Q3 2023 Pacific Premier Bancorp Inc Earnings Call
Good day, everyone and welcome to the.
Premier Bancorp third quarter 2023 conference call all participants will be in a listen only mode should you need assistance. Please signal.
Gunther pressured by pressing Star then P&L. After today's presentation, there will be an opportunity to ask questions to ask a question. You May Press Star then one on the tax strong phone to withdraw your question. Please press Star then two please note. This is being recorded I would now like to turn the conference over to Steve Gardner Chairman.
Please go ahead Sir.
Good morning, everyone. I appreciate you joining us today.
As you're all aware, we released our earnings report for the third quarter of 2023 earlier. This morning. We have also published an updated investor presentation with additional information and disclosures on our financial results.
If you've not done so already we encourage you to visit our Investor relations website to download a copy of the presentation and related materials.
I note that our earnings release and Investor presentation include a safe Harbor statement relative to the forward looking comments I encourage each of you to carefully read that statement.
On today's call I'll walk through some of the notable items related to our third quarter performance Ron Nicolas Our CFO will also review a few of the details surrounding our financial results and then we will open up the call to questions.
Over the past 18 months, we have been very strategic and cautionary in terms of accelerating capital accumulation moderating balance sheet growth and maintaining a commitment to disciplined prudent liquidity and risk management.
As a result, we've been able to maintain a level of flexibility and organizational nimbleness that allows us to act quickly and opportunistically as we navigate a challenging environment.
And as I've indicated before our teams have been highly effective and playing both offense and defense simultaneously.
Looking at our results for the quarter, we generated a return on average assets, a 0.88% and our return on average tangible common equity of 10.08% as.
As we noted in this morning's earnings release, we had and non relationship shared national credit placed on non accrual status that resulted in a 1.7 million dollar interest accrual reversal and a $3 2 million dollar charge off in the third quarter.
As a reminder, in early 2022 at the onset of the rising interest rate environment, we intentionally curtailed loan production in certain business lines through pricing increases and tightening our underwriting standards. Additionally.
Additionally, we were proactive on the liability side of the balance sheet as we opportunistically accessed wholesale funding sources to enhance our liquidity levels at the front end of the current rate cycle.
Our available liquidity at the end of the third quarter totaled approximately $11.4 billion, consisting of $1 4 billion in cash and $10 billion of additional borrowing capacity.
Pressures on non maturity deposit balances eased considerably compared to the first two quarters of 'twenty twenty-three has noninterest bearing deposits ended the quarter at 36.1% of total deposits.
Our high quality client relationships and disciplined pricing practices, resulting in only a modest increase in the cost of non maturity deposits to 89 basis points.
Notably we were able to reduce broker deposits by $490 million in the quarter because of our bankers efforts to reinforce and deepen existing client relationships and attract new clients to the franchise.
Even with these successes we are seeing some customers continue to pursue high yield nonbank alternatives, such as direct U S treasury purchases and money market mutual funds.
Reflecting our emphasis on capital accumulation, our third quarter tangible common equity ratio increased to 9.87% and our third quarter's CET, one and total risk based capital ratios increased 53, and 50 basis points to 14.87%.
<unk> and 17.74% respectively.
On a year over year basis, our total risk based capital and she E. T. One ratios each increased more than 250 basis points and rank among the strongest capital levels in the industry.
Contraction in our overall loan portfolio balances slowed considerably in the third quarter and we believe we could be approaching an inflection point in the coming quarters.
Prepayment activity slowed in the quarter, although we continue to see some businesses and real estate investor clients utilizing excess cash reserves to reduce outstanding debt.
We will continue to take a thoughtful approach towards loan origination activity, maintaining our focus on bringing in high quality banking relationships into the organization that meet our risk adjusted return requirements.
Given where we are in the credit cycle, there's a significant amount of uncertainty around commercial real estate performance with that in mind I'd like to spend a minute discussing our credit risk management philosophy, which has served us well throughout a variety of cycles.
We remain committed to our long standing approach to disciplined underwriting standards, which historically has resulted in superior long term performance across our loan portfolios.
We extend credit to businesses and real estate investors that have a well established operating history had a documented track record of positive cash flow.
We underwrite loans based on actual rather than projected borrower cash flows we generally require personal guarantees on the vast majority of our loans from guarantors, who typically have ample sources of liquidity and other available assets.
We have a granular customer base, consisting mainly of small and middle market businesses, along with seasoned real estate operators, which is reflected in our relatively low average loan size.
Our loan to values are conservative while our debt coverage ratios are strong.
Our loan portfolio is structured with a balance of hybrid adjustable and fixed rate loans with de Minimis loan maturities over the next 10 to 12 quarters.
Our portfolio managers are proactive in monitoring for any change in borrower financial performance, which enables them to quickly detect trends that could impact our portfolio.
Additionally, CRE concentrations are stress tested semiannually and continue to move lower as we accumulate capital and moderate new origination activity.
Overall, our loan portfolio is well managed across the organization, we expect it to perform well throughout the cycle.
Our third quarter asset quality results were solid as total delinquency decreased 2.08% of total loans and nonperforming assets were just 0.13% of total assets.
As I mentioned earlier to the shared National credit review process, we had a non relationship participation placed on non accrual status.
The shared national credit portfolio, which is a legacy opus line of business that was discontinued totals 22 loans for $201 million and outstanding balances or 1.5% of total loans at September 30th.
With that I'll turn the call over to Ron to provide a few more details on our third quarter financial results.
Thanks, Steve and good morning.
For comparison purposes. My comments today are on a linked quarter basis, unless otherwise noted.
Let's start with the quarter's results.
Third quarter net income totaled $46 million or <unk> 48 per share and our return on average assets and average tangible common equity were eight 8% and 10.08% respectively.
Total revenue was $168 $1 million and our noninterest expense came in at $102 $2 million, resulting in an efficiency ratio of 59%.
And pre provision net revenue as a percentage of average assets of 127% for the quarter.
All of our regulatory capital ratios increased significantly and our TCE ratio grew to $9 87%.
Yeah.
Taking a closer look at the income statement.
Net interest income decreased to $149 $5 million, primarily as a result of higher cost of funds as well as the smaller balance sheet, reflecting our strategy to moderate new loan origination activity in the current operating environment.
On the funding side.
Both our deposit mix as well as our higher cost of funds impacted the net interest margin, which was three 2% in the third quarter.
Our non maturity deposit costs were well controlled at eight 9% and our total deposit costs were $1 five zero percent.
On a cumulative total deposit beta of 28% reflects our <unk>.
Disciplined pricing actions throughout this rate cycle.
Earning asset yields were flat compared to the second quarter, which included the impact of four basis points due to the reversal of nine months of accrued interest on the shared national credit that Steve referenced earlier.
Okay.
Looking ahead.
We would anticipate some net interest margin pressure from higher funding costs and the higher for longer interest rate environment.
That being said, we intend to mitigate some of those pressures through continued balance sheet optimization by reducing cash on hand, and higher cost wholesale funding.
We began to execute this strategy during the quarter as we reduced our level of broker deposits by $490 million compared to June 30th.
Also in early October we paid down $200 million.
<unk> advances with a cost of 4.84% that were set to mature in may of 2024.
Noninterest income of $18 $6 million decreased $2 million from the prior quarter.
Driven by a $1 8 million.
Lower operating income.
Both trust custodial account fees and escrow and exchange fees generated similar levels of noninterest income compared to the prior quarter.
Operator: Thank you, everyone, and welcome to the Pacific Premier Bancorp 3rd quarter 2023 conference call. All participants will be in a lesson on emotes. Should you need assistance? Please signal a conference special type pressing star than zero.
Okay.
For the fourth quarter of 2023, we expect our total noninterest income to be in the range of $18 million to $19 million.
Operator: After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. Please note this event is being recorded.
Noninterest expense increased slightly to $102 $2 million, mostly due to an expected $1 $6 million increase in deposit expense related to higher earnings credit rates.
Steven Gardner: I would now like to turn the conference over to Steve Gardner, Chairman, and CEO. Good morning, everyone. I appreciate you joining us today. As you're all aware, we released our earnings report for the 3rd quarter 2023 earlier this morning. We have also published an updated investor presentation with additional information and disclosures on our financial results. If you have not done so already, we encourage you to visit our investor relations website to download a copy of the presentation and related materials.
Compensation and benefit expense increased $644000 to $54 1 million.
From a staffing perspective, we ended the quarter with a headcount of 355 compared to <unk> hundred 83 as of June 30th.
As our staffing levels continue to fall.
<unk> with our smaller balance sheet.
We remain focused on tightly managing our operating expenses.
And we expect fourth quarter expenses to remain relatively flat in the range of $102 million to $103 million.
Steven Gardner: I note that our earnings release and investor presentation include a safe harbor statement relative to the forward-looking comments. I encourage each of you to carefully read that statement. On today's call, I'll walk through some of the notable items related to our 3rd quarter performance.
Provision for credit losses of $3 $9 million increased slightly from the prior quarter.
As our ACL coverage ratio increased one basis point to 1.42%.
Ronald Nicolas: Ron Nicholas, our CFO, will also review a few of the details surrounding our financial results.
Commensurate with the relative size of our loan portfolio and.
And our economic outlook.
Steven Gardner: And then we will open up the call to questions. Over the past 18 months, we have been very strategic and cautionary in terms of accelerating capital accumulation, moderating balance sheet growth, and maintaining a commitment to disciplined prudent liquidity and risk management. As a result, we have been able to maintain a level of flexibility and organizational nimbleness that allows us to act quickly and opportunistically as we navigate a challenging environment. And as I've indicated before, our teams have been highly effective in playing both offense and defense simultaneously.
Turning now to the balance sheet.
We finished the quarter at $23 billion in total assets as we saw less loan portfolio contraction compared to the prior quarter.
Due to slower prepayment activity.
Total loans held for investment declined $346 million, driven by prepayments sales and maturities of $371 million, partially offset by new loan commitments of $68 million.
Reflecting our disciplined underwriting and pricing standards.
Total deposits ended the quarter at $16 billion, which represented a linked quarter decrease of $532 million, primarily due to a $490 million decrease in higher cost brokered Cds.
Steven Gardner: Looking at our results for the quarter, we generated a return on average assets of 0.88% and a return on average tangible common equity of 10.08%. As we noted in this morning's earnings release, we had a non-relationship shared national credit placed on non-accrual status that resulted in a 1.7 million dollar interest accrual reversal and a 3.2 million dollar charge off in the third quarter. As a reminder, in early 2022, at the onset of the rising interest rate environment, we intentionally curtailed loan production in certain business lines through pricing increases and tightening our underwriting standards.
We continue to exercise deposit pricing discipline, which is somewhat pressured non maturity deposit balances during 2023 and led some customers to redeploy the cash reserves into higher yielding alternatives.
The securities portfolio decreased $97 million to $3 7 billion and the average yield on our investment portfolio increased six basis points to 270%.
Not surprising given the late quarter surge in interest rates, our pretax Aoc I on the <unk> portfolio increased to $296 $7 million, but still remain below our December 31, 2022 fair value Mark.
Steven Gardner: Additionally, we were proactive on the liability side of the balance sheet as we opportunistically accessed wholesale funding sources to enhance our liquidity levels at the front end of the current rate cycle. Our available liquidity at the end of the third quarter, total approximately 11.4 billion dollars consisting of 1.4 billion in cash and 10 billion dollars of additional borrowing capacity. Pressures on non-matured deposit balances eased considerably compared to the first two quarters of 2023 has non-interest bearing deposits ended the quarter at 36.1% of total deposits.
We anticipate approximately $100 million in cash flow from the amortization and maturities of our investment portfolio over the remainder of the year and.
And reinvestment will be dependent upon deposit flows funding mix and liquidity considerations.
Okay.
The combination of consistent profitability and a smaller balance sheet bolstered our risk based capital ratios this quarter with all ratios increasing significantly from June 32023.
In addition, our tangible common equity.
Ratio increased 28 basis points to 987% and our tangible book value per share increased $19 and 89.
Steven Gardner: Our high quality client relationships and discipline pricing practices resulted in only a modest increase in the cost of non-matured deposits to 89 basis points. Notably, we were able to reduce broker deposits by $490 million in the quarter because of our bankers' efforts to reinforce and deepen existing client relationships and attract new clients to the franchise. Even with these successes, we are seeing some customers continue to pursue high yield non-bank alternatives such as direct US Treasury purchases and money market mutual funds.
And lastly from an asset quality standpoint.
Our asset quality remains solid across multiple measures.
Nonperforming assets.
Increased five basis points to one 3% a slight increase from the prior quarter.
Additionally, total delinquency decreased to just eight basis points and our total classified loans ended the quarter at one 1% 2%.
Our allowance for credit losses remained a healthy $188 1 million and our coverage ratio increased to 142%.
Steven Gardner: Reflecting our emphasis on capital accumulation, our third quarter tangible common equity ratio increased to 9.87%, and our third quarter CET1 and total risk-based capital ratios increased 53 and 50 basis points to 14.87% and 17.74% respectively. On a year-over-year basis, our total risk-based capital and CET1 ratios each increased more than 250 basis points and rank among the strongest capital levels in the industry. Contraction in our overall loan portfolio balances slowed considerably in the third quarter and we believe we could be approaching an inflection point in the coming quarters.
Yeah.
Our total loss absorption, which includes the fair value discount on loans acquired through acquisition finished the quarter at 176%.
With that I'll turn the call back to Steve.
Great. Thanks, Ron.
I'll wrap up with a few comments about our outlook as we head into year end in 2024, we will continue to take a thoughtful approach with respect to liquidity balance sheet growth risk management and building capital.
We expect the environment to remain challenged for the foreseeable future as businesses and real estate investors adjust to the evolving economic and interest rate environment.
At this point, we are prepared for the higher for longer interest rate scenario and the corresponding ramifications. It may have on the broader industry.
Steven Gardner: Preparing an activity slowed in the quarter, although we continue to see some businesses and real estate investor clients utilizing excess cash reserves to reduce outstanding debt. We will continue to take a thoughtful approach towards loan origination activity, maintaining our focus on bringing in high-quality banking relationships into the organization that meet our risk-adjusted return requirements. Given where we are in the credit cycle, there is a significant amount of uncertainty around commercial real estate performance.
Our organization is well positioned to opportunistically diversify our business in a disciplined prudent fashion through organic and strategic growth as a result of the disruptions taking place in our markets.
In addition, we anticipate that the challenges our industry faces may intensify, which in turn could create additional opportunities for us.
In conclusion, we are entering the fourth quarter from a position of strength and our teams remain keenly focused on executing our business strategy to deliver long term value for our shareholders.
Steven Gardner: With that in mind, I would like to spend a minute discussing our credit risk management philosophy which has served us well throughout a variety of cycles. We remain committed to our long-standing approach to disciplined underwriting standards, which historically is resulted in superior long-term performance across our loan portfolios. We extend credit to businesses and real estate investors that have a well-established operating history and a documented track record of positive cashflow. We underwrite loans based on actual rather than projected borrower cash flows.
That concludes our prepared remarks, and we would be happy to answer any questions. Operator, Please open up the call for questions.
Thank you we will now begin the question and answer questions to ask a question you May Press Star then one touchtone phone.
Sure.
Please pickup your handset before pressing.
Vicki.
If I break down your question.
Mr. <unk> would like to withdraw your question. Please press Star then two.
Steven Gardner: We generally require personal guarantees on the vast majority of our loans from guarantors who typically have ample sources of liquidity and other available assets. We have a granular customer base consisting mainly of small and middle-market businesses along with seasoned real estate operators which is reflected in our relatively low average loan stocks. Our loan devalues are conservative while our debt coverage ratios are strong. Our loan portfolio is structured with a balance of hybrid adjustable and fixed rate loans, with the minimum loan maturities over the next 10 to 12 quarters.
At this time.
Thanks.
Foster.
Our first question comes from David Feaster with Raymond James. Please go ahead.
Hey, good morning, everybody.
Hi, David.
Maybe just kind of following up on your commentary booth, both use D. The Enron.
It seems like this higher for longer environment is probably the new normal I'm. Just curious you know you touched on it a bit I was hoping we could dig into the balance sheet and margin trajectory in a higher for longer environment. You guys have been very active in managing the balance sheet, but just how do you think about the margin trajectory in light of the moves that you've made.
Steven Gardner: Our portfolio managers are proactive in monitoring for any change in borrower financial performance, which enables them to quickly detect trends that could impact our portfolio. Additionally, CRE concentrations are stress-tested semi-annually, and continue to move lower as we accumulate capital and moderate new origination activity. Overall, our loan portfolio is well managed across the organization we expected to perform well throughout the cycle. Our third quarter asset quality results were solid, as total delinquency decreased to 0.08% of total loans and non-performing assets were just 0.13% of total assets.
Active liquidity management reduction in some of the wholesale funding and then maybe just more broadly Steve to your point just how do you think about the broader economy and the bank's performance and a higher for longer environment.
Sure will.
Ron why don't I I'll, let Ron go ahead, David address.
The margin in our outlook and then I am certainly happy to give you my perspective on the.
The outlook for the economy.
Sure.
Thanks, Steven and David So as we've indicated we're going to be managing.
As much as we were able to of course, depending on deposit flows deposit mix that cost of deposits. That's our primary.
Steven Gardner: As I mentioned earlier, through the shared national credit review process, we had a non-relationship participation placed on a cruel status. The shared national credit portfolio, which is a legacy opus line of business that was discontinued, totals 22 loans for $201 million in outstanding balances, or 1.5% of total loans at September 30.
Focus, we're still originating albeit at lower levels, but the loans that we are bringing on the books of course theyre coming in at higher yields so that should also add.
To the to the net interest margin.
And and as we move forward I do anticipate although the denominator effect of the deposit beta.
He is going to.
Because thats decelerating, it's going to give rise to a higher base.
Ronald Nicolas: With that, I'll turn the call over to Ron to provide a few more details on our third quarter financial results. Thanks, Steve, and good morning. For comparison purposes, my comments today are on a linked quarter basis unless otherwise noted.
Peter.
On a quarterly basis, I do anticipate deposit pricing to start to decelerate as we move into 2024 and that so.
We do look for some level of stabilization, we're still getting a little bit of repricing is.
Ronald Nicolas: Let's start with the quarter's results. Third quarter net income total $46 million, or 48 cents per share, and our return on average assets and average tangible common equity were 0.88% and 10.08% respectively. Total revenue was $168.1 million, and our non-interest expense came in at $102.2 million, resulting in an efficiency ratio of 59%, and pre-provision net revenue as a percentage of average assets of 1.27% for the quarter. All of our regulatory capital ratios increased significantly, and our TCE ratio grew to 9.87%.
If there is another move on the asset side, so that should also help so.
There's a lot of moving parts to this.
We'll see how it plays itself out, but we're very very focused on.
On that deposit cost and managing.
The balance sheet tightly in that respect.
I think I would certainly add Ron.
We highlighted.
We've been certainly laser focused on reducing higher cost wholesale funding.
Which we took down.
Starting in.
Early 2022, and we expect that to benefit us as we move through the end of this year and into next year.
Ronald Nicolas: Taking a closer look at the income statement, net interest income decreased to $149.5 million, primarily as a result of higher cost of funds, as well as a smaller balance sheet, reflecting our strategy to moderate new loan origination activity in the current operating environment. On the funding side, both our deposit mix as well as our higher cost of funds impacted the net interest margin, which was 3.12% in the third quarter. Our non-maternity deposit costs were well-controlled at 0.89% and our total deposit costs were 1.50%.
Or is it.
I'll make outlook at some.
So it's certainly an unusual environment, where we have from all indications preliminary estimates on on GDP.
Very strong 5% handle in the third quarter employment continues to be strong low low low unemployment rate.
Three 8%.
But at the same time, we have some of these dynamics.
Going on.
From the commercial real estate markets.
And as investors in businesses.
Just to this rapid rise in interest rates.
Ronald Nicolas: On a cumulative total deposit beta of 28% reflect our discipline pricing actions throughout this rate cycle. Earning asset yields were flat compared to the second quarter, which included the impact of four basis points due to the reversal of nine months of accrued interest on the shared national credit that Steve referenced earlier. Looking ahead, we would anticipate some net interest margin pressure from higher funding costs in the higher for longer interest rate environment.
I think it remains uncertain how all of this plays out and Thats, certainly informing our approach to managing the balance sheet and capital levels liquidity as I highlighted.
To ensure that we are in a position to take advantage of what we believe are going to be opportunities here as we move through 2024.
Two to further grow.
And expand our franchise.
Okay.
And maybe to that point <unk>.
You talked about in your prepared remarks, it sounds like we're closer to an inflection point on our loan portfolio I'm. Just curious maybe if you could elaborate there you talked about proactively slowing growth some time ago through pricing and just your disappoint I'm. Just curious how is demand trending from your perspective, what's the pipeline look like and the composition of that.
Ronald Nicolas: That being said, we intend to mitigate some of those pressures through continued balance sheet optimization by reducing cash on hand and higher cost wholesale funding. We began to execute this strategy during the quarter as we reduced our level of broker deposits by $490 million compared to June 30th. Also in early October, we paid down $200 million of FHLB advances with a cost of 4.84% that were set to mature in May of 2024.
Where are you where are you seeing good risk adjusted returns with the origination rates over 8% and how do you think about loan growth.
I think youre right as far as we are approaching or it appears we're approaching an inflection point in the loan portfolio at least the contraction that we've seen here over the last year.
Ronald Nicolas: Non-interest income of $18.6 million decreased to $2 million from the prior quarter driven by a $1.8 million of lower operating income. Both trust custodial account fees and escrow and exchange fees generated similar levels of non-interest income compared to the prior quarter. For the fourth quarter of 2023, we expect our total non-interest income to be in the range of $18 to $19 million. Non-interest expense increased slightly to $102.2 million, mostly due to an expected $1.6 million increase in deposit expense related to higher earnings credit rates.
Year, plus period of time or at least it could be.
Prepayments certainly slowed.
Subsequently in the third quarter I suspect that some lenders pulling back generally speaking demand is pretty muted right now.
And I would say were not seen.
A lot of strong opportunities.
To land at the rates that makes sense to us.
I think as we underwrite credits and look at opportunities, it's predominantly on the business side.
Where some businesses have very strong cash flows and see opportunities to expand their business.
Ronald Nicolas: Compensation and benefit expense increased $644,000 to $54.1 million. From a staffing perspective, we ended the quarter with a head count of $1,355 compared to $1,383 as of June 30th, as our staffing levels continue to fall commensurate with our smaller balance sheet. We remain focused on tightly managing our operating expenses, and we expect fourth quarter expenses to remain relatively flat in the range of $102 to $103 million. Provision for credit losses of $3.9 million increased slightly from the prior quarter, as our ACL coverage ratio increased one basis point to 1.42%, commensurate with the relative size of our loan portfolio and our economic outlook.
And that makes sense.
And then.
Generally as I said pretty muted.
Other areas and so we'll see how this dynamic plays out.
In the coming months and as we move into 2024.
Okay.
And last one for me just just touching on capital look you've got an incredibly strong balance sheet.
<unk> positioned the bank extremely well for a broader economic slowdown and difficult operating environment.
Look we don't have a ton of need for.
Capital for loan growth, you're continuing to grow capital.
And now our shares are trading below tangible book value at this point I'm just curious how you're thinking about your capital priorities at this point or is there any appetite for share repurchases given where the stock is or is capital preservation is still a fair amount.
Ronald Nicolas: Turning now to the balance sheet, we finished the quarter at $20.3 billion in total assets, as we saw less loan portfolio contraction compared to the prior quarter due to slower Total loans help for investment to climb $346 million, driven by prepayments, sales, and maturities of $371 million, partially offset by new loan commitments of $68 million, reflecting our discipline, underwriting, and pricing standards. Total deposits ended the quarter at $16 billion, which represented a linked quarter decrease of $532 million, primarily due to a $490 million decrease in higher cost brokerage CDs.
Generally speaking capital.
Preservation is.
Certainly one of the primary considerations for the board we continue to look at.
Optimizing our capital levels and.
Bob.
Certainly we have an approved stock buyback, but we have not been active for some period of time.
Something that we are regularly considering and looking at at the board level.
And that is the way that we'll approach it.
In the coming quarters.
Okay I appreciate everybody. Thank you.
And our next question comes from Matthew Clark with Piper Sandler. Please go ahead.
Ronald Nicolas: We continue to exercise deposit pricing discipline, which has somewhat pressured non-maternity deposit balances during 2023, and led some customers to redeploy their cash reserves into higher yielding alternatives. The securities portfolio decreased $97 million to $3.7 billion, and the average yield on our investment portfolio increased six basis points to 2.70%. Not surprising, given the late quarter surge in interest rates, our pre-tax AOCI on the AFS portfolio increased to $296.7 million, but still remain below our December 31, 2022 fair value mark.
Hey, good morning, Thank you.
Just along the lines of that.
Capital related question, what's your appetite to restructure the securities portfolio, given how much capital you have at this point.
Yes.
We've talked about it before Matthew that it's something that we've looked at it.
Various points, we continue to consider it.
And I think as the environment moves away.
From call it the <unk>.
The disruptions that we saw earlier this year and in March April and May.
That that approach may become more attractive.
Ronald Nicolas: We anticipate approximately $100 million in cash flow from the amortization and maturities of our investment portfolio over the remainder of the year, and reinvestment will be dependent upon deposit flows, funding mix, and liquidity considerations. The combination of consistent profitability and a smaller balance sheet bolstered our risk-based capital ratios this quarter, with all ratios increasing significantly from June 30, 2023. In addition, our tangible common equity ratio increased 28 basis points to 9.87%, and our tangible book value per share increased $19.89.
So we will continue to.
SaaS that opportunity and how we're thinking about it.
Because as you point out we do have certainly very strong capital levels today.
Yes.
Okay, Great and then.
Gosh, I guess to the margin.
Can you give us a sense for the timing of the.
Runoff in the brokerage Cds this quarter I'm trying to get a sense for whether or not you saw that benefit fully in.
<unk> Q and then remind us how much you have.
<unk> for Q.
Okay.
And then with the 200 million run off of it I think youll be October six it looks like that could benefit the NIM.
Ronald Nicolas: And lastly, from an asset quality standpoint, our asset quality remains solid across multiple measures. Non-performing assets increased five basis points to 0.13%, a slight increase from the prior quarter. Additionally, total delinquency decreased to just eight basis points, and our total classified loans ended the quarter at 1.12%. Our allowance for credit losses remained a healthy $188.1 million, and our coverage ratio increased to 1.42%. Our total loss absorption, which includes the fair value discount on loans acquired through acquisition, finished the quarter at 1.76%.
By about five basis points at what I'm trying to get at is when you run through the numbers and you consider the spot rate on your deposits being pretty tight to the quarterly average and it looks like your NIM could actually be up a little bit here in <unk>.
The $490 million of broker deposits that we paid off was mainly mature towards the end of the quarter and in September .
Most of the broker deposits that we have.
$500 million, while roughly about 600 million this quarter, most all of those mature towards the end of the quarter and depending upon our cash levels high deposit flows.
Steven Gardner: With that, I'll turn the call back to Steve. Great. Thanks, Ron.
Loan activity.
Look two to pay down or potentially pay those off towards the end of the quarter.
Steven Gardner: I'll wrap up with a few comments about our outlook. As we head into year-end in 2024, we'll continue to take a thoughtful approach with respect to liquidity, balance sheet growth, risk management, and building capital. We expect the environment to remain challenged for the foreseeable future, as businesses and real estate investors adjust to the evolving economic and interest rate environment. At this point, we are prepared for the higher for longer interest rate scenario and the corresponding ramifications it may have on the broader industry.
Okay.
Then maybe for Ron the amount of the hedging gain how much did that benefit NII this quarter in dollars.
Alright, and then the.
Swaps yeah on the swaps are Matt yes.
The swaps, we entered the quarter with about $1 billion for.
It contributed just under $10 million in interest.
That was in.
The 'twenty Hy 'twenty eight 'twenty nine basis points, we've got about a third of that book, that's going to be maturing, although the bulk of it is.
Steven Gardner: Our organization is well positioned to opportunistically diversify our business in a disciplined prudent fashion through organic and strategic growth as a result of the disruptions taking place in our markets. In addition, we anticipate that the challenges our industry faces may intensify, which in turn could create additional opportunities for us.
Late in the quarter.
The good news is as we move into 2020 for the silver lining on that maturity is it's only about 20 little over 20% of the.
The interest that is generating today or that we saw in this quarter. So.
Steven Gardner: In conclusion, we are entering the fourth quarter from a position of strength and our teams remain keenly focused on executing our business strategy to deliver long-term value for our shareholders.
We're still going to be pretty with 900 million entering next year will still be in a pretty good position as far as a pretty good impact.
With that and that's at the current level of.
Operator: That concludes our prepared remarks and we would be happy to answer any questions. Operator, please open up the call for questions. Thank you. We will now begin the question and answer session to ask a question you may press star than one on your touchtone phone. If you're using the speakerphone, please pick up your handset, focusing the keys. If at any time, your question has been addressed and you would like to withdraw your question, please press star than two. At this time, we will pause momentarily to assemble a lot faster.
So for assuming no no moves by the fed.
Okay. Thanks, and then just on extensive head count down 2%, but the run rate remaining relatively flat in <unk> I guess, what what's masking the potential savings there in comp.
Yes, thats predominant.
We may see.
Some additional attrition.
Attrition there.
But but we're gonna be truing things up for the full year, we will see how that plays itself out in terms of comp and and then.
David Chiaverini: Our first question comes from David, please serve with Raymond Jean. Please go ahead. Hey, good morning everybody. Hi, David. Maybe just kind of following up on your commentary, both you, Steve and Ron, it seems like this higher for longer environment is probably the new normal. I'm just curious, you know, you touched on it a bit. I was hoping we could dig into the balance sheet and margin trajectory in a higher for longer environment.
The primary driver is the deposit.
Posit expense and in the earnings credit that we saw ratchet up pretty good here in the third quarter and were anticipating maybe not as much but still an increase nonetheless, and I think that thats going to.
Impact the fourth quarter.
David Chiaverini: You guys have been very active managing the balance sheet. But just how do you think about the margin trajectory and light of the moves that you've made proactive liquidity management reduction in some of the wholesale funding. And then maybe just more broadly, Steve, to your point, just how do you think about the broader economy and the banks performance in a higher for longer environment?
Okay, and then last one for me just on the SNCC portfolio Steve.
I'm a little surprised you kept that portfolio. After you bought <unk> because we all know that you don't I'm sure you don't like that type of business.
So I guess why not unwind that earlier and.
Or is there something about it you like.
Steven Gardner: Sure. Well, Ron, why don't we all let Ron go ahead and David address the margin in our outlook. And then I'm certainly happy to give you my perspective on the outlook for the economy. Sure. Thanks, Stephen and David. So, you know, as we've indicated, you know, we're going to be managing as much as we were able to, of course, depending on deposit flows, deposit mix, that cost of deposits, that's our primary focus.
No we had been we had been unwinding it.
It is it has performed well.
<unk> rate credit.
And.
Up to this point, we were fine with it as we said.
We've reduced it from from where we were at.
We're comfortable with the portfolio, where it stands at just one 5% of the loan portfolio and in particular, given the declines in contraction in the overall loan portfolio that we've seen over the last year.
Steven Gardner: We're still originating albeit at lower levels, but the loans that we are bringing on the books, of course, are coming in at higher yields. So that should also add to the net interest margin. And as we move forward, I do anticipate, although the denominator effect of the deposit beta, you know, is going to be because that's decelerating, it's going to give rise to a higher beta on a quarterly basis. I do anticipate deposit pricing, to start to decelerate as we move into 2024 and that.
Okay makes sense. Thanks.
Our next question comes from.
Please go ahead.
Chris are you there.
Yep Yep.
Steve if we stay in this.
Higher for longer environment as you described.
I'm interested what you might be able to do on the expenses beyond what you've done.
Do you feel like you have to do more on the expenses.
To protect profitability.
Yeah.
I'd say, yes, I think that historically, we've always managed.
Steven Gardner: So we do look for, you know, some level of stabilization. We're still getting a little bit of repricing as if there is another move on the asset side. So that should also help. So, you know, there's a lot of moving parts to this. We'll see how it plays itself out. But we're very, very focused on that deposit cost and managing the balance sheet tightly in that respect. I think I certainly add, Ron, that, you know, as we highlighted, we've been certainly laser focused on reducing higher cost wholesale funding, which we took down starting in early 2022. And we expect that to benefit us as we move through the end of this year and into next year.
Expenses, well and as the environment as evolved and our outlook is what it is.
I think there's there's room for us to.
Take a look at expenses across the board.
But that is frankly nothing new.
Okay.
And then maybe Ron coming back to comments.
Comments on the margin I'm looking at I guess slide 12, just looks at the repricing schedule.
I saw the dip in the loan yields in the quarter and I know part of that was the interest reversal, but I guess, how should we think about the back book repricing.
In this environment, if the fed's done I guess it would be more more trying to get at when when do you think trough NII might might happen.
Steven Gardner: It was far as the economic outlook. It's to, it's certainly an unusual environment where we have from all indications preliminary estimates on GDP as very strong 5% handle in the third quarter employment continues to be strong low low low unemployment rate 3.8%. But at the same time, we have some of these dynamics going on from the commercial real estate markets. And as investors and businesses adjust to this rapid rise in interest rates, I think it remains uncertain how all of this plays out.
Yes.
So we've got a little over.
Somewhere in the neighborhood of about 33% 34%.
Of pretty active repricing of the book the portfolio with the benefit of the swaps.
If the fed is done we will still see a little bit more of that trickle in as we move.
Into the fourth quarter not all of it moves at all.
Of it moves over a couple of months timeframe.
And that so we could see a little bit of a lift there. There was some noise of course between the second and third quarter on the loan yields.
The interest accrual being one of them that we've already talked about the reversal I should say of the interest on the on the snick.
Steven Gardner: And that's certainly informing our approach to managing the balance sheet and capital levels liquidity as I highlighted. To ensure that we are in a position to take advantage of what we believe are going to be opportunities here as we move through 2024 to to further grow and expand our franchise. And maybe to that point, you talked about in your prepared remarks, sounds like we're closer to an inflection point on the loan portfolio.
And but for the most part will probably pick up just on incrementally on the new loans coming on the book.
And.
And see where that goes if if the fed.
Pauses.
On a more permanent basis, we'll see how that that's where we're very focused on the deposit side and managing that deposit cost.
Okay, and then maybe if I could on the noninterest income that you're thinking about that the trough and we got moderating.
Moderating loan decline.
On.
The spot deposit rate was pretty unchanged for the quarter average.
Steven Gardner: I'm just curious, maybe if you could elaborate there, you talked about proactively slowing growth some time ago through pricing and just your disappoint. I'm just curious, how's the man trending from your perspective? What's the pipeline look like and the composition of that? Where are you just, where are you seeing good risk adjusted returns with origination rates over 8% and how do you think about loan growth? I think you're right as far as we are approaching or it appears we're approaching an inflection point in the loan portfolio, at least the contraction that we've seen here over the last year plus period of time, or at least it could be, because prepayment certainly slowed subsequently in the third quarter.
It feels like we've got a couple more quarters, but is that something that's kind of how youre thinking about dropping dropping reminisce.
Okay.
I'll jump in here.
I mean I think it's.
Generally how we're thinking about it let's see how things play out whether it could be sooner or or beyond that point I think just.
And there is there's a lot of different dynamics at play.
Going on in the market and the economy and certainly.
On rates.
It's dependent upon the flows.
From both the deposit and loan side, so a lot of moving pieces, but I think it's reasonable to think in a quarter or two.
Steven Gardner: I suspect that some lenders pulling back. Generally speaking, demand is pretty muted right now. And I would say we're not seeing a lot of strong opportunities to lend at the rates that make sense to us. I think as we underwrite credits and look at opportunities, it's predominantly on the business side where some businesses have very strong cash flows and see opportunities to expand their business and that makes sense. And then it's generally, as I said, pretty muted in other areas. And so we'll see how this dynamic plays out in the coming months and as we move into 2024.
Okay.
Thanks, Steve and then Ron last one the tax rate how should we think about prospectively.
We've been hovering right around that 26% and I think that that's a.
Pretty consistent.
We'll finish of here in the in the year.
Alright, great. Thank you very much Youre welcome certainly.
Yes.
A question Please press star.
Our next question comes from Gary.
Please go ahead.
Thanks, Good morning.
I wanted to revisit the loan yield discussion for a moment ago, a six basis point contraction in loan yields by my math about fiber that was interest reversal and maybe another couple of basis points from lower loan discount accretion. So that kind of gets you back to flat quarter over quarter I'm. Just wondering I mean, there was some some mixed shift.
Steven Gardner: And last one for me, just touching on Capitol, look, you've got an incredibly strong balance sheet. You've positioned the bank extremely well for a broader economic slowdown and difficult operating environment. But, you know, look, we don't have a ton of need for, you know, Capitol for loan growth, you're continuing to grow Capitol. And now shares are trading below tangible book value at this point. I'm just curious how you think about your Capitol priorities at this point.
Within the portfolio, but just I would've I would have anticipated maybe a bit more lift this quarter. So is there some other kind of drivers or a function that.
Prevented that or is it just more of a timing issue.
Yeah.
We had some loan sales last quarter.
That that impacted this quarter, they were a little bit higher.
In terms of their yield.
Steven Gardner: Is there any appetite for share of purchases given where the stock is or is Capitol preservation still paramount? Generally speaking, Capitol preservation is certainly one of the primary considerations for the board. We continue to look at optimizing our Capitol levels and, you know, certainly we haven't approved stock buyback, but we have not been active for some period of time, something that we are regularly considering and looking at at the board level. And that is the way that we'll approach it in the coming quarters. Appreciate everybody.
And that came into play probably another five or six basis 0.45 basis points, let's say.
And I think Gary to your point, that's that's why you didn't see as much lift as you.
Operator: Thank you.
You would have anticipated.
Okay, I appreciate that and.
Steve I'm curious you know last quarter I think you made the comment that you were a bit more comfortable on lending from a credit perspective, but still not from a pricing perspective, obviously, the new loan origination yields moved up quite a bit this quarter, albeit on a smaller dollar amount I was just curious.
To what degree or how your view of the World maybe has changed from a from a credit risk perspective over the last call.
Call It 90 days.
Hi.
I don't think its it hasnt changed materially.
Part of it is there is just not a lot of demand.
Out there.
And again, we're going to maintain our discipline around the pricing side. So.
Matthew Clark: Our next question comes from Matthew Clark with Piper Sandler. Please go ahead. Hey, good morning. Thank you. Just along the lines of that Capitol related question, what's your appetite to restructure the securities portfolio given how much capital you have at this point? Yeah, I know we've talked about it before Matthew that it's something that we've looked at at at at various points. We continue to consider it. And, and I think as the environment moves away from call it the disruptions that we saw earlier this year in in March, April in May, that that approach may become more attractive. So we'll continue to assess that opportunity and how we're thinking about it. Because as you point out, we do have certainly very strong capital levels today.
I think it really gets back to that comment I made that I think that both business owners.
And real estate investors are all reassessing the current environment because rates.
Have impacts across the board on on cap rates for real estate some of the expenses and inflation thats going on and impacting whether it's now.
Business is a real estate operators from from an expense side I think that all of those dynamics.
Half half.
Investor's business owners real estate investors.
Rethinking their outlook.
And so that's tamping down on on demand at least in in our markets.
Okay, great and if I could ask one more Ron just to clarify your comments on the on the swaps a moment ago. So the roughly one third of the swaps that mature over the course of the fourth quarter only have about a 20% impact on on the gains that you would be looking at or the benefit you've been looking at for 2024.
Ronald Nicolas: Okay, great. And then there's to the margin. Can you give us a sense for the timing of the runoff and the brokerage cities this quarter trying to get a sense for whether or not you saw that benefit fully in 3Q. And then remind us how much you have coming due in 4Q. And then with the 200 million runoff of FHLB October 6, it looks like that could benefit the NIM by about 5 basis points.
Correct.
Okay.
Very much.
Youre welcome.
Operator is there anyone else in the queue.
Yes, David.
Christopher.
Please go ahead.
Ronald Nicolas: What I'm trying to get at is, you know, when you run through the numbers and you consider the spot rate on your deposits being pretty tight to the quarterly average. And it looks like your NIM could actually be up a little bit here in 4Q. We, the 490 million of broker deposits that we paid off was mainly matured towards the end of the quarter in, in September. Most of the broker deposits that we have, 500 million, well roughly about 600 million this quarter, most all of those mature towards the end of the quarter, and depending upon our cash levels, deposit flows, loan activity, and it will look to you to pay down or potentially pay those off towards the end of the quarter.
Hi, Thanks, So I wanted to ask about credit quality. So slide 18, you've got the classified loans and we saw an uptick there I was curious for the loans that have reached maturity in the third quarter or over the past couple of quarters for that matter how many are struggling.
To come up with additional equity, particularly for those borrowers that you would consider.
Reextending alone or putting out a new load can you talk about how borrowers are handling.
The new environment, that's their loans mature.
We haven't seen any pressure from our book on on maturities.
Classifieds are just that uptick is just.
Part of our regular review process and are analyzing cash flows.
Ronald Nicolas: Okay, and then maybe for Ron, the amount of the hedging gain, how much does that benefit, and I, this quarter in dollars? Around the swaps? Yeah, and the swaps, amen. Yeah, the swaps, we, you know, we entered the quarter with about a billion four, it contributed just under $10 million in interest. You know, that was, you know, in the 20, high 20, 829 basis points, we've got about a third of that book that's going to be maturing, although the bulk of it is late in the quarter, the good news is, as we move into 2024, the silver lining on that maturity is, it's only about 20, a little over 20% of the interest that it's generating today, or that we saw in this quarter.
No real impact that I can think of David from a maturity standpoint, Ron is there anything that comes to your mind that.
From a maturity standpoint, Steve no no I think you've got it correct I mean, you see the fluctuations.
To your point on the on the classified I think Thats just a.
Just a normal or the typical flux.
Fluctuations that we see so no David.
Not not heard or seen anything like that just yet.
And generally yes.
I'm, sorry, I was just going to add that.
We have the slide in the deck on.
The loan portfolio maturity and we have a relatively.
Ronald Nicolas: So, you know, we're still going to be pretty, with 900 million entering next year, we'll still be in a pretty good position, as far as a pretty good impact with that, and that's at the current level of, of sulfur, assuming no, no moves by the Fed. Okay, thanks, and then just on expenses, head count down 2%, but the run rate remaining relatively flat and 4Q, I guess what's, what's masking, you know, the potential savings there and comp?
Low percentage of loans that mature over the next several quarters.
Right. So the ones that and granted it's a very small number but the ones that are seeing maturities youre.
Not seeing.
Those borrowers kind of struggle or refinance to it to another lender.
No. We're frankly, we're seeing them take.
Cash out of there.
There are accounts and paying us off or paying us down.
On top of it we're having we have very proactive portfolio management, so we're reaching out to those clients.
Ronald Nicolas: Yeah, that's, that's predominant. You know, we may see some additional attrition there, you know, but you know, we're going to be truing things up for the full year, we'll see how that plays itself out in terms of comp. And then the primary driver is the deposit, the deposit expense in the earnings credit that we saw, you know, ratchet up pretty good here in the third quarter, and we're anticipating maybe not as much, but still an increase nonetheless, and I think that that's going to, you know, impact the fourth quarter.
Nine six months before maturity talking to them.
About what their plans are.
And how we're looking at the world So.
<unk>.
I think it's part of that proactive portfolio management that we benefit from as well.
Good to hear thanks very much.
Good.
Operator is there anyone else in the queue.
Steven Gardner: Okay, and then last one for me, just on the snake portfolio, Steve, a little surprise, you kept that portfolio after you bought Opus, because we all know that you don't, I'm sure you don't like that type of business. So, I guess why not unwind that earlier, or is there something about it you like? No, we have been, we had been at you unwinding it. It is, it has performed well, adjustable rate, credit, and, you know, up to this point we were fine with it as we said, you know, we've reduced it from where we were, and we're comfortable with the portfolio where it stands, you know, just 1.5% of the loan portfolio, and in particular given the declines in contraction in the overall loan portfolio that we've seen over the last year. Okay, makes sense.
Well. Thank you all we appreciate you joining us today and that concludes today's call.
Matthew Clark: Thanks.
This concludes our conference and thank you for attending today's presentation.
Okay.
Christopher McGratty: The next question comes from Chris McGratty with KVW. Please go ahead. Chris, are you there? There we go. There's a mute button.
Steven Gardner: Steve, if we stay in this higher for longer environment as you describe, I'm interested what you might be able to do on the expenses beyond what you've done. I mean, do you feel like you have to do more on the expenses to protect profitability? I'd say yes. I think that historically, we've always managed expenses well and as the environment has evolved and our outlook is what it is. I think there's room for us to take a look at expenses across the board, but that is frankly nothing new.
Ronald Nicolas: Okay. And then maybe Ron coming back to comments on the margin and looking at, I guess, like 12 just looks at the repricing schedule. I saw the dip in the loan yields in the quarter and I know part of that was the interest reversal, but I guess how should we think about the back book repricing in this environment if the fed's done. I guess it's more trying to get at when you think trough and I might happen.
Ronald Nicolas: Yeah. So we've got a little over somewhere in the neighborhood about 33, 34% of pretty active repricing of the book, the portfolio with the benefit of the swaps. If the fed is done, we'll still see a little bit more of that trickle end as we move into the fourth quarter, not all of it moves, all, you know, some of it moves over a couple of months time frame. And that so we could see a little bit of lift there.
Ronald Nicolas: There were some noise, of course, between the second and third quarter on the loan yields. The interest accrual being one of them that we've already talked about the reversal, I should say, of the interest on the on the snake. But for the most part, we'll probably pick up just incrementally on the new loans coming on the book and see where that goes. If the fed pauses, you know, on a more permanent basis, we'll see how that that's where we're very focused on the deposit side and managing that deposit cost.
Steven Gardner: Okay. And then maybe if I could on the net interest income, thinking about the trough, we got moderating loan decline. The spot deposit rate was pretty unchanged to the quarter average. I feel like we've got a couple more quarters, but that's something with kind of how you're thinking about trough, troughing revenues. I mean, I'll jump in here. I mean, I think that it's generally how we're thinking about it. Let's see how things play out, whether it could be sooner or, or beyond that point.
Steven Gardner: I think just, you know, there's there's a lot of different dynamics at play, going on in the market and the economy and certainly on rates. And it's dependent upon the flows from both the deposit loans. A lot of moving pieces, but I think it's reasonable to think in a quarter or two.
Ronald Nicolas: Okay. Thanks, Steve.
Ronald Nicolas: And then Ron last one, it tax rate, how should we think about prospectively? You know, we've been hovering right around that 26% and I think that that's pretty consistent of where we'll finish here in the year. All right, great. Thank you very much. You're welcome, sir.
Operator: Yeah, and if you have a question, please just start and want to be joined into the queue.
Gary Tenner: Our next question comes from Gary Denner with David. Please go ahead. Thanks, good morning. I wanted to revisit that loan yield discussion for a moment ago. Six basis point contraction and loan yields by my math about five of that was the interest reversal and maybe another couple of basis points from lower loan discount accretion. So that kind of gets you back to flat quarter or quarter. I'm just wondering, I mean, there was some some next shift within the portfolio, which is I would have anticipated maybe a bit more lift this quarter.
Gary Tenner: So is there some other kind of drivers or a function that prevented that or is it just more of a timing issue? We had some loan sales last quarter that impacted this quarter. They were a little bit higher in terms of their yield. And and that came into play probably another five or six basis point four or five basis points, let's say. And I think Gary to your point, that's that's why you didn't see as much lift as you you would have anticipated.
Steven Gardner: Okay, I appreciate that. And Steve, I'm curious, you know, last quarter, I think you made the comment that you were a bit more comfortable on lending from a credit perspective, but still not from a pricing perspective. Obviously the, you know, new loan origination yields moved up quite a bit this quarter. I'll be it on a kind of small dollar amount. I was just curious, you know, to what degree or how your view of the world maybe has changed from a from a credit or risk perspective over the last, you know, called 90 days.
Steven Gardner: You know, I don't think it's it hasn't changed materially. It's, you know, part of it is there is just not a lot of demand out there. And and again, we're going to maintain our discipline around the pricing side. So I think it really gets back to that comment I made that I think that folks business owners in real estate investors are all reassessing the current environment because rates have impacts across the board on on cap rates for for real estate.
Steven Gardner: Some of the expenses and inflation that's going on and impacting whether it's now businesses or real estate operators from from an expense side. I think that all of those dynamics have have investors business owners real estate investors rethinking their outlook. And so that's camping down on on demand at least in in our markets.
Gary Tenner: Okay, great. And if I can ask one more run just to clarify your comments on the on the swaps a moment ago. So the roughly one third of the swaps that that mature year of the course of the fourth quarter only have about a 20% impact on on the gains that you would be looking at or the benefit you've been looking at for 2024. That's correct, Gary. Okay, thanks very much. Welcome. Thank you very much, Gary.
Operator: Thank you very much for having me with that push security.
David Feaster: We've go ahead. Hi, thanks. So I wanted to ask about credit quality. So slide 18. You've got the classified loans and we saw an uptick there. I was curious for the loans that have reached maturity in the third quarter or over the past couple quarters for that matter. How many are struggling to come up with additional equity, particularly for those borrowers that you would consider re-extending alone or putting out a new loan.
David Feaster: Can you talk about how borrowers are handling the new environment as their loans mature? We haven't seen any pressure from our book on on maturities. Classifieds are just that uptick is just part of our regular review process and analyzing cash flows, no real impact that I can think of from a maturity standpoint. Is there anything that comes to your mind from a maturity standpoint? No, Steve. No, no. I think you've got it correct.
David Feaster: I mean, you see the fluctuations to your point on the classified. I think that's just a normal or the typical fluctuations that we see. So no, David, we're not not not heard or seen anything like that just yet. And generally as the I'm sorry, I was just going to add that and we have the slide in the deck on the loan portfolio maturity and we have a relatively low percentage of loans that mature over the next several quarters.
David Feaster: Right. So the ones that in granted to very small number, but the ones that are seeing maturities, you're not seeing, you know, those borrowers kind of struggle or refinance to another lender. No, we're frankly we're seeing them pay cash out of their accounts and paying us off or paying us down on top of it. We're having we have very proactive portfolio management. So we're reaching out to those clients, you know, nine, six months before maturity talking to them about what their plans are and and how we're looking at the world. So, you know, I think it's part of that proactive portfolio management that we benefit from as well. Good to hear. Thanks very much. Very good. Operator, is there anyone else in the queue?
Operator: Well, please come to our conference and thank you for attending today's presentation.