Luther Burbank Corp (LBC) 2018 Q3 法說會逐字稿

Good morning, and welcome to the Luther Burbank Corporation Third Quarter 2018 Earnings Conference Call. (Operator Instructions)

Before we begin, I would like to remind everyone that some of the comments made during this call may be considered forward-looking statements. The company's Form 10-K for the 2017 fiscal year, its quarterly report on Form 10-Q and current reports or Form 8-K identify certain factors that could cause the company's actual results to differ materially from those projected in any forward-looking statements made this morning. The company does not undertake to update any forward-looking statements as a result of new information or further events or developments. The company's periodic reports are available from the company or online on the company's website or the SEC's website.

I would like to remind you that while the company's management thinks the company's prospects for continued growth and performance are good, it is the company's policy not to establish with the markets any earnings, margin or balance sheet guidance.

I would now like to turn the conference over to John Biggs, President and CEO. Please go ahead.

Good morning. This is John Biggs. We're going to use the same format that we used in previous quarters. I have with me Laura Tarantino, our Chief Financial Officer; John Cardamone, our Chief Credit Officer; and Robert Armstrong, our Chief Banking Officer.

I think we produced a good quarter in Q3, and I'll start with earnings. Net income was $12.1 million, I pretty much try to compare previous 2018 quarters as 2017 has S- to C-corp conversions. So as a comparison, the second quarter net income was $11.2 million, third quarter was $12.1 million, so we achieved an 8% increase in net income. That equates to $0.21 fully diluted per share, which is the average analyst estimates for the quarter.

Some of the components in that net income, efficiency ratio is essentially holding steady. With NIM -- some NIM compression, I really look at the G&A to average asset number as that doesn't have NIM factored into it, and we're seeing a steady decline in that quarter-over-quarter, Q1 1.01%, Q2 0.97%, Q3 0.95%. So we're seeing that continued consciousness in our expenses. Net interest income has grown each quarter. That has been -- one of our top targets is continued growth in net interest income. It was $31.7 million for the third quarter compared to $31.2 million in the second quarter.

NIM did compress slightly. If you look at Page 21 of the slide deck, that was posted along with the earnings release, I really look very closely at the year-to-date NIM numbers. I mean, we look, obviously, at quarter-to-date as well, but if you look at the chart on the left on Page 21, I really think our NIM compression is very modest considering the large amount of deposits that we gathered over the last couple of quarters, particularly Q3.

But if you look at that chart, Q3 of 2018, we're at 2.01% NIM. Q3 of 2017, we were 2.05%. So in a year-to-date NIM calculation, we're down 4 basis points in a year. I think that, given the fed increases and the market conditions, is a very modest NIM compression. If you look at quarter-to-date NIM, we're down 6 basis points from the previous quarter, we were at 2% and we're down to 1.94%. So that, as a leading indicator of year-to-date NIM, can give you some indications of where we might end up year-to-date for 2018.

In lending, the first 2 quarters were significant loan growth. There was actually some discussion amongst the executive team about whether we should slow that because the growth was outpacing deposit growth. My philosophy has always been, we can't manufacture market conditions and the market was very strong, so we let that run. And I'm glad we did do that because we are seeing a slight slowdown, you see that in the Q3 numbers. Net loan growth, Q1 was $285 million, Q2 was $409 million, and in Q3 $191 million. A large part of that is an increase in payoffs, particularly, in the single-family sector. But that still gives very strong loan growth through the year of $885 million net, 17% growth over the first 3 quarters.

If you look at Page 13 of the slide deck, you can see total originations year-over-year. You can also see what we're originating at coupon. And you can see in 2017, we were originating loans at a combined average coupon of 4%. We're at 4.60% in 2018, and you can see quarter-over-quarter the results, Q1 was $477 million and a 4.31% coupon. Second quarter was $636 million, a 4.65% coupon. Third quarter was $463 million, at a 4.84% coupon, for a net of 4.60%. So we have definitely seen increased coupons on our originations. The difference with our balance sheet versus the C&I balance sheet is that it takes time to move the overall loan portfolio rate, because we're only getting these better yields on the new loans that are put on during the year. But nevertheless, that's, I believe, very good progress.

On page 14, and 15 you can see some detailed compositions on the CRE portfolio and the single family. We have discussed this in previous calls in order to try to get some better yield on our loan portfolio on the CRE. We purposely made a target of about having 25% of our originations not to be core, the lowest priced originations, and you can see we're almost to that 25% after 9 months at 24%. And the top of that chart, you can see the increase yields in each one of those sectors, so good progress on that. In the single-family chart, even a more larger increase in changes in that, the niche was 42% last year, niche is already at 71% and almost all of those niche products gather a 15, 20, 25 basis point increase in yield with really very little increased credit risk. So loan portfolio has performed really -- quite well.

On deposits, we did read the analyst writeups after the earnings release this morning. I think one thing I'd like to make clear on this call, as best as I can, is that we strategically determined that this was a good time to grow deposits.

The first quarter, loans outpaced deposit growth. We watched the market and saw many of the writeups about bank's ability to grow deposits in this environment, and how is that going to happen. And so we really made a concerted effort in the third quarter to say, let's grow our deposit portfolio. We also chose to have that growth other than -- and Robert Armstrong is in the business banking, we chose to have that growth be in CDs. I purposely designed plans for that, and in a rising rate environment I would much rather have longer term CDs than liquid accounts. Anybody who's gathering deposits in liquid accounts, every time the fed moves, they're going to have those customers pounding at you saying, are you going to raise this liquid account that I put my money in? So most of our growth, we had a very good program for an 18-month CD. So we grew a fair amount of deposits in that category. And my strong feeling is that in 6 months or less, we're going to be very comfortable with those dollars and those rates after the fed continues to do their rate increases. So again, that was strategic. We -- in my mind, I guess, you could word it, we sort of loaded up on deposits in Q3. I think that's going to serve us well for the rest of our growth in Q4 and into '19. So that was the strategy that we executed and I think showed that we have the market share, we have the reputation to be able to attract those deposits. A good example in our new Bellevue office, we're up to about $62 million after about 3 months.

So once again, if you look at the chart of our branches, I don't think there's another bank out there like us that has such efficient branches with large deposits, and it works very well for us.

So deposit growth for the year is $992 million, our original budget was $700 million. We increased that midyear, but it's very excellent growth, $829 million of that in the last 2 quarters.

With that deposit growth, you see a reduction in our loan-to-deposit ratios, a reduction in broker deposits. I know the markets view broker deposits negatively, although, we will still use them if they are a less expensive source of funding. Although, I think I would prefer to have 10% or under broker deposits just from the perception of the market that if broker deposits go above 10%, it seems to relate to a conclusion that the bank does not have the ability to attract deposits within their own footprint and that's not the case for us.

So I think I'll pass this off to each of the executives to talk about their areas. A couple of things I wanted to comment on, I think -- I hope that we're showing consistent performance. We've always been a consistent performer. There should not really be hiccups in our numbers, and I think our first 3 quarters after being public show that, I'm very happy that we've been able to meet the average analyst estimates with those numbers. We will continue to have NIM pressure. It will depend on what the Fed does, it will depend on the what the 10-year Treasury does for our lending coupons, and it'll depend on competitive marketplace. If lending slows and all of the competitors are looking to grow loans, then competitive pressures can at times outpace what the 10-year Treasury might do, so all of those will factor into future numbers.

I wanted to talk about 1 particular area, which is capital utilization. We -- when we went public, we really used up some good portion of the money of the new capital raised, and I think that's positive. It helps our ROE. And I think that was the right thing to do. We have run numbers, obviously, we do it regularly. But my expectation is that, as usual, we will do a shelf registration after a year of being public. That is really more for the regulators, and I think that's pretty standard to go ahead and file that shelf registration. Our projections show that we will easily run through 2019 and potentially a good portion of '20, before we would need to go out and raise more capital. So we're a long way away from that need, and I think a lot of it depends on the fed growth, the economy over '19 and '20 as to how that run rate rolls out. But at this point, plenty of run room with the initial public offering.

I'll pass it over to Laura Tarantino to give you more insight on some of those numbers.

Thanks, John. So hopefully, I can add a little more granularity to our third quarter results without being too repetitive, as John covered quite a few things. And in typical fashion, I'll be concentrating on our results for the third quarter in comparison to the linked quarter.

As John said, our third quarter net income was $12.1 million or a $903,000 increase over the second quarter, 8% growth. The increase in net income quarter-over-quarter is primarily attributed to 2 items, both growth in net interest income and a reduction in our loan loss provision.

As I look at our result, I'm only going to characterize 1 item, 1 income item as nonrecurring during the third quarter and that's $140,000 gain on the small pool of multifamily loans that were sold. But even excluding that $140,000 gain, we would still have recorded a $0.21 diluted earnings per share for the third quarter.

Net interest income increased $553,000 or 2% over the prior quarter. Interest income was up $4.7 million or 9% quarter-over-quarter. Of that $4.7 million, loans -- interest on loans accounted for $4.3 million of the increase, roughly 2/3 of that being attributed to volume and about 1/3 of it attributed to increases in rate. So our average loans increased $282 million quarter-over-quarter, while our yield grew 12 basis points as compared to a 9 basis point yield increase in the second quarter.

During the third quarter, we continue to see improvement, both in our loan origination rate and an improvement in the spread on the coupon of loans that were adding to the portfolio as opposed to the coupon of loans paying off. The new loan rate of 4.84% for the third quarter is a 19 basis points increase over the second quarter rate of 4.65%. And the -- the rate differential on originations and payoffs grew to 64 basis points year-to-date, higher than the 61 basis point differential at the end of the second quarter.

Although the growth in both of those items are increasing, we have seen those growth levels taper off. As we've seen a slower -- a slowing of competitive rate increases on new loans, competitors are not necessarily pricing their loans following the 10-year Treasury, and as we've all seen even though the 10-year Treasury grew recently, it's back down under 3.10% this morning. We've also seen increased prepayments on single-family portfolio particularly, and the rate on those payments are higher than we would anticipate based on our modeling.

At 9/30, the coupon on the loan portfolio was 4.04%, 28 basis points increase year-to-date and so what we're seeing is about a 3 basis point increase month-over-month in our loan portfolio.

Increase in our net interest -- excuse me, the increase in our interest income was offset, of course, by increase in interest expense of $4.2 million or 18% growth quarter-over-quarter, all of that increase is due to increased volume and rate on our deposits.

Average deposits increased $573 million, and the rate on those deposits increased 26 basis points in the third quarter compared to an increase of 17 basis points in the second quarter.

Increase in deposits -- interest expense on deposits is somewhat offset by a decrease in expense on FHLB advances during the quarter as we had less reliance on wholesale funding.

Over the past 2 quarters, our deposit growth has outpaced our net loan growth. As John said, we made a concerted effort to balance our deposits with the strong loan growth that we reported in the first half of the year. Due both to that growth and competition, our deposits are -- deposit beta has increased quarter-over-quarter. We are showing our beta as a measure to the 3-month LIBOR at 54% in our slide deck. I would point out that I'm not sure we're using the right comparative index, you can compare it to different indexes. The general takeaway should be that we're seeing an increase in the speed of deposits repricing. And even though if advertised rate for deposit seems to be holding steady, we still have a pretty healthy portfolio of time deposits that will be maturing in the fourth quarter. Over the next 3 months, we have approximately $900 million in time deposits that will be subject to renewal. The weighted average interest rates on those deposit is 1.73%.

During the month of September, we saw the average rate on new and renewing CDs of 2.5%. Therefore, we have about a differential of 77 basis points. Again, higher than the second quarter but only about 7 basis higher than prior quarter.

At September 30, the ending rate on our deposit portfolio was 1.65%, an increase of 19 basis points from the prior quarter and a 50 basis point increase from the beginning of the year. So on the deposit side, we're seeing about a 6 basis point month-after-month increase in rates.

As John said, over the past 2 quarters, we reduced our reliance on wholesale funding. Our wholesale dependency ratio is down to 27% as of the end of the third quarter.

Most of the growth has been in retail deposits, but we've been using broker deposit opportunistically, as currently those rates are lower than the FHLB overnight advances. As a result, our loan-to-deposit ratio is down to 120%.

However, I would just point out that we're still comfortable operating in the mid-120% range. As you would expect from less reliance on FHLB advances, repricing of our advance portfolio has increased from 20 -- excuse me, to 27 months to -- from 22 months in the prior quarter. So it's seen extended duration in that portfolio.

With regard to the NIM, as you would expect, the short-term interest rate increases and the nature of our loan and deposit portfolio, we've experienced increased NIM compression of 6 basis points quarter-over-quarter. As John said, our NIM was down to 1.94% for the third quarter as compared to 2% for the second quarter 2018. That trend in NIM currently reflects our liability sensitivity. And as we think about our sensitivity and our 34-year history. We know that we've experienced similar rate cycles to this. We've recorded lower margins and still we've maintained consistent profitability. We think that our efficiency in operations and our credit quality provides us some latitude to operate with lower net interest margins than typically seen in the industry.

And as we said in the past, we believe that our bank and our stock is really a defensive investment in down turns and credit cycles or in poor credit cycles. With our conservative credit quality, what we've seen is that our credit risk and our interest rate risk counter balance each other in different cycles. Our interest rate risks measured quarter-over-quarter and year-to-date has remained relatively consistent, measured by our parallel interest rate shocks in EVE and NII.

Moving to loan loss provisions. We did record a decreased loan loss provision of $650,000 this quarter as compared to $1.3 million in the prior quarter. That's entirely due to our net loan growth increasing by less than half of what it was in the second quarter. That loan growth in the third quarter was $190 million as compared to $409 million in the second quarter.

We've maintained a consistent ALLL coverage ratio of 58 basis points. But because of our improved credit quality, we continue to see increases in our coverage of problem assets. The ALLL was more than 15x nonperforming asset at the end of the third quarter and approximately 5x classified assets. ALLL measured $34 million at the end of the third quarter and with no net charge-offs for the past 4 years, I think simple back testing would indicate that our allowance is a pretty conservative estimate of the incurred loss methodology. Looking forward, I would expect us to maintain our ALLL coverage in about the same range. Noninterest income increased 226% -- excuse me, $226,000 over the quarter. As I said earlier that included $140,000 gain on loan sales, and it also included $113,000 increase in FHLB dividends. With lesser dependence on FHLB borrowings and no planned loan sales for the fourth quarter, I would expect to see a decline back down to second quarter levels in the fourth quarter of this year.

Noninterest expense came in at line -- on line with our projections at $15.1 million, a small increase over the linked quarter. Two components there, marketing expenses increased by $673,000 quarter-over-quarter related to deposit gathering -- and intensive deposit competition, but that marketing increase was offset primarily by reduced provisions for off-balance allowances related to declines in off-balance-sheet commitments and decline in securitization balances subject to repurchase obligations.

As John said, our efficiency ratio improved slightly, for the quarter it's only 46%. And our noninterest expense average assets continues to decline. Our effective tax rate for the quarter is 29%. So we're not expecting any change looking at that quarter going forward. And very briefly on the balance sheet, our assets ended at $6.7 billion, a 3% increase over prior quarter, almost $1 billion in growth since the prior year on annualized basis 23% asset growth. We're pleased with our loan growth quarter-over-quarter. We're more pleased that our loan growth has been entirely funded by deposits and that's primarily retail deposit growth of $743 million since the beginning of the year. Our tangible capital at $10.05 per share is a growth rate of 3.8% from year-end. And we're providing a consistent quarterly dividend based on current pricing -- for that yield over 2%. Our performance year-to-date recorded a return on average equity of 8.2%, which we feel pretty good about when we combine that with our dividend yield.

With that, I'll pass it to John Cardamone to talk a little bit more about credit.

Thank you, Laura. And hello, everyone, thank you for joining us today. As you've heard from both John and Laura, we've had some exciting growth this year and I'm delighted to report to you that we've been able to maintain and actually improve credit quality from -- quarter-to-quarter. Our -- this is exemplified by our delinquencies being at the lowest rate we've had in the 5 years that I've been with the bank. Our classified assets continue to decrease, and are at under 1% of the -- our core capital with the bank. Nonperforming assets were cut more than in half as we're down to 3 basis points of the bank's total assets. We've also experienced some very good parameters in our new growth. Our loans on the CRE side are now averaging slightly over $2 million per loan. We've been able to keep the LTVs in the low 60% range, and debt coverage on the new production in the 120-plus, 125 range. The same is true for our single-family production. While the portfolio average is about $900,000 new production, this year's has been $1.1 million. LTV is in the low-70% range. FICO scores in the mid-750s, and debt coverage in the low -- high '30s, low '40s. So again, the parameters of the portfolio remain very strong and then continue to improve quarter-to-quarter.

And with that, I will turn it over to Robert Armstrong.

Hi. So this quarter, we saw on the deposit side, a continued increase in our market share throughout the footprint. It was very much about growth this quarter. Again, demonstrating our ability to grow organically. But this growth did come at a cost as previously discussed. And this was in -- despite significant competitive pressure. It did raise our rates this quarter. So while our lower-cost business-banking initiatives continue to gain traction, now 12.7% of our deposits. This was offset by a very successful retail CD campaign that was discussed by John earlier, designed to fund our significant loan growth, decrease our reliance on broker deposits, and we are also looking to increase duration with that program. We believe that our investment this quarter in longer-duration CDs and continued expansion of our business-banking platform should help to lower deposit betas in future quarters as industry rates continue to rise.

Luther Burbank's investment in technology and marketing supporting our niche business verticals continues to pay dividends as well. We are beginning to really establish market leadership in some of the niche verticals that we participate in. Banking some of the top firms in these selected markets because of our commitment to service, technology and tailored products that will ever increasingly improve our cost of funds. Our branch network actively pursues cross-sell opportunities as well. You look at the market share of those branches and the critical math in each of those branches with averages well into the $400 million range. There is a significant opportunity that persists to convert existing business and cross sell new product. It also is supported by decades of robust lending activity in the communities that we serve. This quarter positions us very well for future growth and the ability to respond to the competitive landscape, retaining and expanding our market share.

Thank you, Robert. That's the end of our prepared remarks. We'll open it up to investor questions at this point.

(Operator Instructions) Our first question comes from Tim O'Brien of Sandler O'Neill.

One question for you, John. Could you give a little color on -- in other markets and other niches, other focuses on the lending front we've seen. I heard a lot of anecdotal conversation about much more intense competitive pressures, both around pricing structure, things like that. Have you seen anything like that manifest in the multi space?

Not really. I think most of it has been in the single-family space. I mean, I think we've all read articles that have been coming out. And so it's unclear where single-family is going.

Obviously, it's slowing, and it's slowing particularly in the higher balance loan. We're coming off market that was very seller-biased, right? So people are moaning about it, but I think if you look at the numbers at this point in time, it's really becoming a more balanced market, and which I think is healthy. You really can't continue forever with a market, where it's a seller's market, and prices are being bid up above offering price.

I've not -- we've not really seen that in the multi-family, although I will say, it's a very competitive marketplace. And as Laura mentioned, not every competitor just follows the 10-year, we don't follow the 10-year lockstep. Obviously, we watch it very carefully, and we will adjust pricing and really from a point of view of managing our pipeline, and it's pretty easy to tell if other competitors are not following price changes like we do and that you'll see the pipeline to diminish or go down. So our pipe is pretty good in both of our units right now. It was down a little bit a month ago, but now they replenished. So we're certainly not seeing anything. If you're thinking like what's going on in the East Coast with multifamily, the answer is absolutely not. None of that has transferred over to the West Coast. John, do you have any...

Just from the credit side, we've done nothing to change our structures, Tim. We're keeping our LTVs and our debt coverage requirement solid, and we have no plans to move them.

Okay. And then could you give a little color, any update on how the construction business build-out going? Any progress there -- this quarter on that? And what thoughts or expectations may be for 2019 in terms of where you like to see that business head?

Yes, sure. We hired Tom Atmore a few months ago, but he's not really a business development officer. So we just hired construction business development loan officer for Southern California. We've had a couple of customers come in into the Santa Rosa market from single-family from the fires. So my expectation is we'll do some of that, but our balance of construction now is what? $11 million, $12 million?

$12 million. We have a couple of opportunities that we're looking at. They look good.

But when we typically do these things, we do them conservatively. So these are going to be very strong credit deals with good metrics, strong borrowers, good locations. I would like to, since we're pricing those that are about prime plus 1, plus a point, can we get to a couple hundred million next year, who knows? But we'll probably hire one other business development person for Northern California as well. So hopefully that'll begin to start getting better traction.

Keep us up on your progress, if you would, and in terms of -- and the kind of loan and educate us about the kind of business that's evolving of being, and what kind of construction projects you're going to focus on? Those sorts of things down the road, that'd be great, that'll be helpful -- that will be useful to folks. And then...

I -- we just haven't done, there is not much there.

No worries, plenty of time. And last question just touching on the deposit campaign that you guys executed this quarter. There is 2 questions. One, is that going to extend do you think into the fourth quarter, given its success this quarter? And given your strategic considerations for 2019 kind of heading into that. And then also when you -- can we expect in future campaigns kind of an indication of a campaign's progress and stuff, the marketing expense that's going to be tied to it? You guys are going to run these campaigns in the future, and we'll see a pop in marketing expense typically around such campaigns going forward.

Yes, I think you will. As far as future campaigns, my feeling is that we are seeing growth slow a little bit. We are seeing payoffs accelerate a bit. In the past couple of years, we've been taking the previous year and saying, well, let's do what we did last year and do 20% more and that would be both on the loan side and the deposit side. I don't see that for '19. So I really feel that we've gotten ahead of the game a bit on our deposit gathering. So what that should allow us to do in 2019 is work more strategically to get more of the cross-sells of the operating accounts. And when you're pushing to bringing deposits to match loan growth, you have less ability to be as disciplined on your pricing. So again, I think -- I know everyone has been worried about NIM. But with the expectation, what the Fed going is to do, I think longer duration CDs is a very good strategy. And yes, you're going to pay up a little bit. In the quarter, you do it, but over the term of that CD, you're -- I think we're going to be very pleased with the overall cost of that CD. And I prefer it in a CD versus a liquid account, not considering noninterest-bearing, but money market liquid I prefer in the CD. And I think we've seen a lot of competitors do money market campaigns. It's some pretty healthy rates. I've been through...

Pine Street, San Francisco, John. Pine Street, San Francisco.

Well, I've been through this before, and one of things I'm very careful with is, I do not want to do any kind of, what I call, bait and switch with customers, and we're very loyal to our customers. And when you do a money market like that, and then the Fed starts raising rates, you are going to have customers coming and saying, I put this money in this money market knowing that you're going to raise these rates. So you end up doing this sort of battling with your customers, and that's really sort of foolish because I think you hurt your reputation that way. So I feel much better in a rising rate environment with the CDs.

Our next question comes from Gary Tenner of D.A. Davidson.

Wanted to ask a couple of follow-up questions. One with regards to your comment on capital and feeling well-positioned through 2019 and maybe into '20. Can you just remind us what your kind of focus capital ratio is in terms of how you think about that?

At this point, we're looking for Tier leverage -- Tier 1 leverage ratio to be at the lower end of 8% -- tangible 7%. Well, I was just going to add tangible obviously lower than that at 7%.

Okay. And then with regards to your comments on the single-family space, do you think any of the slowdown in that market at the higher end is related to the tax changes last year? Will you draw any conclusions to that or is it other factors?

Yes, I don't relate it to that. So I don't think this (inaudible) is an impact to us. The lending and the properties that we focus on are in short supply. So if you're looking at Bel Air, Brentwood, Beverly Hills, all areas like that up and down the West Coast, there is not enough of those properties. And people who live there, yes, they're complaining about it, and they don't like it, but are they going to move to Nevada so they don't have to pay those taxes? No, they're not. So I don't see that. Could it in time roll into some of that? Possibly, but I just don't see that happening. But I think this is really more a function of the markets been so hot for so long that it's getting more balanced now, properties are staying on the market longer. They are not getting multiple bids and being bid up above the asking price and things like that, which really is more healthy. I think it's a more healthier market, but time will tell what it ends -- where the market ends up going.

Okay. And then one last question for me just to make sure I understand your, kind of, outlook on the deposit side and the comments you made. Is the idea that in the fourth quarter and, say, into '19, you would continue to extend durations in the deposit portfolio but maybe not grow it as rapidly? Is that the balance or at least not (inaudible) CD portfolio if we have to look?

Yes, I would -- that would be a correct assessment.

Albeit forward-looking, we're not sure what we'll be able to achieve. What you see as an undercurrent to this is people in short-term instruments migrating to the longer-term instruments within portfolio. So that does dilute that effort to some extent people are waking up to rate. And...

That's a good point that waking up to rates. Rates have been so low for so long, even people who are in noninterest-bearing checking have not really cared that much because rates have been 1% or below. But now they're seeing rate, and so I think throughout the banking landscape, the consumers are waking up to the fact that there are better rates out there. And so we're not subject to that because we don't have -- there is one positive about, I guess, is that we don't have a lot of noninterest-bearing checking and customers moving it out or (inaudible).

That delta won't be as large as other institutions that have enjoyed a low cost of business checking historically.

Our next question comes from Jackie Bohlen of KBW.

Wanted to clarify on the growth projections for 2019 into '20 under the current capital level. Do you take repurchase activity into consideration with that?

We are not modeling repurchase activity, no. And we're not going to -- that doesn't mean-- we did implement our repurchase program. So it doesn't mean that when we're in our open windows, we're not monitoring that. But we have not projected any of that in any of our modeling.

Okay. But it does -- it's part of a flexible capital planning tool, and it is possible that you could add some repurchases in there?

It's possible, depending on what the market does, yes.

Okay. And then in terms of deposit pricing in the CDs that you're putting on and are likely to put on in the future, are you -- I know you gave an average growth -- an average rate of 2.50% for September. Does that vary across footprint, thinking more specifically about Northern California where I think in the past you said it's a little bit less price-sensitive up there?

I don't know if we're specifically setting different pricing grids based on geography. However, I think the adoption rate is different depending on where you are Washington, for example, where it's a newer market tends to go at the longer term of the spectrum and higher price. We do have a difference between our Northern and Southern footprints, but I -- we're not adopting a specific pricing policy for those geographies at this time.

The only thing we do, Jackie, and I think we've mentioned this before. For the branches that are mature, meaning we have excellent market share, and the Santa Rosa branch is a good example, almost $1.2 billion. We do not market these products in that marketplace because we don't want to have to reprice all of those customers at these nicer rates. We tend to put them out in the markets where we don't have the market share, and we are looking to grow. So that is really part of the strategy with our branch openings. So you take Bellevue. We can go into Bellevue, and yes, we have to pay good rate to grow it, but we're only paying that rate on $62 million. So in Santa Rosa, it's the best example. We have not advertised a rate CD or money market in Santa Rosa in probably 3, 4, 5 years because it's mature. Now we use these specials as defensive tactics, where the managers on renewals can use them as needed to retain deposits, but we don't market it. So that's really the only sort of regional pricing or marketing that we do on the deposits.

Our next question comes from Matthew Clark of Piper Jaffray.

Just wanted to ask a little bit about kind of repricing of your loans and deposits. I mean, you had some -- your new spreads are roughly 235 basis points. But obviously, your deposits are repricing faster than your loans, somewhat fairly consistent with last quarter, 3 basis points versus 6 month-over-month. I guess, if we get another Fed rate hike here, and you -- how do you feel about that kind of differential, whether or not it could moderate here? Or do we need the Fed to basically stop before that can happen?

I think what you see is, we're at the shorter end of the curve. Our durations are less than a year. So it's going to hit us faster than it will a loan reprice, where we are not tied to an index-like prime. So this is normal for us. We've been through these cycles before. We anticipate them, and they right now are a little bit lopsided. But they turn once we gain some traction on the loan side. So all these initiatives play out positively, but it looks rather -- with time, but it looks rather dyslexic for a few quarters as things accelerate. So I wanted to point it out again that we anticipate this type of business. On the roadshow, we were very deliberate in pointing out that we are exposed to the short end of the curve. And all we can do about that piece of it is to continue to really add our focus to lower-cost options, and those businesses are building out nicely. When it does slow, I would tell you that you're going to see that come to the surface more prevalently.

Okay, great. And then just on your loan growth outlook and some of your commentary around single-family resi payoffs and prepays. Can -- any -- I guess, how do you feel about that midteens outlook go longer term? Do you still feel good about that kind of growth outlook?

Asset growth, I think looking forward into '19, we're thinking something little slower than this year. But right now, our estimates are probably about 15%.

Midteens, yes.

Okay, great. And then just on the expensed average asset ratio continues to come down industry-leading, I guess, how low do you think that can realistically go before you have some sort of catch-up? Or kind of need from an infrastructure perspective?

My feeling is, we're probably at the near low. It's moving 1 basis point or 2. We're a pretty thin organization. I think in the slide deck, kind of, what are we showing? 260 somewhat in place? I know it's in there. So there is not that many institutions.

273.

273. So there's not that many institutions that are almost $7 billion in deposits with 273 employees. So I can't really go in and lop off many heads or we would have some problems. So my feeling is, we'll get under one and sort of maintain that.

That concludes our call today. A recorded copy of the call will be available on the company's website. Thank you for joining us.