, probably let me.
But we'll have to give you some actual numbers, but my take on it is that the.
Improvement in.
And loan rate pricing.
It's been swallowed up by deposit reprice to this point in time.
So that's why you haven't seen the margin improve yes because of that.
If we think the rate increases are behind us.
And then it stabilizes from this point forward pretty well as we reprice loans more of that starts flowing to the net income instead of flowing to reprice deposits. So that's the first thing.
Bud Boche: We also experienced an increase in FDIC insurance, 825,000 from the first quarter. We have built our staffing and our new offices and do not expect additional headcount for any existing offices. Our things are performing quite well and have grown new accounts 19% year-over-year. We continued our growth in book value for share. Our CVT-1 ratio was 10.69%, and our tier-1 leverage ratio was 9.35. Our capital continues to be a strength.
And of course.
We had no idea of deposits, we ask our people 15 mustard out to focus solely on growing deposits all.
Alright incentive plan is skewed.
Almost 100% of that for the year 2023. So you know you probably heard me say people, Dave what you incent them to do and they've done what we intended them to that they have grown deposits. So.
Now we've actually gone back in.
For the last three months of the year.
In our special incentives to grow loans.
Bud Boche: That concludes my remarks and I'll turn the program back over time. Thank you, bud.
For October 15th January 15th to have an incentive to to grow loans.
Thomas Broughton: If we made a list of the 20 most important metrics in managing a bank, we are performing extremely well on almost all of those except for the one that's the most important which is Ernest per share. We've got to get Ernest back up to where they were. It's going to take a few quarters, we think, but we'll get there. We think our performance and all those other metrics will lead to improved Ernest per share in the future.
<unk>.
A fair amount of money to try to get the loan pipeline restarted, but I guess, but I don't know.
You know obviously when you add that much in deposits the sitting at the fed it does not do anything to help the net interest margin at all but that wasn't the point.
Doesn't hurt in the net interest income and Thats, we think showing liquidity today, we will start rationalizing deposit cost as we go forward.
Thomas Broughton: Will it up now for questions? Be glad to see what you have on your mind. Thank you.
We had a call with our.
Our original executives.
A couple of weeks ago, and we're starting to try to rationalize some of that cost because we're in a pretty good spot and we think again, we think having all this excess liquidity has significant competitive advantage.
Unknown Executive: We will now be conducting a question and answer session. If you would like to ask a question, please press bar 1 on your telephone CPAP. A confirmation tone will indicate your line is in the question queue. We may press bar 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to take off your handset before pressing the star 2. One moment please while we pull for questions. Thank you.
And the industry.
But I, probably Didnt answer your question Ken.
No that was that was helpful. Tom Im just I guess.
I know theres a lot of moving parts to it but are you do you guys feel like that.
It sounds like Youre overshot not overshot.
Never.
You can never have too much of it but is it.
One quarter, but do you feel.
Kevin Fitzsimmons: Our first question comes from Kevin Fitzsimmons with DA Davidson. Please proceed with your question. Hey guys, good afternoon. Thank you. I'm just trying to, you know, there's a number of contributors into the margin, but I'm just trying to let unpack. I think when we run the last conference call, we talked about the NIM maybe stabilizing in third quarter and then beginning to expand in fourth quarter. And there's looks like there's maybe a couple contributors here and maybe you can kind of go through them in terms of what contributed.
Assuming the fed is mostly done here or do you feel we're getting closer to that ratio stabilizing and then maybe eat up to expand in 'twenty four.
<unk>.
Yes, we mentioned that our municipal clots.
<unk>.
No.
Take liquidity these are existing customers we're not.
There are correlationship, so we're not out bid no money.
Municipalities in fact, we're not bidding on money with municipalities, where we're not going to do that.
These are core relationships at some reasonable price that doesn't leave you a lot of profit when you put the money to the fed, but nevertheless, we're not going to tell a good client we won't take their money. So that's right.
Kevin Fitzsimmons: So it looks like on the one hand, you talked about repricing the loans and maybe that's going to help earnings in the future, but it seems like that might have led to less substantial loan growth than you might have had otherwise. And then coupled with pay downs on the funding side, you know, you had a very successful quarter growing deposits and building up that liquidity, but I guess it comes out of cost to that ratio.
That's the bottom line.
There's not.
We don't have any.
We don't have any broker deposits and we don't have any home loan bank advances so we aren't really.
<unk>.
Kind of a spot I don't think most of the industry would with dry places was if I could.
And Tom just on loan growth typically you guys have seen.
More back half of the year heavy and loan growth, if I recall correctly and that sort of thing.
Kevin Fitzsimmons: And I know you don't talk about not necessarily managing to that ratio, but, you know, and then the loan deposit ratio looks like it came into. And so I'm just trying to like weigh all those with the with the increased funding, was that that exceeding that goal of a billion by to two billion. Was that more a byproduct of just the movement you saw in the correspondent network and elsewhere, or was it a deliberate.
It gains momentum over the course of the year and so on the one hand, you mentioned that a lot of customers are looking to pay down debt.
There is the impact of rates there is the impact that you guys been.
Tightening standards.
And but on the other hand, you cite you cited if I heard it correctly a big increase.
One pipeline and last quarter you were.
Got it.
It seemed like much more optimistic on the economy. So.
Kevin Fitzsimmons: Because most banks are talking about, you know, I'm not sure if you guys put it this way, but but really. You know, long growth being governed by the piece of deposit growth, and in this case, we saw a big, big delta between deposit growth and long growth. So I know that's a lot, but I just wanted to set up on helping us understand where the margin goes from here next. Yeah, I probably only.
Do you feel like loan growth is just going to grind higher at this point not necessarily in leaps and bounds.
Yes, we do have now again like I say, our loans grew $87 million in the month of September .
We've seen a lot of activity just in the last 30 days it seems like we've seen things really.
Pick up borrowers are getting a little bit more confidence in the economy and star.
Starting with projects.
Kevin Fitzsimmons: You know, but I'll have to give you some actual numbers, you know, but my take on it is that the improvement in loan repricing has been swallowed up by deposit repriced to this point in time. So that's why you hadn't seen the margin improve yet because of that. If we think the rate increases are behind us, you know, then it stabilizes from this point forward pretty well. And as we repriced loans, more of that starts flowing to net income instead of flowing to repriced deposit.
Both C&I and CRE so.
And again.
We're being a little bit more creative in trying to find.
Sources of loan demand.
Right now Kevin and I. Thank you.
That's what we had to do after <unk> after the.
People weren't buying boats in airplanes during that period of time and we had to.
Try to finance operating equipment for.
Trucking companies and things that we're still growing and doing well. So that's that's what we're trying to do this time, we just have to be able to more creative in finding alone demand out there.
Kevin Fitzsimmons: So that's the first thing I think. And, you know, of course, you know, we had no idea of deposits. You know, we asked our people 15 months ago to focus solely on growing deposits. Our incentive plan is skewed almost 100% of that per year 2023. So, you know, you probably heard me say people do what you incentive them to do, and they've done what we incentive them to do. But they've grown deposits.
But then you do when times are really good.
Right, Okay, alright, well, thank you very much I'll hop out and let others hop in.
Thanks, Kevin.
Thank you. Our next question comes from Keith Maher with Raymond James. Please proceed with your question.
Kevin Fitzsimmons: So, you know, now we've actually gone back. And, you know, for the last three months of the year, we're put in a special incentive to grow loans, you know, for October 15th to January 15th to have an incentive to grow loans. I'm a fair amount of money to try to get the lone pipeline restarted but I guess but I don't know you know obviously when you add that much into deposits, the sitting at the feet, it does not do anything to help the niedrushes margin at all but that wasn't the point, you know the point, it doesn't hurt the niedrushes to income and that's you know we think showing the putty today, we will start rationalizing deposit cost as we go forward, we had a you know call with our regional executives you know a couple of weeks ago when we're starting to try to rationalize some of that cost because we're in a pretty good spot and we think again we think having all this excess of quitting is significant competitive advantage with our in the industry but I probably didn't answer your question Kevin.
Good afternoon.
Thanks, Dave.
Tom you spoke about the loan pipeline improving here just kind of curious what is the rate you are seeing these days and kind of.
Hearing you say $87 million of growth in September kind of feels like maybe you will see us.
Step up in growth for the fourth quarter.
Loans.
Go ahead, but oh, yeah, we think that.
Well I was going to increase the right that new loans went on during September .
835, so we felt like it would be.
Our bar and like Tom said, we put in an extra incentive for loans in the fourth quarter. So we expect.
Loans to increase in the fourth quarter is always our best quarter.
Dave what I can't I can't project, what kind of payoffs will go half and then I'm looking at Henry Abbott.
No.
If we've got.
If a multifamily developer.
It's looking at going to permanent financing with Fannie Mae.
Kevin Fitzsimmons: No no that was that was helpful time I just I guess it you know I know there's a lot of moving parts to it but are you do you guys feel like that you know it sounds like you're over shop not over shop but I mean it's never you can never have too much of it but is it and it's just one quarter but do you feel you know assuming the Fed is mostly done here do you feel we're getting closer to that ratio, stable out of thing and then maybe eat up to expand and 24 is that where what you and we back yeah we mentioned that you know our municipal clients have had big liquidity and these are existing customers you know we're not you know there are correlationships we're not out bidding on money with municipalities in fact we're we're not bidding on money with municipalities we're we're not going to do that these are core relationships it's some reasonable price you know that doesn't lead you a lot of profit when you get the money to the Fed though but nevertheless we're not going to tell a good client we won't take their money you know so that's right that's the bottom line but they're not this not you know again we don't have any we don't have any broker deposits and we don't have any home loan back advances so we're in really you know kind of a spot I don't think most of the industry would would drive places was like good and Tom just on loan growth typically you guys have seen more back half of the year heavy and loan growth if I recall correctly and sorry gain gains momentum over the course of the year and so on the one hand you mentioned that a lot customers are looking to pay down debt there's the impact of rates there's the impact of you guys being you know titan standards and and but on the other hand you cite you cited if I heard a correct of a big increase in the loan pipeline and last quarter you were kind of you know it seemed like much more optimistic on the economy so if you feel like loan growth is just going to grind higher at this point not necessarily in leaps and bounds yeah we do now you know again like Sarah let us group 87 million in the month of September but we've seen a lot of activity just in the last 30 days it seems like we've seen things really you know pick up borrowers are getting a little bit more confidence than the economy and you know starting with project and both C and I and CRE. And again, we're being a little bit more creative in trying to find sources alone to man right now, Kevin, and I think that's what we had to do after a wait on 9-10, after the people weren't buying boats and airplanes during that period of time, and we had to try to finance operating equipment for trucking companies and things that were still growing and doing well.
Their rates going up, but it's still less than what we're charging them.
They might be six at Fannie, but theyre going to pay us they're paying us in the quarter.
Eight and a half so theres <unk>.
Theres <unk> Theres, a theres, what I can't predict.
Great.
And then maybe just curious in terms of.
Underlying mixing the pipeline is that a little more weighted towards CRE and construction these days or.
They're healthy C&I component just kind of curious.
Business mix.
Yes, I mean, I think I think it's a mix I mean, we're seeing.
Lot of AT&T opportunities, but at the same time, we know we've got a limited bucket. So we're being more selective on those and obviously trying to point our incentive in our our folks they'd go after C&I opportunities and those are certainly what we're looking for and striving for.
Yes.
We think we need to kind of stay on to that 100% a D&C.
Exposure level that seems to be a bright line width.
It might become more of a bright line with our regulators, we're not sure but.
That will drop off rate.
Okay, and then just in terms of thinking about liquidity on balance sheet. Here you guys achieved the goal of having $1 billion on balance sheet.
Curious, let's just say there is a healthy step up in loan growth may be sustained for the next quarter or two.
Are you willing to dip below that $1 billion of liquidity or kind of how do we think about.
Funding loan growth and it will be more by deposits our existing liquidity.
Yes.
<unk>.
We've got $2 billion.
And cash at the fed today, and I guess, we've got some short term treasuries that are about 250 million Budd.
So you say, we've got 2 million to 50.
We really.
Thanks that are that we can put one 5 billion probably enter into the loan bucket you know over time now.
Some of these municipal deposits are gone.
Again.
They're going to spend it.
Politicians always find a way to spend money as you know.
So it will burn a hole in their pocket a bit but it will take a couple of years to borrow some of it off and we'll replace it by then with other with other deposits but.
Right now we feel good about where we are we're just again are actively looking for the right.
We're still being careful alone so I mean, we're not really.
Falcon to we're trying to talk to the people, we've always done business with her.
Rather than somebody that just walked in the Delaware.
Got it.
One last one for me here just on the reserve ratio you guys had built it up.
For a number of quarters this quarter kind of flat.
Just curious is this kind of.
Kevin Fitzsimmons: So that's what we're trying to do this time. We just have to be a little more creative and find them alone to man out there, then you do when times are really good. Right. Okay. All right. Well, thank you very much. I'm all hop out and let others hop in. Thanks, Kevin. Thank you.
As high as it can go in terms of what maybe the auditors are comfortable with or is.
Is there any are you guys just more comfortable with credit enhancement.
Our reserve ratio.
Climbing up as much or not climate.
And I think the primary driver as Tom mentioned in his remarks was kind of the economic outlook improved over the past two or three quarters. So I mean, that's where we were able to maintain where we are.
Steve Mauch: Our next question comes from Steve Mauch with Raymond D. Please proceed with your question. Good afternoon. I think I told you spoke about, you know, the loan pipeline improving here, just kind of curious, you know, what is the rate you're seeing these days and kind of, you know, hearing you say $87 million of growth in September kind of feels like maybe we'll see a decent step up in growth for the fourth quarter on loans.
It just depends on kind of the key drivers being unemployment GDP.
We're going to kind of impact the modeling and the outlook on those.
Yeah. Unfortunately, there is a limit on what you can.
No.
I think bankers by nature would have a much higher loan loss reserve. If we were left around you know desires.
But we're not.
And subject to the seasonal models are.
Steve Mauch: Go ahead, bud. Yeah, we think that loans can increase the rate that new loans went on during September was $8.35. So we feel like it'd be that or above. Like times that we put in an extra incentive for loans in the fourth quarter, so we expect loans to increase. I mean, fourth quarter is always our best quarter. Steve, what I can't I can't project is what kind of payoffs we're going to have and then, you know, I'm looking at Henry Abbott, you know, if we've got, you know, if the multifamily developer is looking at going to permanent financing with Fannie Mae, I mean, their rates going up, but it's still less than what we're charging them, you know, I mean, they might pay six if Fannie, but they're going to pay us, you know, they're paying us eight and a quarter, eight and a half.
That can that can switch change all the time as you will know.
Alright.
Okay, well I appreciate all the color and I'll step back thanks, guys. Thank you.
Thank you.
<unk> come from Gram gold with Piper Sandler. Please proceed with your question.
Hey, good evening guys.
Great.
I just wanted to circle back with something you just touched on is that at $1 5 billion number of deployment into loans.
What's sort of the ideal time horizon for achieving that.
[laughter] last I don't know.
You know I mean.
At this point.
I don't know.
I just don't know how quickly we can book getting loans on the books and I don't know what it'll pay off our loan pipeline is pretty pretty robust, but its nothing like $1 $5 billion I can tell you that so.
Steve Mauch: So there's your there's a there's what I can't predict. Right. And then maybe just curious in terms of, you know, the underlying mix in the pipeline, is that a little more weighted towards CRE and construction these days or, you know, is there a healthy C&I component? It's kind of curious. Business necklace. Yeah, I mean, I think I think it's a mix. I mean, we're seeing a lot of AD&T opportunities, but at the same time, we know we've got a limited bucket, so we're being more selective on those and obviously trying to point our incentive and our folks that go after C&I opportunities and those are certainly what we're looking for and striving for.
That is a that is a 64000 dollar question, which is.
That was you weren't born with a $64000 question came about Graham but.
Google at some time.
[laughter] okay.
Fair enough fair enough.
Okay.
So then I guess I wanted to just talk a little bit more about deposits.
As it relates to the pipeline you mentioned that the pipeline is smaller than it was last quarter. Now can you just provide what the pipeline wise heading into <unk> and then also what it was heading into <unk>.
Steve Mauch: Yeah, we think we need, we think we need to stay under that 100% AD&C, you know, exposure level that seems to be a bright line with, you know, it might, it might become over bright line with a regulators. We're not going to lose our thought. All right. Okay, and then just in terms of thinking about liquidity on balance sheet here, you guys achieved the goal of having a billion on balance sheet.
Yeah.
You know, it's not a scientific number and we don't ever.
I'll discuss it but let me see.
The.
I don't have it.
Probably down.
[noise] probably down.
A couple of hundred million dollars.
Steve Mauch: Curious, let's just say there's the healthy step up in long growth and it may be sustained for the next quarter or two. Are you willing to get this below that billion of liquidity or kind of, how do we think about funding long growth? Will it be more by deposits or existing liquidity? Yeah, we've got two billion cash at the fair today and I guess we've got some short term treasuries that are about 250 million.
From the last quarter.
Graham Okay. So we put it on the books. So we got it on the books, so and again, where we're trying to rationalize deposit cost now is time to start improving profitability.
So we've got we got available smarter about it.
Steve Mauch: So you say we've got two million, two fifty, we really think that of that we could put one and a half billion probably into the loan bucket over time. Now, again, some of these municipal deposits are going, they're going to spend it, politicians always find a way to spend money as you know. So it'll burn the loan when they're back in a bit. It'll take a couple of years to burn some of it off and we'll replace it by the end with other deposits.
Okay, and then on that front with deposit costs I mean, it seems like most of the growth has been in money market.
Recently.
Most of that is probably fully indexed and floating rate. So as you start to adjust.
Your strategy on the deposit.
Pipeline and pricing perspective, what is that sort of look like for you guys as you're saying like no more index money market and just time Matt.
Right below fed funds, how do you guys kind of approach that from here I guess.
Well it depends on you know what as a percent of it as a percent of fed funds what is a rate issue.
You're not interested in 100% of Fayetteville, and you answered some sort of percentage of fed funds. So.
Now that.
Steve Mauch: But right now we feel good about where we are. We're just, again, actively looking for the right. We're still being careful on loans. I mean, we're not really talking to, we're trying to talk to the people we've always done business with or rather than somebody that just wants in the door. Got it. One last one for me here, just on the reserve ratio, you guys have built it up for a number of quarters, this quarter kind of flat.
You got to have some margin and what you want at least to have some margin and what you Leif sitting at the fed because we got a lot of cash isn't as bad right now.
Of course, the other <unk>.
Question is when do you start buying securities and we got to buy securities again someday, but.
Given we've got so much you know we don't we won't have a little bit more floating rate assets on the books. So.
You know warehouse.
The move into <unk>.
Steve Mauch: Just curious, you know, as high as it can go in terms of what, you know, maybe the auditors are comfortable with or, you know, is there any ability? Are you guys just more comfortable with credit and hence the reserve ratio not climbing up as much or not climbing? I think the primary driver has come mentioned in his remarks was kind of the economic outlook improved over the past two or three quarters.
Longer term when I say longer term say two to five year you know.
Treasuries.
So that that you know you might make smart start doing it now, but we're not going to be smart because we're not going to do it now.
We're just waiting on that.
But again, we don't have to do all do it someday.
Yes understood and.
And I guess, just one more follow up on the deposit front and the costs so that money market piece.
Just correct me if I'm wrong, that's like that's fully floating rates, so that theres not a lot of there's no maturities nothing or any.
Steve Mauch: I mean, that's where we were able to maintain where we are, you know, just depends on kind of the key drivers being unemployment and GDP are going to impact the model and the outlook on those. Yeah, unfortunately, you know, there's a limit on what you can, you know, I think bankers by nature would have a much higher loan loss reserve if we were left around, you know, desires. But we're not. And the seasonal models are, you know, they can switch, change on the dime, as you will note. Right. Okay. Let's appreciate all the color and I'll step back. Thanks, guys. Thank you.
I guess exception pricings within that segment, that's going to cause that to have any further catch up. So for example, if we get no more rate hikes.
It's probably going to stick around for two 5% on cost right.
We think so Graham.
Okay, Alright, that's helpful. That's all I had thanks guys.
Thank you.
Thank you.
Next question comes from Dave.
Hi Group. Please proceed with your question.
Yeah.
Hey, good evening gentlemen, how are you.
Good day promote a degree.
Yes, thank you for clarifying that.
Hum.
You noted the.
Graham Dick: Our next question comes from Graham Dick with Piper Samson. Please proceed with your question. Hey, good evening, guys. Great. I just wanted to circle back with something you just touched on is that at 1.5 billion number of deployment into Clowns. What sort of the ideal time horizon for achieving that?
The revamp of the incentive plan.
Obviously, they were very successful on the funding side this quarter from an operating expense standpoint does that imply maybe an acceleration.
Operating expenses until the last quarter of the year and how should we think maybe about expense growth at the until the next year.
Now we've already caught up we created more than a third a good bit more than the third quarter Dave.
Don't know the exact number but got it over there, but we're going to create more in the third and the fourth quarter to account for that so we've already started doing that in the because they they have we have been wildly successful that ryzen deposits and they've done what they've done what we asked them to do.
Thomas Broughton: You know, mom, I'm laughing, Graham, I don't know. You know, I mean, this point, I don't know. I just don't know how quickly we can book, get the loans on the books. And I don't know what will pay all, you know, our loan pipeline is pretty, pretty robust, but it's nothing like one and a half billion dollars. I can tell you that.
Got it and then circling back to the liquidity and make them maybe securities.
Thomas Broughton: So that is a, that is a $64,000 question, which is, that was, you weren't born when the $64,000 question came about, Graham, but Google it sometime. Okay, fair enough there enough. Okay. So then I guess I wanted to just talk a little bit more about deposits as it relates to the pipeline. You mentioned that the pipeline is smaller than it was last quarter now. Can you just provide what the pipeline was heading into three queue and then also what it was heading into four queue?
Outlook here maybe.
Maybe you answered that.
Last question or so, but there's been a lot of chatter and I think even noticed probably are higher for longer.
Scenario economic outlook your interest rate outlook moving forward.
Is there a potential to potentially restructure the securities portfolio.
And maybe I don't know if you don't get them sell.
Sell off some of the lower yielding stuff pay off some of the borrowings.
The margin of profitability just curious how we should think about that.
Hi, David but I don't see us selling anything I think we will continue to buy if we buy we'll buy treasury short term.
Thomas Broughton: Yeah, it's a, you know, it's not a scientific number and we don't ever, you know, discuss it, but let me see, where the, I'll have it probably down. Probably down, you know, a couple hundred million dollars from the last quarter, Graham. Okay, so, you know, we put it on the book, so we got it on the book. And again, we're, we're trying to rationalize the deposit cost now. It's time to start, you know, improving profitability.
Six months to a year.
Just takes a long time too.
That should be paid back and earn money.
I just I don't know if there's something we don't want to do it we'd rather just harder to maturity and what if rates drop yeah.
I mean <unk>.
My salesmen can always show you a bloomberg run that shows that makes you a lot of money to reposition securities.
Got it understood understood.
And then.
A housekeeping question I guess maybe for for Bud.
Thomas Broughton: So we've got to, we've got to be a little bit smarter about it. Okay. And then on that front with deposit costs, I mean, it seems like most of the growth has been in money market recently. I guess most of that's probably fully indexed and floating, right? So as you start to adjust your strategy on the deposit pipeline and pricing perspective, what does that sort of look like for you guys? Is it saying like no more indexed money market and just time at, you know, a rate below Fed funds?
Good tax rates assume moving forward it looks like there was some.
Lower than trend tax rate this quarter with here is how should we think about next quarter and in 2000.
Yeah, I would say, 18% would be a good ROI for fourth quarter.
18%.
Yeah.
Got it great. Thank you.
Thank you.
There are no further questions at this time I'd like to turn.
On the floor back over to <unk>.
A quick closing comment.
Thomas Broughton: How do you guys kind of approach that from here, I guess? Well, it depends on the, you know, what as a percent of, as a percent of Fed funds, what is the right, you know, you know, you know, you're not interested in a hundred percent of Fed funds, you're interested in some percentage of Fed funds. So, you know, that, you got to have some margin and what, you won't at least have some margin and what you leave sitting at the Fed because we got a lot of cash sitting at the Fed right now.
I think where we're done thank you everybody for joining us.
This concludes today's teleconference you.
You may disconnect your lines at this time, thank you for your participation.
Thomas Broughton: Of course, the other question is, when do you start buying securities and we got to buy securities again someday, but, you know, given we've got so much, you know, we don't, we want a little bit more floating rate assets on the book. So, you know, we're hesitant to move into, you know, longer term, when I say longer term, I'll say a two to five year, you know, treasuries. So, that, that's, you know, you might be smart to start doing it now, but we're not going to be smart because we're not going to do it now. So, we're just waiting, waiting on math, but again, we're going to have to do it someday. Yeah, understood.
[music].
Graham Dick: And I guess just one more follow-up on the deposit front and the costs. So that money-market piece struck me wrong. That's like, that's fully floating, right? So there's not a lot of, there's no particularities in that thing, or any, you know, I guess, exception pricings within that segment that's going to cause that to have any further catch up. So for example, if we get no more rate hikes, it's probably going to stick around 4.25% on cost, right? We think so, Graham. Yeah, all right, that's helpful.
Graham Dick: That's all I had. Thanks, guys. All right, both. Thank you.
Dave Bishop: Our next question comes from Dave Bishop with Hard Group. Please proceed with your question. Hey, good evening, Joe, and how are you? Good, Dave. From Love DeGroote. Yes. Thank you for authorifying that. Hey, you know, to the revamp and the incentive plans, obviously, they were, you know, very successful on the funding side of this quarter. From an operating expense standpoint, does that imply maybe an acceleration of operating expenses into the last quarter of the year?
Dave Bishop: And how should we think maybe about the expense growth into the next year? Now, we've already caught up. We crude more in the third, a good bit more in the third quarter day. I don't know the exact number of us got it over there, but, you know, we're going to crude more in the third and the fourth quarter to account for that. So we've already started doing that in the, because they have, we have been wildly successful at raising deposits, and they've done, they've done what we asked to do.
Dave Bishop: Got it. And then circling back to the quantity and maybe securities outlook here, and it may be answered that last question or so, but there's been a lot of chatter, and I think you've even noticed we're probably in a higher for longer, you know, scenario economic outlook here, and straight outlook moving forward. Is there potential to potentially restructure the securities portfolio, and maybe, I don't know, you know, sell off some of the lower yielding stuff, pay off some of the borrowings to improve the margin and profitability.
Dave Bishop: Just curious how we should think about that. Hey, Davis, but I don't see a felony thing. I think we'll continue to buy, if we buy, we'll buy the, that's the paid back and earned money. I just, I don't know, just something I don't want to do. We rather just hold it to the jury. And what if rates drop, you know? Yeah, I mean, probably, my salesman can always show you a Bloomberg run that shows that makes you a lot of money to reposition securities.
Dave Bishop: Got it now understood, understood. And then a housekeeping question, maybe for Bud, good tax rate system moving forward, it looks like there was some, you know, lower than trend tax rate this quarter. Here is how should we think about next quarter? 18% right to you. Thank you. There are no further questions at this time.
Unknown Executive: I'd like to turn the floor back over to the participant for closing comments. Thank you. That's what we're doing. Thank you. Bye for joining us. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.