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spk07: Hello and welcome to Bank of California's third quarter earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on the touchstone phone. To withdraw your question, please press star, then two. Today's call is being recorded and a copy of the recording will be available later today on the company's investor relations website. Today's presentation will also include gap measures, the reconciliation for these and additional required information is available in the earnings press release, which is available on the company's investor relations website. The reference presentation is also available on the company's investor relations website. Before we begin, We would like to direct everyone to the company's safe harbor statement on forward-looking statements included in both the earnings release and the earnings presentation. I would like to now turn the conference call over to Mr. Jared Wilkes, Bank of California's President and Chief Executive Officer. Please go ahead, sir.
spk06: Good morning, and welcome to Bank of California's third quarter earnings call. Joining me on today's call is Lynn Hopkins, our Chief Financial Officer. We'll talk in more detail about our quarterly results. During the third quarter, we continued to capitalize on the core strength of our franchise, which is our ability to deliver on clients' needs in our markets in an exceptional way. This enables us to consistently add new commercial clients and expand existing relationships, which resulted in growth of non-interest-bearing deposits despite a rapidly rising rate environment that has put a premium on low-cost deposits. The rapid increase in rates and expectation of further rate increases has made for a challenging operating environment, but our core earnings power demonstrated our ability to continue to drive earnings, despite a slightly smaller balance sheet, which was primarily a result of lower warehouse balances. Our strong earnings power, combined with the actions we took during the first quarter to mitigate the impact of rising rates on our investment portfolio, resulted in growth in tangible book value per share this quarter, excluding the impact of the deep stack acquisition, and even as we continued to implement our stock repurchase program. We recorded another quarter of core double-digit annualized loan growth, excluding warehouse. At the start of the quarter, we continued to see the same level of business development momentum that we experienced in the second quarter. During the latter part of the quarter, however, we experienced a pullback in loan demand as the expectation of further rate hikes weighed on economic activity. While this resulted in a pipeline slowing and our overall loan fundings coming in below the level we had experienced in the first half of the year, Our loan production was at higher rates, and the repricing on our variable rate loans resulted in a 19 basis point increase in our average loan yields compared to the prior quarter. Excluding both warehouse and any SFR purchases, we had annualized commercial loan growth of 11% during the third quarter, which reflects our continued success in growing the core areas of the portfolio. As expected, mortgage warehouse line utilization continued to decline. which we were able to partially offset with purchases of high-quality SFR loans through the relationships with our warehouse clients. Further, our warehouse unit is best in class, and they continue to manage our portfolio very well. With one-third to a half of our warehouse portfolio self-funded with low-cost deposits, it remains a very profitable business unit. I'm particularly pleased that on an adjusted earnings basis, we were able to earn about the same amount of money as the prior quarter despite a smaller balance sheet. This is consistent with our stated plans to diversify our lending without a decline in earnings. Further, while our margin was flat for the quarter, our margin is expected to expand based on our asset sensitivity to further support earnings growth going forward. The strength of our deposit franchise continues to show through, as non-interest-bearing deposits held at 38% on average for the quarter and grew to 40% at the end of the quarter. We continue to attract new commercial clients to the bank, During the third quarter, we increased non-interest-bearing accounts by 117 million, or 17% annualized. This was fueled by a continued increase in the number of commercial accounts for an eighth consecutive quarter. We highlight this information in a new slide in the investor deck. As we have added new clients, we have exited certain deposit relationships in products with higher rate expectations, particularly those that are pegged to the Fed funds rate. This resulted in a decline in interest checking and money market account balances that we had this quarter. Going forward, we will look to continue to replace these types of relationships with continued growth in non-interest-bearing deposits while balancing our overall funding needs to support future loan growth. We also added some longer-term fixed-rate funding in the form of FHLB advances and time deposits to strategically lock in some of our funding costs going forward as interest rates continue to rise. While this had the effect of increasing our cost of funds in the third quarter, we were still able to keep our net interest margin consistent with the prior quarter, and we believe it puts us in a better position to realize margin expansion over the next year, as we expect to see higher earning asset yields and non-interest-bearing deposit growth. While our loan-to-deposit ratio remains around 100%, we're able to manage our balance sheet efficiently, as we observe the net interest margin starting to expand in the latter part of the quarter. As I mentioned earlier, our warehouse business influences our loan to deposit ratio based on the variability of line utilization and the level of funding provided directly from this business line. On average, approximately a third to half of our warehouse lending is self-funded, and we fund the rest of it with core deposits and flexible short-term sources that we utilize to match the remaining outstanding balances. For the third quarter, when warehouse loans and deposits are excluded, our loan to deposit ratio would decline from 100% to 96%. While the economy is showing signs of slowing, to date, we have not seen any impact on our asset quality. We have stress tested our portfolio under a number of scenarios involving rising rates and lower valuations, with a particular focus on credits that were underwritten three or four years ago that will be coming up for renewal in the next 12 to 24 months in a much different environment. And due to the conservative approach we take at initial underwriting, the stress tests indicate that our asset quality should remain strong, even in adverse scenarios. While we continue to deliver strong financial results for our shareholders in the third quarter, we also took another significant step in building long-term franchise value with our acquisition of DeepStack Technologies, an entry into the payments processing business. We closed the acquisition on September 15th, and we have made good progress on integrating DeepStack's technology into our internal platforms. We remain on track to complete the integration by the end of Q4 or early Q1, at which point we will begin ramping up our business development efforts and growing the client base in targeted verticals that we expect will make this a high margin business that also attracts non-industrial sparing deposits. Now let me hand it over to Lynn, who will provide more color on our financial performance. Then I'll have some closing remarks before opening up the line for questions.
spk01: Thanks, Jared. Please feel free to refer to our investor deck, which can be found on our investor relations website, as I review our third quarter performance. I'll start with some of the highlights of our income statement, and then we'll move on to our balance sheet trends. Unless otherwise indicated, all prior period comparisons are with the second quarter of 2022. Our earnings release and investor presentation provide a great deal of information, so I will limit my comments to some areas where additional discussion is warranted. Net income available to common stockholders for the third quarter was $24.2 million or $0.40 per diluted share. Our adjusted diluted earnings per share totaled $0.44 for the third quarter when net indemnified legal costs, acquisition costs, and net losses on investments in alternative energy partnerships are excluded. Our net interest margin was unchanged from the prior quarter at 3.58%. as our overall earning asset yield increased by 29 basis points and our total cost of funds increased by 30 basis points. Our interest earning asset yield increased to 433 due to higher yields on both loans and securities during the third quarter. Our average loan yield increased 19 basis points to 454 due primarily to higher average yields in our core CNI and warehouse portfolios. The average yield on securities increased 70 basis points to 338 due mostly to the CLO portfolio resetting and reflecting the 125 basis points of Fed funds rate increases that occurred in May and June. With the additional increases in the Fed funds rate during the third quarter, we expect to see further increases in the yields on earning assets during the fourth quarter. Our average cost of funds was 79 basis points, and our average cost of deposits was 47 basis points for the third quarter, both up 30 basis points compared to the prior quarter. The increase in our average cost of deposits was primarily driven by rate increases in our money market and interest-bearing checking accounts, as well as the CDs that were added to lock in some longer-term funding, offset by the positive impact of maintaining average non-interest-bearing deposits at 38% for the linked quarters. Our non-interest income decreased $1.5 million from the prior quarter due mostly to lower income from equity investments that increased our other income by $2.1 million in the second quarter. This decrease was offset by higher loan servicing income, which we anticipate will continue at this increased level in the near term due to the purchase of mortgage servicing rights at the end of the second quarter and the impact of the higher rate environment on such earning assets. Our adjusted non-interest expense increased $247,000 from the prior quarter, with the largest contributor being occupancy and equipment expense. At the end of the third quarter, we consolidated a branch, which is our third branch consolidation this year, generating an estimated $1.5 million in annualized cost savings. Looking ahead to the fourth quarter, we expect our non-interest expense to be in the range of $48 to $50 million, including approximately $1 million related to deep stacks operations. The effective tax rate for the third quarter was 29.1%, slightly elevated from the prior quarter's rate of 27.9%. The higher effective tax rate decreased third quarter's net income by approximately $500,000. We continue to estimate our annual effective tax rate for 2022 to be approximately 28%. Turning to our balance sheet, our total assets decreased by 133.5 million in the third quarter to 9.4 billion, and total equity increased by 2.9 million. The increase in total equity was due mainly to the 24 million in net earnings for the quarter, partially offset by higher net unrealized losses in the investment portfolio, and capital actions. Our capital actions included common stock dividends and the repurchase of $13 million in common stock under the program we announced in the first quarter of 2022. At September 30, our tangible book value per common share was $13.79, compared to $14.05 at the end of the second quarter. The reduction in the tangible book value per share was due mostly to the following three items, $0.22 related to the change in AOCI resulting from higher unrealized losses in the investment portfolio, $0.34 from the impact of the deep stack acquisition, including the issuance of common stock, and $0.04 related to our stock buyback program. Our non-interest-bearing deposits remain strong, averaging 38% for the quarter. We intentionally exited certain high-costing deposits in the money market and checking categories, which were replaced in part by longer-term fixed rate funding, both FHLB advances and wholesale CDs, which we believe will help us better manage our cost of funds in a rising rate environment. This resulted in overall deposits decreasing $278 million during the quarter, despite the growth we had in non-interest-bearing deposits and the CDs we added in the quarter. The growth in noninterest-bearing deposits and the change in our deposit mix had the effect of increasing noninterest-bearing deposits to 40% of our total deposits at the end of the third quarter. Our credit quality remains solid in the third quarter with nonperforming loans decreasing $1.8 million to $42.7 million at the end of the third quarter. At September 30th, 66% of our nonperforming loans were either in a current payment status but were classified non-performing for other reasons, or have an SBA government guarantee. We did not record a provision for credit losses in the third quarter, given the lower loan balances and favorable trends in asset quality, which offset the impact of weaker economic forecasts. Our allowance for credit losses at the end of the third quarter totaled $98.8 million, and our allowance to total loans coverage ratio stood at 1.36%. which is a bit higher than the end of the prior quarter. Excluding our warehouse loans, which have a lower relative risk level in our reserve methodology, the ACL coverage ratio stood at 1.47% at September 30th. Our ACL to non-performing loan ratio remained healthy at 232%. This time I'll turn the presentation back over to Jared.
spk06: Thank you, Lynn. Through the first nine months of the year, We have already delivered on the goals and strategic objectives that we set for 2022. We successfully integrated the Pacific Mercantile Bank acquisition and exceeded our projected level of cost savings. We've continued growing our targeted areas of lending, which has resulted in loan growth, excluding warehouse, that has already exceeded our expectations for the full year. We have a strong core deposit franchise with stable and growing non-interfering deposits from commercial clients that continue to increase as a percentage of total deposits. We've capitalized on our asset sensitivity and realized significant expansion in our net interest margins since January and expect our earnings to benefit from further rate hikes ahead. We've been able to effectively manage expense levels while continuing to add banking talent, expand attractive verticals, and invest in our technology initiatives. We've optimized our use of capital through the redemption of our Series E preferred stock and returned more capital to shareholders through the implementation of our stock repurchase program. while still growing our CET1 ratio and TCE ratio on a year-over-year basis, remaining very well capitalized and well positioned to manage through economic slowdowns. With the acquisition of DeepStack and our entry into the payments processing business, we have advanced our goal of elevating the client experience and becoming the hub of their financial services ecosystem, while at the same time adding a business that we expect to provide a consistent, high-margin source of fee income, increase the diversification of our revenue mix, grow non-interest-bearing deposits, enhance our business development efforts, and contribute to further increases in our level of profitability and franchise value. And in an environment when banks have struggled to grow tangible book value per share, excluding our use of capital for the acquisition of DeepStack, we have continued to show our ability to protect it and grow tangible book value, even as we complete a share repurchase program. It's already been a very successful year from a number of perspectives. and I want to thank all of our colleagues at Bank of California for their extraordinary efforts. Despite the uncertainty in the economy, we expect earnings growth ahead fueled by strong and a stable base of non-interest-bearing deposits, a solid core loan engine, and asset sensitivity. We continue to add new client relationships that should contribute to further growth in our core loan portfolios and non-interest-bearing deposits. And over the next year, we believe our payments business will become a meaningful contributor, providing another level to fuel our growth. Based on everything we have accomplished this year, we are optimistic about the opportunities to continue profitably growing our franchise in the coming quarters and years ahead and creating additional value for shareholders. Thank you for listening. And with that, operator, let's go ahead now and open up the line for questions.
spk07: Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using the speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Timor, Brazil with Bell Fargo. Please go ahead.
spk03: Hi, good morning. Good morning. Maybe just starting on balance sheet size, can you give us your expectations for mainly loans and deposits going forward? How much more of a drag should we expect warehouse to be here in the next couple of quarters? And then similarly on the deposit side, I know you guys took some initiatives to get some hotter money off the balance sheet this quarter. What should we look at or what should we look for on the deposit side as far as size as well?
spk06: Thanks, Timur. Well, look, I think it's hard to know where Warehouse is going to settle down. We had the ability during the quarter to continue to fuel loan growth, but we just were, I guess we were pretty conservative in the second half. You know, borrowers obviously We're hesitant as well with rising rates and certainly in the real estate side, there was a little bit of a pause, but we had the opportunity to do plenty of loans. We just decided it was better to be a little cautious. And I think that's going to be our posture through the end of the year. It's hard to see the balance sheet shrinking at this point because it feels like things have leveled out. Obviously we're all expecting another rate increase in November, but it feels like things have stabilized a little bit. So I don't know how to predict where we're going to be other than I think we can probably keep the balance sheet pretty flat, but I want to be clear. I mean, we see ourselves making more money going forward. And if we shrink loans, there's obviously good opportunities in the investment portfolio. So it feels like we can stay flat if not grow.
spk03: Okay. And then on the deposit side, I mean, that's really impressive what you've been able to do on DDA. You know, 40%, how sustainable is that? We've heard from other banks this quarter, even those that have been able to grow DDA, the few that have, that there's some seasonality built in and it's unlikely that those balances kind of remain. You're talking about growing DDA. Is that reasonable in this environment? Is there any pressure that you're seeing from your client base either looking to move money elsewhere or wanting some sort of ECR or some sort of other alternative for rates there?
spk06: So it is a challenging environment and I'm really pleased with what our team's been able to do. We have it front and center. in terms of our deposit growth plans. The key for us, we do expect balances to flow out and we do expect as the economy contracts a little bit, which is what the Fed intends, that balances will get used and maybe not replenish, which is why one of our focus is on bringing in new relationships to the bank. We added that slide to the deck, as you probably saw, that shows the fairly dramatic change since I've been at the company in terms of bringing new commercial accounts and relationships to the company. And so that's our focus. You can't control the balances within your client's account. But if you're continuing to bring new relationships to the company, which hopefully that demonstrates we've been doing it very successfully over a very long period of time, that, you know, our overall, we expect our deposit balances to grow. I want to be really clear because I've said this before. We are not about looking at what's going to happen quarter to quarter we are very focused on what our trends are over the course of the year which is why in the end of my prepared remarks i talked about all the things that we have done over the course of this year already look i think we had a really solid quarter we expanded our non-interfering deposits we you know protected our exchangeable book value which i think doesn't get enough credit given what you know we've done relative to others you know we kept our name flat even though we locked in some long-term fixed rate funding which And as we said, we expect our MIM to expand. I think it was pretty solid overall. Yes, we did not hit the earnings expectations for the quarter due to a slowdown and decline in warehouse. But again, remaining earnings relatively flat on a smaller balance sheet shows that we are improving our quality of earnings. And so going back to your specific question, you know, is it fair to expect us to continue to grow non-interest-bearing deposits or low-cost checking, I think we will do it. I can't tell you quarter over quarter that it will decline or increase a little bit. I just don't know. But over the course of the year, we will continue to have positive trends because all of our momentum is moving in that direction.
spk03: Okay. And then maybe one last one, if I can, just Looking at warehouse specifically, loan balances have gone down. It seems like the deposit side of that relationship has been quite resilient. Are you seeing kind of those deposits that were brought in during peak warehouse balances, are those all still sticking around? Or are you seeing that kind of one-third to one-half funding on the newer base? And then to the extent that they are sticking around, How much of a risk is it for them to actually exit the system, and what type of scenario would drive that type of an event?
spk06: Yeah, no, good question. I mean, we have a very resilient warehouse business. We have a very strong warehouse team. We continue to expect our warehouse business to be funded a third to a half by balances that it holds. There's movement inside of those balances, but, you know, the there seems to be very good stability for us in those balances, whether they're from existing clients or new relationships that we're bringing on. It's obviously all fungible money, but we don't have any expectations for that to change. So if the business grows, we expect it to be a third to a half funded with its own balances. If it shrinks, we expect it to be a third to a half funded with its own balances. That we expect to continue. I hope that answers your question.
spk03: It does. Thank you. I'll step back.
spk06: Yep. Yep. Thanks, Mark.
spk07: The next question comes from David Feaster with Dream Engine. Please go ahead.
spk02: Hey, good morning, everybody.
spk07: Good morning. Hi, there.
spk02: I just wanted to touch on DeepStack. You guys gave a little bit of color, talked about when the integration is expected, and maybe a little bit on the expense front. But I was hoping maybe you could just walk us through, as you step back and think about it, what is your roadmap for this business? What are you guys working on currently, and what do we need to do in order to really get us to the point where you're going to generate the revenues that you think you can generate? And can you help quantify the revenues that could come out of this and maybe talk to the pipeline of clients that you're talking to today?
spk06: Yeah, thanks for the question, David. So the roadmap that we have is we're – In the process of integrating DeepStack into our company, currently all transactions are being processed through a third party bank. We are finishing the integration with our own bank so that we can process transactions on our own pipes. We're doing what's called a soft launch this quarter with the expectation that we'll flip the switch and do like open the pipes fully early next quarter, at which point we will be able to start bringing on the clients that are in our pipeline and bring them on directly. The hard part for me, in terms of providing numbers to you, is obviously I don't want to set expectations the wrong way. And it all, for me, is timing dependent. We have a pipeline. I know what it looks like. But what I can't tell you until we flip the switch is when those clients will be brought on board. And so I can't today tell you those clients are gonna be brought on board in the first half of the year or the end of next year because we're not live yet. Once I know we're live, it'll be very easy for me to kind of figure out what the sequence of events will be and we'll be prepared to give some sizing around it. We'll obviously be very conservative at first to make sure that we're not missing there. But that should be in the first quarter. The opportunity with DeepStack, again, is really meaningful. First of all, it's a solution that really, we believe, is going to be very valuable to our existing clients. I had a call this week with one of our existing clients who's pretty excited to use DeepStack. And then, obviously, we think that there's a whole landscape of new relationships that we can bring to the bank that will go after providing these services to ISVs, and we think that their end clients will also be attractive clients for our bank, and it's obviously you know, the opportunity is fee-based, but there's also plenty of deposits that we think will follow given the nature of the transaction. So that's the roadmap we have. There's a second level to our payments roadmap that includes some other products that we'll be talking about in the first quarter. But right now, that's the specific roadmap for D-Stack.
spk02: When do you think you could start seeing some of the deposit growth from that? If revenues start you know, mid to late next year, is it really a 2024 event when you could start getting the, uh, no, no, no, no, it'll, it'll be, it'll be, it'll be absolutely in 2023.
spk06: We'll start showing some deposits that will come over with, as we bring on clients, because there'll be the average balances for the transactions that they flow through. It'll obviously build, but we'll start seeing some impact. It'll, it'll be obviously dependent upon how successful we are, how quickly, um, but that, that there will be some impact next year.
spk02: Okay. And maybe just touching on demand and kind of how the pipeline's trending, I'm just curious, what are you seeing across your footprint? And it sounds like the slowdown in originations was more strategic rather than higher rates, you know, kind of decelerating demand. Just kind of curious what you're seeing on that front and what do you expect to be the key drivers of growth, kind of given your more maybe a bit more cautious outlook, do you think it'll still be multifamily and single family resi near term?
spk06: So I don't see us in the market to buy a single family anytime soon. You know, we feel like our book is fairly full there and it served its purpose of stabilizing the balance sheet as warehouse kind of ran down. So what we got in the last quarter was a reflection of things that we've pre-committed to. And, you know, I would say at fairly good pricing, We thought it was a good buy when we did it. Surprisingly, you know, in the markets where we operate, things are pretty resilient. And, you know, healthcare deals continue to go through. We've got some really good momentum on the entertainment side where deals are still happening. There's a, you know, kind of a film event in two weeks in L.A. where we're presenting on a panel. And it's just there's a lot of activity in that side. There's a lot of bridge real estate. we're just being super cautious in areas where we think, you know, we've done a lot of stress testing in our portfolios. We're just being very cautious. I mean, I'd be worried about, you know, on the manufacturing side and on the light distribution side, inventories having built up, right, because people bought extra inventories at a time when supply chains were limited, you know, so they were trying to shore up their inventories, and now the economy has slowed, and are they sitting on extra inventories? or you gotta be worried about businesses where receivables aren't coming in as fast, and then they're drawing down their line of credit to bridge liquidity. You just gotta be really careful. And so this is not a, the Fed is intending for the economy to slow. It's absolutely happening. We still see signs of borrowing and people wanting to borrow. We just think the smart thing to do this quarter is to be really careful and protect the franchise for the long term. This is absolutely a long term game. We're not looking, as I said, we're really not focused quarter to quarter as much as I don't want to disappoint. It's just we're trying to really build our franchise for the long term, which is why I'm so proud that we've done a great job and Lynn and her team have done an exceptional job of protecting our tangible book value. We really have not had the AOCI marks, and Lynn went through the numbers about what impacted our tangible book value to the quarter. But for DeepStack, we would have continued to grow tangible value. But we chose to apply some of our capital toward the future. So I think in terms of where loan demand is coming from, there is still loan demand in every sector. We're being very, very cautious. And obviously, at 100% Loan Deposit, we want to do that anyway. But the environment's helping us do that. But we could fill our loan pipelines. There's stuff to do.
spk02: Okay. That's good. And then maybe just last one for me, just touching on hires. You guys have done a phenomenal job hiring new producers over the past several quarters and expanding into new verticals. Just curious, given where we are and what you guys have going on with DeepStack, how do you think about hiring new producers? And what's the market like? Are you still seeing that being a talent magnet and continued opportunities to hire new producers?
spk06: 100%. That's an active part of our business. It's an active part of my job. I had lunch yesterday with somebody who is at a competitor just to make sure we were, you know, in front of each other and talking about opportunities together. I do that frequently. We will continue to hire talent because we have the ability to absorb it. We have a very talented team. But for us, A producers and high-quality people, we will continue to add talent.
spk02: Great. Thanks, everybody.
spk06: Thank you, David.
spk07: Our next question comes from Gary Benner with BA Davidson. Please go ahead.
spk05: Thanks. Good morning. Hey, good morning. So if you've said a few times that, you know, kind of back half of the third quarter of loan growth, you know, was pretty intentionally slowed, you know, X warehouse. As you think about fourth quarter and even, you know, early next year, given the uncertainty in the environment, I mean, does that translate to, you know, low single digit loan growth? ex-warehouse for a couple of quarters as you're kind of replacing runoff and bridge loans with some new production? Or do you think that, you know, the kind of just the organic strength of the business results in something better than that, depending on how conservative you are?
spk06: No, I, look, I don't think there's, it's hard for me to know, right? But I don't think that's unreasonable. I mean, the economy is coming to a halt. So if you're like, if we grew double digits, annualized loan growth next quarter, that would surprise me. I think low single digits or even flat is probably not unreasonable. But then again, you know, loans are repricing in a higher rate environment. So you don't need to be growing your balance sheet to be making more money. You can be flat and redeploying into a securities portfolio that now can give you opportunities that didn't exist. Your margin should expand as, you know, ours at least we see it expanding. And we see that expansion being incremental. We're not going to get it all in one quarter. It's going to just, like everything we do, it's going to be incrementally better quarter over quarter as things move down the road. So we're not looking for some massive jump in any particular quarter. We just see the trends getting better and better and better for us as we continue to just kind of move the ball down the field. I don't think it's unreasonable to think that loan growth next quarter on a net basis could be flat. We obviously are making loans all the time. Runoff has slowed as well, but we can make good money not growing as fast, and I think that's prudent right now. Hard to see what's around the corner. I saw one economist report yesterday that was projecting that we were going to hit a recession pretty quickly. The Fed was going to drop rates at the end of next year. So, you know, I don't think it's consistent with what others are saying, but it was one of the major banks. And, you know, if that's the case, then everybody's going to play defense for nine months, you know, or this rate hike is going to be over pretty quickly. But who knows? But I don't think it's unreasonable to think that loan growth on a net basis could be flat or low single digits.
spk05: Okay, I appreciate that. And then in terms of, given that and your prior comments about maybe the balance sheet is basically flat from here, but you make some more money, as you think about kind of runoff in the securities portfolio, given where rates are now, would you be prone to reinvest some of those cash flows? Or would you think about taking some pressure off the funding side? Yeah, just broadly thoughts on that.
spk06: Yeah, I mean, all of that. I mean, we've been going through that analysis for a while. Lynn, what are your thoughts there?
spk01: Yeah, I mean, you know, I think on the securities portfolio side with the higher rates, you know, prepayment speeds have slowed there as well. But to your point, I think there's opportunity for the cash flow that is coming off to go back in the securities portfolio. And I think further to Jared's point, I think there's opportunity for cash flows coming off of maybe other parts of the loan portfolio to deploy into the securities portfolio for attractive yields. And then I think strategically, you can also take down some higher cost variable rate deposits as we continue to grow our non-interest bearing deposit base. So all of those things, I think, point to, you know, Margin expansion.
spk06: There's also the opportunity to sell some securities that are lower yielding and take a hit and then offset it with something that's significantly higher yielding that will benefit you in the long term. So we're looking at all of those things to look at what will benefit investors over the long term as opposed to just quarter to quarter.
spk05: Got it. Appreciate that insert for cutting you off. Last question for me, just in terms of capital and buyback, obviously you remained active this quarter. I think you've got around 19 million or so left in the authorization. You know, with the stock here, obviously, you know, a lot of banks down quite a bit the last couple of days, including today, down around, you know, in the $15 range. You know, how do you think about, given the uncertainty about the environment, you know, your capital is strong. Uh, is it a time that you would press a little bit more on the buyback or, uh, you know, are you cautious enough that you wouldn't want to use capital at this point for that?
spk06: We have, we have a lot of capital and I don't, I wouldn't have any problem using it to buy back our stock at highly attractive valuations. What I want to be careful about is. not just limping in and not really making a dent. So if you if you can't contribute enough toward a program, it's probably not worth doing it. But we have a lot of other uses for capital reinvesting in our company, you know, and improving our technology, improving team, you know, systems for our teams, improve bringing on products for our clients, we have a lot of uses for capital that we think will generate a very high return. And including buying our stock. I mean, our stock is clearly at a value where buying it is attractive. I was talking to one of our larger investors this morning who was, I guess, pleased with the temporary dip. He told me he had bought some more. So, you know, look, I don't want our stock to be down at those levels, but when it is, it certainly is something we have to look at very carefully.
spk00: Thank you. Thank you.
spk07: The next question comes from Kelly Mota with KBW. Please go ahead.
spk08: Hi. Thank you. Thanks for the question. Maybe we could circle back to funding. You mentioned you layered in some longer-term fixed-rate funding, some brokered CDs and FHLB. Could you just provide more color on what specifically you added in terms of rate and the term on that?
spk06: Lynn, you want to take that?
spk01: Yeah. Let me start. So it was a combination of our brokered deposits, which we show separately, as well as putting on some FHLB term advances. I think during the quarter, there was a little bit more inversion to the yield curve. So at this point, I look at the combination of the two. And we have maybe just under a billion dollars, maybe about $900 million in these wholesale funds. A portion in Brokered Cities and a portion in FHLB Advances. The FHLB Advances have a longer duration. They're more closer to about three years. And I think the average rate is just under 3%, Kelly. The stuff that was added in the quarter was a five-year term at about 370. Got it. $200 million. And then our brokered CDs, we've taken a little bit shorter view on those, so they have a little bit shorter duration. I think their average rate is a little bit lower. Let me see here. Duration is around one year. Oh, it's about $270 as well.
spk08: Okay, got it. And that allowed you to roll off some of the hotter money. Do you think that after the actions you took this quarter to really refocus on the core deposit base that most of that hotter rate money is gone and you're kind of good with what you have? Or is that going to maybe roll into the fourth quarter as well?
spk01: I think really a few things happened that gave us an opportunity to reset some of our funding base. So with the pullback and with the higher rates and the pullback on the warehouse balances and knowing that we have some core funding but then we match fund a portion of it, we were able to let go of some higher costing deposits. But then also looking out over, you know, our crystal ball, kind of the yield curves, expectations. We're able then to transition some of the other variable rate money into term money. So I think there's good opportunity for us to keep what we have and then grow core deposits and then manage our balance sheet growth, kind of what we've been talking about on the loan front and, you know, being cautious and judicious there. Yeah.
spk07: That's a long answer.
spk01: The short answer is I think there's an opportunity to continue to grow with a core deposit base.
spk06: Got it. Let me add to that. I think I just want to make sure we're not cutting off or being clear. If there was an opportunity to lock in some fixed rate funding again, I think we would do it if we saw that it made sense and Lynn did mention a specific opportunity when we thought the yield curve was sufficiently inverted that it made sense, but that's not to say that there wouldn't be another opportunity to do it going forward.
spk08: Got it. Thank you. Maybe a last question for me. I think in your prepared remarks, you said that margin exited the quarter higher than the average rate. Do you have like an ending spot on that or any numbers to add around there?
spk06: So we didn't publish it because, you know, Lynn likes to say a quarter doesn't make a turn. And so, you know, and nor does a month, nor does a month. Right. So what we saw, we think was stable and we think, well, is the reason why we know, we know we're asset sensitive. Everything we see shows us we're asset sensitive. Every scenario we run says we're going to make more money as rates go up. The pace at which that happens is hard to predict. And so I said that I thought our margin would continue to expand and we believe that that's the case. We didn't want to put out the September margin as a prediction of where our margin would be going forward because while we think that's the right trend and we think it's going to be that or better, we just weren't confident that was the case. And so we didn't want to improperly guide on that note.
spk08: Got it. Thank you. I'll step back.
spk06: Try to be cautious. Try to be cautious. Yeah, thanks, Kelly.
spk07: As a reminder, if you have a question, please press star, then you'll need to be drawn into the queue. Our next question comes from Tim Coffey with JANI. Please go ahead.
spk04: Great. Thank you. Morning, everybody. Morning. I just got a question on the allowance. I mean, given kind of where it is right now in conjunction with, you know, your outlook on the credit market and as well as the structure of your non-accruals and the kind of safety nets you have there, do you feel like this is a sufficient level as the allowance is at right now, or do you think it needs to be taken higher?
spk06: No, we definitely feel it's sufficient right now. I mean, you know, as I mentioned, we've done all the stress testing, and we don't see pickups going forward even as rates go up. So as of right now, I mean, you know, the economy was strong and the Fed is trying to create slowdown. I think one of the things they're primarily concerned about is wage growth and how that affects inflation. And so they're obviously trying to slow things down dramatically, but this is not being charged by credit concerns. So then the question becomes as rates go up and the pace at which they go up, How does that in any way cause any credit concerns? I outlined a couple of areas where we would be cautious and why, but we do not see any credit hiccups right now, certainly through our portfolio, which we view as very well underwritten and very secure. And so we believe that our allowance is very healthy.
spk04: Okay. And then prior comments on the efficiency ratio, I think, you know, I forget exactly where we left it, but it, I think there was expectations for incremental improvements. Has the trajectory straight up in interest rates changed that at all? Lynn?
spk01: Yeah, I would say I think there's room for improvement. I think with our guidance that we've provided with our investment in DeepStack and with with the higher interest rates, I would expect our efficiency ratio to be at where it is now or a little bit lower. Okay.
spk04: Those are my questions. Thank you very much. Thank you, Tim.
spk01: I apologize. I got disconnected at the end of Kelly's question, so I did join back in with Tim.
spk07: Our next question is a follow-up. Yep. Two more.
spk03: Hi. Thanks for the follow-up. Just one more for me. It looks like the spot rate on deposits isn't too different than the reported 47 basis points, so 56 basis point spot rate versus the 47. Is that any kind of indication that some of the higher deposit costs were kind of implemented earlier in the quarter and then beta slowed throughout the quarter? And, you know, how should we be thinking about the pace of deposit betas here into fourth quarter and then, you know, through 23?
spk01: Let me start. I do. Great question and observation. You know, I think that with the rapids, increase in interest rates and how we've managed the deposit base with the growth and non-interest bearing and then exiting some of our variable rate deposits. It did moderate our deposit betas. You know, we're around 25%. And then we had that last rate hike in September. So, you know, I think as I look at it going forward, given the shift into some of our longer-term fixed-rate funding, I think that the deposit betas would probably remain around the same level. It's a little difficult to predict with, yes, facing potential rate hikes of call it 75 plus 75. But I think that with 40% in our non-interest bearing, you know, being in that 25 to 30%, 35% range, you know, is a pretty good indication. And to your point, Our spot rate at the end of the quarter is very similar to our average for the quarter.
spk03: Great. Thanks for the clarification.
spk00: Thank you.
spk07: This concludes the question and answer session, and the conference is also now concluded. Thank you for attending today's presentation. We may now disconnect.
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