Veritex Holdings, Inc.

Q3 2022 Earnings Conference Call


spk10: Good day and welcome to the Virtex Holdings third quarter 22 earnings conference call and webcast. All participants will be in a listen-only mode. Please note this event will be recorded. I would now like to turn the conference over to Ms. Susan Caudill, Investor Relations Officer and Secretary to the Board of Virtex Holdings.
spk00: Thank you. Before we get started, I would like to remind you that this presentation may include forward-looking statements, and those statements are subject to risks and uncertainties that could cause actual and anticipated results to differ. The company undertakes no obligation to publicly revise any forward-looking statements. At this time, if you are logged into our webcast, please refer to our slide presentation including our safe harbor statement beginning on slide two. For those of you joining us by phone, please note that the safe harbor statement and presentation are available on our website, All comments made during today's call are subject to that safe harbor statement. Some of the financial metrics discussed will be on a non-GAAP basis, which our management believes better reflects the underlying core operating performance of the business. Please see the reconciliation of all discussed non-GAAP measures in our filed 8K earnings release. Joining me today are Malcolm Holland, our Chairman and CEO, Terry Early, our Chief Financial Officer, and Clay Riebe, our Chief Credit Officer. I will now turn the call over to Malcolm.
spk03: Good morning, everyone. Welcome to our third quarter earnings call. Veritex continues to operate at a very high and efficient level, producing record dollar earnings continued growth, and improved credit metrics. Slide five gives you a summary of our third quarter results, which are candidly the best in our company's history. Starting with earnings, we reported $43.6 million in net income, or $0.80 per share, up from $0.55 per share in Q2. Our pre-tax, pre-provision income continues to climb, up to $63 million, or 2.2% on average assets. This metric continues to show the earnings power of Veritex. Terry will give you additional color on the components of our income, much of which is solid, sustainable profit. Our growth profile remains strong, but is down from the previous quarters. For 3Q, loans grew $595 million, or 30%, and for the first nine months of the year, 31% annualized. We see growth continuing to slide down as we expect the fourth quarter to be in the low 20s, and forecast 2023 loan growth to be in the low double digits. Our pipelines are currently down one-third from the previous quarter, and we have had over $150 million in payoffs during the first three weeks of October. Keep in mind, much of our growth we have had has come from new hires since we have made since the start of the pandemic. For the third quarter, 42% of our growth was from our new hires. We consider this growth more of a market share grab versus the region's economic growth, which we see beginning to slow a bit in our DFW and Houston markets. While we have slowed our hiring for new bankers in many areas of the bank, we will always be opportunistic in adding quality people to our team when they become available. Deposit growth has continued during this quarter, showing growth of $231 million, or 10.7%. As we think about deposit growth going forward, it is my team's greatest focus. We have proven that loan growth is a strong core competency of our company. While we have shown that we can grow deposits, and it is our intention and focus to bring our deposit growth numbers very much in line with our loan generation numbers. As I look over the last 12 months, our non-interest-bearing growth is up 300 million, or 16%. And our interest-bearing money market accounts are up 750 37 million or 36%. These are numbers that we're very proud of and shows our ability to grow both sides of the balance sheet. Despite some of the noise in the markets, our credit metrics continue to trend in a positive direction. For the eighth consecutive quarter, NPAs declined, falling this quarter 14 bps to 0.26%. Past dues greater than 30 days also remain in very good shape, producing numbers lower than two Q levels. Despite improvements in credit metrics, we find it prudent to continue to perform deep dive analysis on our portfolio and our concentrations and stress our credits at levels we don't think we will see. With this stress testing, we do not see any significant weakness in our portfolio at this time. I'll now turn it over to Terry.
spk05: Thank you, Malcolm. Starting on page six, Q3 was a very strong quarter for Veritex. one of the best I've seen in my 40-plus year career. Our operating return on tangible common equity is almost 18%. This is on an equity basis, more than 17% larger than it was at the beginning of the year. Our efficiency ratio was under 45%, reflecting our branch-like business model, asset sensitivity, and strong growth. Net interest income grew almost 20% on a linked quarter basis. Our lingering spot of underperformance was fee income. I will discuss this later in my comments. We don't have a presentation table on operating leverage, but let's start our discussion there. Revenue growth since Q3 21 has been 31.2%, even with weaker fees in Q3. Expense growth over the same period has been 22.5%, reflecting significant investments in talent. This results in 8.7% of positive operating leverage. If you adjust Q321 for the non-recurring impact of PPP fees, then revenue growth goes up to 32.5% and operating leverage improves to 10%. Those results indicate our investments in talent, which are a significant factor in our growth profile, are generating strong returns. Tangible book value per share only declined by 1.6%, reflecting the impact of rising rates on AOCI. It has grown by 6.7% over the last four quarters, adding back the impact of the dividend. On slide seven, Malcolm's already mentioned our loan growth for the quarter. This loan growth includes the purchase of approximately $40 million in owner-occupied mortgage pools. Veritex has delivered a loan growth caterer of over 18% since the beginning of the pandemic. On slide 8, huge progress being made in our C&I business. Year-to-date growth in 2022 is up by approximately $775 million over 2021. One of the key drivers is the DFW team that has attracted 16 new C&I relationships. They have served as lead or joint lead arranger on over $1 billion in credit commitments. Lastly, the insurance-related vertical is showing real promise with both sizable loan commitments and deposit opportunities. Advances on the ADC portfolio are approximately $430 million per quarter, and our average mortgage warehouse balance has decreased 6.4% in the third quarter. We're certainly pleased with both the great results and the risk mitigation steps given what is going on in our mortgage industry. On slide nine, we produced $1.7 billion in loans. This brings the total for the last four quarters to $6 billion in production. On slide 10, Net interest income increased by $16.6 million, or almost 20% from Q2, to $101 million in Q3. The two biggest items in the increase are growth, which accounted for $6.6 million of the increase, and the Fed raising short-term interest rates, which represents $8.4 million. The net interest margin increased 35 basis points from Q2 to 3.77%. The NIM got stronger as the quarter progressed, given the timing of the Fed rate hikes. and the lag in the reset of one-month SOFR and LIBOR-based loans. The NIM for the month of June was 3.87%, and has strengthened further in October, as contractual loan yields on the portfolio have increased another 33 basis points through mid-month. As you look to model net interest income in future periods, keep the following in mind. First, our average balances are up just a little bit, so keep that in mind, creating somewhat of a jump-off. Given market expectations of 150 basis points and additional Fed rate hikes, this will add significantly to net interest income. Great Texas asset sensitivity has decreased since Q2, but so has our down rate risk. We have been intentionally hedging floating rate loans for three to four years to mitigate falling short-term rates out through 2026. On slide 11, Please note that during Q3, our loan yield was up 85 basis points to 5.01%, while deposits only increased 48 bps. The loan portfolio accrual rate on 9-30 was 5.20%. Q3 loan originations were 85% floating. These floating rate loans carrying interest rate at the end of the quarter of almost 5.70%. Slide 12. Non-interest income increased by 2.7 to 13 million. Most of the increase was due to our customer interest rate swaps, which increased 2.1 million to 3.4 million in total. We did more swap revenue in the third quarter than in any previous full year. Revenue related to our government-related businesses remained weak at approximately 600,000. One correction on this page, we stated in the bullet in the bottom left, The servicing asset valuation adjustment of 2.1 was taken in 3Q22. We actually took a $1.5 million write-down in 2Q. We had a $560,000 write-up of the servicing asset in Q3. The combined change from Q2 to Q3 was $2.1 million, so a $560,000 write-up from Q3. Non-interest expense increased $2.7 million to $50.6, reflecting the investments and talents we've been discussing for many quarters. Even though operating expenses are up, operating leverage remains strong, and the efficiency ratio is in the 44% range. Regarding the increase in Q3 non-interest expense, 65% of the increase is in variable comp, about 25% of the increase is in salaries. So just think about that as you go forward in model expenses. So far in 22, we've incurred approximately $145 million in operating expenses. We believe we will be at the top end of the range in our expense guidance, which was $185 to $195 million for the full year. Looking forward, the pace of hiring is slowing. This seems prudent as we see production slowing in 2023. Slower loan growth will translate into stronger capital ratios and improving the loan-to-deposit ratio. These steps, coupled with lower variable compensation, should slow the growth of NIE in 2023. Turning to slide 13, Q3 was another bumpy quarter for North Avenue Capital as the USDA continued its centralization of all loan funding decisions in Washington. We were unable to get any USDA loans closed during the third quarter. Our pipeline has grown $100 million in the third quarter, and we are expecting closings in the fourth quarter. Our SBA business continues to build momentum as our new leadership and recent hires gain traction. The pipeline is up about $15 million since the end of the second quarter. Gain on sale premiums for the government-guaranteed business have declined about another 10% since the end of Q2. It's likely that if gain-on-sell premiums in the USDA and SBA market remain under pressure, that Veritex will choose not to sell a portion of our production. Rather, we will portfolio the loans given their strong pricing and favorable capital treatment. Know this, we're going to make the right long-term economic decision for Veritex, even if it means foregoing some short-term revenue. Moving to Thrive. Veritex recorded an equity method loss of just over $1 billion today. This funded volume decreased approximately 50% in Q3, while the MBA has been forecasting a 30% decline for the same period. Higher interest rates and significant rate volatility have created a very challenging environment. Thrive has been able to maintain their gain on sale margins and even expanded this quarter due to the high percentage of their volume coming from Sunbelt States, and they've always had more reliance on purchase business versus refi. They continue to aggressively manage costs and staffing levels while successfully hiring origination teams in different parts of the country. This should add meaningly to forecasted volumes going forward. Moving forward to slide 14, a good quarter on the deposit front with growth of 230 million and a 20% CAGR since the beginning of 2020. Total deposit cost increased 48 basis points to 76 basis points. Our cycle-to-date deposit beta is approximately 27%, as total deposits have increased 58 bps, and the average Fed funds effective rate has moved up 212 basis points. On slide 15, total capital grew approximately $44 million during the quarter to $1.4 billion. CET ratios have expanded by 34 basis points year-over-year. Looking forward on capital, we believe that moderating loan growth coupled with higher earnings from rising interest rates should allow us to achieve our CET1 target of 10% by the end of 2023. Finally, on slide 16, Malcolm's already mentioned the improving credit trends. I just want to note in Q3, we increased the weighting on the downside economic scenarios to 35% and reduce the weighting on the baseline scenario to 65%. That drove a little over $4 million increase in provision you see there. With that, I'd like to turn the call back over to Malcolm.
spk03: Thanks, Terry. We continue to see some very positive results and momentum from our markets and the incredible team we've assembled. Our 3Q results produce strong metrics. 1.51 return on average assets. Pre-tax, pre-provision, 2.2%. Return on capital, tangible capital, 18%. Efficiency ratio, 44%. And NPA is down 14 bits quarter over quarter. I'm proud of how our company continues to perform in these uncertain economic times and grateful for the opportunities we've had to add to our business. With that, I'll open the line for any questions.
spk10: Thank you. As a reminder, to ask a question, you will need to press star 11 on your telephone. Please stand by while we compile the Q&A roster. One moment for our first question.
spk09: Our first question comes from Brady Gailey of KBW.
spk10: Please proceed.
spk06: Hey, thanks. Good morning, guys. Hi, Brady. Hey, Brady. I feel like fee income has a lot of moving pieces here. You just had a monster swap quarter but mortgage loss money and um you know usda market was still closed in 3q but it's about to kick in in 4q so how do you i know it's volatile and i know it's tough to to think about but as you look to 4q in the 2023 how should we think about total fee income yeah um right here's terry um here's the way i think about it is that
spk05: It's going to be hard to replicate a swap quarter as good as that when you do more than you've ever done in any year in one quarter. So I think swap income comes down some. I think SBA and USDA go up, and I think Thrive is basically a break-even business. So, you know, I mean, I kind of feel like the current level, while the mix is going to change, the absolute current level of fee income feels pretty good right here as we go into next year.
spk06: Okay. All right. And then, and then onto the expense space, you know, as the hiring slows, I think you said, you know, expense growth should be less in 2023 versus 2022, but maybe just quantify, you know, if expenses come in close to the $50 million rate, level, that'll put you close to $195 million for 2022. So off that base, any way to guess what the expense creep could be in 2023?
spk05: Probably high single digits. And percent increase. Okay. I mean, when you think about our current run rate, around $51 million, you analyze that I mean, you annualize that, and you're close to 205. So depending on how you're looking at it, if you're looking at 2022 to 2023, I think somewhere close to high single digits. I think if you're looking at it based on the annualized Q3 run rate, not high single digits from there, but you can put about mid-single digits on that and get to the similar level.
spk03: One of the difficult things there, Brady, is the variable comp piece. Because as loans, you know, as loan production comes down, a lot of our loan production for next year is embedded already through the unfunded commitment piece. But, you know, as that comes down, variable comp comes down. We're still going to hire some people. We have some areas where we need some folks. But I don't think you're going to see it while hiring levels that we had in 2022.
spk06: Okay. All right. That makes sense. And then finally for me, just on the margin, I mean, a nice step up here again in the margin, which we've seen from a lot of banks. So we've had some banks talk about, you know, how the margin could, you know, the growth in the margin could really start to moderate here as deposit data start to pick up. How do you guys think about, I mean, I know you're still, you know, growing the company. So NII growth should still be very strong, but on the percentage NIMH, Do you think it's close to a peak here, or is there still room for expansion?
spk05: Well, there's still room for expansion. You know, I said in the second quarter earnings call that we believed when we modeled for every 25 basis point rise in funds rate, we could pick up five basis points in the NIM. So this quarter, we got six 25 basis point moves. Our NIM grew 35, so we were actually closer to six BIPs per move. I don't think we can stay at six, but maybe we come back to four to five for every move. Look, I think Q4 is not really the question. It's really a Q1. It's when the Fed slows. It's when the NIM is really going to come under pressure. I think that's going to be Q1. There still may be a 25-bit move after they do 125 to 150 in moves over the rest of the year. So that should drive NIM expansions. But when the Fed starts to slow and the deposit betas catch up, I think it's when you're going to feel the pressure on the NIM and people's NIMs will start to contract, including ours. Having said all that, I know everybody, and somebody's probably going to ask this question, but I'm going to go ahead and answer it. I think when you think about deposit betas for Veritex or any other high growth bank with a higher loan to deposit ratio, especially if they're heavily floating rate. Deposit betas just don't have the same impact. If I've got a 60% deposit beta and I've got all this stuff and all this extra funding in the investment portfolio with fixed rates, then the deposit beta means an awful lot. But when you're sitting here in your Veritex and your 75% portfolio is floating, 85% of your production is floating, then it's pretty well, and you're not sitting on any floors, then it's pretty well synced up, if you will. So you can, I mean, it still matters, but I don't think it needs to be the most important metric in the world to everybody when your balance sheet's structured like ours is. There's other banks I could name that are just like us, and I think they saw great BIM expansion, 30 BIPs, that type thing, because they're heavily floating. So anyway, I just wanted to offer that up and say it matters. We're very focused on beta, but when you have the asset side structured the way we do and the earning asset mix the way we do, the impact of the deposit beta is just not as material on Veritex as it is on some of our peers. Sorry for my model.
spk06: That makes total sense. Great. Well, thanks for all the color, guys. Okay. Thanks, Brady.
spk10: Thank you. One moment for our next question. And our next question comes from Gary Tenner of DA Davidson. Please go ahead.
spk07: Thanks. Good morning, guys. Hi, Gary. Terry, jumping off your point a moment ago about kind of the NIM in 2023 and kind of what that looks like in terms of pressure when the Fed stops raising rates and the commentary about slower loan growth relative to deposit growth next year. Can you talk about any kind of deposit initiatives that you're kind of focused on right now to try to keep up with that pace of loan growth? We saw this quarter obviously you know, deposit growth lag, but, you know, with long growth slowing next year, shouldn't be as much of an issue. Just wondering how you think about deposits over the longer term than the next couple of quarters.
spk03: Yeah, Gary, I'll answer that one. You know, we as a company have spent an inordinate amount of time over the last 90 days just talking about deposits, talking about funding. Our off-site strat session was dominated by this topic. And candidly, everything around my table, there's always a discussion about funding at some level. And so we've started an initiative here. And listen, there is no magic bullet. There's no single solution to our deposit growth. It's kind of just a focus on that being a more important part of our business going forward. We've put together a team, actually. We've hired a consultant. There's a couple of people we're going to hire. And it's going to be focused strictly on improving our funding mix, which in turn will increase our deposit flows. And so the goal on our side is we want to grow deposits at the same level that we grow loans. We've proven for 12 years the length of this company that we're pretty good loan growers. And now we're going to prove out that we're really good deposit growers. Now, it's in a market that's really hard. You know, not only are we major metro, but everybody's, you know, asking the same questions. But I think you'll see that our initiative and our focus on this part of the business is going to be as strong as any. And we've got the right people involved. So I'm not trying to dodge your question because there's no single answer. It's about seven or eight different levers. The one place where we've been really successful, uh, growing deposits is in our community bank. Our, you know, this, this bank is built on the community bank foundation. Um, most of the banks that we, uh, acquired were community banks and our community bankers are heavy relationship people. And so our community bank is about 25% on the loan side, but it provides almost double that in funding. And so that's an area where we're going to really pay attention. You know, when I said we're going to make some hires, I'll bet you we're going to make some in the community bank space. Are we going to open a branch or two because there's some location? You can probably count on them. We're good at that. And so we think that's one of the levers, one of many levers. You know, Terry mentioned the insurance space. We have some folks on board now that are very good at that. That's a very good deposit business. we still have a small fintech group. That's not going to solve our problems, but that's going to be another lever. And so you go to treasury products, you go to incentives, and you just go to change in culture and just change in thinking. And I think you're going to see us be fairly successful on the deposit side.
spk07: I appreciate that. I may just ask another follow-up on the topic. When you had the interlink transaction queued up, The thought process was, you know, getting the loan deposit ratio down to 85% or thereabouts. It sounds like, from what you're saying, that at least over the intermediate term, you're comfortable with keeping it up around the 100% range. Maybe longer term, there's deposit initiatives that you could outpace to lower that number, but for the near future, 100% plus or minus is kind of where our tax will be.
spk03: Yeah, so the answer is we still – achieve and want to get to that 85% loan deposit ratio. That's our goal. And we have a longer term plan than just 23 to get there. But you are right on. I mean, we're going to be operating in the high 90s for a while as we become more and more efficient on growing the deposit side of our bank. But Yeah, if I was modeling it, I'd be in the high 90s on the loan deposit side. All right, guys. Thank you. Thanks, Gary.
spk10: Thank you.
spk09: One moment for our next question.
spk10: And our next question comes from Brad Millsaps of Piper Sandler. Please proceed.
spk04: Hey, good morning. Good morning. Hey, Brad. Hey, Terry. I wanted to start on slide 10, the interest rate sensitivity chart in the bottom right-hand corner. Your base case this quarter is up to almost $468 million. That's up from $405 million last quarter. Last quarter, I think the up 100 was $425. Now we're at $483 million. Can you kind of walk me through the change? I would assume the base this quarter is basically the up 100. Is all that related to loan growth? I just can't recall what you were assuming as terminal fed funds last quarter. I would assume it's about 100 basis points higher now, but just wanted to kind of walk through kind of the moving pieces there. So you kind of go from what was the up 100 last quarter to what the base case is now and some of the assumptions there underlying.
spk05: I think there's two big changes and assumptions. Well, not changing assumptions. I think the balance sheet is just materially bigger. That's point one. Point two is we model this. Before we do our shocks, we model off the forward curve, consensus forward curve. So it's much higher. You know, it's probably 100 bps higher. I don't have the actual reports in front of me from 2Q. But I did look at the Q3 reports last night, and it's got Fed funds peaking at 4.5, which seems kind of low to me, but that's where the curve was at the end of the quarter. So, Brad, that's the big thing, a bigger balance sheet, a better earning asset mix, and higher terminal rates.
spk04: Got it. And I think you threw out – Was the 60% deposit beta that you threw out more just kind of a number? I think you were talking 40 to 45. Was 60% just kind of say, hey, if it is there, we still have so much assets that reprice above that level, it doesn't really matter? Or do you think you'll actually get 60 this time around?
spk05: No, sir, no. I was talking about others were at loan-to-deposit ratios of 60%. And if that's where you are and you have that much and your loan portfolio is balanced 50-50, fixed versus floating, and you've got a bigger investment portfolio, greater allocation of earning assets there, then the importance of the deposit beta is greater in that structured balance sheet than ours. With high floating, low investment portfolio allocation, the deposit beta just doesn't have the same impact. Last quarter, I said 40 to mid-40s, 40 to mid-40s in the deposit beta. That's still what we think. But let me tell you, it's a hard one because week to week, the impact of deposit pricing competition isn't going down. It's going up. So, I mean, I'm going to say that's still our estimate, but it's truly an estimate because of just the competitive nature. You know, I've always said In my 40-plus year career, DFW is the most difficult pricing market I've ever been in. It is hand-to-hand combat. Pre-pandemic, it was hand-to-hand combat, and it's getting back to that again. So, you know, but no, we're not moving up our deposit beta assumptions for the cycle. It was just, you know, maybe I misspoke if I did when I was talking about loan-to-deposit ratios. I apologize.
spk04: No, I may have misheard you. I apologize. And then just kind of last housekeeping, you threw out a monthly NIM. I think it was 387. Was that for the last month of the quarter? I thought you may have said June, but I think you may have meant September, but just wanted to confirm. Oh, my bad. 387 was September's NIM. Okay. Sorry.
spk05: Perfect.
spk04: No problem. I may have misheard. All right. Thank you, guys. No, no.
spk05: You're right on that one, Brad. Malcolm's telling me you're right, and just for the record, I have to say, you only missed our NIM for the quarter by one bit, so that was pretty strong, too. Okay. Thank you, guys. Appreciate it. Thanks, Brad. See you.
spk10: Thank you.
spk09: One moment for our next question.
spk10: And our next question comes from Michael Rose of Raymond James. Please proceed.
spk08: Hey, good morning, guys. How are you? Good. Good. Yeah, so I just want to go back to Brady's question on the fees, understanding some of the puts and takes, and I hear you on Thrive and the swap income, which will likely come off. But on a year-over-year basis, do you guys actually think that you can grow fee income just with some of the the puts and takes that you laid out?
spk05: Let's see. I think so. Yeah. I mean, we do because we've had such a difficult year getting loan closed in the USDA space. I think that and We've made some meaningful, significant investments in SBA.
spk03: I think those are the two things. Those are the two drivers that are going to increase our fee incomes next year. You know, management in the SBA space is huge. Our new guy has been here for three or four months. Is that right? Less. Less than that. Okay. And in the USDA space, it's been kind of a perfect storm on a whole bunch of different fronts. Those guys are hustling their tails off. Their pipelines are really strong. They're super competent people. Somebody asked me, are you glad you bought that business? Absolutely. We've just been in a difficult spot. So I personally, Michael, I see both of those areas outperforming 22 by a pretty wide margin. I think swaps, Terry's already mentioned it. And Thrive is going to just – move along. They've made some acquisitions of some people along the way in this last quarter or so. I think they're going to be opportunistic. The difference between Thrive and some of the independents out there is independents ain't going to make it. Thrive's got a pretty good partner in Veritex. We're going to be able to actually be opportunistic in that space. Certainly, spreads are important, but volume is too. To answer your question, our fees are going to be I believe our fees will be greater in 2023 than 2022.
spk05: Yeah, I mean, if you take Q3 and annualize, you're at about $52 million, depending on what your view is of what Q4 fees will be. But, you know, I don't lose any sleep over having a fee number in 2023 that's going to be below $50 million. I just don't.
spk08: Okay, helpful. And then maybe just one follow-up question for me, just given where the stock is and, you know, just the amount of capital you guys have, any thoughts on, you know, a buyback at this point and, you know, being, you know, somewhat aggressive just given where the stock is? I know loan growth is going to slow, right, a little bit, but it seems like the capital should continue to build. So just wanted to get any updated thoughts on capital return here. Thanks.
spk05: Well, in the absence of any other, you know, issues, sure, this valuation level, you've seen us over the past three years be active on the buyback, but not right now, especially going into this economy with unknown credit stress of how are we going to have a recession? If we do, how deep, how long? I just don't think that that makes a lot of sense at the current time. And with us, for the first time, I believe putting out there a 10% CET1 goal, I just don't, given the economy, everything else, I don't see us doing a lot with this, especially early in the year, because there's a clear economic picture and capital ratios have built. If we get to our target, then that's something we'll think about. Some of this depends on how much does loan growth do to the economy? How much does it slow? So, I mean, it's a great question. I just don't see it, especially... And you say the first half of 23, I think it becomes a more relevant question in the back half, depending on the economy and where capital ratios are. Yeah.
spk08: Totally get it. Thanks for taking my questions. Thanks, Michael.
spk10: Thank you. One moment for our next question.
spk09: And our next question comes from Matt Olney of Stevens.
spk10: Please proceed.
spk01: Hey, thanks. Good morning. I want to go back to the funding strategy for the fourth quarter and into next year. I appreciate the commentary on the deposit growth initiatives. I think they all make sense. I guess I'm curious how much you plan on leaning into borrowings and other wholesale products in the short term, and then also on the securities portfolio. How much is this cash flowing at this point, and to what degree do you expect cash flows and securities books to help fund loan growth next year? Thanks.
spk05: No, Matt, it's a good question. I mean, I think you will see us use wholesale broker, those type things, FHLV, you know, maybe for 20, as you think about the rest of Q4, even going into 23. Our goal is not to let that type of funding, broker or wholesale, get above 20% of incremental funding. As it relates to on the investment portfolio, don't expect us to be adding to that. And it's going to spin off maybe about 75 million, something a little bit higher, between 75 and 100 million next year in cash flows coming off the portfolio. And so that will certainly help the funding of the loan growth, which was going to be down, and will improve the earning asset mix, which should help the NIM.
spk01: Got it. Okay. That makes sense. And then on the loan yields, we saw the nice improvement in the third quarter. Any noise in that number in 3Q, or should we assume that the loan betas in the fourth quarter would be similar to what we saw in the third quarter?
spk05: Uh, no noise in the number that I, that I'm aware of nothing of any size. You know, and so, you know, I said the, the ending loan yields. For the loan loan contractual yields were up to were like 522, something like that. I think I said. And I also said that after the end of the quarter. Loan yields from from 930 through, uh. Mid last week, we're up another 33 bips. So I think you're going to get some lift on the loan yield side.
spk01: And what about some of the newer production on some of your newer loans? What are you seeing as far as yields there?
spk05: Q3 loan production, ending yield for the quarter was 569. Okay. 85% of that production being floating.
spk01: And then just lastly for me, when I think about loan growth next year, you gave us some parameters as far as the size of loan growth and the amounts. What about the mix of loan growth? What kind of type of growth could we see next year, and how could that differ from what we're seeing this year?
spk03: I think you're going to see higher loan growth on the C&I side. That's been our focus. Listen, we're really good real estate lenders. We'll always be in that business. Certainly the construction side of the real estate lending business, for all intents and purposes, not because we decided, but the market decided that there's just no appetite for that right now. And so that's also an area where we have all those unfunded commitments. So we'll bleed those off over 2023. But really, our growth is going to be in the commercial C&I side, in the community bank side. We've made some recent hires on the private bank side. I think you're going to see some growth there. Um, so I think you'll see a little bit different mix. Again, this is part of our deposit initiative. We're going to, we're going to go, uh, my chief banking officer research always telling me we got to do a better job at selecting our clients. And we were selecting clients in the CNI, uh, community bank, private bank space because they provide some funding for us. And so that's a, that's another, um, you know, answer to the deposit question, but yeah, I think you'll see a little bit different mix, um, Because we have relied a fair amount on real estate. Candidly, we didn't rely on it, Matt. We just got really, really good at it. We don't want a market that's going crazy. Delivering a lot of opportunities. Exactly. And our folks are just really, really good. And that's okay.
spk01: And as far as the construction funded balances, she would be thinking about maybe one more quarter of growth there as the unfunded gets funded and then the paydowns pressure that balance next year?
spk05: No, no. You know, we've got over $2 billion in unfunded. That thing's going to bleed down over the next five quarters. If I had to put a stake in the ground, I think it's probably going to still be about a billion dollars at the end of 23. So, I mean, that's just with what's on the portfolio now. But it's going to – so you're going to see growth. A lot of this really hinges on payoffs. Very much so. You know, our real estate payoffs have been running like $151 million or so, Malcolm referenced earlier. Probably two-thirds of that's in the real estate space in the first two to three weeks of October. So I think, you know, I think the unknown is what's going to happen on the payoff side, but the growth and the production – and the funding of unfunded is going to continue.
spk01: Okay. Makes sense. Thanks, guys.

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