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spk03: obviously taking into account sort of full relationships and doing the right thing by our customers. And so I think there's a chance for us to offset some of that just by pricing discipline and potentially long growth in 2024.
spk07: Yeah, as I mentioned earlier, thanks, Kurt. I mean, we do. feel like we have the right to ask for the proper pricing relative to our cost of funds. And to the extent there is less liquidity in the economy, the deposit pricing, cost of funding goes up. And I would expect to recover a piece of that or perhaps all of it in our pricing equation. But again, we'll see what the market allows and what we can demand from it.
spk04: I know one of the factors is noninterest bearing levels, right, which we're down again this quarter. But I'm curious, Are you seeing customers still optimize and move balances out in search for higher yield, or is it just back to spending cash?
spk07: Stephen, that's actually one of the areas of encouragement to me. I mentioned the deposit beta is really moderated in recent weeks. I would also say the same is true of non-interest-bearing deposits. If I look month by month since the disruption in the spring, the decline in non-interest-bearing deposits has slowed up every month. And it was essentially flat from August to September. I'm not saying it will always continue to be flat. But I do think that these corporate creditors manage their own cash levels. They're starting to hit that floor where they need a certain amount of cash to run their businesses. And we're really seeing a slow up as a result. We think they've squeezed that orange about as much as they can. Now, could there be a little bit more to go? Yes, it's possible. But we do think that the trend is our friend in this case. we're really seeing a flattening out of the non-interest-bearing decline. So I don't see a lot of decline occurring at this point in time, probably a little bit more, but I think we're well past the worst of it.
spk04: If I could squeeze one final one in, I hear all the comments around moderating expense growth in 2024, but if we step out, you know, if we look at this quarter, revenue is down 9% year over year, expenses are up 11% year over year. We know why, but earnings are down 30%. As you guys think about the next year, are there levers to pull to start generating more meaningful operating leverage, or is it just a tough environment and you have to just wait for the yield curve to improve and other things? Or do you sense we need to do more here and there's other levers we could pull to get at least earnings heading in a more favorable direction? Thanks. Thanks.
spk03: Well, Steven, I would just say in general, as a company, we are always committed to delivering positive operating leverage. Short-term, that's a bit more challenging, as you just outlined for us for all the reasons that we know. But two things there. One, first and foremost, we are focused on top-line revenue growth, and we believe we've got great momentum there with the things I outlined to you previously, whether it's product expansion, and capabilities, treasury management, capital markets, et cetera. We continue to add talent in many of our areas. We just had a very successful lift out of a wealth management team in Southern California and the expansion into the Southeast, but also just adding depth in the existing markets that we operate in. And I do believe that we will continue to drive fee income and that loan growth will return for us in 2024. We'll provide more guidance at our fourth quarter earnings call. So we're focused there on the revenue side. And then secondly, we are going to be focused on the expenses. And we've done that historically well as a company. And we're going to be careful to strike the right balance between short-term expense management and sort of the longer-term investment in the company. So I can't promise sort of when did that sort of positive operating leverage equation tilt, but it's our objective, and we are very focused on delivering positive operating leverage for the company and for our investors long-term. Got it.
spk04: Thanks for taking my questions.
spk11: Thank you. Next question is coming from Chris McGrady from KBW. Your line is now live. Good morning, Chris. Oh, great.
spk08: Good morning. Hey, good morning. Jim or Chris, maybe on the $100 billion, going back to that, you are about 15% below that. How are you thinking, I guess, within the budget for expenses? Like what needs to be spent to be compliant for $100? I guess what's already been spent that you could kind of grandfather in? And then also, can you remind us on the pension expense? I think it's tied to the 10-year, and just remind us the magnitude of how you're thinking about it. This year was a big year. Thanks.
spk03: Chris, I'm going to take the beginning of that question on the $100 billion target, and I'll let Jim address the pension issue. We obviously, with the significant buildup In deposits, we were getting closer to the $100 billion mark, which we really never thought was maybe a sustainable situation, that we had a lot of buildup in liquidity because of sort of stimulus and monetary policy overall. So that has pulled down as we've moderated some on the RWA side of the equation. We're very comfortably right now below that $100 billion mark at $86 billion. And if you just look at organic growth, which has always been our focus as a company, it would take us some time, we think, to get back over the $100 billion mark. So it's important that we are positioned to be over $100 billion in terms of regulatory compliance and what would be required to be a Category 4 bank. that we've had a project and initiatives underway for some time. We're probably 40, 50% through sort of what would be necessary for us to comply in terms of the technology and sort of infrastructure to support that. But we've got some time to sort of make that happen. But it is one of the expenses that has applied some additional expense pressure for us for the longer term. I made some comments previously that I think at one of the investor conferences just around M&A. And just maybe just to be clear there, nothing has changed for us in that equation. Getting close to $100 billion really does not change whether we would do M&A or not. We were focused first and foremost, as I said earlier, on organic growth. So if the deal came along, it still had to make great strategic sense for us. And again, we think we can sort of manage where we are today. We've got some time to sort of evaluate the landscape longer term, but I don't anticipate any sort of pressure on the $100 billion level, you know, at least for the foreseeable next couple of years.
spk07: Yeah, and I might take that even a step further. Chris, you mentioned 15% below. We do plan on repaying more debt in the fourth quarter. We'll get the full quarter effect of what we did in the third quarter. So we do see cash and purchase funds coming down another $4 billion in the fourth quarter on average on an ending basis, more like probably a billion or a billion and a half. So we are well below the $100 billion. Now as AOCI comes back and we have loan growth, we'll start moving back towards $100 billion. But as Kurt said, we're probably a few years away from that. And I'll just say that in terms of what we're focused on in terms of complying with $100 billion as it might impact expenses, We're only focused on that subsection of the requirements that potentially take more than a couple years to make sure you're comfortable with. So those things that have a longer tail to them, we are focused on working on, and that will be one of the expense pressures we have to offset. But we don't feel like we need to jump into it entirely in terms of getting ready at this point in time. A lot of the requirements, we can wait until we're a little bit closer to $100 billion In terms of the pension question, pension counting is one of our favorite topics and a great one to waddle through. A lot of variables there. But interest rates are the key one, market performance in general, but interest rates most specifically. If you go back to our K, we do have a sensitivity in there that shows that for every 25 BIPs, a rate change in 10 years is a pretty good proxy for our liability and the assets we have offsetting that. Every 25 BIPs translates to about $11 million of expense. So obviously, we strike that in 1231. There's been a big step up since then. But I would also say there are other variables that are likely to make us come in below what that sensitivity would suggest. Most importantly, we have a number of amortized credits from past actuarial assumptions that we all performed on. And so we will perform that sensitivity. But a lot of variables involved there, so that's something we'll have more clarity on as we approach the end of the year.
spk08: That's really helpful. Thanks, Jim. Just one final one in terms of the targeted, I guess, level of cash and bonds on the balance sheet. You haven't reinvested the bonds in the last year. Remind us either as a percentage of earning assets or maybe an absolute level where you could ultimately see those levels shrinking down to.
spk07: Yeah, that's going to depend on just the overall composition of the balance sheet, how close we are to $100 billion, as it might relate to liquidity rules and debt requirements. But I would see us moving closer towards $14, $15 billion securities, probably closer to $14. So we have a ways to go. And what I might suggest is we're likely not going to be buying securities at least for the next couple of years. Great. Thank you. Thank you, Chris.
spk11: Thank you. Next question is coming from from Morgan Stanley. Your line is now live.
spk03: Good morning. Hey, good morning.
spk01: I wanted to follow up on your comments on AOCI. I mean, I think you noted that you haven't added any swaps in the books this year, given that the tenure is up another 50 basis points this quarter. How are you thinking about managing AOCI risk here?
spk07: Well, at this point, we don't feel like we have to do anything synthetically to manage it. We're okay with where we're at based on the burn-off that we see over the next couple years, and really more importantly, the burn-off over the next five years as we potentially become a Category 4 bank. And so at this point in time, we are comfortable with where we're at. We do think that as we move closer towards category four, we will consider modifying our strategies to maybe shorten the duration of the securities, whether that be with what we purchase or doing something synthetically. But for the time being, we don't feel compelled to do anything. We're comfortable with the burnout that we see over the next few years.
spk01: Got it. So there's clearly some volatility on the long end of the curve. Does it make sense to use the same DV01 for AOCI that you saw this quarter and then apply to changes in the 10-year in future quarters to figure out the AOCI risk there?
spk07: I think that's a pretty good proxy. Yeah, you can see a little bit of movement one way or the other, but I think it's a good proxy for future rate changes.
spk01: Got it. And then maybe finally just on the, I think you mentioned a 37% pull to par on unrealized losses over the next couple of years. how is that impacted by the rate environment?
spk07: Well, that 37% considers the curve as it stands today, so not just spot rates but where the curve is. So, you know, to the extent the entire curve shifts up or down, you know, that will have an impact on that burn-off. But for now, you know, this obviously contemplates the entire spectrum of the curve.
spk01: In the sense that if the curve moves higher than the – pull-to-power will be longer, and if it moves lower, then the pull-to-power will be sooner.
spk07: That's right, and we do have a sensitivity on that on slide 14 in the bottom right, so you can see what 100-bit movement would do one way or the other.
spk01: Got it. All right, thank you.
spk07: Thank you, Manan.
spk11: Thank you. Next question today is coming from Brody Preston from UBS. Your line is now live.
spk03: Good morning, Brody.
spk09: Hey, good morning, everyone. I just wanted to ask, could you give us a reminder? I think it was the gear up initiative that you had in the past. Could you remind me what the if you if you happen to know what the total kind of, I guess expense expenses you kind of took out of the run rate or kind of, you know, like, I'm just trying to remember what you did in the past.
spk03: Brody, I would not go back through all that detail with you. I might just say that, in general, that GEAR UP was a combination of expenses, but also some revenue enhancement opportunities that we focused on. Some of that was around capabilities. Some of it was around pricing strategies, et cetera. And it was not just a single-year impact. It was an impact that we – a program we put in place to improve the overall efficiency what was at that point a very low rate environment so if you're looking at sort of applicability to today i mean we're a bigger company in terms of our overall revenue base as an organization and our expense base as well and so we're going to think about this in a thoughtful way on a go forward if you're kind of driving to sort of what expense reductions we might look at and look at things that really minimize anything associated with revenue and customers and really try to focus on areas, you know, real estate, sort of our technology spend that we might be more careful with, you know, vacancy rates in terms of headcount, et cetera. And we'll have more to potentially share as we get into the outlook for 2024. Got it.
spk09: Okay, thank you for that. I wanted to ask a couple questions to Melinda. Melinda, you said... You talked a little bit about the multifamily and the migration there, but the sponsors have kind of stepped up to cover any shortfalls. When you say shortfalls, do you mean like there's multifamily properties that are falling below one debt service coverage ratio?
spk00: It could be that they are in the process of being leased up, and so they're behind schedule. But the biggest driver right now in the multifamily space in terms of any kind of a shortfall is really because of the rising rate environment. The majority of the loans are floating rates, so they've been absorbing the rate increase of 500 basis points over the last four or five quarters. And so there could be a shortfall in an interest reserve that we require during the construction phase or a debt service coverage during the lease-up phase as those are going into stabilization.
spk09: Got it. Are there any markets, you know, that you look at across your footprint and say, you know, maybe there's new supply coming on that, you know, might exacerbate any of these issues, like any that come to mind in particular?
spk00: Yeah, I think the market where we've seen the most challenge and the most migration, again, reminder, though, that the migration has been very manageable and criticized loans in the commercial real estate book are still relatively low. But the migration is really concentrated in the California, some of the sub-markets, Northern California being the most impacted at this point, and then Southern California. So we're watching those really, really closely. And again, the customer base there and sponsor base I would consider exceptionally strong. And we have tenured colleagues that know how to manage through this. So we feel really good about our strategy there. We feel really good about the product set. But multifamily has had a tremendous amount of supply come to market, and there's more to come. So I expect that we'll continue to see some modest level of migration in that portfolio. Wow.
spk09: Got it. Okay, and I know it's a very small portfolio for you guys, but do you happen to have what the reserve is on the office portfolio at this point?
spk00: We don't have a reserve specifically on the asset classes, but we do have coverage ratio for the commercial real estate book as a whole, and it's 1.58.
spk09: Okay, got it. And, Jim, I just wanted to follow up on the swap question, the swap that you said. You've got forward starting coming on that'll – you know, outpace anything that's maturing. That's all reflected in the 24, you know, kind of walk up on the swaps book. Absolutely, it is. Okay, great. I just wanted to make sure. Then this last one for you, you know, for, I know it's a smaller portion of the book, but for the, you know, true fixed portion, you know, not the swapped floating portion. Can you walk us through what the maturity schedule looks like over the next, 12 months and kind of what the yields are that are rolling off versus what current origination yields are right now?
spk07: Yeah, it's really a relatively small part of our book, and I don't see it having a big impact on yields next year. I think somewhere in the appendix you'd surmise fixed rate loans, organically speaking, are about 8% of our book. And they have pretty long maturities, up to 12 years on average. You don't see a lot come up for repricing every year. We might see $300 million come up in 24 to use kind of an average. And they are priced below our current loan yield. So there is some opportunity there. But I wouldn't see fixed rate repricing having more than a couple of bips of impact on our loan yields next year. But there is a little bit of favorable impact. do you have any security maturities that are you know lumpy and lower yielding at any point in the next 12 months you know we have a normal what i'll consider to be smooth roll off of mbss and we do have some treasuries maturing over the next you know 15 months but i would say those aren't necessarily lumpy we see a little bit in most quarters so we obviously are going to benefit in 2024 from securities maturing as we redeploy that either into cash, earning much higher yields, or avoid purchase funds. So net-net, we will see a benefit from fixed asset repricing next year, a tiny bit from loans. You'll certainly get a nice lift up from securities. Fixed rate swaps actually go the other direction, but the net benefit will be favorable in 2024. Got it.
spk09: Thank you very much for taking my questions, everyone. Thanks, Brody.
spk11: Thank you. Next question is coming from Ken Uzen from Jefferies. Your line is now live.
spk07: Good morning, Ken.
spk05: Hi, thanks. Good morning. I want to ask a question on the loan book, on the business line basis. You're not under any kind of dieting, so to speak, but after you got out of Mortgage Banker this year, there's a couple of these lines that are getting a little smaller over time, like Tech and Life Sciences and Equity Fund. Just wanted to ask how much of that is environmental and And do you envision taking a harder look at any of the loan categories that you have in terms of what you're thinking about in terms of future growth opportunities?
spk02: Hey, Ken, this is Peter. Yeah, we've got some of our businesses that have kind of continued to drift down this quarter and quite candidly probably will into the fourth quarter and maybe even the first quarter. But we don't really see any additional changes to the lines of business that we're in. We do feel really good about the portfolio on a go-forward basis. I do think that in the environment with increased expectations around profitability and pricing and just sort of managing our balance sheet, some businesses are impacted more than others. But, you know, as we get into next year, we'll try to get a little more guidance on what we think loan outlook looks like for 24. But I suspect a few of these businesses that you've kind of seen creep down here as of late probably be another quarter or two before we start to go the other direction. With our general portfolio, middle market, business, banking, small business, our pipelines there are still pretty good relatively. It depends on the geography a little bit. We're trying to add customers and add new business in that space as we get into the end of the year and into next.
spk05: Got it. Great. Thanks. And my follow-up is just on the expenses. Can you just explain like the kind of the right back on the modernization this quarter? How does that mechanically work? And then just making sure they understand that the fourth quarter guide is built on the all-in 3Q number. Thank you.
spk07: Yeah, Ken, the modernization expenses were actually a net credit because of the real estate gain that you saw in the third quarter that we noted on the expense slide. That was offset by some expenses, but modernization expenses were a net negative $14 million or $14 million credit for the quarter. We would expect that to be a little closer to zero for the fourth quarter. We may have an additional real estate sale that could give us something in the low single digits of millions.
spk05: But overall, I don't expect modernization to be a big driver of fourth quarter expenses Okay, got it right so that okay and then the fourth quarter guide is built on the aside from the deferred comp that you don't expect to Repeat the fourth quarter expense guide is built off of the the 555 That's right Yeah, okay. Got it. Thank you Thank you again
spk11: Thank you. Next question today is coming from Brandon King from Truist Securities. Your line is now live.
spk03: Good morning, Brandon.
spk06: Hey, good morning. Just putting the pieces together, how are you thinking about balance sheet growth next year, particularly with earning assets? Are you kind of looking to keep things stable, or could we see some incremental growth?
spk07: Brandon, it's Jim. I'll start off, and Peter may want to chime in here. But we've been very focused on stabilizing the funding base and the liquidity base in recent months, as you know. We've had a lot of success there. We're actually in better shape than we actually thought we would be back in the spring with the loan to deposit ratio of 80%. I think of us right now as being in a period of recalibration. We're focused on getting the right mix of customers, right mix of businesses, getting the right pricing. And then we expect this at some point in 2024 to be at a point where we start with growing loans at a more normal pace again. We're not quite there yet, but we expect to be there at some point in 2024 with loan growth. But right now we're still going through that period of recalibration, whether it be getting more certainty around our deposit base, getting the right mix in terms of business lines. But we do anticipate some type of balance sheet growth at some point in 2024.
spk02: Yeah, Brandon, I might just add to what Jim said. I mean, we're also, you know, seeing a lot of, I would say, caution in our customer base. You know, there's a lot of headline risk, I think you might say, as we go into next year. And, you know, Melinda's talked a lot about credit. But, you know, we're prepared that it could be a tougher economic environment that we'll just navigate successfully. We always have as a company really well. So what that looks like for loan demand, per se, is probably to be determined. I mean, we'll give some more guidance, as we've mentioned, on loans when we get into the fourth quarter call for next year. But we do think we'll get back to loan growth next year. I think we just don't know necessarily what that looks like just yet with the environment, with interest rates where they are. And to the extent that we enter a more challenging economic environment, we'll have to navigate that. And again, it also depends on business by business what that may look like and geography by geography.
spk06: Got it, got it. And then could you speak to deposit seasonality flows? What are your kind of expectations near term? And just how close you think we are to maybe a normal seasonality trend?
spk07: Yeah, Brandon, you know, seasonality has really been a tough one the last couple years. The typical seasonal trends that we see amongst different business units, whether it be loans or deposits, It's kind of gone out the window, so we're waiting to see whether or not those return back to normal seasonality patterns. We're in a higher interest rate environment and to what extent a different liquidity environment, too, in terms of overall liquidity in the economy. So it remains to be seen if we do return back to those typical patterns that we've seen in the past. And as I mentioned, we may have a very small bit of seasonality assumed in our outlook, but not a lot. So we do see some potential for upside there. But frankly, it just feels like deposit seasonality, much like many other patterns, remains to be seen in this new paradigm as to whether or not we return back to the old normal or not.
spk06: That's all that I had. Thanks for taking my questions.
spk11: Thank you. Thank you. Next question coming from Peter Winter from DA Davidson. Your line is now live.
spk10: Good morning, Peter. Good morning. Good morning. Just going back to the 24 expense outlook, does that already contemplate some expenses initiatives? Or as you go through the budgeting process, there's opportunities for maybe some additional expenses versus that guidance?
spk03: Peter, it's a bit of both. We haven't been sitting on our hands, so to speak, and have been looking at opportunities to slow expense growth and to be more prudent. We have some other things that are still in process as we think about sort of the planning process for 2000 and 2024. So we'll, again, have more to share potentially as we get into the fourth quarter earnings call.
spk10: Okay. And then just one housekeeping, just what was the end of period balance on the mortgage banker loans? Just curious how much is left to run off.
spk07: Mortgage banker, I mean, for the quarter, you know, we were at $900 million, a little bit lower than that for ending. I don't know. I think period end was around $650. Yeah.
spk02: We communicated there, Peter, that we expect the balances to be pretty minimal by the end of the year. Period end might be a couple hundred million.
spk10: Okay. Thanks.
spk11: Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to President, Chairman, and Chief Executive Officer Kurt Farmer. Please go ahead.
spk03: Again, I just would say I'm very proud of our performance for the quarter, always proud of our colleagues and how they are delivering for our customers every day. And thank you again for your interest in our company, and I hope you all have a great day. Thank you.
spk11: Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.
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