Tesla Q3 2023 Earnings Call Transcript

There are 9 speakers on the call.

Operator

Thank you all for joining. I would like to welcome you all to the Heritage Financial Corporation Q3 2023 Earnings Conference Call. My name is Brica, and I'll be your moderator for today's call. All lines are on mute for the presentation portion of the call with an opportunity for questions and answers at the end. Followed by the number 1 on your touch phone keypad.

Operator

I would now like to pass the conference over to your host, Jeff Jewell, CEO of Heritage Financial to begin. So, Jeff, please go ahead.

Speaker 1

Thank you, Brika. Welcome and good morning to everyone who Called in and for those who may listen later, this is Jeff Duell, CEO of Heritage Financial. Attending with me are Brian MacDonald, President and Chief Operating Officer Don Hinson, Chief Financial Officer and Tony Shelvant, Chief Credit Officer. Our Q3 earnings release went out presentation on the Investor Relations portion of our corporate website, which includes more detail on our deposits, Loan Portfolio, Liquidity and Credit Quality. We will reference the presentation during the call.

Speaker 1

Please refer to the forward looking statements in the press release. We're pleased to report another solid quarter with earnings per share exceeding consensus. This quarter's performance was enhanced by loan recoveries. These recoveries are further evidence of our strong risk management practices and how they continue to benefit us. We continue to see pressure on deposit pricing in Q3, which is impacting our net interest margin.

Speaker 1

Deposit balances stabilized in Q3, although the mix As expected, due mostly to the rate environment, Loan growth slowed in Q3 compared to the 1st 2 quarters of the year. Although year to date, we are still reporting We will now move to Don, who will take a few minutes to cover our financial results.

Speaker 2

Thank you, Jeff. I'll be reviewing some of the main drivers of our performance for Q3. As I walk through our financial results, unless otherwise noted, all of the prior period will be with the Q2 of 2023. Starting with the balance sheet, loan growth slowed in Q3, Increasing $15,500,000 for the quarter, year to date loan growth through Q3 is at 5.3%. Yields on the loan portfolio were 5.30 for the quarter, which was 11 basis points higher than And contributed to a 12 basis point increase in yield on earning assets.

Speaker 2

Brian McDonald will have an update on loan production and yields in a few minutes. Unlike the declines over the past few quarters, total deposits increased $39,600,000 during the quarter. The increase is due substantially to higher CD balances as customers continue to take advantage of the higher rate environment by lowering their excess balances and lower paying non maturity deposit These factors contributed to an increase of 31 basis points in our cost of interest bearing deposits to 1.23 percent for Q3. Also impacting total deposit balances in Q3 was the sale All of our Ellensburg branch along with its $14,700,000 of deposits as well as an increase of $62,800,000 in brokered CDs during the quarter. Due to the current market pressure related to deposit rates, we expect to continue to experience increase in the cost of our core deposits, although at a slower pace.

Speaker 2

This is illustrated by the cost of our interest bearing deposits being 1.35% for the month of September with a spot rate of 1.38 percent as of September 30. Investment balances decreased $136,000,000 during Q3 due to higher than normal maturities and prepayments during the quarter, as well as the sale of $47,000,000 of securities. These sales in combination with the purchase of 23,000,000 transactions will be $1,400,000 resulting in an earn back period of 1.4 years. We will consider additional loss trades in order to continue to defend our margin from downward pressures. Moving on to the income statement, net interest income decreased 206,000 due to a decrease in net interest margin, partially offset by an increase in average earning assets.

Speaker 2

The NIM decreased to 3.47 percent for Q3 from 3.56% in the prior quarter. The decrease in NIM was primarily due to the cost of interest bearing deposits increasing more rapidly than the yields on earning assets. We expect NIM to decrease further in Q4 since the NIM for the month September was 5 basis points lower than it was for the quarter. The pace and duration of our Decrease in margin will be highly dependent on continued increases in our cost of interest bearing deposits as well as maintaining deposit balances. As our cost deposits as well as deposit balances level off, we expect to experience margin stabilization due to the repricing of adjustable rate loans in addition to higher Origination rates on new loans.

Speaker 2

We recognized a reversal of provision for credit losses in the amount of $878,000 during Q3 versus a provision expense of $900,000 in Q2. The reversal of provision expense was due to net recoveries of $1,200,000 recognized during the quarter. Tony will provide more information on these recoveries in a few minutes. Non interest income decreased $1,000,000 from the prior quarter primarily due to the loss on the sale of securities previously mentioned, partially offset by a gain of $610,000 on the sale of our Ellensburg branch that I discussed earlier. Non interest expense decreased $355,000 to approximately $41,000,000 in Q3.

Speaker 2

This was due to decreases in numerous categories, partially offset by an increase in compensation and benefits. Compensation expense was higher compared to Q2 due to the adjustments we've made to the accrual for incentive based compensation in Q2. All of our regulatory capital ratios remain comfortably above well capitalized thresholds and our TCE ratio is at 8.2%, down slightly from the prior quarter due primarily to AOCI. In addition, with a loan deposit ratio of approximately 76% And cash balances over $200,000,000 we have plenty of liquidity to keep to grow our loan portfolio. I will now pass the call to Tony, who will have an update on our credit quality metrics.

Speaker 3

Thank you, Don. I'm pleased to report that credit quality remains strong and stable through the 1st 9 months of the year. As of quarter end, non accrual loans totaled just over $3,000,000 and we do not hold any OREO. This represents 0.07% of total loans as compared to 0.11 percent at the end of the second quarter. Non accrual loans declined by $1,600,000 during the quarter And are now down by 51% over the last 12 months.

Speaker 3

Reductions of just over $2,000,000 were largely tied to the payoff of an agricultural loan That was the culmination of a long term workout. Partially offsetting the reduction was the movement of 3 C and I relationships to nonaccrual status In the aggregate amount of $440,000 Page 25 of the investor presentation reflects the significant improvement we've experienced in our nonaccrual loans since the end of 2020. This quarter, we began including loans over 90 days past due and This total includes 3 loans that are well secured by commercial real estate at low loan to value ratios And are in the process of collection. They remain on accrual status because the risk of loss is very low. Criticized loans, those risk rated special mention and substandard totaled just under $135,000,000 at the end of the quarter.

Speaker 3

This is a decrease of $8,500,000 or 6% from the end of the second quarter. Criticized loans are virtually unchanged Since the end of 2022. Within that group, loans rated substandard remained stable and are actually down by $3,000,000 over that same time period. Overall, our commercial real estate portfolio continues to perform well and has been stable through the 1st 9 months of the year. Total criticized CRE loans represent 3.1% of our total CRE portfolio and 2.2% of our entire loan portfolio.

Speaker 3

While we continue to closely watch our portfolio of office loans, We have yet to see any material deterioration in credit quality. At quarter end, criticized office loans totaled approximately $21,500,000 which is down from the $25,000,000 reported at the end of the second quarter. This represents 3.8% of our total portfolio of owner And non owner occupied office loans. In summary, we believe our office CRE portfolio is conservatively underwritten, very granular And not materially exposed to the high risk of the Central Business District Areas. Page 24 of the investor presentation provides more detailed information about our office loan portfolio.

Speaker 3

During the Q3, we had a large recovery on the payoff of the agricultural loan that I mentioned earlier. This represented the majority of the $1,300,000 in total recoveries and was partially offset by charge offs of $138,000 resulting in a net recovery of just under $1,200,000 for the quarter. Through the 1st 9 months of the year, we're in a net recovery position of $895,000 On Page 27 of the investor presentation is a new slide that we believe demonstrates that by proactively identifying criticized assets within our portfolio, We've been able to keep our net charge off levels lower than our peers. While our credit metrics remain strong, we remain watchful of inflation pressures and other We are confident that our consistent and disciplined approach to credit underwriting will continue to serve us well Should the economy show any material deterioration in the coming quarters. I'll now turn the call over to Brian for an update on loan production.

Speaker 4

Thanks, Tony. I'm going to provide detail on our Q3 loan production results, starting with our commercial lending group. For the quarter, our commercial teams closed 217,000,000 in new loan commitments, up from 212,000,000 last quarter and down from 277,000,000 Closed in the Q3 of 2022. Please refer to Page 19 in the Q3 investor presentation for additional detail on new Originated loans over the past 5 quarters. The commercial loan pipeline ended the 3rd quarter at $291,000,000 down from $473,000,000 last quarter and down from $604,000,000 at the end of the Q3 of 2022.

Speaker 4

Our heavy filtering of non owner occupied real estate loan requests since March is the primary driver of the pipeline decline, although loan demand has also been softening as interest rates have moved higher. Loan growth was below last quarter at 15,000,000 Despite the higher volume of new loans originated due to a combination of higher prepays and payoffs, lower net advances on loans And lower principal balance on loans originated in the quarter. Please see Slides 2021 of the investor deck for further detail Based on our lower pipeline levels and the softening loan demand, we anticipate For our organic loan growth rate to be in the low single digits over the next couple of quarters and largely driven by prepaid levels and advances on construction loans. The deposit pipeline ended the quarter at $134,000,000 up from $118,000,000 And balances associated with new deposit accounts opened during the quarter totaled 39,000,000 The increase in the deposit pipeline is broad based across the footprint, although we are seeing a higher concentration of new accounts coming from our new teams And the most disrupted markets. The Oregon and Portland MSA is the only major market where we saw net deposit growth during the quarter, with details reflected on Slide 10 of the investor presentation.

Speaker 4

Moving to interest rates. Our average In addition, the average 3rd quarter rate for all new loans was 6.54%, up 27 basis from 6.27 percent last quarter. The increase is due to a combination of higher underlying index rates And widening spreads implemented in 2023 versus working through the pipeline coming into the year that included pricing committed at lower levels. The market continues to be competitive, particularly for C and I relationships. The mortgage department closed $18,000,000 in new loans in the Q3 of 2023 compared to $25,000,000 closed in the Q2 of 2023 $26,000,000 in the Q3 of 20 The mortgage loan pipeline had ended the quarter at $10,000,000 versus $13,000,000 last quarter and $18,000,000 at the end of the Q3 of 2022.

Speaker 4

With mortgage rates remaining at higher levels, we anticipate volumes will continue at the relatively low levels we have seen year to date. I'll now turn the call back to Jeff.

Speaker 1

Thank you, Brian. As I mentioned earlier, we're pleased with our performance in the 3rd quarter. While we continue to experience the challenges of this rate environment and our deposit franchise, we are confident that the strength of our franchise will continue to benefit us over Our relatively low loan to deposit ratio positions us well to continue to support our Within the organization. Overall, we believe we are well positioned to navigate the challenges ahead and to take advantage of any potential That's the conclusion of our prepared comments. So, Brico, we're ready to open the call to any questions callers may have.

Operator

The first question we have on the phone lines comes from Matthew Clark of Piper Sandler. You may proceed with your question, Matthew.

Speaker 5

Thanks. Good morning, gentlemen. First one for me, just on the securities sold In the quarter, can you give us a sense for the timing of that sale and the yield pickup that you anticipate from reinvesting those proceeds? And then As a follow-up to that, just your appetite to do more.

Speaker 2

Matthew, We did it in September, so we didn't really get much benefit of it in Q3. The overall estimated, again, we purchased Some securities about $23,000,000 have $566,000,000 The rest went into cash and of course that's earning about 540 Of the $45,000,000 that we sold, the average estimated pickup on the annualized is 1 point $1,000,000 or you might think of $350,000 per quarter on that. So if you calculate that, that's about a NIM pick up of about 2 basis points.

Speaker 5

Yes. Okay.

Speaker 2

And we are considering doing more, we're going to watch the market And be selective, we did it. We could do this again. We could do more also, depending on how we're feeling about where the market's

Speaker 5

Okay. And the yield on the securities sold, I can back into it, but just to make it easy on us?

Speaker 2

236.

Speaker 5

Okay. Thank you. And then shifting gears to deposits, it looks like deposits were up in the region where you hired the bankers last year. Just can you give us an update on that front? I assume none of that's brokered related.

Speaker 5

Is it all core? And then, again, maybe an update on what you're seeing in that Portland market with First Republic the First Republic branch that's closed?

Speaker 4

Sure. Matthew, it's Brian. And you see it on Slide 10, the deposits were up about $73,000,000 since the start of the year. So that's about a 13% growth rate versus the Bank wide, we're down about 9%. And if you look at the chart above on Slide 10 in the Seattle MSA, we're actually down a little bit more, 15% Just due to the amount of excess deposits some of our customers had in that market.

Speaker 4

So we are seeing Disruption we're seeing benefit from benefit as you're seeing here. And it's not just from the new team. We're also Seeing it positively benefit our other branches and other commercial teams in the market. And then the outlook is pretty favorable as well. I mentioned the pipeline numbers in my comments And a significant portion of both the loan and deposit pipeline are coming from our new teams.

Speaker 4

It's about 38% of the loan pipeline and then it's actually a little over 40% of the deposit pipeline. So we're pleased with the outlook as well as the performance and we are seeing disruption In that market from, as you mentioned, First Republic and the Columbia Umicua combo. And I'd also add, which I've said before, really that customers are coming from a variety of different spots, having the sales force Down there without a portfolio out calling, obviously, we're getting a lot of strong opportunities. Again, not just the new team, but all of our teams And bankers in that market.

Speaker 5

Okay, great. And shifting to Expenses done, you have an updated outlook on the run rate of non interest expense, a little bit lighter than your low $42,000,000 Guys coming out of last quarter. Just curious what your thoughts are on for 4Q?

Speaker 2

Yes, we had a little bit of benefits. Some things happened, just kind of Miscellaneous things that for the quarter kind of helped us out. I would say kind of a we are managing FTE levels To such that I think probably a run rate would have been like 41.5% type in that range. Now I will also say that we are looking at various On the expense side, and we're talking about expense management initiatives. So even though that's probably a decent run rate, we are We could potentially have higher expenses in a short like possibly in Q4 or Q1 of next year As we review things like contracts, renegotiate contracts or even we could even exit contracts and take Some hits upfront that we feel is going to we're not getting value and we're going to have savings going forward.

Speaker 2

So there's a chance that we may see higher expenses in Q4, But if we do, we'll have benefits from it in future quarters.

Speaker 5

Okay, great. And then last one for me, just on Office CRE, can you give us the magnitude or quantify the reserve associated with that portfolio at this stage? I know criticized And then if you're seeing any differences or any weakness, I should say, in Suburban office segment considering we heard someone last night call out 2 non performers in suburban office in Southern California, Totally different market, Don?

Speaker 3

Yes, Matthew, this is Tony. I can take the first part and then I think Don has The actual reserve number against the office portfolio, but we haven't seen a lot of weakness in our suburban office market. We continue to watch it closely, but nothing's Really materialized from that standpoint. So not really much to add to my comments in that area.

Speaker 2

Alan's follow-up, we don't have any individually evaluated Loans on the office side, but we I think the percentage our overall percentage is 1.1%. The On the office loans, it's around 1.56%, I believe, percent on the allowance. So as you so I guess you can calculate the number,

Speaker 6

The numbers, I don't have the

Speaker 2

exact number, but we do disclose how many office loans we have, so you can kind of figure that out.

Speaker 5

Got it. Okay. Thank you.

Speaker 7

Thanks, Matt.

Operator

We now have Jeff Rulis of D. A. Davidson.

Speaker 6

Thanks. Good morning. Good morning. Jeff, maybe a question for you. Just checking in on capital, you've got CET1 close to 13%, total capital over 14%.

Speaker 6

You rattled through the TCE number. I guess, Are there some in house comfortability levels that you've exceeded at this point? And just I mean, frankly, those Levels haven't changed much over the last year. Trying to get a feel for maybe you want to inch those higher or can we Think about you want to be proactive when the time is right type of thing with M and A. Thanks.

Speaker 1

Thanks, Jeff. Don, I think that's a good question for you.

Speaker 2

Okay. Yes, as far as Our capital levels, we are comfortable with our capital levels. Obviously, with the rate environment, the TCE ratio is probably lower than Our ideal, but that will, you know, assuming rates stay the same or don't Go up much, we will see that come back into capital over a certain time period. And then as far as we're using our capital forward, we obviously are looking to grow. We may do some Trades, like we mentioned on the loss trade, it was a smaller one.

Speaker 2

We could do A bigger one, but that wouldn't impact TCE so much, it would impact regulatory capital. But we're comfortable with that. I don't think we necessarily have A large overabundance of capital. We did a few buybacks again in Q3, about $150,000,000 I think or $150,000, sorry, of Shares repurchased, we could continue to pick at that also. We don't have any plans to do any large scale buybacks at this point.

Speaker 6

Okay. So it doesn't sound like you're uncomfortable on the high side to really deploy that, but Okay. If our regulatory capital start exceeding 10%, then we might certainly be like our leverage ratio, We probably want to keep that under 10% in

Speaker 2

the current rate in the current economic environment,

Speaker 6

just because I think it's you start getting over 10 And then we may not

Speaker 2

be getting the value of that, but right now I think we're in the high 9s. So I think we're fine.

Speaker 6

Okay. Thanks, Don. And then maybe Tony, just on the I know this is a squishy question in terms of Reserve to loans and any guideline there, but that continues to lift as a percent of loans and you've been in a net recovery position for Over 2 years now, I know those are specific credits, but just the thought of looking at low single digit Loan growth in the short run, your thoughts on the reserve, do we kind of hold steady or continue to Lift up as we've seen it.

Speaker 4

Yes. Don, I don't know

Speaker 3

if you want to take that with on the ACL.

Speaker 2

I think this holds steady. We don't have any plans for the change that. It's been pretty consistent. We've already considered all of our looking forward potential recessions is in the model. So Again, we're our underwriting is such that as you can see, we tend to always kind of outperform what we're putting on our Criticized loan portfolio and with the actual amount of charge offs.

Speaker 2

So, I think it's possibly changes It's the mix of loans and the amount of loans.

Speaker 6

Okay. Does that answer your question? Yes, I know that Not black and white necessarily, but just trying to get a gut feel of where that is. It sounds like you're pretty comfortable with the level and Got you. One housekeeping, Don, while I have you.

Speaker 6

Was there An interest recovery that added to margin in the quarter, the $3.47 was there a bump there at all that it flowed through there?

Speaker 2

I don't believe so. I don't think we had anything that ballooned the loan yields at all. That's what we're talking about.

Speaker 6

Yes, from the credit side. Okay.

Speaker 2

I don't think we had Income recoveries on that.

Speaker 6

Okay. And Don, did you mention an expense Growth rate in 'twenty four of expectations, I know that you kind of walked through the near term Around 41.5 or a little higher in the short term, it did take exiting contracts or something. But Is that if I look at the balance of 24, is it right to say that's still going to be pretty managed growth, If at all, going to keep that growth rate pretty low?

Speaker 2

Yes. Obviously, in this Great environment. We're looking at all aspects to protect overall profitability. So, I mentioned And maybe 41.5% is a little more specific, maybe I meant to more say mid-41s, right, for next quarter. But Again, we are I would say some things are lower right now because of because profitability is down this quarter compared to As expected, so like again, incentive comp accruals are down.

Speaker 2

If they go back to normalized levels, I would expect You know, for more of a $42,000,000 run rate, that's kind of ex any tactics We are in the process of looking at, but I would say the run rate would probably pop to 42 a quarter starting Q1 if we don't do anything else regarding that.

Operator

We now have David Easter of Raymond James.

Speaker 8

Hi, good morning, everybody.

Speaker 1

Good

Speaker 8

morning. Maybe just starting on the pipeline and the origination and loan growth side, obviously, the pipeline declined. Sounds like it's kind of a combination of maybe less appetite for credit from your standpoint, Actually on the NOO CRE side as well as weaker demand, I'm just curious, where are you still seeing good opportunities? What segments can still drive growth here and can pencil out even at higher rates? And then just how new loan yields are trending?

Speaker 1

Brian, you want to take that one?

Speaker 4

Yes, sure, David. We have been in the spring, We saw a big increase in real estate requests come in as Other banks were pulling back on that category. And then concurrently, our prepay levels have come way down from what we had The last few years. So really what we've been doing is managing our Concentration levels has been the primary driver behind the heavy filtering we've done, not to get Too high in terms of our construction concentrations and our investor CRE concentrations. So that was really the Primary reason, the rates at the time were also a consideration in the spring just as The new yields really hadn't adjusted.

Speaker 4

If you fast forward today, Pricing is good on the investor real estate on the request that we're seeing coming in. We're just Feeling so we are still fielding them, but at a much lower level. So it's strong in that category. C and I activity, We are very focused on that. We have got a nice customer base and prospect base we have been going after.

Speaker 4

But the pricing is Pretty competitive in that space, obviously, because of the deposit aspects of those relationships. And in many cases, the customers we're looking at have very significant Deposit levels. So from that standpoint, it makes sense that the loan pricing is competitive. And then overall, just with rates up, Customers that have been in business for 15 years or 20 years, they've experienced these rate levels in their business And aren't reacting as strongly as some of the business customers that have been in business for maybe the last 10 years or Dean that haven't experienced rates at these levels, so they're maybe pausing a little bit more on new projects. In general, The health of the local economy and the customer base is really good.

Speaker 4

Liquidity levels are strong. We are seeing a bit more use of cash To expand versus using DAS in part because of the pricing on new loans. Again, not a surprise with liquidity levels that the customers might use more liquidity first. But overall, the economy is good. We are just we are seeing A dip in demand, again, primarily based on rates.

Speaker 4

On the non owner side, that's been our own choice to filter that hard. The volume has gone down in the market, But we could take a larger share if we chose to. And then you also asked on new rates and I did mention those The total for the total portfolio of new deals closed in the quarter, the average rate was 6.54 which is up 27 basis points from last quarter.

Speaker 1

Okay. That's great color.

Speaker 8

And then maybe touching on the other side of the coin on the credit front. I mean, Credit is phenomenal. Non accruals are down. You got the large ag recovery. I'm just curious, We already touched on office, but maybe more broadly, what are you seeing on the credit front?

Speaker 8

I mean, we're starting to see Some cracks and normalization in the industry, it can't get better than 0. I'm just What are you watching? What are you seeing? And then maybe if you could talk a bit about what drove kind of that increase in classified balances in the quarter?

Speaker 1

Tony, do

Speaker 4

you want

Speaker 1

to take that?

Speaker 3

Yes. Yes, sure, David. Generally, credit has been pretty benign now for quite a few quarters, As you mentioned, and I think we're still in a little bit of a credit bubble. And our numbers were a bit impacted by the recovery on the large deal this quarter. But it's still even if you netted that out, it would be lower than much lower than historical for NCOs.

Speaker 3

And again, non accruals remain very low. So I think we're still in that what I would call a very slow move back to a more normal credit environment. It's just been slower than I expected over the last several quarters. So Nothing really from jumping out as to the small the little increase in the classified numbers. It's just more Just movement of credits between grades and there was nothing really that jumped out.

Speaker 3

We are continuing to watch everything closely, but again our total criticized numbers have stayed pretty stable now for quite some time And while there might be a little bit more pressure as we go forward, we've got quite a bit of room still to move to get back to what I would call a more normal credit environment. I will say that there is probably a little bit more weakness in the C and I space right now just and I don't know really what to attribute that to, But I think it's just maybe the stimulus money that's worked its way through the economy and isn't really there to kind of prop some of those operating companies up. So we're seeing a little bit more stress there, but nothing of any significance that's very alarming.

Speaker 8

Okay. And then maybe just touching on kind of the implications, it seems like We're going to be in a higher for longer environment, or at least that's kind of more of a consensus, it seems like. Maybe just on the margin and the NII High trajectory, I guess, as we look out to next year. I guess, if rates do stay higher and funding pressures persist, you talked about Some margin compression, but I guess would you expect that in the upcoming quarter, I mean, I guess would you expect that to persist Kind of in the first half of the year and I guess just kind of how you think about the margin trajectory and kind of opportunities for expansion over time In a higher for longer environment?

Speaker 7

Yes.

Speaker 2

Yes. I think that we're going to continue to have some pressure as again you mentioned how September was lower than NIM And for the quarter, again, I think the pressure on deposits is really the factor. Again, our the Costs there are will continue to go up. How quickly is it seems like we go in kind of waves Where we get a lot of exception requests and other times there's less so. But With the rates higher and especially if the Fed increases another time where there's a lot of a lot out there on the short end of the curve, That could cause more problems and hurt us at least For rates higher longer, at some point, the increases on the deposit side will subside and our assets will re And we'll hit equilibrium, but at this point, we're probably looking Maybe the middle of next year.

Speaker 2

We might have in Q2, but it might not happen until Q3 at this point.

Operator

Thank you. We now have Andrew Tuttle of Stephens.

Speaker 7

Hey, good morning.

Speaker 1

Good morning. I wanted to

Speaker 7

go back to the securities Repositioning transaction, I appreciate all the color you guys provided there. As you're contemplating similar transactions Moving forward, I know the one that took place this quarter was, I think you mentioned a 1.4 year earn back. Is that The kind of threshold you're looking to manage any incremental repositioning trades around or would you be willing to extend to call it 2, 3 years? I want to get your thoughts there.

Speaker 2

At this point, yes, 1.4 is a very good earn back period. If we At a larger scale, I don't necessarily see that probably occurring. I imagine it would go over maybe go over slightly over 2 years. We definitely want to keep it under 3 years and even 2.5 would be preferable.

Speaker 7

Yes. Okay. We'll continue to

Speaker 2

review this. And again, a lot will depend On really the rate environment and right now of course rates have been up so far this quarter and which makes sales a little more Challenging.

Speaker 7

Yes, understood. Okay. And then on the time deposit Portfolio, it looks like about a third of the growth came from broker deposits. Can you just talk about the cost differential between the broker deposit growth And the core customer time deposit growth. And on the core customer side, where are you pricing new deposits at today?

Speaker 7

And how does that compare to competitors in the market?

Speaker 2

Sure. The brokers, I think came in around $545,000,000 We did those in July. So, That had a we pretty much got the whole impact for the quarter there on the brokered. Again, brokers just another way to manage the balance sheet. It's not they're not core deposits.

Speaker 2

They're not they're not They're not core deposits. They're not the customers. So we just use this one more instead of using borrowings we can The new deposits coming on, I think a lot of them are in the 4% to almost 5% At times, we have gone up to 5% and even the low fives periodically for new CDs, but I think on average, it's probably And the 4s for our customer seating.

Speaker 7

Okay, got it. Thank you. And if I could ask, I think, Brian, on the new origination yields

Speaker 4

for the quarter, did

Speaker 7

you say 6.54 was the new origination yield, all in?

Speaker 4

Yes. So on the all loans, It was 654.

Speaker 7

Okay. As I look back to origination yields a year ago, I've got down 4.89% in 3Q of last year and we've obviously gotten that's 160 basis point pickup. We've obviously gotten a lot More than that in terms of short term rate increases. I'm just curious, is there anything influencing like or could you talk about the range And is there anything like such as old commitments that are funding up at lower rates, anything that's influencing that number lower And how you would expect new origination yields to progress over the next, call it, 6 months?

Speaker 4

Yes. I mean, the range went From kind of the 6% range all the way up to 8.5% just kind of looking at the full quarterly averages. So Anything that's tied to a variable index prime or SOFR, you're getting strong rates. If you look at the renewal The rates on the renewals are we're over 8% for the quarter. Where we're really seeing strong pressures anything C and I are more owner occupied or anything kind of business related and that's because here at Ingen Our competitors are really focused on deposits and that commercial category.

Speaker 4

So it's been super Competitive in that space, the investor real estate or the construction less so. Your question Did we have a carryover of commitments we made last year and the early part of the year? Yes. And we've largely worked through that. So we expect to continue to see the pricing move up over the next few quarters.

Speaker 4

Again, both spreads And the index is benefiting us at this point.

Speaker 7

Okay. That's very helpful. I appreciate the color. If I could sneak one more in, just do you have the total dollar amount of syndicated credits in the portfolio?

Speaker 3

Yes, Andrew, the syndicated credits, the SNCs is $75,000,000 in outstandings at quarter end, which is just about 1.75% of total loans. So it's a fairly Small portfolio that we play in a pretty small portion of that space. Those deals that are higher rated and lower levered is really where we really focus our efforts.

Speaker 7

Okay, great. Thank you guys for taking the questions.

Speaker 2

Andrew, real quick, just a follow-up. I did look up the originate or the new CD Rates for Q3, it was around $450,000,000

Speaker 7

$450,000,000 Got it. Okay. Thank you.

Speaker 1

Rica, do we have any other call any other questions?

Operator

We now have Kelly Motak from KBW on the line.

Speaker 1

Terrific. Thank you. Hi. Hi, Kelly.

Operator

Hey, good morning. Most of my questions have been asked and answered at this stage. But maybe if you could go back to Can you remind us how much of that portfolio re prices or comes up for renewal over the next year or 2?

Speaker 1

Tony, I think you have some good data on that with regard to

Speaker 3

I do. Yes. I mean, I don't have it over the next year, but of that Kelly, of that portfolio, that's about $563,000,000 which includes owner and non owner occupied. If I look at the amount of that, it's actually over the next 3 years is what I haven't done, may have something a A little more specific, but I've got about a little over $70,000,000 of that portfolio. So over a 3 year period, we feel like that's a pretty low amount Of maturing loans.

Speaker 3

Now that doesn't include some repricing that might be in there too.

Operator

In your markets and the ability to add teams, like how would you kind of stack rank those priorities as we sit here at this stage of the cycle?

Speaker 1

Well, Kelly, I think it's That time of year where all of us are starting to plan for the New Year and we've said many times in the past that Expenses is one thing that we can control. We are always watching expenses, particularly Comp and benefits for 1 because it's one of our biggest categories. We'll continue to focus on that as we plan for 'twenty four. I think there's pockets With inside the organization that we can spend some time on that's in our control, Don referenced, maybe looking at contracts, whether it's Renewing, renegotiating or maybe releasing them altogether is one thing we can do. But there is an underlying I believe on the part of the leadership and the Board who are in full support of this line of thinking that first choice when it comes to acquiring would be Teams in our footprint and we've done that many times.

Speaker 1

While we're really focused on maintaining or controlling our expenses as they And today, I don't think that that would stop us from pursuing the right teams in the right locations if they presented themselves. We are also very well aware of how much of an impact the 2 team projects that we just brought on over the last 18 months has had on our expense base, but we can kind of carve that out and show how that's impacting us. For example, We've kind of gone through the exercise of saying, okay, assuming that these teams that we brought on are fully functioning today as opposed to As we model 3 years out, that's about 4 points on our efficiency ratio, which Gives us a little bit of relief as we monitor our metrics. And I think that we are now seeing the beauty of those teams bringing on as Brian walked through the benefits, You know the deposits and the loans that we're bringing on and flushing out those geographic locations, I think it's a great way for us to grow the organization. M and A is close behind, but we all know M and A is pretty rough right now and probably not front and center for us In the next, I don't know, 6 months at least.

Operator

We now have Tim Coffey of Janney. You may proceed.

Speaker 7

Hey, thanks. Good morning, everybody.

Speaker 1

Good morning, Chip.

Speaker 7

Don, I have a question about kind of the NII Outlook, is it a reasonable expectation to think that it might be flat here for a couple of quarters even if NIM does compress?

Speaker 2

Well, I think that a lot will depend on our deposits. Can we With the deposits continue to stabilize, can we maintain on interest bearing deposits? That's The key because then the margin is, I think, is going to continue again, it will continue to decrease more slowly, but Still decreased some. So it will be a challenge. I mean it came down a little bit and we actually increased our average earning assets for the quarter.

Speaker 2

I'm not sure that's going to happen every quarter right now. Again, it's so dependent on deposits. I think we might see continued a little bit of decline in NII.

Speaker 7

Okay. And since you brought this up a little while ago, Don, the request For exception pricing on deposits, the pace of that, has that changed in 3Q relative to 2Q?

Speaker 2

Unfortunately, no. It's still pretty I think the dollar amounts have decreased some, but I think the numbers are It's still pretty high.

Speaker 7

Okay. And then, Jeff, just want to follow-up on the M and A A comment you just made there. So in the Q3 in the Western region, we saw some interesting certainly structured transactions, right, where one, The legal buyer was different from the accounting buyer and just recently we saw it take under. Do you think thinking creatively about how to Structured M and A transactions might unlock the M and A market regardless of the kind of fair value marks all the banks seem to be carrying?

Speaker 1

Yes, I think that, well, we haven't those particular deals were not lost on us. We spent a lot of time looking at them and it Sort of opened our eyes to the variety of creative ways of going about these deals there are out there. I think we would Certainly, consider any kind of structure that makes sense for us to get a deal done. But I just don't See, our conversations continue as they always have. I keep in close contact with a lot of the organizations that we You know, have an admiration for, but I think regardless of what the creative structure is, I just don't think there's Deals to be done right now.

Speaker 1

Historically, Tim, I just wanted to add historically the deals we did do were mainly because of Retiring CEO without specific succession and the scenarios now are A little different than that. They're not as urgent. So I think a lot of the potential targets are taking their time to decide what they want to do.

Speaker 7

Yes. No, that makes a lot of sense. It does.

Speaker 1

All right. Thank you very much. Those are my questions. Thank you.

Operator

Thank you.

Speaker 8

I'd like

Operator

to turn it back to Jeff Jewell, our CFO, for any final remarks.

Speaker 1

Perfect. Thank you. We'll wrap up this quarter's call. We thank you for your time, your support and your interest in our ongoing performance, and we look forward to talking with many of you in the next couple of Take care and goodbye.

Operator

Thank you all for joining. I can confirm that does conclude today's call. Please have a lovely rest of your day You may now disconnect

Earnings Conference Call
Tesla Q3 2023
00:00 / 00:00