Q3 2023 Third Coast Bancshares Inc Earnings Call
A question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference.
Press Star Zero on your telephone keypad as a reminder, this conference is being of the contract. It is now my pleasure to introduce your host Natalie Hairston. Thank you person you may begin.
Thank you operator, and good morning, everyone.
Thanks for joining us for the third test.
Sure Conference call and webcast to review, our third quarter 2023.
With me, it's Bart Carolyn Chairman, President and Chief Executive Officer, John Mcwhorter, Chief Financial Officer, and Arthur Duncan Chief Credit Officer.
First a few housekeeping items, there will be a replay of today's call and it will be available by webcast on the investors section of our website.
<unk> got T V F S E Dot com.
I'll also be a telephonic replay available until November 32023, and more information on how to access these briefly.
What was included in yesterday's earnings release.
Note that the information reported on this call speaks only as of today October 26, 2023, and therefore, you're advised that time sensitive.
Mike no longer be accurate at the time of any replay listening or transcript reading.
In addition, the comments made by management. During this conference call may contain forward looking statements within the meaning the United States Federal Securities laws. These forward looking statements reflect the current views of management. However, various risks uncertainties and contingencies could cause actual results performance or achievements to differ materially from those.
The statements made by management.
The listener or reader is encouraged to read the annual report on Form 10-K that was filed on March 15, 2020, great to better understand those risks uncertainties and contingencies.
The comments made today will also include certain non-GAAP financial measures additional details and reconciliation to the most directly comparable GAAP financial measure included in yesterday's earnings release, which can be found on the website now I would like to turn the call over to our chairman.
Chairman, President and CEO, Mr. Bart Caraway Bart thanks.
Thanks, Natalie and good morning, everyone. Thank you for joining us today I'll begin by highlighting the company's performance for the third quarter. John will then provide a more detailed financial review in all drew will give them credit update Dan before we take your questions I'll return to discuss our outlook.
During the third quarter, we achieved significant progress towards our strategy of conservative loan growth disciplined expense management and strengthening of shareholder value.
Total assets reached $4 two 2 billion during the third quarter, an increase of six 4% over the prior quarter and 19, 9% increase over the prior year period we.
We booked over $226 million in high quality loans, an increase of six 8% sequentially and 19, 7% increase over the third quarter of last year.
Likewise deposits reached 365, billion% to 7% increase from the linked quarter.
On a year over year increase of 22, 2%.
In response to market conditions, we took some deliberate actions to reduce our operating expenses and other overhead costs, including the previously announced winding down of our auto finance group as well as a 5% reduction in workforce.
As a result, our full time employee head count now stands at approximately 370, which is consistent with our numbers from the beginning of the year.
We have been able to grow the bank by 443 million in that same timeframe. During the quarter. We also booked a $2 6 million provision for credit losses, primarily driven by strong fourth quarter, which Audrey will discuss in more detail in her prepared remarks. These actions were necessary to position us.
For the fourth quarter and established a solid foundation for 2024.
Deposit rates remained highly competitive, but this quarter and we were able to increase our deposits by $238 million or 7% from the previous quarter. A notable achievement. Our success in deposit acquisition can be attributed to the deposit campaign contest held across multiple lines of business, including retail.
Private banking Treasury management, and commercial bankers, we were able to raise deposit by an impressive 275 million within a short span of four months.
Our bankers unwavering focus on deposits coupled with their commitment to building strong relationships with clients played a crucial role in achieving this feat.
This approach combined with our commitment to providing innovative solutions and exceptional service as a resulted and success across all our markets are insured cash suite in Treasury management services are particularly proven to be innovative solutions contributing to our company's growth as.
As we progress we will continue to explore new ways to deepen our relationships with existing customers and attract new ones, all while maintaining our focus on deposits and loans.
Additionally, we were able to increase book value and tangible book value per share by one 4% and one 5% respectively by.
By delivering exceptional shareholder value and increasing tangible book value per share. We have made significant progress in enhancing our balance sheet and maintaining a strong financial position in the third quarter. We believe we can continue to drive increased shareholder value and achieve sustainable success long term.
With that I'll turn the call over to John for a more detailed financial review John.
Thank you Bart and good morning, everyone. We provided the detailed financial tables in yesterday's earnings release. So today I'll provide some additional color around select balance sheet and profitability metrics.
As Bart mentioned loans were up 226 million.
Others were up slightly more at 239 million.
Total assets reached 4.22 billion, a new all new records for the company.
Net interest margin for the quarter was down 11 basis points slightly more than expected due primarily to higher than expected loan.
Spreads on new loans tend to average less than the banks current net interest margin.
Loan growth is expected to be less in the fourth quarter, which should result in less margin pressure.
Additionally, the bank has $100 million Treasury securities maturing in October yielding 2.25%.
These were used to pay down of wholesale funding and net interest margin would improve two to three basis points. We therefore believe that for the fourth quarter. The net interest margin will be down less than five basis points.
Noninterest expense was materially higher than expected due to several nonrecurring items, including severance expenses fraud losses, and legal fees associated with those items.
Previously mentioned San Fran.
Severance expense totaled $460000, we reduced head count to roughly where we started the year.
As a result, we expect fourth quarter salary and benefit expense to be less than 16.
All other noninterest expenses were up 1.35 million in the third quarter versus the second.
This increase was primarily due to the fraud losses and legal fees as previously mentioned.
Even though net interest margin was down 11 basis points for the quarter net interest income was up $1 2 million to $35 3 million.
Due to strong.
We have shown consistent growth in net interest income since going public in the fourth quarter of 2021, when our net interest income was only 24 six.
The third quarter performance also resulted in increases in both book value per share with the Street 24, 57, intangible book value per share which reached $23.17.
This is up 11% or $2 23 from $20.94 since going public in 2021.
This compares very favorably to our peers, who over the same period saw an average decrease in tangible book value of nine 3%.
Also as a reminder, we use the if converted method to calculate earnings per share for the third quarter. This resulted in anti dilution and therefore, the preferred shares were excluded from our diluted share count.
We expect this to put it back in the fourth quarter.
That completes the financial review and at this point I will pass the call to Audrey for credit quality.
Thank you John and good morning, everyone certain tests credit performance for the third quarter was again strong our total nonperforming assets currently stand at $16 4 million, which is 0.39% of total assets and our net charge offs has stayed extremely low at 24000 for the.
Quarter.
The $6 $4 million increase in nonperforming loans is primarily due to the placement of the $2.3 million.
An approval and a 2 million dollar loan that was over 90 days matured and still accruing those loans are well secured and no losses are anticipated in October of 2023, the $2 million was renewed and it's correct.
The remaining loans placed on non accrual this quarter consist of two relationships totaling $2 million and minimal losses are expected as those loans are worked out.
The remaining loans that are over 90 days past due at quarter end are well secured and in the process of renewal.
Overall, we remain confident in our asset quality, which continues to remain strong.
Provisions for credit losses totaled $2 6 million and related to provisioning for new loans and commitments.
The ACL remains at the high end of the range calculated under the new CFO methodology.
Consistent with our prior quarters loan growth of $226 million continues to be well diversified from a loan category standpoint, commercial loans were up $123 $7 million and real estate loans were at $106 million from the previous quarter.
The loan portfolio mix is well balanced with commercial and industrial loans accounting for 36% of total loans and owner.
Owner occupied and non owner occupied commercial real estate, and 15% and 16% respectively.
Non owner occupied office represents one 8% of Mezz loan.
Portfolio with non owner occupied medical office accounting for an additional one 3% while owner occupied office and medical office total 2.3% of total loans. The office portfolio generally consist of class b with some owner occupied class.
These days and it's all located within our Texas footprint.
Performance for the quarter is a testament to our solid business model and our commitment to prudent risk management. We are pleased to see continued loan growth across a diverse range of loan categories, which further strengthens our position in the market.
At the same time, we're mindful of the potential risks that may arise from the changing economic environment. We will continue to closely monitor our credit quality and continue to be conservative in our lending practices to maintain our strong credit performance.
Overall, we are confident in our ability to navigate the current economic landscape in staying committed to delivering conservatism.
With that I'll turn the call back to Bart Barthes.
Thanks Albert.
As we move into the fourth quarter and ended the year, we're confident in our goal to achieve operating leverage which will translate into increased shareholder value.
We will maintain an active focus on managing expenses carefully analyzing our budget and identifying areas, where we can reduce cost without sacrificing customer quality or operational efficiencies at the same time, we will continue to invest in key areas of our business that are critical to our future growth.
Our commitment to full wallet relationship banking remains a top priority, we will continue to leverage our treasury management and other services deepen existing customer relationships and attract new ones.
In addition, our innovative custom digital solutions, such as banking as a service and embedded finance platforms will play a larger role in 2024, we have successfully transitioned from the proof of concept stage to fully operational with wide partnerships.
Our bankers and branches are strategically located in Texas best markets, providing access to some of the highest quality deals available, allowing us to remain conservative in our deal approach and choose the most promising opportunities looking ahead, we will remain optimistic about our ability to continue to grow our business we will.
We need to prioritize asset quality and make prudent and proactive decisions relative to the current economic environment. Our dedicated team is committed to delivering exceptional service to our customers and creating long term value for our shareholders and we are confident that our growth strategy will enable us to navigate the challenges and.
Opportunities that lie ahead.
This concludes our prepared remarks, I would now like to turn the call back over to the operator to begin the question and answer session operator.
Thank you.
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Questions.
Yeah.
The first question comes from the line of Nick.
But Piper Sandler. Please go ahead.
Hey, everyone. Good morning.
Good morning Graham.
So I just wanted to I wanted to start on expenses, you've got the 460000 and 400000 in fraud losses, and then you mentioned another another legal charge, what what was the size of that legal charge this quarter.
Yeah, we didn't detail out the legal expenses I mean.
You know anytime you have a reduction in force, there's legal fees associated with the agreement to the employee as well.
We we didn't detail that out just because you know we always have lots of lots of legal fees, but if it was.
It was somewhat material certainly nonrecurring.
Okay, Yeah, I'm, just trying to get a sense for where.
The growth came off of the I think we had talked about 24 million give or take a last quarter. So I'm just trying to get a sense for what drove that.
Higher expense base. This quarter was it was it the deposit competition you guys were talking about or was it related to the loan growth, which was really strong this quarter just trying to any color there would be would be helpful.
Yeah, I mean, there were some incentives related to the deposit campaign in where we were paying out prizes to people you know they were bonuses earned during the quarter, but you know I think probably the the important number is where we think the fourth quarter will be and I'm pretty confident that it'll be less than $16 million in total.
Our expense and.
In total noninterest expense, we think will be less than 26 months.
Okay.
Okay. That's helpful.
And then I guess looking into 2020 for I mean, just what's the what's the it sounds like you guys are you know focused on expense management, but obviously youre still growing bank, having to invest where needed and what's your outlook for expense growth as you begin to budget for 2024.
Yeah.
A good question I mean, we certainly talk about it a lot.
On the on the loan side on the growth side. We've you know for the last couple of years talked about growth being lumpy.
It makes it hard to predict we certainly weren't expecting $225 million in loan growth for the quarter.
It's not as if all of those deals were sourced and approved and booked all in the quarter some of more carryover from previous quarters.
At the same sorts of things will happen on expenses and that's kind of what happened. This.
Catch up on expenses.
That we werent expecting but you know looking ahead to next year I mean, we.
Hum.
Our plan is to be disciplined I mean, where we're trying to grow revenues faster than expenses I think we've done a pretty good job of that in the past and I think we will again next year. So you know.
If we think that you know.
Net interest income is going to continue to grow in that 10% to 15% range expenses will be less than that so there'll be in the 5% to 10%, yes, Graham if I could add little color to it again.
We're in the process as we've grown and reallocating resources internally to be more efficient and I think you can see that from if you look at our head count is not just the expense of the just the head count we started the year at 369 employees.
We probably got a little head up to 390 or so employees now we're back down to about $3 70, and we've grown 443 million. So what you're seeing is we're kind of managing.
The employee head count to still continue to grow and this whole process has been what we've talked about before is that we've got to go into a little bit of the operating efficiency as well as cut cost and I think the 226 million to come in the third quarter. It was actually fortuitous because I think the fourth quarter will be <unk>.
Slower, but it tees up the opportunity for us to grow a little bit into our operating efficiency.
Controller head count and also have a an increase in revenue that's going to affect the bottom line and I think fourth quarter is going to look a lot better and it's certainly going to tee us up for a good 2024.
Okay. That's very helpful. Bart and then I guess you touched on it a little bit there, but the loan growth outlook. Obviously, you guys had some unexpected stuff happened it got things got pulled forward to this quarter.
What are you guys.
For next year on loan growth I think this year before this quarter, we had talked about maybe 300 or $400 million in growth for the full year can you frame up what you expect in 2024 do you think it'll be a little bit less than that as the economy cools down are you still seeing pretty good opportunities on the lending side to do something similar.
Yeah, I mean, I think what that.
The nice thing that position. We're in is we've had some really high quality customers that we have been onboarding and it's just a unique market in that we can be very choosy and so it's been very nice to be a pool you know.
High quality customers from some of the competitors and established relationships. So with that I think you'll still continue to see some growth I think for the.
Fourth quarter, the growth is going to be very mild.
50 to 100 million, but when looking at 2024, we think somewhere between three and 400 million is quite reasonable.
And again, you got to factor in that we're going to have.
Some attrition in loans, so there's going to be some paydowns and payoffs with it but you know I think net growth of $3 million to $400 million is very reasonable and I think all of that is coming from.
Just almost high grading the portfolio, we just have such excellent clients that we're choosing that I think before he lives portfolio is even going to get even better.
We continue to grow so we're very excited about it I think it's an opportunity for us to gain market share in our markets with some of the best clients that are out there.
With you now.
Again $3 million to $400 million in net growth score for 2020 for John do you have anything to add to that.
I mean rates may affect that somewhat to the extent that rates were to continue to go up we'd be at the lower end of that scale that they come back down I think we will see even more opportunities, particularly on the <unk>.
Operator: Question and answer session will follow the formal presentation. If anyone should require operate assistance during the conference, please press star zero on your telephone key page. As a reminder, this conference is being recorded.
Builder side.
Okay perfect.
Helpful color, that's all for me guys. Thanks.
Natalie Hairston: It is now my pleasure to introduce your host, Natalie Hairston. Thank you, Ms. Hairston, you may begin. Thank you, Operator, and good morning, everyone. We appreciate you joining us for the Third Coast Bank Share conference call and webcast to review our third quarter 2023 results.
Thank you Graham.
Thank you.
Question comes from the line of Michael Ross.
James Please go ahead.
Hey, good morning, guys. Thanks for taking my questions just wanted to start on good morning, just wanted to start on.
Natalie Hairston: With me and Bart Caraway, Chairman, President and Chief Executive Officer, John McWordor, Chief Financial Officer, and Audrey Duncan, Chief Credit Officer. First, a few housekeeping items. There will be a replay of today's call and it will be available by webcast on the Investors section of our website at ir.tcbsc.com. There will also be a telephonic replay available until November 3rd, 2023, and more information on how to access these replay features was included in yesterday's earnings release.
The continued negative mix shift in deposits look I know you guys have had really strong deposit growth. It's been it's been a welcome sight see but.
Obviously your deposit costs are are fairly high relative to peer and I think a function of that strong asset growth that you've had but just as we think about the next few quarters are not in a rate environment, where fed rates are kind of at or near a peak.
How should we think about the progression of of deposit cost betas and mixed shift as it relates to.
Natalie Hairston: Please note that the information reported on this call sticks only as of today, October 26, 2023, and therefore you advise that time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. In addition, the comments made by management during this conference may contain forward-looking statements within the meeting of the United States federal security blogs, these forward-looking statements reflect the current views of management. However, various risks and uncertainties and contingencies could cause actual results, performance, or achievements to differ materially from those expressed in the statements made by management.
Kind of the ongoing you know asset.
Thing that who's going to help the margin again this quarter, just trying to kind of frame out the puts and takes as we think about that.
Yield and margin progression into next year. Thanks.
Sure. So so looking at non interest bearing balances first as a percent of total deposits. They have certainly come down.
Having come down so much on an average quarterly basis, our non interest bearing was actually up a little versus last quarter, but you know those deposits are certainly harder to grow one one we have a quarter, where we're growing $240 million in deposits. It's hard for those non interest bearing to keep up so so yeah that is.
Natalie Hairston: The listener or reader is encouraged to read the annual report on Form 10K, that was filed on March 15, 2023, to better understand those risks, uncertainties, and contingencies. The comments made today will also include certain non-gas financial measures, additional details and reconciliation to the most directly comparable gas financial measures, or included in yesterday's earnings release, which can be found on the 3rd Coast website.
Certainly is a negative shift in the mix.
You know.
We will continue growing dollars, but as a percent of total deposits to the extent that we're growing fast that's going to be harder to keep up we're certainly seeing more deposits go into Cds than anybody would have predicted predicted a year ago, but the good news about being relatively high.
Bart Caraway: Now, I would like to turn the call over to 3rd Coast Chairman, President and CEO, Mr. Bart Kleraway. Bart? Thanks, Natalie. Good morning, everyone. Thank you for joining us today.
As far as cost of funds as I think we've already repriced most of the portfolio. We just don't have much left to reprice higher for longer is probably good for our margin I think especially relative to peer.
Bart Caraway: I'll begin by highlighting the company's performance for the 3rd quarter.
John McWordor: John will then provide a more detailed financial review, and Audrey will give a credit update.
Bart Caraway: Then, before we take your questions, I'll return to discuss our outlook. During the 3rd quarter, we achieve significant progress towards our strategy and conservative lung growth, discipline expense management, and strengthening shareholder value. Total assets reach 4.22 billion during the 3rd quarter, an increase of 6.4% over the 3rd quarter, and 19.9% increase over the prior year period. We built over 226 million in high quality loans, an increase of 6.8% sequentially, and 19.7% increase over the 3rd quarter last year. Likewise, deposits reach 3.65 billion, a 7% increase from the linked quarter, and a year-over-year increase of 22.2%.
I just don't think we'll see much change in from an asset liability perspective, we're almost exactly evenly matched our provider for a L. M has said that we are.
Certainly one of the most closely matched banks and their portfolio of several hundred may be singularly the most either so.
If rates stay right, where they are I don't think well see much change in the margin and even if they change a little bit I don't think we'll see much change yeah. You know the numbers coming back a lot of stuff that's going on with banks I think you'll see over time.
Bart Caraway: In response to market conditions, we took some deliberate actions to reduce our operating expenses and other overhead costs, including the previously announced winding down of our auto finance group, as well as a 5% reduction in workforce. As a result, our full-time employee head count now stands at approximately 370, which is consistent with our numbers from the beginning of the year. We have been able to grow the bank by $443 million in that same time frame. During the quarter, we also booked a $2.6 million provision for credit losses primarily driven by strong lung growth for the quarter, which Audrey will discuss in more detail in her prepared remarks.
The positive nodes is between the commercial bankers in <unk>.
Really the Treasury management side is that we're seeing a lot of onboarding.
Counts, we certainly have a lot more full wallet relationships than we've ever had and we're rolling out more sophisticated products and being able to handle more sophisticated treasury customers and they are quite busy on boarding customers with it but they are keeping lower DDA balances because obviously they want.
To earn as much as they can on their money everybody's major money carefully, but we do have a lot of customer acquisition is we're growing so fast as John said percentage wise.
It's tough to keep up but.
Overall, what I would tell you our customer base more than ever.
Bart Caraway: These actions were necessary to position us for the fourth quarter and establish a solid foundation for 2024. Deposit rates remained highly competitive for this quarter, and we were able to increase our deposits by 238 million or 7% from the previous quarter, a notable achievement. Our success in deposit acquisition can be attributed to the deposit campaign contest held across multiple lines of business, including retail, private banking, charging management, and commercial bankers. We were able to raise deposit by an impressive 275 million within a short span of four months.
It tends to have both deposit accounts and loans with message very much full wallet relationships going forward.
Alright, I appreciate all the color. Thanks, and then obviously just on the head count.
Reductions this quarter some of that strategic just as we think about the next year or so I mean are there other other businesses or I know you've got out of it the auto business, but are there other portfolios. Other optimization efforts that you could look to and maybe just on the loan side.
Or are there areas that you're emphasizing versus.
Emphasizing I assume office, where it might be one of those but would just love some color. Thanks.
Bart Caraway: Our bankers' unwavering focus on deposits, coupled with their commitment to building strong relationships with clients, played a crucial role in achieving the speed. This approach, combined with our commitment to providing innovative solutions in the exceptional service, has resulted in success across all our markets. Our insured cash suites and Treasury management services have particularly proven to be innovative solutions contributing to our company's growth.
Yeah, if I could start with just the head count part of it I think we're looking at this and.
And exploring all kinds of efficiencies across every line of business I think everybody in the.
The bank has bought in to the efficiency side as its been.
Very interesting how we can even.
Utilizing cross trained employees for instance, we have some retail.
Bart Caraway: As we progress, we will continue to explore new ways to deepen our relationships with existing customers and attract new ones, all while maintaining our focus on deposits and loans. Additionally, we were able to increase both value and tangible book value per share by 1.4% and 1.5% respectively. By delivering exceptional shareholder value and increasing tangible book value per share, we have made significant progress in enhancing our balance sheet and maintaining a strong financial position in the third quarter. We believe we can continue to drive increased shareholder value and achieve sustainable success long-term.
Employees that volunteered to learn some of the BSA side and with excess capacity they're actually.
Performing some of the BSA AML tasks with it.
And so it's neat that everybody's kind of pitched in in and were finding ways to utilize people to the full list, but at the same time as we continue to grow some functions need more resources.
So it's been we staffed as we are you know we do have to continue to think about where we're going in the future and make sure we're making the proper investments at the same time I think John does a fantastic job of looking at every line of business and monthly.
John McWordor: With that, I'll turn the call over to John for a more detailed financial review. John? Thank you, Bart.
We break that line of business and you know.
John McWordor: Good morning, everyone. We provided the detailed financial cables and yesterday's earnings release. So today, I'll provide some additional color around select balance sheet and profitability metrics for the call. As Bart mentioned, loans were up 226 million, the deposits were up slightly more at 239 million, and total assets reached 4.22 billion, a new, all-new record for the company. Net interest margin for the quarter was down 11 basis points, slightly more than expected, due primarily to higher than expected loans.
All right the existing lines of business that are left are very profitable and we're very pleased with their performance and I think they are getting with scale, even more efficiencies. So I don't see at this point, but there is another line of business to exit as much as we're just everybody is going to grow into their size.
If you look at all of our.
Our different lines of business. They all can scale and become more accretive to us with just even a little bit more growth.
As far as the loan mix I don't know Andre if you want to have any comments.
John McWordor: Spreads on new loans tend to average less than the bank's current net interest margin. Blown growth is expected to be less than the fourth quarter, which should result in less margin pressure. Additionally, the bank has a $100 million treasury security, maturing in October, yielding 2.25%. If the proceeds were used to pay down wholesale funding, the net interest margin would improve 2-3 basis. Sports. We therefore believe that for the fourth quarter, the net interest margin will be down less than five basis points.
As far as what what we're not looking at I would say.
You know you mentioned office of course, our office is holding up really well.
Only have one loan that's classified for $1 million then we're not we're not looking at office I would say not looking in retail.
And don't.
Can't give much wouldn't wouldn't really entertain much multifamily at this time really focusing on C&I and you know that's full wallet relationships that we've been talking about.
John McWordor: Non-interest expense was materially higher than expected due to several non-recurring items, including severance expenses, broad losses, and legal fees associated with those items. As previously mentioned, severance expense total is $460,000. We reduced headcount to roughly where we started the year, and as a result, we expect fourth quarter salary and benefit expense to be less than 16 months. All other non-interest expenses were up 1.35 million in the third quarter versus the second quarter.
Makes sense.
John maybe just one final one for me just the.
The loss in other noninterest income sorry, if I missed it in the release, but kind of what what drove that was there something nonrecurring in there just just would love an explanation.
Well it is nonrecurring.
You're talking about the one crore loss will not win in other non interest income we had a unfavorable swing quarter to quarter end.
Some of that is a little bit of a swap between quarters there Michael on M. S. P. I see I mean weekend and we have several SB IC investments in some quarters they make money in other quarters. They don't so most of it was related to Spi C. Having a great quarter last quarter.
John McWordor: This increase was primarily due to the broad losses and legal fees as previously mentioned. Even though net interest margin was down 11 basis points for the quarter, net interest income was up 1.2 million to 35.3 million due to strong loans. We have shown consistent growth in net interest income since going public in the fourth quarter of 2021 when our net interest income was only 24.6 million. Third quarter performance also resulted in increases in both low value per share, which reached 24.57 and tangible low value per share, which reached $23.17.
Actually losing a little money this quarter, which we.
We don't have big investments there, it's usually not material enough to change a line item, but it just happened to be this quarter.
Understood.
All the color thanks for taking my question.
But Michael I, just might add one thing on that the Spi CS I mean, they they don't often have in quarters, where they're selling an asset at a loss that we're needing to realize so I certainly wouldn't expect that going forward, we didnt pointed out.
John McWordor: This is up 11% or 223 from $20.94 since going public in 2021. This compares very favorably to our peers who over the same period saw an average decrease in tangible low value of 9.3%. Also as a reminder, we used the if converted method to calculate earnings per share. For the third quarter, this resulted in anti-delusion, and therefore the preferred shares were excluded from our deluded share count. We expect this to flip back in the fourth quarter.
Because.
I mean, I don't guess sure would typically take out something like that I mean, we didn't highlight it last quarter that they had a good quarter or it's just kind of one of those could be things that went from good to bad over consecutive quarters and it was I don't know to the kids into this.
And then 250000, good last quarter and down to 15, I mean, it was a swing candidates that sort of magnitude.
Audrey Duncan: Back in place, the financial review and at this point, I'll pass the call to Audrey for a credit quality review. Thank you, John.
Yeah.
Audrey Duncan: Good morning, everyone. Third coast credit performance for the third quarter was again strong. Our total non-performing assets currently stand at 16.4 million, which is 0.39% of total assets. And our net charge assets stayed extremely low at 24,000 for the quarter. The $6.4 million increase in non-performing loans is primarily due to the placement of a $2.3 million loan on not a cruel and a $2 million loan that was over 90 days matured and still accruing.
Thank you.
Next question comes from the line of pornography <unk> with Deutsche Bank. Please go ahead.
Hey, guys. Good morning, I'm, John heard your comments on the drivers of the lower NIM than expected given the loan spread dynamics you know what kind of spreads are you putting on sort of the new loans versus the portfolio average.
What are your expectations on loan spreads from here.
Yeah. So you know our margin is relatively high compared to peers, but our spreads are probably much closer we're competing for deals every day I mean, the the reason our margin is better is because we don't have the Aoc.
Audrey Duncan: Both loans are well secured and their losses are anticipated. In October of 2023, the $2 million loan was renewed in its current. The remaining loans placed on non-correl this quarter consist of two relationships totaling $2 million. And minimal losses are expected as those loans are worked out. The remaining loans that are over 90 days pass due at quarter end are well secured and in the process of renewal. Overall, we remain confident in our asset quality, which continues to remain strong.
I losses, we don't have the legacy investment portfolio, that's relatively low yielding.
For new business going forward as we're looking at it I mean, we typically won't do a deal that is less than fed funds plus 300, so with fed funds today are so for what however, you want to look at it as five in a quarter. We typically don't do a deal for less than eight in a quarter. Today. There you know there there could be some exceptions.
Audrey Duncan: Provisions for credit losses totaled $2.6 million and related to provisioning for new loans and commitments. The ACL remains at the high end of the range calculated under the new seafood methodology. Consisted with our prior quarters, loan growth of $226 million continues to be well diversified from a loan category standpoint. Commercial loans were at $123.7 million and real estate loans were at $106 million from the previous quarter. The loan portfolio mix is well balanced with commercial and industrial loans accounting for 36% of total loans and owner occupied and non-owner occupied commercial real estate at 15% and 16% respectively.
To that but for the larger floating rate deals there are typically 300 over sofa.
And I think I would add just that you know the close.
Flight quality in our chance to get some of these really high quality deals. The margin is a little less whenever you're you're talking about a customer that could basically take anything they wanted to go with.
Unfortunately been able to get those type customers. It is a little thinner margin, but it's also there.
<unk> deal. So obviously, there's always tradeoffs that we've tried to manage.
Got it and then just on the <unk>.
Auto finance exit I think last quarter you noted.
That you would expect something like direct expense savings would be 500000 plus.
Audrey Duncan: Non-owner occupied office represents 1.8% of the loan portfolio with non-owner occupied medical office accounting for an additional 1.3% while owner occupied office and medical office total 2.3% of total loans. The office portfolio generally consists of class B with some owner occupied class C space and is all located within our Texas footprint. Performance for the quarter is a testament to our solid business model and our commitment to prudent risk management. We are pleased to see continued loan growth across the diverse range of loan categories, which further strengthen our position in the market.
And you're reallocating 50 million of loans into more strategic areas of focus is that still kind of like the same thought process there any any updates.
Yeah.
The team.
Has been disbanded at this point that portfolio was paying down I don't have the numbers right, but it's way less than $50 million.
And Bernie that effective September 30, or so we really haven't seen any of the savings there, particularly on the salary side nor on the loan side, we had certainly stopped doing that last quarter end.
I think that portfolio has about a four year weighted average life. So it pays down several million dollars or so a month and we're reallocating those proceeds to other loans, but the direct effects are.
Audrey Duncan: At the same time, we're mindful of the potential risks that may arise from the changing economic environment. We will continue to closely monitor our credit quality and continue to be conservative in our lending practices to maintain our strong credit performance. Overall, we are confident in our ability to navigate the current economic landscape and stay committed to delivering conservative loan growth.
We didn't see any of it in the third quarter, we will see we'll see more in the four.
Not not super material, but every little bit adds up we're certainly looking at everything.
Okay, great. Thanks, so much.
Thank you.
Before we take the next question a reminder to all the participants that do my star one to ask a question.
Bart Caraway: With that, I'll turn the call back to Bart. Thanks, Alder.
Next question comes from the line of Matt Olney with Stephens, Inc. Please go ahead.
Bart Caraway: As we move into the fourth quarter and end of year, we are confident in our goal to achieve operating leverage, which will translate into a free shareholder value. We will maintain an active focus on managing expenses by carefully analyzing our budget and identifying areas where we can reduce costs without sacrificing customer quality or operational efficiencies. At the same time, we will continue to invest in key areas of our business that are critical to our future growth.
Hi, Thanks, Good morning won't want to go back to the discussion around the margin and John you mentioned the spreads on some of the more recent loan growth.
The commentary there any other color about how those spreads have changed during the course of the year had those maintained similar levels or any kind of wanting that you've seen this year so far.
Yeah.
Bart Caraway: Our commitment to full wallet relationships banking remains a top priority. We will continue to leverage our church remanagement and other services, deepen existing customer relationships and attract new ones. In addition, our innovative custom digital solutions, such as banking as a service and embedded finance platforms, will play a larger role in 2024. We have successfully transitioned from the proof of concept stage to fully operational with five partnerships. Our bankers and branches are strategically located in Texas's best markets, providing access to some of the highest quality deals available, allowing us to remain conservative in our deal approach and choose the most promising opportunities.
Yeah.
BARDA Audrey certainly jump in and I don't think they have changed that much I think I mean.
The bigger commercial corporate type loans I think we're in that so for plus 300 range. We do see deals that are at plus 200, but we're typically just not doing that I think we've commented before that we could be growing faster. If we were willing to do those but we're mindful of our capital.
Positions and our liquidity position.
Not often doing things that are.
Certainly in the low twos, I mean, there might be occasion, we'll deal with it.
Plus $2 50, or $2 75, but those are kind of more of the exception than the rule or.
Bart Caraway: Looking ahead, we will remain optimistic about our ability to continue to grow our business. We will continue to prioritize asset quality and make prudent and proactive decisions relative to the current economic environment. Our dedicate team is committed to delivering essential service to our customers and creating long-term value for our shareholders. And we are confident that our growth strategy will enable us to navigate the challenges and opportunities that lie ahead.
<unk> talked that we've been very disciplined about trying to make sure we have kind of a spread there but.
Sure.
They are deals that had a story behind them that makes a lot of sense for us to do and certainly.
Once that I would choose to do it.
All over again with it because they're good quality customers and there's a reason that we're doing it. So I think from the from the bone selection I think we've been very selective and disciplined I think that's why I continue to say so the exceptions are typically at least partially self up exactly.
Bart Caraway: This concludes our prepared remarks on a lap.
Operator: Now I'd like to turn the call back over to the operator to begin the question answer session. Operator? Thank you.
And they have the highest rated credits that would be a high pass otherwise we.
Operator: We will now be conducting a question and answer session. If you would like to ask a question please press star 1 on your telephone keypad. A confirmation tone will indicate your line isn't a question cue. You would like to remove your questions from the cue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions.
You know make sure we don't know.
Yeah, and even with that I think we're seeing a lot of you know.
Loan opportunities and maybe we do one about every 10 or something.
The market out there.
Obviously, there's a lot more loan demand than there is matte lipstick in front of it so it would be.
The C Cherry pick really good customers.
And I think we will continue to be just that discipline as we go forward with it.
Graham Dick: The first question comes on the line of Graham Dick with Piper Sandler, Peace go ahead. Hey everyone, good morning. Morning Graham.
Okay. Thanks for the commentary and then.
I guess the.
As far as the incremental cost of funds that you're using to fund the loan growth. If we blend the growth the dollar amount growth of N I b, along with the interest bearing deposits, what's the what's the incremental cost of total deposits that you've seen more recently.
John McWordor: So I just wanted to, wanted to start on expenses. You've got the 460,000 in severance, 400,000 in fraud losses. And then you mentioned another legal charge. What was the size of that legal charge like this quarter? Yeah, we didn't detail out the legal expenses. I mean, you know, any time you have a reduction in force there's legal fees associated with agreements to the employees. We didn't detail that out just because, you know, we always have lots of legal fees, but it was somewhat material.
Yeah.
Yeah. So so for this last quarter when we had the deposit campaign that really span. The last two quarters are our cost of funds for those deposits was all that I've seen what was less than 5% wholesale deposits that we're needing to raise to make up the difference is.
John McWordor: It was certainly not. Okay. Yeah, I'm just trying to get a sense for where maybe the growth came off of the, I think we had talked about, you know, 24 million give or take last quarter. So just trying to get a sense for what drove the higher expense basis quarter was it was it the deposit competition you guys were talking about or was it related to the loan growth, which was really strong this quarter just trying to any color there would be, would be helpful.
Probably more in the 535 30 range, it's hard for us to predict what the mix is going to be going forward as you know our self generated core deposits versus what it is.
Needed on a wholesale basis to make up the difference but.
Self generated you know its probably averaging in the four and a half range and then the wholesale and the five.
John McWordor: Yeah, I mean there were some incentives related to the deposit campaign, where we were paying out prizes to people, you know, there were bonuses earned during the quarter, but you know, I think probably the important number is where do we think the fourth quarter will be, and I'm pretty confident that it'll be less than 16 million dollars in total salary expense, and total non-interest expense, we think it'll be less than 26 million. Okay. Okay, that's helpful.
130 range.
Okay.
Well I, if I kind of take that and think about the margin are in 2020 for it it feels like there's a little bit more incremental pressure beyond the fourth quarter. We talked about you just if we assume that spread.
Spreads continue is that the right way to think about the margin for next year little incremental pressure from the fourth quarter.
It is it if we would have grown loans of $100 million in the third quarter. I think we would have been pretty close to our forecast of the margin being down plus five. So so it is certainly a function of how fast we grow now with that said if we grow 300 million next year, it's certainly a smaller percent of the overall balance sheet.
Graham Dick: Okay, and then I guess looking into 2024, I mean, there's, what's the, what's the, it sounds like you guys are focused on expense management, but obviously you're still a growing bank, having to invest, where needed, what's your all's outlook for expense growth as you begin to budget for 2024? Yeah, that's a good question. I mean, we certainly talk about it a lot, and you know, on the on the loan side, on the growth side, we've you know, for the last couple of years talked about growth being lumpy, that it makes it hard to predict.
It won't affect the margin as much as it would happen this year, but.
You know it was going to be less than 371 on average the spreads for new business.
Yeah.
Okay, Yeah that makes sense and then just lastly capital can you talk more about just capital constraints.
Graham Dick: We certainly weren't expecting 225 million in loan growth for the quarter, and it's not as if all of those deals were sourced, and approved, and booked all in the quarter, some of them were carried over from previous quarters, and you know, the same sorts of things will happen on expenses, and that's kind of what happened this. Catch-up on expenses that we weren't expecting. But looking ahead to next year, our plan is to be disciplined.
Binding ratios that you're that you're watching for us, especially in light.
If the pipelines do improve in loan growth at the higher end and just kind of what kind of capital ratios are you watching closely.
Yes, so there is.
Our risk based capital ratio was flat quarter versus quarter end and that's the one that we watch most closely is a is a high loan to deposit ratio bag, but.
As long as we're earning in that 1% ROA range is going to be it should be capital accretive and we may not be exactly there this next quarter, but.
Graham Dick: We're trying to grow revenues faster than expenses. I think we've done a pretty good job with that in the past. And I think we will get next year. So, if we think that net interest income is going to continue to grow in that 10 to 15% range, expenses will be less than that. So, there'll be in the 5 to 10%. Yeah, Graham, in fact, that little color to it. Again, I think we're in the process as we've grown and we're allocating resources internally to be more efficient.
Certainly that's our bare minimum goal and we expect to be there and again it'll be capital accretive. So we are not planning any capital Burns.
In 2024, we should be.
Capital accretive we're self funding basically is what the goal is.
I feel pretty good about dumping and therefore, we don't need capital.
Graham Dick: And I think you can see that from, if you look at our headcounts, not just the expensive, but just the headcount, you know, we started the year at 369 employees. You know, we've probably got a little head up to, you know, 390 or so employees. Now we're back down to about 370. And we've grown 443 million. So what you're seeing is we're kind of managing, you know, the employee headcount to still continue to grow.
Yes.
So what you're saying is I think that that threshold to.
Our internal engineering enough capital.
The way it needed to be pretty close to 1% to get there is that is that right.
At the rate that we have been growing this year, yes, and we expect our growth to be a little bit slower next year. So it would have to be in the 1% to be self generating but thats. The 1% is certainly the way we were looking at this year and I think our growth is 20 plus percent. So you know as we go down to 12 or 15%.
Graham Dick: And this whole process has been what we've talked about before is that we've got to grow into a little bit of the operating efficiency as well as cut costs. And I think the 226 million coming in third quarter is actually fortuitous because I think the fourth quarter will be slower, but it tees up the opportunity for us to grow a little bit into our operating efficiency, control or headcount and also have an increase in revenue that's going to affect the bottom line.
Next year, it'll take a little bit less to get to the same place.
Yep Okay.
And just just one more I guess for Audrey I think Audrey mentioned there were two loans that were thank you said there were being worked out currently any prepared remarks, what's the timeline on the resolution is that a near term fourth quarter event or could that move into the next year.
Hmm.
Bart Caraway: And I think the fourth quarter is going to look a lot better and certainly going to tees up for a good 2024. Okay, that's a very helpful part.
Probably I would say.
So next year, but not.
Probably in first quarter I think.
Graham Dick: And then I guess you touched on a little bit there, but the loan growth outlook, you know, obviously, as you guys said, some unexpected stuff happened. You know, things got pulled forward to this quarter. What do you guys think for next year on loan growth? I think this year before this quarter, we had talked about maybe 300 or 400 million in growth for the full year. Can you frame up what you expect in 2020?
Okay, and how would you characterize or.
Describe the collateral on some of those loans relative to the cost per se yet.
So the the increase in non accruals we had four.
$4 million increase one of them is a $2.3 million.
Stackhouse and L. T V brand, new appraisal of 64% it's in a great location.
Graham Dick: Do you think it'll be a little bit less than that as the economy cools down? Are you still seeing pretty good opportunities on the lending side to do something similar? Yeah, I mean, I think what the nice thing the position we're in is we've had some really high quality customers that we have been onboarding. And it's just a unique market in that we can be very cheesy. And so it's been very nice to be able to pull, you know, high quality customers from some of the competitors and established relationships.
New construction so it's.
We're not anticipating a loss on that and that was done in our community bank vertical.
And then we also Canada.
Small builder in southeast, Texas that we've done.
Honestly, nearly 100 small homes wearing them overnight.
Past eight to 10 years and we've got a.
A couple that relationship is one 1 million that we put on non accrual.
Graham Dick: So with that, I mean, you'll still continue to see some growth. So I think for the, you know, fourth quarter, the growth is going to be very mild, 50 to 100 million. But when looking at 2024, we think somewhere between 300 and 400 million is quite reasonable. And again, you got a factor in that we're going to have, you know, some attrition and loans. There's going to be some pay downs and payoffs with it.
Mm three houses and then a couple of smaller <unk>.
And I have $160000 specific reserve on that relationship that's our estimate at this point so no not significant and then the third non accrual with a 900000 dollar.
Graham Dick: But, you know, I think net growth of three to 400 million is very reasonable. And I think all of that is coming from just almost high grading the portfolio. We just have such excellent clients that we're choosing that I think for those portfolios, even going to get even better as we continue to grow. So we're very excited about it. I think it's an opportunity for us to gain market share in our markets with some of the best clients that are out there with, you know. Call it again, three to four hundred million in net growth for 2024.
Borrowing base line of credit we have a very strong guarantor of a separate income.
So we're not anticipating a loss in the specific reserves on that either and then on those past dues. They can't they typically you don't see estimate.
Over 90 days past due.
And still it currently we had a $2 million.
<unk>.
This quarter, but it is clear it is when do you Didnt current and it's not a credit problem.
It's also an <unk>.
Real estate deal with an LTV in the 16% range and then just two other smaller ones that are in the process of renewal and those aren't credit concerns either.
John McWordor: John, do you have anything to add to it? I mean, rates may affect that someone to the extent that rates were to continue to go up. We'd be at the lower end of that scale. If they come back down, I think we'll see even more opportunities, particularly on the builder side.
Yeah.
Okay got it I.
Appreciate all the Colorado and thanks to everybody and thank you.
Graham Dick: Okay, perfect, that's really helpful, Collier. That's all for me guys. Thanks. Thank you, Graham. Thank you.
Thanks Ben.
Thank you.
There are no further questions at this time I would like to turn the floor back over to Bob for closing comments.
Michael Ross: Next question comes on the line of Michael Ross with Raymond James, please go ahead. Hey, good morning, guys. Thanks for taking my questions.
Yeah, I just want to thank you wearing cheaper or.
Michael Ross: Just wanted to start on morning. Just wanted to start on, you know, kind of the continued, you know, negative mix shift in deposits. Look, I know you guys have had really strong deposit growth. It's been a welcome sight to see. But you know, obviously you're deposit growth. The costs are fairly high relative to peer. And I think a function of that is just a strong, you know, asset growth that you've had.
Taken care of as an operator I want to thank everybody else for joining us and your continued support and to anticipate chairs and we look forward to speaking next quarter. Thank you have a good evening.
Thank you.
Todays teleconference. You may disconnect your lines at this time, thank you for your participation.
[music].
Michael Ross: But just as we think about the next, you know, few quarters in a rate environment where fed rates are kind of at or near peak, you know, how should we think about the progression of deposit cost betas and, you know, mix shift is a relates to, you know, kind of the ongoing, you know, asset, you know, repricing that is going to help the margin again this quarter. Just trying to kind of frame up the puts and takes. We think about yield and margin progression in the next year. Thanks.
Okay.
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John McWordor: Sure. So, so looking at non interest bearing balances first as a percentage of total deposits, they've certainly come down. The dollars had to come down so much on an average quarterly basis, our non interest bearing was actually up a little versus last quarter. But, you know, those deposits are certainly harder to grow when we have a quarter where we're growing, you know, 240 million deposits, it's hard for those non interest bearing to keep up.
Yeah.
Oh.
[music].
John McWordor: So, so yeah, that certainly is a negative shift in the mix. And, you know, we will continue growing dollars, but as a percent of total deposits to the extent that we're growing fast, that's going to be harder to keep up. We're certainly seeing more deposits go into CNAs than, you know, anybody would have predicted predicted a year ago, but the good news about being relatively high as far as cost of funds is I think we've already repriced most of the portfolio.
Oh.
[music].
Okay.
Okay.
Okay.
Okay.
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John McWordor: We just don't have much left to reprise higher for longer is probably good for our margin. I think it's especially relative to peer. I just don't think we'll see much change and from an asset liability perspective, we're almost exactly evenly matched our provider for ALM has said that we're, you know, certainly one of the most closely matched banks in their portfolio of several hundred maybe singularly the most even that. So, I mean, we're afraid to stay right where they are.
Okay.
[music].
John McWordor: I don't think we'll see much change in the margin and even if they change a little bit, I don't think we'll see much change. Yeah, you know, the numbers kind of ask a lot of stuff that's going on in the bank that I think you'll see over time and one of the positive notes is between the commercial bankers and, you know, really treasured management side is that we're seeing a lot of onboarding of accounts.
John McWordor: We certainly have a lot more full wallet relationships and we've ever had and we're rolling out more sophisticated products and we have a handle more sophisticated treasury customers and they're quite busy onboarding customers with it, you know, but they're keeping lower DDA balances because obviously they want to earn, you know, as much as they can on their money, everybody's managing money carefully, but we do have a lot of customer acquisition. We're going so fast.
John McWordor: John said the percentage wise, it's tough to keep up, but, you know, overall, we'll tell you our customer base more than ever tends to have both deposit accounts and loads with us. There's very much of full wallet relationships going forward.
Bart Caraway: Hi, I appreciate all the other color of the thanks.
Michael Ross: And then, you know, obviously just on the head count reductions this course, some of that strategic, just as we think about the next, you know, you're so, I mean, are there other other businesses or, you know, you got out of the auto business, but are there other portfolios, other optimization efforts that you could look to and maybe just on the loan side, you know, are there areas that you're emphasizing versus, you know, kind of the emphasizing, I assume, some officers might be one of those, but we just lost some color. Thanks.
Michael Ross: Yeah, I mean, I think it's start with just the head count part of it. I think we're looking at this and exploring all kinds of efficiencies across every line of business. I think everybody in the bank have fallen into the efficiency side of it. It's been very interesting how we can even utilize across trained employees. For instance, we have some retail employees that volunteered to learn some of the BSA side and with excess capacity, they're actually, you know, performing some of the BSA and L tasks with it.
Michael Ross: And so it's neat that everybody's kind of pitched in and refining ways that utilize people to their fullest. At the same time, that we continue to grow, you know, some functions need, you know, more resources. And so it's been with staff as we are, you know, we do have to continue to think about where we're going in the future and make sure we're making proper investments. At the same time, I think John does a fantastic job of looking at every line of business and monthly, you know, we grade that line of business.
Michael Ross: And, you know, the existing ones that are left are very profitable and we're very pleased with their performance and I think they're getting with scale even more efficiency. So I don't hate this point, but there's another line of business to exit as much as we're just everybody's going to grow into their size. You know, I think if you look at all of our, our different lines of business, they all can scale and become more accrued to us with just, you know, even a little bit more growth.
Michael Ross: As far as the moon mix, I don't know, Audrey, if you want to have any comments. As far as what we're not looking at, I would say, you know, you mentioned office, of course, our office is holding up really well. We only have one loan that's classified for a million dollars, but we're not, we're not looking in office, I would say not looking in retail. And don't do much, wouldn't, wouldn't really entertain much multi family at this time. Really focusing on C and I and, you know, the full wall of relationships that we've been talking about. Makes sense.
John McWordor: And John, maybe just one final one for me, just the, the, the loss in other non instant come. Sorry if I missed it in the release, but kind of what, what drove that was there, you know, something that's not recurring in there, just, just would love an explanation. Thanks. What is on recurring, I don't know, I mean, you talk about that one fall loss. Well, no, and in other non in child income, we had a unfavorable swing quarter to quarter and some of that is a little bit of a swap between quarters.
John McWordor: They're Michael on an SBIC. I mean, we can, we have several SBIC investments and some quarters, they make money in other quarters. They don't, so most of it was related to SBIC having a great quarter last quarter and actually losing a little money this quarter, which we don't have big investment fair. It's usually not material enough to change a line item, but it just happened to be this quarter. I just might add one thing on that.
John McWordor: The SBICs, I mean, they don't often have orders or they're selling an asset at a loss that we're needing to realize. So I certainly wouldn't expect that going forward. We didn't point it out because I mean, I don't guess y'all would typically take out something like that. I mean, we didn't highlight a last quarter that they had a good quarter, she's kind of one of those spooky things that went from good to bad over consecutive quarters. And it was, I don't know, 250,000 good last quarter and down to 50. I mean, it was a swing kind of that sort of magnitude. Thank you.
Bernard Gizycki: Next question comes on the line of Bernard Wendt Gizycki with Deutsche Bank, please go ahead. Hey guys, good morning. John, heard your comments on the drivers of the lower NIMM than expected given the loan spread dynamics. You know, what kind of spread that you're putting on to the new loans versus the portfolio average. And you know, what are your expectations on loan spreads from here? Yeah. So, you know, our margin is, you know, relatively high compared to peers, but our spreads are probably much closer we're competing for for deals every day.
Bernard Gizycki: I mean, the reason our margin is better is because we don't have the AOC eye losses, we don't have the legacy investment portfolio that's relatively low yielding. But for new business going forward as we're looking at it, I mean, we typically won't do a deal that is less than that funds plus 300. So with that funds today or so far, what however you want to look at it is five and a quarter, we typically don't do a deal for less than eight and a quarter today.
Bernard Gizycki: You know, there could be some exceptions to that, but for the larger floating rate deals, they're typically 300 over so far. And I think about that, just that, you know, with the flight quality and our chance to get some of these really high quality deals, the margin is a little less whenever you're, you're talking about, you know, a customer that could basically take any kind they want it to get with. Unfortunately, didn't get those type of customers, it is a little bit of margin, but it's also a very quality deal, so obviously there's always trade off that we try to manage.
Bernard Gizycki: Got it. And then just on the auto finance exit, I think last quarter you noted that you'd expect me like direct expense savings would be 500,000 plus. And you were reallocating 50 million of loans with some more strategic areas of focus, is that still kind of like the same thought process there and the updates. Yeah, I mean, the team has been disbanded at this point that portfolio was paying down, I don't have the numbers, but it's way less than 50 million.
Bernard Gizycki: Yeah, and burning that effective September 30th, so we really haven't seen any of the savings there, yeah, particularly on the salary side. No, on the loan side, we had certainly stopped doing that last quarter and, you know, I think that portfolio has about a four year weighted average life, so it pays down several million dollars a month and we're reallocating, you know, those proceeds to other loans, but the direct effects are.
Bernard Gizycki: We didn't see any of it in the third quarter. We'll see more in the fourth. Not super material, but every little bit adds up. We're certainly looking at everything. Okay, great. Thanks so much. Thank you. Before we take the next question, a reminder to all the participants that you might press star and want to ask a question.
Bernard Gizycki: Next question comes on the line of Matt Olney with Steven Nink, please go ahead. Hey, thanks. Good morning. Want to go back to the discussion around the margin. And John, you mentioned the spreads on some of the more recent long growth. Appreciate the commentary there. Any other color about how those spreads have changed during the course of the year? Have those maintained similar levels or any kind of widen that you've seen this year so far?
Bernard Gizycki: I mean, Bart Audrey, I mean, certainly jump in. I don't think they have changed that much. I think we've, you know, for the bigger commercial corporate type of levels, I think we're in that so for plus 300 range. We do see deals that are, you know, plus 200, but we're typically just not doing that. I think we've commented the whole way that we could be growing faster. If we were willing to do those, but we're mindful of our capital.
Bernard Gizycki: All positions in our liquidity position and are, you know, not often doing things that are certainly in the low to I mean, there may be occasional deal with, you know, plus 250 or 275, but those are kind of more the exception and the rule. Yeah, I mean, Audrey and I pop it. We've been very disciplined about trying to make sure we have kind of the 200 spread. They're going to be their deals that had a story behind them that makes a lot of sense for us to do.
Bernard Gizycki: And, you know, certainly once that I would choose to do it, you know, all over again with it because they're good quality customers and there's a reason that we're doing it. And so I think from the loan selection, I think we've been very selective in discipline. I think that's one to say the exceptions are typically at least partially self up exactly. And they're the higher credit credits. They be a high pass.
Bernard Gizycki: Otherwise, we, you know, make sure we don't go over those important communities. And yeah, and even with that, I think we are seeing a lot of, you know, loan opportunities. And, you know, maybe we did one out of every 10 or something. I mean, it is the market out there. Obviously, there's a lot more loan demand than there is. So, you know, we've been able to see cherry pick really good customers. And, and I think we'll continue to be just that discipline that's going to be forward with it.
John McWordor: Okay. Thanks for commentary. And then I guess the as far as the incremental cost of funds that you're using to the fund the long growth. If we blend the growth, the dollar amount growth of the NIBs along with the industry and deposits, what's the incremental cost of the total deposits that you've seen more recently? Kelly. Yeah, so for this last quarter when we had the deposit campaign, and it really spanned the last two quarters, our cost of funds for those deposits was less than five percent, wholesale deposits that were leading to raise to make up the difference, if probably more in the 530, 530 range.
John McWordor: You know, it's hard for us to predict what the mix is going to be going forward as to, you know, our self-generated core deposits versus, you know, what is needed on a wholesale basis to make up the difference. But, you know, self-generated, you know, it's probably averaging in the four and a half range and then the wholesale and the 530 range. Okay. Well, if I kind of take that and think about the margin in 2024, it feels like there's a little bit more incremental pressure beyond the fourth quarter we talked about, just if we assume those spreads continue.
John McWordor: Is that the right way I think about the margin for next year's little incremental pressure from the fourth quarter? It is. If we would have grown loans 100 million in the third quarter, I think we would have been pretty close to our forecast of the margin being down plus five. So, so it is certainly a function of how fast we grow. Now, with that said, if we grow 300 million next year, it's certainly a smaller percent of the overall balance sheet, so it won't affect the margin as much as it would have this year, but it's, you know, it's going to be less than 371 on average.
John McWordor: The spreads for new business. Okay. Yep. That makes sense. And then just lastly, capital. Can you talk more about just capital constraints finding ratios that you're that you're watching for, especially in LIDA. If the pipelines do improve the long growths at the higher end, just kind of what kind of capital ratios are you watching closely? Yes, but there's, you know, our respect capital ratio was flat quarter versus quarter and that's the one that we watch most closely is as a high loan deposit ratio back.
John McWordor: But, you know, as long as we're earning in that 1% RLA range, it's going to be, it should be capital of creative. And, you know, we may not be exactly there this next quarter, but, you know, certainly that's our bare minimum goal and we expect to be there. And again, it'll be capital of creative, so we're not planning any capital. Yeah, and I think in 2020, we should be, you know, capital created to where, you know, self funding basically is what the goal is.
John McWordor: John, I thought we're good about not being there, but we don't need capital. Yes. So, what you're saying is I think that that threshold to internal engineering of capital, the RLA needs to be pretty close to 1% to get there. Is that right? At the rate that we have been growing this year, yes, and we expect our growth rate to be a little bit slower next year. So, it wouldn't have to be the 1% to be self generating, but that's the 1% and certainly the way we were looking at it this year, and I think our growth is 20 plus percent. So, you know, as we go down to 12 or 15% growth next year, it'll take a little bit less to get to the same point. Yeah, okay.
Audrey Duncan: And just just one more I guess for Audrey, I think Audrey mentioned there were two loans that were, I think you said there are being worked out currently. Any prepared remarks. What's the timeline on the resolution? Is that a near term fourth quarter of an or could that move into into next year? Probably, I would say in to next year, but not probably in first quarter, I think. Okay, and how would you characterize or describe the collateral on some of those loans relative to the cost.
Audrey Duncan: Okay, yep. So the increase in non accrual, we had $4 million increased. One of them is a $2.3 million spec house and the OTV brand new appraisal is 64% it's in a great location in a new construction. So it's, we're not anticipating a loss on that. That was done in our community bank article. And then we also had a small builder in Southeast Texas that we've done. Honestly, nearly 100 small homes for him over the past 8 to 10 years and we've got a couple that that relationship is 1.1 million that we put on non accrual.
Audrey Duncan: Three houses, and then a couple smaller loans. I have $160,000 specific reserve on that relationship that's are estimated at this point. So not significant. And then the third non accrual with a $900,000 borrowing base line of credit. We have a very strong guarantee with separate income on that. So we're not anticipating a loss in those specific reserves on that either. And then on those past news, we typically typically you don't see us with over 90 days past due and still occurring.
Audrey Duncan: We had a $2 million loan. This quarter, but it is clear. It is renewed and current and it's not a credit problem. It's also a real estate deal with an LTV in the 60% range. And then just two other smaller loans that are in the process of renewal and those aren't credit concerns either. Okay, got it. Appreciate all the color Audrey and and thanks to everybody and thank you. Thanks. Thank you.
Operator: There are no further questions at this time.
Bart Caraway: I would like to turn the floor back over to Bart Kelly for closing comments. Now, I just want to thank you for for taking care of us as an operator. I want to thank everybody else for joining us and your team's 40, 30th thanks shares. And we look forward to speaking to you next quarter. Thank you. Have a good evening. Thank you.
Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.