Q3 2024 Hilltop Holdings Inc Earnings Call
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Speaker Change: Good day, everyone and welcome to today's hilltop Holding's third quarter 'twenty 'twenty four earnings conference call and webcast. At this time all participants are in a listen only mode. Later, you will have the opportunity to ask questions. During the question and answer session.
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Speaker Change: Please note. This call is being recorded and I will be standing by if you should need any assistance and it's now my pleasure to turn the conference over to Matt done.
Matt done: Thank you before we get started please note that certain statements. During today's presentation that are not statements of historical fact, including statements concerning such items as our outlook isn't a strategy future plans financial condition credit risks and credit trends and credit allowance for credit losses.
This liquidity and sources of funding.
Matt done: Costs dividends and impacts of interest rate changes as well as such other items referenced in the practice of our presentation are forward looking statements.
Matt done: These statements are based on management's current expectations concerning future events that by their nature are subject to risks and uncertainties.
Matt done: Actual results capital liquidity financial condition may differ materially from these statements due to a variety of factors, including the precautionary statements referenced in the practice of our presentation and that was included in our most recent annual and quarterly reports filed with the SEC.
Matt done: Please note that the information presented is preliminary and based upon data available at this time.
Matt done: To the extent required by law, we expressly disclaim any obligation to update earlier statements as a result of new information.
Italy. This presentation includes certain non-GAAP measures, including tangible common equity and tangible book value per share.
Matt done: A reconciliation of these measures to the nearest GAAP measure maybe found in the appendix to this presentation, which is posted on our website at IR hilltop Dot com.
Speaker Change: I will now turn the presentation over to hilltop, President and CEO Jeremy Ford.
Jeremy Ford: Thank you, Matt and good morning.
Jeremy Ford: For the third quarter Hilltop reported net income of approximately $30 million or <unk> 46 cents per diluted share.
Jeremy Ford: Return on average assets for the period was <unk>, 8% and return on average equity was five 5%.
Favorable operating results from the banking and broker dealer business units helped to produce a quarter over quarter increase in pre provision net revenue and net income.
Maintaining the balance between our consolidated earnings profile and strong liquidity position hilltop realized a quarter over quarter improvement in net interest income primarily due to our growth in average earning assets.
Jeremy Ford: No consolidated net interest margin at hilltop and net interest margin at the bank did experience modest compression in the quarter we.
Jeremy Ford: We will comment further on the bank's NIM later in our prepared remarks.
Jeremy Ford: During the quarter Plains capital Bank generated $48 million of pre tax income on $12 $8 billion of average assets, representing a return on average assets of 1.14%.
Jeremy Ford: Average loans at the bank declined by $40 million in the quarter, primarily due to elevated levels of loan pay offs and a lower pull through rate on the bank's loan pipeline from heightened competition across our footprint.
Jeremy Ford: However, as borrowers expectations of declining interest rates grew the bank saw an increase in client activity throughout the quarter and a corresponding growth in our loan pipeline.
Jeremy Ford: We expect it will take several quarters for increased borrower activity to materialize into an increase in funded loans held for investment.
Jeremy Ford: Yeah.
Our average deposit balances increased by 1% during the quarter, which was driven by an increase in core interest bearing deposits for the third straight quarter.
This growth was partially offset by a modest decline in noninterest bearing deposits.
Jeremy Ford: Results in the quarter at Plains Capital Bank included a reversal of credit losses of one $4 million. This recapture primarily due to positive credit migration in the loan portfolio and an improvement in collective economic conditions, though partially offset by changes in specific reserves.
Speaker Change: Well, it's going to provide further commentary on credit in his prepared remarks.
Speaker Change: The bank realized a five basis point compression in net interest margin from the second quarter to 3.05%. This.
Speaker Change: This change was primarily attributable to an increase in the cost of interest bearing deposits and a mix shift in average earning assets.
Speaker Change: Overall, the bank continues to perform well and has prudently manage liquidity and funding over the past handful of volatile quarters.
We remain dedicated to responsibly growing our high quality relationship based core loan portfolio as we move in to an anticipated declining interest rate environment.
Speaker Change: Moving to prime lending, where the company reported a pretax loss of $8 $7 million during the quarter.
Speaker Change: Quarter over quarter decline in operating results was driven by a reduction in origination volume of $72 million and a decline in the gain on sale margin of four basis points to 224 basis points.
Speaker Change: Further the trend of downward pressure on loan origination fees as a percentage of origination volume continued through the third quarter.
Speaker Change: Additionally, prime money recognized valuation adjustment related to the MSR asset of $4 $2 million during the third quarter, which negatively impacted its financial results.
Speaker Change: While there is increased optimism regarding industry wide mortgage origination volumes for 2025.
Speaker Change: We believe the coming quarters will remain a challenging operating environment for prime lending as the business moves into the seasonally slower fourth and first quarters of the calendar year.
Speaker Change: In the third quarter Hilltop securities generated pre tax income of $17 million on net revenues of $124 million for a pretax margin of 14%.
Speaker Change: Looking to the business lines at Hilltop Securities.
Public Finance services produced flat net revenues compared to the third quarter last year as municipal advisory fees increased by 4% on strong offering volumes straw.
Speaker Change: Structured finance net revenues increased by $4.4 million from the third quarter 2023. This.
This year over year improvement was driven by expanded availability within downpayment assistance programs from select state housing clients, which resulted in strong TBA lock volumes and further by elevated buy side demand for call protected collateral.
Speaker Change: In wealth management net revenues declined by $2 $1 million compared to last year's third quarter as balances in our FDIC sweep program continued to subside.
Client and sweep revenue was partially offset by an increase in investment in securities advisory fees within wealth management.
Speaker Change: Finally, while our fixed income business remains pressured due to challenging market conditions. The business unit did produce an increase in net revenues year over year of $3 $1 billion.
Speaker Change: Overall hilltop Securities had continued positive performance in public finance and a strong quarter from both the structured finance and wealth management business lines.
Speaker Change: The broker dealer generated a year over year increase in net revenues and a low teens pretax margin, which reflects the firm's ability to perform well in a variety of rate environments and market conditions.
Speaker Change: Moving to page four.
Speaker Change: Hilltop maintains robust capital levels with a common equity tier one capital ratio of 25%. Additionally, our tangible book value per share increased from year end two.
Speaker Change: 2023 by 94 cents to $29.29.
Speaker Change: During the period, we returned $11 million to shareholders through dividends.
Speaker Change: Thank you and now I will turn the presentation over to will to discuss our financials in more detail.
Speaker Change: Thank you Jeremy I'll start on page five.
As Jeremy noted for the third quarter of 2020 for Hilltop reported consolidated income attributable to common stockholders of $29 $7 million equating to <unk> 46 cents per diluted share.
Speaker Change: Quarter's results included the impact of a $4 $2 million valuation adjustment.
Speaker Change: Weighted to the signing of an LOI to sell approximately $43 million of the remaining EMR at MSR assets.
Speaker Change: Lending.
Speaker Change: Largely offsetting the MSR charge, where gains and positive valuation adjustments in our merchant, making unit hilltop opportunity partners.
Speaker Change: Lower health care related costs during the period and a modest reduction in the allowance for credit losses.
To discuss the allowance in more detail I'm moving to page six.
Speaker Change: Hilltops allowance for credit losses declined during the quarter by $4 million to $111 million.
Speaker Change: As noted in the graph specific reserves increased in the period by $1 2 million impacted by the ongoing evaluation and related adjustments for the two large auto lending credits, we discussed last quarter and various small adjustments to other specific reserve credits.
Speaker Change: For addition, additional reference materials regarding our auto lending portfolio, we provided a slide on page 21 of this presentation.
Speaker Change: One is the size of this portfolio, including recent trends and the allowance coverage maintained on this portfolio as of September 30th.
Speaker Change: Offsetting the additions to the specific reserves were positive migrations in the collectively assess portfolio, which reduced the allowance for credit losses of $2 2 million.
Speaker Change: This reflects a modest improvement of certain client cash flow and operating results.
Speaker Change: Lastly, during the third quarter management decided it was appropriate to move away from the Moody's <unk> scenario and moved to the Moody's S. Five scenario, which provides for slow economic growth into the future and does not include an immediate recession.
Speaker Change: Further yes, five scenario more closely aligns to managements views on the trajectory of interest rates in the future.
Speaker Change: Of note the impact of change in economic conditions assessments between the scenarios from period to period.
Speaker Change: Approximately a $300000 reduction to the ACL.
Speaker Change: We continue to monitor the entire portfolio closely.
Speaker Change: Sing on the areas that we believe may pose future risk to the bank.
Speaker Change: That said, we do expect that the ongoing cash flow challenges facing existing clients as well as new projects driven by higher interest rates and ongoing inflation could lead to negative credit migration overtime.
Speaker Change: As has been evidenced since the adoption of Cecil ACO can be volatile as it is impacted by economic assumptions as well as changes in the mix and makeup of the credit portfolio.
Speaker Change: We continue to believe that future changes in the allowance will be driven by net loan growth in the portfolio credit migration trends and changes to the macroeconomic outlook over time.
Speaker Change: Given the current uncertainties regarding inflation interest rates, the future outlook for GDP growth and unemployment volatility could be heightened over the coming quarters.
Speaker Change: Turning to page seven.
Speaker Change: Net interest income in the third quarter equated to $105 million, including approximately $700000 of purchase accounting accretion.
Speaker Change: So as the prior year third quarter net interest income decreased by $11 million or 9%.
Speaker Change: Driven primarily by higher yields on deposits and declining earning assets.
Speaker Change: During the third quarter net interest margin decreased versus the second quarter of 2024 by six basis points to 284 basis points.
Speaker Change: The decline in NIM was largely driven by the continuing migration of deposits into higher cost products, including our top tier money market products.
Further lower accretion and the period accounted for approximately half of the decline.
Speaker Change: Ladies do accretion we have been and continue to expect the recognition of the discount to decline over time.
Speaker Change: And while this quarter was lower than prior periods. It is somewhat indicative of the expected long term trend.
Speaker Change: Our current internal rate outlook includes 225 basis point rate reductions, which we are forecast to occur in November and December.
Speaker Change: Based on this rate scenario, we expect that NIM levels could drift lower with anticipated additional rate cuts in the fourth quarter of 'twenty four 'twenty five as deposit rate reductions likely lags behind both cash yields and variable rate loan repricing.
Speaker Change: Turning to page eight.
Speaker Change: Third quarter average total deposits are approximately $10 5 billion.
Speaker Change: Declined by $759 million or 7% versus the third quarter of 2023.
Speaker Change: Driving the decline versus the prior year as the decline in broker dealer sweep deposits held on the balance sheet, which had been reduced by $672 million on average.
Speaker Change: And the return of virtually all broker deposits, which is equated to a decline of $392 million on average.
Speaker Change: The magnitude of these changes we are pleased with the growth in our non broker dealer sweep and non broker deposits over the past year, which approximates $305 million on average.
Speaker Change: On a linked quarter ending balance basis deposits increased during the third quarter by $418 million, largely driven by $288 million of growth in the money market products at Plains capital Bank.
Speaker Change: Interest bearing deposits continued to migrate modestly higher increasing by three basis points from the second quarter levels to 262 basis points. During the third quarter is our expectation that interest bearing deposit costs have peaked and will begin to move lower at a modest pace as we focus on lowering.
Speaker Change: Got it.
Speaker Change: In step with the federal Reserve's news on short term interest rates.
Speaker Change: We remain focused on balancing our competitive position with our long term customer relationships. While we continue to focus on prudent management of net interest income over time.
However, the current environment remains competitive and we expect the intensity of competition for deposits will continue.
Speaker Change: Moving to page nine.
Speaker Change: In the upper left chart on the page, we provide some historical detail regarding hilltops overall asset sensitivity currently in the up 100 scenario for a parallel yield shift and a static balance sheet will top remains approximately 7% asset sensitive.
Speaker Change: We continue to work towards a more neutral position by evaluating reinvestment options in the securities portfolio.
Speaker Change: Creasing retention of mortgage loans from prime lending and reducing net cash levels at the federal reserve redeploying broker dealer sweep deposits.
Speaker Change: In the table in the lower right of the page we provide details regarding the current variable rate loan reset periods.
Speaker Change: As can be seen in the chart. The majority of our variable rate loan book resets quickly within one month of a rate change.
Speaker Change: Of note related to interest bearing deposit betas, the cumulative interest bearing deposit beta for the rising rate cycle was 68%.
Speaker Change: Our current modeling and estimates assume that we will manage a $50 to 55% interest bearing deposit beta in the declining rate portion of this rate cycle.
Speaker Change: Moving to page 10.
Speaker Change: Total noninterest income for the third quarter of 2024 equated to $200 million versus the same period in the prior year mortgage revenues declined by $8 8 million, including the aforementioned negative MSR valuation adjustment of $4 2 million.
Speaker Change: Versus the same period in the prior year origination volumes were modestly higher gain on sale margins for those loans sold to third parties improved by 25 basis points to 224 basis points.
Speaker Change: While we believe revenues in production from the mortgage segment have begun to stabilize at this lower level. We also feel that it remains important to note the ongoing challenges in mortgage banking, whereby a combination of higher interest rates home affordability limited housing supply and ongoing overcapacity in terms of mortgage originators.
Speaker Change: Restrictive to the market.
Speaker Change: That said even in the face of these challenges we do expect that the overall mortgage market is slowly improving and we expect that improvement to continue into 2025.
Speaker Change: To that end the leadership team at Prime lending is focused on growing our client facing sales team across the country and optimizing our pricing to support profitable growth in the future.
Speaker Change: The structured finance business line, which has benefited from the down payment assistance support provided by certain of our client states significantly contributed to the $5 $4 million improvement in securities and investment advisory revenues.
Speaker Change: This increase in revenue versus the prior year was driven primarily by improved secondary market conditions, which resulted in higher net spreads in that business.
Speaker Change: In addition, fixed income services business line results improved versus the prior year period, a $2 million also contributing to the growth in revenues.
Speaker Change: During the third quarter growth in other income resulted from internal consolidation of sweep fees between the bank and the broker dealer.
Speaker Change: And this consolidation impact accounted for approximately $6 million of the change reported in the table.
Speaker Change: Turning to page 11.
Speaker Change: Noninterest expenses increased from the same period in the prior year by $4 million to $264 million.
Speaker Change: The increase in expenses versus the prior year third quarter was driven by increases in variable compensation largely related to higher noninterest revenue production at the broker dealer.
Speaker Change: Looking forward, we expected expenses other than variable compensation will remain relatively stable with current levels. As we remain diligently focused on prudent growth of revenue producers, while continuing to gain efficiencies across our middle and back office functions.
Speaker Change: Turning to page 12.
Speaker Change: Third quarter average H F I loans equated to $8 billion.
Speaker Change: Period, ending basis, H F I loans declined versus the second quarter of 2024 by $194 million driven largely by payoffs in commercial real estate and C&I lending.
Speaker Change: During the quarter, we experienced significant pay downs from customers, who had either sold their business or move to the permanent funding markets, which do appear to be more active.
Speaker Change: Lines were somewhat offset by growth in the mortgage warehouse lending business, which grew by $26 million or 9% versus the second quarter of 2024.
Speaker Change: In addition, <unk>.
Speaker Change: <unk> lending pipelines did expand during the third quarter and while this is a positive trend the market for funded loans remains intense with competitive pressures coming from both pricing and structure.
Speaker Change: As a result of these competitive pressures, we expected loan growth to continue to be challenging for the coming quarters.
Speaker Change: As a result of the pay Downs noted previously we now expect full year average total loans to decline.
Speaker Change: Zero to 2% from 2023 levels, excluding mortgage warehouse lending and any retained mortgages from prime lending.
Speaker Change: Turning to page 13.
Speaker Change: Starting in the upper right chart NPA levels have declined from the second quarter of 2024 by $15 million to $94 million.
Speaker Change: The decline from last quarter, largely reflects $12 million of pay downs on the two large auto new loans, we discussed last quarter.
Speaker Change: Related to these two auto new loans, we continue to work with the business leaders and guarantors to find ways to exit these loans overtime.
Speaker Change: While progress has been made it remains too early to determine if additional reserves or losses will be incurred in the future related to these credits.
Moving to the bottom left chart net charge offs for the quarter equated to $2 9 million or 15 basis points of the overall loan portfolio.
Speaker Change: While net charge offs have been more volatile over the last few quarters, we're not seeing any definable or systematic trends in the losses outside of the aforementioned auto no portfolio.
Speaker Change: As is shown on the graph on the bottom right of the page the allowance for credit loss coverage at the bank ended the third quarter at 145%, including mortgage warehouse lending.
Speaker Change: Turning to page 14.
Speaker Change: As we move into the fourth quarter of 2024, there continues to be a lot of uncertainty in the market regarding interest rates inflation.
Speaker Change: And the overall health of the economy.
Speaker Change: Given these uncertainties, we remain focused on controlling what we can to reduce quality outcomes for our clients associates and the communities we serve.
Speaker Change: As noted in the table our current outlook for 2024 reflects our current assessment of the economy and the markets where we participate.
Speaker Change: Further as the market changes and we adjust our business to respond we will provide updates to our outlook on future quarterly calls.
Speaker Change: Operator that concludes our prepared comments I will turn the call back to you for the Q&A section of the call.
Speaker Change: At this time, if you would like to ask a question. Please press the star and one on your telephone keypad.
Speaker Change: You may remove yourself from the queue at any time by pressing star to once again that is star and wanted to ask a question, we'll pause for a moment to allow questions to kill.
Speaker Change: And we'll take our first question from Woody lay with K B W. Your line is open.
Woody Lay: Hey, good morning, guys.
Speaker Change: Good morning, good morning.
Wanted to start on structured finance and third you mentioned.
Woody Lay: The business benefited from the the down payment assistance programs, we've seen it spike in prior quarters from from similar trends. There does it feel like these programs have more legs to them, which could lead to a more prolonged opportunity in the structured finance space.
Speaker Change: Well good morning.
It's a <unk>.
Speaker Change: Not in our control I think is that is the short answer from from from each of the states.
Speaker Change: Budgetary concerns considerations.
Speaker Change: We've been pleased to see reasonably consistent support provided certainly by by certain states.
Speaker Change: We'd like to think that will continue but again it is in the states states control in those legislatures will have to make decisions as to whether they continue to appropriate funds in that way or not so they are somewhat episodic from our perspective.
Speaker Change: Got it and then and then maybe shifting over to fixed income fees. I mean, it was a good quarter in that business as well just given some of the rate volatility towards the end of the quarter do you think that business can continue to trend higher in the fourth quarter.
Speaker Change: Yes, I think our view on fixed income certainly we were pleased with the third quarter results I think as we look forward lower rates generally upward sloping yield curve as a practical matter are beneficial to that business. So.
Speaker Change: So we do expect to continue to see it continue to improve but again.
Speaker Change: As I've said with each call the results both in structured finance and fixed income services can be volatile as it relates to cut all the market rates, but again, a an upward sloping yield curve as well as generally speaking lower rates.
Speaker Change: Net beneficial to that business.
Speaker Change: Got it.
And then lastly, just shifting over to mortgage expenses. The mortgage expenses continued to move lower in the third quarter, but it sounds like trends are are slowly improving and you're looking to make them made some hires in the business do you think the fixed expenses that trough, there and we'd be.
Speaker Change: The <unk>.
Speaker Change: Modestly increase from here.
Yes, I think I think our expectation is they're going to remain reasonably stable. They may they may start to tick up slowly into the first half of next year.
Speaker Change: But again as you noted and as we noted in our comments.
Speaker Change: Sure.
Speaker Change: Fundamentally out in the market looking for quality quality loan originators and producers client facing associates and we will continue to do that but we're also continuing to be very focused on Midland backup back office call. So we recognize while we say that mortgage business, we believe and mortgage industry.
Speaker Change: He is improving.
Speaker Change: Recognized this could be a slow and.
Speaker Change: Steady path. We are we are focused on kind of maintaining those expenses and our overall overall productivity levels.
Speaker Change: To try to manage towards profitability in the future.
Mhm.
Speaker Change: Got it alright, thanks for taking my questions.
Speaker Change: Thank you.
Speaker Change: Thank you we'll take our next question from Michael Rose with Raymond James Your line is open.
Michael Rose: Hey, good morning, guys. Thanks for taking my questions just wanted to start on some of the comments around the margin, having a little bit more pressure as we as we move forward and just wanted to get some thoughts on on loan yields and also deposit costs.
Michael Rose: Like loans held for investment.
Michael Rose: The yield was down.
Michael Rose: 16 to 17 basis points Q on Q, but what drove that and then from a deposit pricing standpoint, do you think we're nearing a peak and then do you have a sense for kind of what the spot rates were at the at the end of the quarter. Thanks.
Speaker Change: Yes, so let's start with loan yields.
Michael Rose: We did see some some average balance movement.
Michael Rose: And the hilltop holdings level kind of Egfr yield, but I would focus you on the.
Michael Rose: The annualized bank <unk> loan yield, which I think more indicative of kind of where the trends are you saw that.
Michael Rose: Bank loan HFF yields dropped from 611% to 607 in the period about three basis points of that accretion. So that that explains a portion of it we did see and can have continued to see customers with the expectation of rates going lower preemptively.
Michael Rose: Starting the process of kind of negotiating rates lower.
Michael Rose: So that's out there and we also had the September 18th Fed reduction and as we noted in the interest rate sensitivity tables.
Michael Rose: Loan reset tables.
Our variable rate loans are going to reset quickly within kind of that one month period of a rate change so.
Michael Rose: Not surprising from where.
Michael Rose: Where where loan rates and loan yields when I think.
Michael Rose: The next piece of that is as rates continue to move lower if the fed does does reduce rates we are expecting.
Michael Rose: Bank loan yields to continue to decline from here.
Michael Rose: At a pace.
Michael Rose: Similar to what we saw during the up rate cycle.
Michael Rose: And in terms of overall overall loan beta, which the loan beta for that upgrade cycle was about 40%.
Michael Rose: If you go to if you think about deposits.
Michael Rose: We've kind of talked at some length now about deposits and deposit yields.
Michael Rose: And the overall interest bearing deposit cost increased to $3 62.
Michael Rose: From $3 59.
Michael Rose: And then our total deposit cost increased by five basis points to 267. So there's two things that were happening first a lot of the inflows of deposits went into our to our higher cost money market products and we've got a CD product out there Thats also got.
Michael Rose: Got it got a pretty attractive rate on it.
Michael Rose: And then are from a total deposit costs the difference between that interest bearing and in total deposit cost is the fact that we continue to see some migration from an IV into.
Michael Rose: Into our interest bearing products so.
Michael Rose: We expect to continue to see niv trend into.
Michael Rose: Interest bearing deposits over time as customers continue to seek yield for those for those excess deposits.
Michael Rose: And.
Michael Rose: But we do expect that interest bearing deposit cost again at $3 62 has peaked and will start to move lower to.
To some extent in.
Michael Rose: In step with the fed fed rate reductions for the current for the first rate reduction you know our target is to have a 50% to 55% data I think the rate reduction actions, we've taken post that first 50 basis point.
Action by the fed put us in a position put us in a position to achieve that.
Speaker Change: Well, thanks for walking through that that was very thorough.
And to put a finer point on it it would seem that you would have.
Some continued modest.
Speaker Change: At the consolidated level. Some continued modest margin pressure as we move through at least the next couple of quarters before hopefully reaching stabilization is that the way putting all those pieces together the way we should you should conceptually think about it.
Speaker Change: Yes, that's in alignment with my comments and I think we will drift a little lower and again, it's some of it's timing and then some of it's the the the betas that are impacted so.
Speaker Change: Our deposit actions will be.
Timely and prudent but also reflects kind of market pressures and competition the loan resets as well as in and I'd highlight this the cash balances which increased two.
Speaker Change: 171 $8 billion in the period at the end those cash balances reset immediately so when the fed makes the rate change the next morning.
Speaker Change: They are earning their earning less in the context of the moving rates lower so the cash balances.
Speaker Change: Our variable rate loan resets and we do expect that deposit the deposit benefits of our of a rate reduction actions will lag that so to your point, we would expect to see I'd.
Speaker Change: I would say modest.
Speaker Change: But ongoing pressure in the NIM for that for the coming quarters until we reach a more stable interest rate.
Speaker Change: Scenario.
Speaker Change: Very helpful. And then maybe just just one follow up you know loan growth has been.
Speaker Change: Fairly anemic for for you and the industry just as it relates to the the willingness to continue to portfolio.
Speaker Change: Mortgage loans any thought process on bringing that number higher particularly as activity picks up just disperse some some loan of balance sheet growth as we move through the year just to get some momentum on the NII front. Thanks.
Speaker Change: I think a good question and certainly in my comments I tried to address some of that so we we are going to be and continue to retain loans.
Speaker Change: Loans from Prime lending they are principally going to be the hybrid hybrid arm products and we're doing that for two reasons, both to bolster earning assets, but also to kind of move or replace some of the cash. So we're trying to move out of some of our cash position into what I'd call more loan loan assets.
Speaker Change: <unk>, which we believe provides us a better a better net return here is as the rate environment kind of plays out if it plays out to our expectations. So.
Speaker Change: While the guidance of zero to $20 million per month, so somewhere between zero and $60 million balance sheet. It per period, we'll stick to that guidance as we sit here, but but.
Speaker Change: Understand will likely be.
Speaker Change: More aggressive closer to the middle top into that over the coming quarters versus kind of at the lower end.
Speaker Change: Very helpful. Thanks for taking my questions.
Speaker Change: Thank you.
Speaker Change: Thank you we'll take our next question from Stephen Scouten with Piper Sandler Your line is open.
Stephen Scouten: Yeah, Thanks, guys I appreciate it.
Stephen Scouten: The movement in Npls is pretty positive this quarter.
Stephen Scouten: And obviously you guys lowered the guidance for the loan loss provision moving forward. So.
Stephen Scouten: And the Moody's.
Stephen Scouten: Scenario, so it feels like you're seeing more positive around credit and kind of what are you seeing that leads to some of this productivity.
Stephen Scouten: And do you think you can kind of see continuing improvement in the non performers from here.
Speaker Change: Well a lot of the a lot of the improvement.
Speaker Change: And what I would call non accrual loans.
Speaker Change: It was driven again as I said in my notes.
Speaker Change: By about $12 million of pay Downs, we received in that auto note auto node portfolio related to two large credits we talked about so we saw improvement.
Speaker Change: $14 million 12 of that 12 of that was from those two.
Speaker Change: In terms of pay downs, we certainly had some charge offs. So.
Speaker Change: I think I think overall, we are cautious on credit we are seeing and did see during the period improve.
Speaker Change: Improved financial results coming in from some of our clients and that caused some positive migration across the portfolio nothing I would call that was systemic or otherwise substantial but nonetheless.
Speaker Change: <unk> trends on some of the some of the customers that were re.
Speaker Change: Re scored in the period.
Our cautiousness continues because.
Speaker Change: With higher rates rates are still materially higher than in certain cases, our customers have existing loans and so as those loans reset cash flows we're going to be pressured inflation still exists prices arent coming down.
So their input costs still remains remain elevated on construction deals and the other and the impact of kind of needing higher equity in transactions also continues to pressure pressure new deals. So from our perspective, we see I'd say.
Speaker Change: Favorable, but we are cautious on how credit will trend here over the coming quarters.
Speaker Change: What we've seen and what we expect is there will continue to be episodic episodic items that come along.
Speaker Change: They cause us to have to react in the in the reserves and the <unk> charge offs.
Speaker Change: Got it very helpful. And then just a couple of finer points on the on the NIM trend looks like I know you said the drop in accretion obviously with more material this quarter, but indicative of the trends we should see.
Speaker Change: If we're looking at I don't know $4 million to $5 million in accretion. This year, what's the kind of pace of expected decline based on what you have remaining is that like a.
Speaker Change: Is it get cut in half next year, which is kind of an incremental change.
Speaker Change: We had expected.
Yeah on a model basis, it would fall somewhere between 15% to 25% a year.
Speaker Change: Okay.
Speaker Change: And then that's without any any specific activity in the portfolio.
Speaker Change: Sure makes sense and then as we think about the floors that you laid out in the slide deck. It looks like maybe 49% of variable rate loans that are.
Speaker Change: Above floors, how many how many of those loans would have floors.
Speaker Change: Do you have any feel for like the degree of those that have floors. How soon we could get to them with incremental rate cuts if that makes sense.
Speaker Change: Yes.
Speaker Change: So.
Speaker Change: Say about 75% to 80% of our variable rate loans have got floors.
Speaker Change: Those floors are generally structured to be between $150 and 300 basis points below the kind of starting rate for that customer and so it's going to take I would say a reasonable amount of kind of fed activity to cause those forced to be in the money.
Speaker Change: Got it extremely helpful.
Speaker Change: And then maybe just last thing for me kind of curious unlike a talent acquisition update I know you guys had talked about that could be the real driver of future growth and upside maybe especially in the middle market business Bank just kind of wondering how aggressive you guys are on that path.
Speaker Change: Today, any any progress there or anything worth noting on the on the hiring front.
So in the bank, we have had positive recruiting in the quarter.
Speaker Change: But it has.
Speaker Change: With the bank, we're very selective on the bankers that we hire and the right fit so.
Speaker Change: I think it will be is that going to be a huge push in increasing our total bankers, but really just trying to fill out, particularly some of the footprint that we are.
Speaker Change: No not as big in.
Speaker Change: Okay makes sense. Thank you all for the time, so I appreciate it.
Speaker Change: Thank you.
Speaker Change: Thank you we'll take our next question from Jordan <unk> with Stephens. Your line is open.
Speaker Change: Hey, good morning.
Speaker Change: I just had a quick question.
Speaker Change: And I think you've kind of.
Speaker Change: Touched on them well with the overnight cash balances and the liquidity no right as of recently it had been ranging from one to 2 billion. If you go back four years, yes. It looks like you guys have kept it below that 1 billion Mark and I was just wondering where you guys see going forward and I know you talked about maybe.
Speaker Change: Replacing that are kind of hinted about that.
Speaker Change: With the balance sheet some of those mortgages, maybe if you're kind of talking about the range you're expecting for.
Those overnight liquidity balance.
Speaker Change: Yes, so they.
Speaker Change: They had moved under a $1 billion, we've said that our target kind of operating range is $300 million to $750 million.
Speaker Change: With with the with the with the pay Downs, we had in the quarter coupled with the strong deposit flows customer deposit flows we had in the quarter, but obviously you've seen that cash balance.
Move higher and move moved to a level above where we would otherwise generally consider target operating.
Speaker Change: And so we do expect that we will continue to work that down we'd like to keep it under $1 billion again and that operating range of $300 million to $750 million would be the target range, it's going to take some time for us to get there.
Speaker Change: But as I noted we are going to rotate.
Speaker Change: And began rotating both into the securities portfolio as well as.
Speaker Change: As well as the retained mortgages to start to just transition those dollars out of cash and into I'd say other earning assets that we believe better position the balance sheet long term.
Speaker Change: Got it thanks for that and then maybe just one other question about the loan growth I know you talked about payoffs have been.
Stronger and then also.
Speaker Change: It's going to take a few quarters for some of these new loans to fund up you know projects to fund up.
Speaker Change: Is there any insight you could kind of give us as we look past. The next few quarters of where youre seeing loan growth and kind of like as far as originations and kind of what has just come down the pipe.
Speaker Change: Could look out beyond the next few quarters and we will give we will give full year guidance on our January January update call, but.
As I noted.
Speaker Change: We are in have seen.
Proved pipelines and largely thats in commercial real estate those are commercial real estate loans some construction projects.
Speaker Change: But we also continue to see our customer base.
Speaker Change: Cautious as they are evaluating.
Speaker Change: This political cycle, the interest rate environment, where the feds going in the overall economy in general, which I would say for the state of Texas in particular remains remains reasonably robust.
Speaker Change: So our view is we're going to need we're going to continue to try to be aggressive on price, we're going to hold our credit structures and maintain and maintain our credit quality and.
Speaker Change: Work to win as much business as we can but again largely the growth will come in the form of commercial real estate based on kind of where the pipeline sits today.
Speaker Change: Got it thanks for taking my questions.
Speaker Change: Thank you.
Speaker Change: Thank you and it appears that we have no further questions. At this time I will now turn the program back over to our presenters for any additional or closing remarks.
Speaker Change: We have none.
Speaker Change: Alright, great. Thank that concludes today's teleconference. Thank you for your participation you may now disconnect.
Speaker Change: Hum.
Speaker Change: [music].
Speaker Change: Got it.
Speaker Change: [music].
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: [music].
Okay.
Speaker Change: Uh-huh.