Damon DelMonte: Got it. And then kind of on the flip side with rates here, if the Fed does cut in the back half of 2024 – I know you guys are pretty asset sensitive. So how do you kind of envision the margin reaction if there is some cuts that happen again in the back half of 2024?
James Lally: Yes, I mean – when you say rate cuts, I mean, I think of that as 25. I mean, I think our view is generally that we expect higher for longer to mean just really stable Fed funds and what we’ll be fighting is largely compression. But down 100, we’re about 4% asset-sensitive. So 25 basis point cut is 1% on an annualized basis, and that will come pretty immediately. I don’t worry as much we – Jeff had pushed on the deposit – specialized deposit costs. We think that those can move very much in line with any Fed funds cuts. I think what we’re maybe the most concerned about is if variable rate proceed or predict on a short-term basis the Fed funds cut because that’s where we get the most compression. But just sort of assuming everything is kind of normally timed, we’re sort of down roughly 1% on a cut, and we think that, that’s generally an area where we can on a longer-term basis outgrow that as long as we don’t have rapid 25 basis points cuts quarter-after-quarter.
Damon DelMonte: Got it. Okay. That’s great. Thanks for all the color. Appreciate it.
James Lally: Yes. You’re welcome. Thanks Damon.
Operator: Your next question is from Brian Martin of Janney. Please go ahead. Your line is open.
Brian Martin: Hey, good morning everyone.
James Lally: Hey, Brian.
Brian Martin: Hey, Keene. Just one last one on the margin. So it sounds like the margin maybe bottoms next quarter or first quarter is kind of – I heard the comments on NII, flat and then maybe down a little bit with the day count, but on the margin percentage, the drift is – the next couple of quarters if we’re kind of stable from a Fed environment?
Keene Turner: Yes. I will just say this, I mean, we’re really thinking about it on a net interest income dollars basis because we’ve got a weighted average life of eight months on the brokered portfolio, and we’re trying to make it a priority to really get that largely paid down. So you could get two, three, four, five basis points just from an efficient balance sheet, lower risk but inefficient. And I don’t want to just be too firm on that. But we generally feel like margin is getting firmer, but still drifting and call it, sometime in the first half of next year, we’re starting to feel better about it. And I think if we’re able to get good decent loan growth in that period, I think we’re optimistic that we can stabilize profitability and then start to grow in the back half.
But yes, I think, call it – you get some weird day count stuff going on. So you could kind of see first quarter margin better than fourth quarter depending on what happens, but then it deteriorates in the second quarter just with some of that 33, 63, 65 stuff on the portfolio.
Brian Martin: Got it. Okay. And then how about just on the – I think – I don’t know if maybe someone answered that, but the – on the SBA gains this quarter with the sales, do you guys expect to do more of that? Or is that – you haven’t done it up until now. So just kind of wondering how to think about that with your commentary on fee income?
Keene Turner: Yes. I would say, Brian, the reason we did it this quarter is we – with the strong growth we had in the second quarter, we started looking at how to fund everything and what we thought was important to investors, and we thought kind of growing net customer funding relative to loan growth was important. It’s a highly saleable class of assets, and we have the opportunity to clear some headway there and sell some of the recent production. With fourth quarter being what we would expect to be seasonally strong, I wouldn’t expect fourth quarter SBA sales, but I would say that depending on how growth looks in the early part of next year and how the fee line items look, we – and overall funding and costs are shaping up, we view that as a play option, and we may do it, but we’d likely be sensitive to when we get some of the other periodic impacts from private equity, CDE, tax credit and those types of businesses.
Brian Martin: So just kind of helps smooth out some of the volatility within the quarters.
Keene Turner: Yes, potentially. Now look, if we’re growing deposits well and there’s no pressure really on the funding growth, I mean, I think the best strategy versus cash is to keep those loans on the balance sheet with their profile. But if you’re trading off high – other high-yield loans that you’re maybe not doing because you’re – you want to make sure that you’re hitting the right funding profile, then I think that, that becomes a much more viable option. So we’ll continue to advise you on that, but it’s certainly more on the forefront and something that I’d say is equally weighted 50-50 versus maybe no way coming into this year.
Brian Martin: Got it. Okay. That’s helpful. And just last two on the expense side, Keene, you talked about the deposit cost. Just in general, what do you – those sound like they’re up a bit more 4Q and then maybe they begin to kind of – the pace of increase lessens. But just as far as the other – if that’s right? And then the other – how are you thinking about increases elsewhere, just inflationary, as we look into next year for kind of the comp line, just collectively the other lines?
Keene Turner: Yes. I would say, Brian, that we’re trying to be very, very thoughtful about managing both the short and the intermediate term. So we don’t want to do things that impair the business. I think you heard from Scott, we hired a new President in our San Diego region and some of those things. And so we’re going to continue to make the right long-term move. We’re going to continue to invest in our associates and technology and training. But we’re mindful of the – sort of the operating leverage that we’ve lost here along the last couple of quarters. And we’re trying to manage it the best we can. So we’re going to apply the normal discipline. I mean, I think you can see it here from first to second to third quarter that we’re being fairly tight on spending.
And I think there’s some opportunities to pay for what we’ll call compensation and raises and things like that next year with some discipline on other types of expenses. But we’re going to be mindful that we’re in a position where even with the provision this quarter we’re still earning well and we don’t want to just try to hit a number that then ultimately becomes a lower number in future periods because we’re not able to grow or we’re not able to restart businesses or things like that. So I think you heard that from Jim, but I think it bears out on expenses. That’s our mantra, and we’re really trying to be as disciplined as we can. And maybe that’s less adding than we would have in prior periods, but I don’t – we’re not – you’re not going to hear from us any big initiatives very likely or anything like that, just continued discipline across the board as much as we can.
Brian Martin: Got it. And in your comments about the efficiency and kind of adjusting for the deposits, I mean, the 56 we’re at today, that feels like a sustainable level now given kind of what you expect on those deposit cost trends. I mean, I know it’s gone up, but when you adjust them, it’s obviously much better relative to the peer and industry, but just kind of the efficiency in general, that level we’re at, is interest higher from here or is it stable-ish?
Keene Turner: I think it’s slightly higher. It’s kind of increasing, but at a decreasing rate, just like we expect that line item to behave. I think the rate – sort of pricing impact on the – that line of kind of earnings credit rate, I think we don’t expect to move as much. And so again, I think it’s trended underlying balances and collective balances and things like that, that continues to have that grow over time. And I think part of it is just how quickly can we get margin to sort of – or net interest income – I guess, say, trying to direct away from margin, net interest income to sort of stabilize and build off that base. And I think that obviously is a big driver for what happened. I mean I think we would have had – we would have really loved to have that tax credit line item be zero or slightly positive.
