PacWest Bancorp. (NASDAQ:PACW) Q3 2022 Earnings Conference Call October 20, 2022 11:00 AM ET
Company Participants
Bill Black – EVP, Strategy & Corporate Development
Matt Wagner – CEO
Bart Olson – CFO
Mark Yung – EVP and COO
Paul Taylor – President
Conference Call Participants
Jared Shaw – Wells Fargo Securities
Christopher Marinac – Janney Montgomery Scott
Matthew Clark – Piper Sandler
Gary Tenner – D.A. Davidson
Brandon King – Truist Securities
Chris McGratty – KBW
David Long – Raymond James
Jon Arfstrom – RBC Capital
Operator
Good day and welcome to the PacWest Bancorp Third Quarter Earnings Call. Today’s conference is being recorded.
At this time, I would like to turn the conference over to Bill Black. Please go ahead.
Bill Black
Thank you. Good morning and welcome to PacWest’s third quarter 2022 earnings conference call. With me today are; Matt Wagner, CEO; Paul Taylor, our President; Bart Olson, CFO; and Mark Yung, our COO and the leader of our Venture Banking business.
Before I hand the call over to Matt, please note that we may make forward-looking statements during today’s call that are subject to risks, uncertainties and assumptions. For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, see our company’s SEC filings including the 8-K filed yesterday afternoon, which is also available on the company’s website.
Now I’d like to turn the call over to our CEO, Matt Wagner.
Matt Wagner
Thank you, Bill. Good morning, everyone and thank you for joining our call today. I want to start off by making a few comments about the overall business and operating environment. Overall business activity remains strong. But we are proceeding cautiously as we are thinking about and planning for weaker economic environments ahead.
We continue to focus our time and attention on our customers, making sure we are there to serve them throughout the cycle. We slowed some of our running businesses, given the economic environment and our desire to grow capital more rapidly, while optimizing our balance sheet. Given the current economic backdrop, we believe this is a prudent thing to do.
Credit remains strong and currently we do not see any negative credit trends and we continue to monitor the loan portfolio closely as part of our conservative approach to credit. Finally, but most importantly, building capital, as we did in the third quarter remains our primary focus and this will continue to be a key component of decisions we make each day.
With that, let me turn it over to Bill to cover the key highlights of the quarter.
Bill Black
Thanks, Matt. The third quarter was marked by a couple of key events. First and foremost, all of our regulatory capital ratios increased during the quarter, including CET1, which increased from 8.24% to 8.55% as we march towards our CET1 target of 10% by the end of 2023. Second, our total deposits grew $228 million. And importantly, after two quarters of decreases, our Venture Banking deposit not only stabilized but grew $129 million to $12.2 billion.
Third, credit quality remained strong with non-performing assets only at 34 basis points and net charge-offs for the quarter of 3 basis points. We continue to monitor the loan portfolio closely and are not seeing any significant signs of credit deterioration at this point. Fourth, our net loan growth remained strong and broad-based across the businesses, but lower than the prior two quarters as planned and as previously communicated. Lastly, our net interest income on a tax equivalent basis was $338.6 million, up 3.3% from last quarter.
I’d like to now hand things over to Bart, our CFO for some specific commentary on the financial results before we go into Q&A.
Bart Olson
Thanks, Bill and good morning, everyone. I’m going to focus my comments on Page 3, a new slide we added to our earnings presentation which provides a condensed view of our financial result. As you can see here, interest income continue to grow, increasing 17% to $410 million during the quarter and up 41% from a year ago, driven by higher average balances and higher rates. Interest expense also grew during the quarter with our cost of deposits increasing to 70 basis points, driven by higher rates and higher average balances on wholesale deposits. As a result that’s limited our net expansion during the quarter.
Turning to the provision, the provision decreased by $7 million, primarily due to slower loan growth, a decrease in COVID-related qualitative reserve, offset by less favorable economic forecast. Our CECL ratio end of the quarter at 1.03%, still above our CECL adoption level of 0.97%.
Moving down to non-interest income, this was up $4.3 million due to the successful outcome of a litigation matter which netted legal fees in 2022, added $5.5 million to non-interest income during the quarter. Meanwhile, non-interest expense was up during the quarter by $12 million. This increase was attributable to a $3.9 million increase in professional services primarily related to the credit-linked note transaction, a $3.4 million increase in compensation related to an additional 68 FTEs, primarily related to Civic and our digital and innovation strategy, along with one more business day.
Other contributors to the increase were a $1.5 million increase in FDIC insurance and assessments as a result of higher wholesale deposits in 2Q and 3Q and a $2.6 million accrual for our illegal settlements, excluding the $7 million in non-recurring items related to the credit-linked notes and legal accrual, non-interest expense would have been $188.6 million.
From the balance sheet perspective, the only comments I would make is that we sold approximately $440 million in bonds at a net gain of $86,000 as we continue to actively manage the investment portfolio, our AOCI unrealized loss for the quarter went from a loss of $645 million at the end of the second quarter to a loss of $848 million at the end of the third quarter, given the movement in market interest rates. Lastly, if you’re looking for our outlook on our fourth quarter, I would point you to Slide 11 in the presentation materials.
This concludes our prepared remarks. Operator, could you please open the line for questions?
Question-and-Answer Session
Operator
Yes, thank you. [Operator Instructions] And we do have a question from Jared. Please go ahead.
Jared Shaw
Hey guys. Everybody, good morning. Thanks. Thanks for the question. You know I guess just maybe a little thought on how we should be thinking about beta from here, you know you, I think accelerated into the quarter. Should we be thinking that there’s you know more room to go here as we move through the cycle or what’s your thoughts on I guess beta through the cycle to start off with?
Bart Olson
Yeah, Jared. Good morning. You know the current leads, the current cycle for rising interest rate environment, we’re at 41 basis points for interest-bearing and 26% for total deposits. I’m looking ahead our updated forecast on deposit betas over the next 12 months is for – that to increase to 50% for interest-bearing deposits and 31% for total deposits.
Jared Shaw
Okay, all right. Thanks. And then you know as we you know you mentioned the slowing outlook on the loan growth. How should we be thinking about the funding – funding of that is that you know going to see a continued increase in loan-to-deposit ratio, should we assume that deposit growth is lagging that or you know should we be thinking that deposits at that beta should keep pace?
Bart Olson
Well again, the guidance that we have on deposits is you know flat to up depending on you know Venture Banking predominantly. So we’ll see where that goes from a deposit perspective, I think those slower loan growth is obviously part of that loans. You know where we’ll probably do some funding with wholesale, obviously if the deposits don’t grow at the same pace as loans.
Jared Shaw
Okay. And I guess maybe just finally for me, maybe a bigger – picture question for Mark on the Venture side. You know good to see the deposit growth there. But you know maybe we’d be interested to hear your thoughts on sort of sentiment in terms of the sponsors and the pace of potential investment as we end the year go into ‘23?
Mark Yung
Hi, Jared. Yeah, I’m Mark. Yeah I would say you know our lookout had been that transaction actually would start picking back up here end of Q3 and getting a little bit more robust into Q4, you know the numbers are out for the broader US venture market, I mean, transaction levels did come down meaningfully in Q3, part of it aided by you know the summer seasonal slump. We are expecting to still $290 billion of dry powder. You know it’s – the numbers been restated, $160 billion of it is estimated to be used for new investments out of that dry powder.
So, we do think you know the VCs will be under some pressure here to put that later to work before year end. So you know we continue to believe that transaction activities should come up into Q4. But again, it’s not going to be 2021 or 2020 pandemic year transaction levels, it’s going to be more like pre-pandemic transaction levels, but aided and assisted by the tremendous amount of dry powder in the ecosystem. So we continue to be cautiously optimistic here into Q4 and we’ll – you know we’ll see where we end up here.
Jared Shaw
Great, thanks very much.
Mark Yung
Yeah.
Operator
And our next question comes from Christopher Marinac.
Christopher Marinac
Yes, good morning. I wanted to ask about the percentage of core funding at the balance sheet. Do you see that changing further as we go into next year? I’m just kind of curious on sort of I guess on the same line kind of help DDAs may play out as well.
Bart Olson
Yeah, I mean I think core funding you know is again tied to Venture with that and so I think you know the guidance we have, we think it’s you know flat to up depending on Venture. So I think from a core perspective that’s going to be probably the key driver. I think we expect Community Bank to continue to grow itself and decrease in the third quarter. But you know we expect that to grow as it typically does.
Christopher Marinac
And is the wealth management kind of funds that are off balance sheet? Isn’t the – is the beta on that materially different from what we see at the Bank overall?
Bart Olson
While it’s off balance sheet so that’s not in our numbers, right. So it has no bearing what those betas would be.
Matt Wagner
We’ve actually had initiatives, Chris, this is Matt, to bring a lot of that funding back on balance sheet, Project Boomerang I think we call it and it’s – we’re having some good success with it. But of course you know we’re paying up for that money.
Christopher Marinac
Great, yeah. That – that’s what I just want to establish. So thanks, Matt for that. And then just a follow-up for me is on the expense guide that you gave us for the fourth quarter. How applicable is that for the first part of 2023? Is that a good number that kind of read through for the early part next year I know budgeting is still going on?
Bart Olson
Yeah, I mean the budgeting process you’re right is going on, we’re in the midst of that right now is probably a good jumping off point. But we are taking a look at our expenses closely as we go through the budget process. And so that’ll be a big focus for us as we go through that, but I think from a jumping off point that’s probably a good guide.
Matt Wagner
You know and Chris, some of the businesses that we’re in you know you can logically look at them but I’m not going to name names necessarily, but it’s activity you’re going to slow down in that activity pretty dramatically like a lot of fixed rate lending and those kinds of things. And you – if you slow down the activity, you need the less people. Yeah and so you’ll see some initiatives coming from us. We don’t have I guess I wouldn’t call it necessarily a formal hiring freeze now. But every new hire including the replacements are heavily scrutinized before we go forward with that.
Christopher Marinac
Great. Thank you, Matt and thank you, Bart.
Operator
And our next question is coming from Matthew Clark.
Matthew Clark
Hey, good morning. I want to start on deposit cost. Do you have – do you happen to have the spot rate on – the spot rate at the end of September on interest-bearing deposits to give us some visibility going into the next quarter?
Bart Olson
Yes, the spot rate was 85.
Matthew Clark
Okay, I thought it was 115 this past quarter, but okay. I have to circle back on that.
Bart Olson
That’s – the 85 is total – Matt, the 85 is total.
Matthew Clark
Total, thank you. Okay. Got it. And then in terms of borrowings they came down this quarter. Should we assume that they continue to come down? And as it relates to the wholesale deposits you’re willing to take on, you know what rates you’ve seen relative to the duration you’re willing to do?
Bart Olson
Yeah, on the borrowings I mean that’s going to fluctuate a little bit again, just with you know lot of demand in growth and how we decide to fund that whether we do with borrowings or whether we do wholesale you know going through the third quarter, wholesale was cheaper than overnight. But that gap has narrowed. And so I think you know when you look forward, I think we can probably you know have a little bit of wholesale in there and then use the overnight as well.
So I think it’ll be a mix then really just depends on you know what the rates are. We did during the third quarter and throughout the wholesale process that we did do you know it’s laddered. And so we’ll continue to do that and see where it goes. But it’s – you know the – it’s probably in the – you know 3.5% to 4% range on the wholesale depending on the duration.
Matthew Clark
Got it. And then just on the guide for slower loan growth in the fourth quarter. You know are we talking low-to-mid-single digits? And how should we think about overall earning assets would be flat from here or flat to down?
Bart Olson
Well, if you – we’re trying to hold the loan side of the balance sheet more towards flat. There will be some growth in the fourth quarter. And looking out into 2023, again, I think you’ll see little growth, but there will be some growth.
Bill Black
Yeah. And Matt, I would just add to that. That we’ve talked about for the last couple of quarters of optimizing the earning asset mix and optimizing the overall balance sheet. And I think the comment that Paul made is more of the net balance of that. There’s obviously going to be ebbs and flows of different things that will grow and different things that may come in and out. But the net result of that should be a flattish loan portfolio and a flattish balance sheet ‘23.
Matthew Clark
Okay. And then just on your guide around modestly higher NII you know from here. Is that assuming you’re going to get some additional lift in the NIM? Or do you feel like the NIM is kind of near a peak?
Bart Olson
No I think we expect NIM to continue to expand. I mean, it was you know limited expansion this quarter because of the deposit cost. But I think you know we see the loan yields continuing to rise, you know deposit costs will rise, but we think that will see expansion in the NIM looking ahead.
Matt Wagner
Yeah. I think it’s a mixture of basically the higher rates and the remixing of the earning assets on a flat balance sheet.
Matthew Clark
Okay. I’ll step back. Thanks.
Operator
Our next question comes from Gary Tenner.
Gary Tenner
Thanks so much, good morning. Just wanted to ask and I think you may have addressed this in part by you know talking about a flattish loan portfolio in 2023. But you know as it relates to your 10% CET1 goal you know obviously added 30 bps this quarter, 20 bps of that was the CLN transaction. Can you talk about any you know additional transactions or strategies you’re thinking about in terms of growing that beyond just internal capital generation as we look out over the next several quarters?
Bart Olson
Yeah. I think we’re looking at everything you know to make sure that we meet or exceed the 10% CET1 by the end of ‘23. So I think you’ll see the company go through a process. We’ll be announcing things and looking at everything we can to improve capital.
Matt Wagner
You know, Gary everything is kind of up for grabs, this is Matt. And you know things like you know obviously, we’re going to have amortization of our multifamily loans. And of course, you’re also going to have some activity there where loans you know properties will be sold as you know in the normal course of business, maybe not as quick a velocity as you would have in this rising rate environment, because they’re not doing refis you’re going to have the same with our SFR portfolio. You’re going to have amortization and you’re going to have people. You know you’re not going to have the refi activity but you’re going to have people moved, sell their homes and that sort of thing.
And just you know in the nature of PacWest and you’ll see this quarter we had payoffs and pay downs of approximately – $2.5 billion, I think, wasn’t it, Mark, yes which is down somewhat from our more average which was like $2.75 billion on a quarterly basis, it’s paid off. And these are things like you know construction projects, a lot of which we do – the majority is multifamily coming to completion certificate of occupancies issued and long-term lenders stepping in and taking this out. And we still see that kind of activity and we don’t expect that to slow down.
So when you think about the portfolio in general you’ve got about between $8 billion and $10 billion in natural runoff on an annual basis which is 30% of our portfolio, more than 30%, a third. And so you know we still have to be out there making loans and you know making them to our customers, our customers that provide us core deposits and we’ll continue to do that. It’s not going to be like we’re going to be sitting around flat-footed in order to keep the balance sheet at check, we still have a lot of work to do.
Gary Tenner
Thank you – thanks for that color, Matt. And then just to make sure that I’m clear on as you’re talking about you know optimizing the balance sheet. As I think the asset side, if you’re kind of not growing loans or the balance sheet overall, is it more of optimizing the mix within the loan portfolio? Or as you look at the broad categories of loan securities and cash shifting that mix more from where it is right now?
Matt Wagner
Well that you know but you know we’re not selling our securities portfolio off unless we can do it at a pretty neutral level. So yeah as you know – as what is our monthly maturities, Mark? $40 million?
Mark Yung
Yeah. This gone down. It was about that during the quarter, but you know forward-looking is around $30 million.
Matt Wagner
$30 million a month and just runoff of the securities portfolio. But yeah, I mean it’s optimizing what we want to do I mean with our loan portfolio. Again, I you know – we know rates are going to continue to go up at least through probably the first quarter of next year, so why would you possibly – be making a fixed rate loan now? I mean we still have some flow and we still have some commitments in Q3 that we had to honor, particularly for our good customers and our also large depositors. But that’s – that pretty much has flushed its way through the system so you don’t – won’t see much more of that.
But – so I’m pretty optimistic. And you know I’m also happy to see the deposit flows improving, particularly in Venture. And I think you know it’s not going to be like ‘20 to ‘21 again as Mark said, but I think it’s going to stabilize and the community-based deposits, which are our other big chunk in deposits are – continue to grow although they’ve never been – it’s never been an exciting growth – it’s low single-digit kind of growth.
Mark Yung
Yeah. The one thing I would add to that is that when I think you look at it, optimizing the balance sheet is not necessarily optimizing a single part of it. It’s optimizing the whole. And so we’re really trying to manage the balance sheet for capital and liquidity and overall long-term use of it. So the ebbs and flows of one part of the balance sheet are less important to me than they are the whole. And I think when we’re talking about optimizing it, it’s not necessarily loans will be that or this will be that, it’s really trying to maximize the overall balance sheet figures.
Bart Olson
And we have to keep in mind that the balance sheet runs off about $2.5 billion a quarter. So we’re going in is looking at all of our types of loans and going with the most profitable best loans that we can to fill that $2.5 billion bucket.
Matt Wagner
Yeah. And that’s when we talk about optimizing and it also gets back into the capital side of it, and that’s how we can see the clear path to the CET1 of 10% by the end of next year. I mean if you look at it, Gary, on the CET1, we’re at $8.55 you know that’s $1.45 that we’ve got it yet. That’s 29 basis points a quarter. Can you achieve that? Absolutely. I mean the profitability is certainly there. It’s just a matter you know we can’t grow the balance sheet at $3 billion a quarter and do that.
So – but it’s not likely that you’re going to see that. I mean as you guys know I’m a very customer-centric guy. And I was talking to a lot of people and I’m headed to the West Coast today to see other customers and people are pulling back. I mean projects have made sense at 4% interest rates and you know aren’t going to make sense at 7.5% you know and that sort of thing. So and they’re naturally – the business is naturally slowing down and we can see that throughout the country with the banks.
And you know so I think you just keep an eye on everything. And you know again, you got to be there for your best customers. And our best customers are our deposit customers. You know again, I emphasize this often in these kind of calls, you know if you take a look at our Venture businesses, I think our loans came in just a little over $2 billion for the quarter, of which a huge chunk of that’s capital call, I mean you know we’ve never been a giant capital call and was just a pretty moderate one, but our deposits related to those businesses, both the tech, life sciences and capital call lending are $12.2 billion.
I mean that’s just remarkable, more than 6 times. And you know we’ve got to take care of those customers, and we will, we’ll be out there. Mark and his team are – you know we’re seeing a lot of lending requests from those groups, because they don’t want to raise capital right now. Because if they probably be looking at a down route, so it’s a dynamic environment.
Gary Tenner
Great. Thanks guys. I appreciate that.
Operator
And our next question is coming from Bryan King [sic – Brandon King].
Brandon King
Hey, this is Brandon. Just curious – hey, yes I want to get an update on Civic loan production. I know it was pretty strong in the quarter. And given you know high interest rates, is it affecting housing demand and lower house prices? Just curious what your outlook is for that, if they can keep up this pace or if you’re expecting a slowdown from there as well?
Bill Black
Hey Brandon, it’s Bill. So you’ve seen higher rates start to translate through – throughout the balance sheet and that includes Civic higher rates is naturally slow in production, you’ll see that happen in the fourth quarter as that ripples through. You’re seeing a maturation of the portfolio, so the payoffs are starting to kick up. And so I thought you saw good production, good solid credit stats, our underwritings remain relatively consistent for the past couple of years. And I think overall that the net growth will obviously slow as rates go up and payoffs kick up.
Matt Wagner
Bill, you might want to – since you brought up Civic, you might want to touch on Florida?
Bill Black
Sure. So obviously with the types of natural disasters that we’ve had, you know we went through a deep dive of the entire portfolio, both within Civic and externally. And the overall amount of the properties that were severely damaged were you know a little more than handful, low single-digit million dollar exposures, all properties where we have insurance policies in place.
So a really nice outcome in terms of the team doing the work and having the quick diligence to jump on the phones obviously a horrible disaster, but I think our teams did a great job in the face of a really tight timeframe. So that we’re pleased with the underwriting and the structure there.
Matt Wagner
And that – I would add to that, that includes other lending that the bank does in Florida, has done and it looks really good. And in terms of yield, I had to step back just really quickly there. We had a nice bump in yield for the Civic production in September, a jump of about 34 basis points at $7.47 which is – which was quite good and hopefully that trend continues. They have raised their amortized rates and we still have a nice inflow of business.
Bill Black
Yeah what you’re seeing there in terms of the pipeline is that the pipeline from origination to fund kind of it’s creeping through the balance sheet. I mean the numbers that Matt mentioned are going to keep creeping up there as that kind of continues to flow through the pipe.
Matt Wagner
Yeah. There were – I mean these deals often are committed 30 days in advance, right, Bill, that I don’t know if we call them a rate lock, but it’s almost more application to do what we said we were going to do. And we don’t like to re-trade deals. So some of that is still working through the pipeline. It works through the pipeline in Q3, but I don’t think we have any more of that really in Q4 in Civic or in the core bank.
Brandon King
Got it, got it. And then lastly I want to touch on credit. I mean charge-offs have been very low for a while now. And I’m curious now that we’re kind of going into an economic downturn that’s kind of the general consensus, what do you think net charge-offs could go to kind of a more normalized level or in a slower economic environment?
Matt Wagner
You know it’s really tough to peg that in a bank like ours. I mean we’re not very actuarial. You know we’re not very consumer-ish. But we continue to do deep dives on all of our portfolios, focusing on things that are more hot buttons and headlines like office properties and things like that. And you know we’re pretty optimistic on what we see within our portfolio. And for that matter, the banking industry overall.
Again you know I think great lessons were learned in the great recession and banks are very – we were much more conservative in their underwriting and lending. And I think pretty optimistic about that. So I don’t see any real you know ugly patches ahead. Bill, do you have anything to add to that?
Bill Black
Yeah. Yeah. What I would say to that, Brandon, is that the past 5 years to 7 years inside of this company have really, in my mind, played itself out in terms of the stated numbers. You’ve seen classifieds criticized, special mentions, non-accruals, really be at the lower end of our historical range.
And I don’t think that’s a fluke. I think that’s the direct result from all the work that’s done. The composition of the balance sheet is materially different than it’s ever been. And I think when you look out, you know could you see it like a bump here or there in terms of an individual credit for sure.
But I think the overall loss content as I think we’ve continued to prove out quarter in and quarter out, I think is very, very manageable. So I don’t think you’re like – I know that there’s historically been some thoughts of the credit here. And I would point to the fact that the non-accrual numbers have been near the lowest that we’ve ever had and all the other metrics jive with that special mentions, classifieds criticized. So you know the intense scrutiny that Matt talked about, we’re doing on a daily basis is our job. That’s what we get paid to do. And I think you’re going to see it continue to show up in some pretty strong loan you know credit metrics.
Matt Wagner
I mean, Bart, what in venture for instance, what was our charge-offs been for the past 3 years? I think net zero?
Bart Olson
Yeah. It’s been very, very low.
Matt Wagner
Which is pretty – just damper, what a great job.
Mark Yung
Matt, we’re not recovering about $1.2 million through this year.
Matt Wagner
Yeah. Yeah. I mean and that’s – but I mean if you like at the previous 2 years, Mark, we were net positive too, I think in recoveries.
Mark Yung
You know 2021 – ‘21, we were as well, yeah.
Matt Wagner
Yeah. It’s pretty remarkable you know that’s a business that as you know in tech and life sciences, if something goes wrong, that’s a doughnut I mean it goes to zero. Now, we often can recover money, but you’re not recovering at a high level. But I think our people have done a great job and we’ve been able to keep the customers and most importantly you know keep that $12.5 billion, $12.2 billion in deposits.
Brandon King
Got it. Thanks for all the color and thanks for taking my questions.
Matt Wagner
You bet.
Operator
And our next question comes from Chris McGratty.
Chris McGratty
Hey, good morning. On the NII guide, the slow growth or modest growth in Q4. If I put the pieces together for next year like down-ish, flattish balance sheet. I heard your comments on margins. Do you think NII can grow from that fourth quarter number into 2023? Or is there going to be some pressure on that?
Bart Olson
We think it will grow in 2023.
Chris McGratty
Okay. So grow off the Q4, great. And then second within the Venture book, I think you said it was $12.2 billion. Where is the composition of that in your deposit portfolio? How much is interest-bearing versus non-interest bearing?
Matt Wagner
Yeah –
Bill Black
I don’t have that breakdown really –
Bart Olson
Mark, do you happen to have that?
Mark Yung
I don’t have that breakdown, not for Venture specific –
Matt Wagner
We will get back to you on it, Chris.
Chris McGratty
Okay. Thanks Matt. And then maybe –
Matt Wagner
Go ahead.
Chris McGratty
No, go ahead, Matt.
Bart Olson
The majority is going to be interest-bearing.
Matt Wagner
Yeah. I mean you know it’s money market. Yeah. I mean you’re over $50 million, and there’s a lot of depositors in that population that are over $50 million. But you have the overall – what’s the rate on the overall portfolio of in Venture?
Mark Yung
It’s 93 basis points.
Matt Wagner
Yeah. Yeah. So it’s more expensive – it leaves – it’s more from driven by the $50 million and over depositors for obvious reasons, you know their big depositors are going to put their hand out. When interest rates are at historic lows, they don’t really care.
Chris McGratty
Got it –
Mark Yung
And just to make sure here, Chris, as well, I mean the betas for the Venture bank specifically have been tracking against other uprate cycles too. So there’s no anomaly here in that sense.
Chris McGratty
Yeah, yeah. Got it. Thanks, Mark. Just one on the expenses for next year. I think there’s an assessment for the industry FDIC assessment that’s going to go through. Is that – how should we think about the magnitude of that for you guys?
Bart Olson
Yeah. I mean we haven’t calculated that out. I mean we’re going through the budget process now and looking at the assessments. Obviously like I mentioned, we saw an uptick this quarter because of the assessment being higher on those sales so that had an impact on the Q2 assessment, and that will have an impact on Q3 assessment. And so you know we’ll see how that continues to play out based on where those costs go and then we’ll look at the increase.
Matt Wagner
I would add too, Chris, it looks very modest to me. But we have – we’ll have to calculate and go ahead.
Chris McGratty
Okay. Yep, understood. Thanks – thank you.
Operator
And our next question is coming from David Long.
David Long
Good morning, everyone. I wanted to circle back on the credit side of things. And you know a lot of your peers have been building reserves here ahead of any pressure despite seeing no sort of kinks in the armor at this point. What would it take for you guys to really start building that reserve level up? Is it something you need to see Moody’s change their forecast? Okay, go ahead.
Matt Wagner
I mean you have to see you know classifieds going up dramatically, we have to see some real you know waves out there. But I mean, if you go down and look through the components of our portfolio, you don’t see a lot of risk there. I mean our multifamily portfolio has held up you know and across the country, it really has, I mean multifamily portfolios have held up really well. You know I don’t know, there has to be a big wave change. I just don’t see it happening, but you know maybe I’m an eternal optimist, I don’t know. I mean what do you – Bill, you got to comment or Paul?
BillBlack
No. What I would say about that is like look, like we’re preparing for whatever gets thrown at us. You know we’re not seeing it today and that’s just capital and reserves. It’s not single amount towards one of them.
Paul Taylor
You got to keep in mind, our NPA ratio is at 34 basis points, which is pretty low.
Matt Wagner
When you think about – we’re still you know our ECL is still above our seasonal adoption slightly. And you know you have to think about where it’s going to – I mean where is – I think about it every day to tell you the truth. You know where are the hotspots can be and you leverage finance, we’re not in them. I think the consumer has got a lot of you know there’s trouble up ahead in my mind for the consumer. I mean there is true inflation.
I mean I don’t spend a lot of time at the grocery store, but I get a lot of comment from my spouse about you know how much more everything costs. I – what I do understand is when we go to a restaurant, I usually pay the bill. And I’m looking at it, and it’s dramatically higher – in cost, that sort of thing. I look at our bank. We’re giving people raises and – it’s much higher raises than we have in the past due to inflation, and that’s here to stay.
I mean there’s real inflation out there. So I think – and the consumer isn’t keeping up with it. We hear that every day. You know if you listen to the news, I mean a 5% raise is going to keep up with what’s going on with gas prices, food costs and that sort of thing. So there’s going to be pain out there. I just don’t think it manifests itself in a portfolio like PacWest so much.
And you know I think the other thing that you got is, is your non-bank lenders have been much more aggressive. When you look at a large real estate project, which we commonly see is the senior debt, which is a bank is you know anywhere from 50% to 60% leverage. And then there’s 20% of [inaudible] after that, and the [inaudible] is charging them you know probably double-digit rates and then the equity. I mean, your non-bank lenders are the guys that have a big risk on whether it’s office or any kind of CRE in my mind. And so I think you’re going to see it.
The other thing a bank can do and you guys have probably all heard me say this over the years, you know when times do get tough and a borrower gets stressed and that we even went through that as most recently as the pandemic, particularly as it related to hospitality, we could be flexible with our borrower. We’re not a CMBS, we’re not a structured CLO or whatever and we can – you know we could back off the rate for a while, looking to fight another day and maybe getting you know improving loyalty from that customer.
You know we give up some income in the short-term, which you know can keep from having a problem. And you know I’ve been in this business for decades, and I’ve seen that happen and as a CEO, I’ve been involved in those kinds of transactions. And you know it’s really worked out well. That’s the way to go about it.
David Long
No, that’s great color and a testament to the way that you guys treat your customers. So the – I appreciate the update on the yield – the underwriting yield on Civic. Do you guys have a specific reserve for that part of your portfolio?
Bart Olson
We do. We do. Sure. It’s treated like every other you know loan asset class that we have. So it has its own reserve based on the history, both inside and outside.
Matt Wagner
You know when you think about that business, and I do not, as much as Bill does, you know you think about that business, there’s decent down payments on these properties. And again, our average loan size is $355,000. And there’s real equity in those deals, and there’s still just a huge need you know for affordable housing out there.
It’s going to get tricky. I mean you know again a lot of these would be considered starter homes and our people in that category going to go out and pay up 6.5%, 7% for a mortgage, maybe not. So how do this business could end up fixed to Brent, of which you know we have a sizable portfolio that today too, and that could be where it ends up in the short-term.
So – but I’m still pretty optimistic. I mean we have much higher delinquency rates in that portfolio. We have – you know as a percentage we have higher non-accruals in that sort of thing. But in the end, we don’t take losses. We have other people that are willing to step into those properties to clean this up or whatever it might be.
So I’m still pretty optimistic about that. And the Florida thing, it’s going to be fascinating, because there’s going to – you know there’s clearly going to be rebuild in Florida. People want to be there. And some of these – some of the most desirable areas in that state got the hell kicked out of it. And they’re going to rebuild.
It may not be the person that lives in that home today, but that person may be selling what’s left of their house for land value and something better will be built there. I think you’ve seen it in all natural disasters, and I think something get that towards yesterday or later, you know Katrina. I mean, they build back better by far, and that – I do think go better. All right I’ll take that back, anyway. So I mean I think that you’re going to see that going way back to the Northridge earthquake you know in California, we definitely saw that. Yeah, anyway.
David Long
Got it. Thank you. Thanks guys. Appreciate the color.
Matt Wagner
Yeah.
Bart Olson
We had a question come in through the web chat. So it was asking for an update on the HOA acquisition. So Bill, maybe you want to talk about that?
Bill Black
Sure, yeah. So the HOA business has been a great add for us. We spent the vast majority of 2022 integrating the platform into the bank as well as starting to combine our legacy business with that business into one HOA business. Overall deposits have been stable and I believe somebody was asking about the betas there. Our betas in that group or amounts the lowest in the bank in terms of that. So we feel good about where we are. The plan was get – to get it integrated and then looks for growth in ‘23 and beyond. Having say that, that was the plan and that’s what we’ve produced.
So we feel really good about the diversity of funding and what it gives us for the bank. And we think it’s like we’re really excited about all the hard work that our team has done to put it together and we’re excited about what’s to come in.
Matt Wagner
Yeah, we’re going to really concentrate on the staffing there and try to really ramp it up. I love that business and I want to see – you know we took our time to integrate it as effectively as possible and not lose customers, which we haven’t. And now it’s time to grow it.
Bart Olson
Operator, are there any more questions?
Operator
[Operator Instructions] And we’ll take our next question from Jon Arfstrom.
Jon Arfstrom
Hey. Good morning guys.
Matt Wagner
Hi, Jon. Good –
Jon Arfstrom
Can you talk a little bit about momentum in your production yields? I know you touched on a little bit at Civic, but you’ve kept [5.92%] [ph] average for the quarter. What does that look like today?
Matt Wagner
Do you want to take it Mark?
Mark Yung
I think – so what I would say is that you see the movement in the loan production yields move up pretty significantly. We talked about it a lot in the second quarter about how you know both higher rates and mix shift is going to continue to help that. I think you’re going to continue to see that. And a lot of that is going to be a lot of the same stuff we’ve talked about, right, higher rates, mix shift, incremental you know production going to a higher yield. So all of those things are going to contribute to that.
I just think if you look at where our variable rate loans are just off of spreads compared to how much LIBOR or SOFR has moved, you will see that incremental yields will continue to keep creeping up from there. And it’s super hard to be specific because it will depend on the type of loan that is in there, because you can see pretty wide variances between asset classes, but – we feel it’s going to continue to creep up.
Jon Arfstrom
Yeah. Okay. That was a big step up in the quarter. And just a couple – Bart, what’s left to do on hiring? You talked about flattish expenses, but what do you feel like you have left to do?
Bart Olson
Well you know we’ve – as Matt mentioned, we – you know we’re looking at every new hire, whether it’s a new add or a replacement. We have a process around that that we implemented in September. But we still are committed to you know our digital and innovation strategy, our Vision 2025.
And so you know they had a slow start we talked about this at the beginning of the year that there was going to be investment in this area. Very slow start in the first quarter. We saw the FTEs ramp up in Q2 and Q3. Although Q3 was down from Q2, but we still have some hiring to do in that group as we get to where we’re going to be.
But I think the pace slows through the combination of the people they’ve already hired and just taking a hard look at just FTEs overall. But I do think there’s probably a little bit more there that we’ll see in the fourth quarter. And then we’ll you know see where that goes next year. You know, Paul, if you want to add to that?
Paul Taylor
Yeah you know that’s an area we’re looking at very seriously and we are going to get more aggressive on that as we’ve stated a couple of times during that call – this call. I have – I look at every new hire and every replacement that’s VP and above and I’ve got to sign off on it in order for it to be filled. So we’re getting very serious on FTEs. That’s been a lot of the increase. Civic is fully build out in terms of FTEs. So there’ll be no more Civic creep that’s been about half of our FTE increase. So again, we’re going to get very serious about expenses here.
Matt Wagner
I mean – we just got – I mean I think we’re not going to be the lone rangers in the industry. You’ve got to look at nook and cranny right now.
Jon Arfstrom
Okay. Last question and I hate the question, but I’m actually kind of interested in the answer. But just Matt, can you touch on or Paul that just the quality of deals that you’re seeing in competitive behavior. You know some people say larger banks are pulling out of CRE. Other banks, you know some of your peers are putting up kind of 8% to 10% annualized loan growth. But I’m just curious what your assessment is of the competitor – competitive environment and the quality of –
Matt Wagner
Yeah. I think the deal flow, first of all, Jon, we’ve really curtailed the deal flow with the exception of you know very large deposit customers. And I think the deal flow has been good and the underwriting has been good, and you know you got a lot of guys pulling out. You know maybe that was somewhat summer, but you got a lot of guys you know that were – you know I mean, the rates are better and not just the rates, spreads you know where we were looking at – we were facing SOFR plus $2.75 on certain kinds of projects, those are clearly up 1% so from $3.75.
Paul Taylor
But we’ve seen no real decline in the quality of the deal.
Matt Wagner
No.
Paul Taylor
Again, we’re trying to slow it a little bit. We had tremendous growth in the first half of the year. And you know we’ve got to rebuild capital here. But also we’ve got to prepare for I mean, I think we – most of us believe there are some rocky waters in front of us too. So I think by slowing down that’s going to help insulate us from potential losses too.
Matt Wagner
I don’t see competitors being willy-nilly or you know being overly aggressive right now.
Bart Olson
The aggressiveness we’ve seen, but it’s not specific to this year. As if somebody wants a product, they just priced to win, right? It’s not a structure.
Matt Wagner
Right.
Paul Taylor
Very little decline in underwriting.
Matt Wagner
But you know we got a couple of deals that we have special mention on. We’ve got a big hotel that’s being taken out by a debt fund. And I’m very happy about it. I mean, we didn’t see a loss potential in it and you know but we just found that out this week which is good news. There was one other deal like that too. And once again, it was a debt fund. And listen, you’re going to pay up if you go into a debt fund, because they’re going to give you more leverage. That’s generally why they we want to do it.
Jon Arfstrom
That’s good news. All right. Well thanks guys. Appreciate it.
Matt Wagner
Thanks Jon.
Paul Taylor
Thanks, Jon.
Operator
And I have –
Bill Black
Okay, great. Well, there’s no further questions. We really appreciate everybody’s attendance, and we look forward to speaking with you next quarter. Thanks.
Matt Wagner
Thank you very much.
Operator
This concludes today’s call. Thank you for your participation, and you may now disconnect.
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