Berkshire Hills Bancorp - Q3 2022
October 20, 2022
Transcript
Operator (participant)
Hello, everyone, and welcome to the Berkshire Hills Bancorp, Inc. Third Quarter 2022 Earnings Conference Call. My name is Nadia, and I'll be coordinating the call today. If you would like to ask a question at the end of the presentation, please press star followed by one on your telephone keypad. I will now hand over to your host, Kevin Conn, Investor Relations Officer to begin. Kevin, please go ahead.
Kevin Conn (Investor Relations and Corporate Development Officer)
Good morning, and thank you for joining Berkshire Bank's third quarter earnings call. My name is Kevin Conn, Investor Corporate Development Officer. Our news release is available in the investor relations section of our website, berkshirebank.com, and will be furnished to the SEC. Supplemental information is provided in an information presentation at our website at ir.berkshirebank.com, and we will refer to this in our remarks. Our remarks will include forward-looking statements and actual results could differ materially from those statements.
Details please see our earnings release and most recent SEC reports on Forms 10-K and 10-Q. In addition, certain non-GAAP financial measures will be discussed in this conference call. References to non-GAAP measures are only provided to assist you in understanding our results and performance trends and should not be relied on as financial measures of actual results or future projections.
A comparison and reconciliation to GAAP measures is included in our news release. On the call today, we have Nitin Mhatre, President and Chief Executive Officer of Berkshire Bank, Sean Gray, our Chief Operating Officer, Brett Brbovic, our Chief Accountant and Interim CFO, Greg Lindenmuth, our Chief Risk Officer, and Steve Finocchio, our Treasurer. At this time, I'll turn the call over to our CEO, Nitin Mhatre.
Nitin Mhatre (President and CEO)
Thank you, Kevin, and good morning, everyone. I'll begin my remarks with the financial performance highlights for the quarter, followed by an update on the CFO departure before coming back to the highlights for the balance sheet and the progress on the BEST strategy in the quarter. I'll begin my comments on slide 3, where you can see the highlights of the quarter.
Overall, this was a strong quarter with continued improvement across all key financial metrics. Adjusted revenues were up 10% quarter-over-quarter and 17% year-over-year, driven by strong net interest income growth.
Revenue growth was driven by growth in loan balances and improved margins, which more than offset the headwinds in the non-interest income. Adjusted expenses were up modestly quarter-over-quarter and year-over-year and were around the high end of the range we provided as guidance in July.
Resulting PPNR was up 28% quarter-over-quarter and up 53% year-over-year. Adjusted earnings per share of $0.62 was up 21% quarter-over-quarter and up 18% year-over-year. This quarter was our highest quarterly adjusted earnings per share since 2019. Adjusted return on tangible common equity improved to 9.92%, and adjusted return on assets was 99 basis points. Metrics nearing the top for our 2024 BEST targets.
Before I comment on the balance sheet and the BEST progress, a quick update on the people front. As you may have seen from our press release last week, CFO Subhadeep Basu has resigned earlier this month for personal reasons and to pursue other opportunities.
Subhadeep has been a key member of my team since he joined us eighteen months ago, and I'm appreciative of his efforts and important contributions. As this was a strictly personal decision, out of respect for Subhadeep's privacy, I won't make any further comments about his departure itself, but will add that he has agreed to help us in a consulting capacity through the year-end.
The board of directors and I thank Subhadeep for his service and wish him success and happiness for the future. I also want to reiterate that there are no accounting improprieties or disagreements regarding financial reporting related to Subhadeep's departure, and we remain confident about our 2022 guidance that was provided at our previous earnings call. As stated previously, we will provide 2023 guidance during the fourth quarter earnings call in January 2023.
We have retained a leading executive search firm, Spencer Stuart, to do a nationwide search for the CFO position. Our Chief Accounting Officer and Interim CFO, Brett Brbovic, will cover the financial details of today's presentation. Brett joined us 10 years ago from KPMG and was promoted to the Chief Accounting Officer position in 2015.
Both Brett and Stephen Finocchio, our Head of Treasury and Planning, will be available to respond to the questions following our remarks. We are blessed to have a deep bench strength in our finance team. Collectively, the totality of Berkshire team is enthusiastically marching forward on our journey ahead. Coming back to the highlights of the quarter on slide three. On capital front, our balance sheet remains strong.
We ended the quarter with a common equity tier one ratio of 12.7% and a tangible common equity ratio of 8.1%. We have ample capital to both fund growth and continue stock repurchases. This past quarter, we returned about $26 million of capital via dividends and stock repurchases.
Over time, we expect to resume the growth of our dividend. Our credit metrics remained strong in the third quarter. Thanks to the tremendous work by Berkshire team members across frontline to the workout group.
Brett will review our credit metrics detail in a moment. Greg Lindenmuth, our Chief Risk Officer, is on the call to assist on any credit-related questions. On the BEST strategy front, we continue our optimization, including real estate optimization and consolidation of five branches in the quarter. We continue to make steady progress against our ESG priorities.
You may recall that we issued $100 million sustainability bond this summer, and we've been actively deploying those proceeds within our sustainable financing framework into projects in renewable electricity, green buildings and affordable housing.
As I always do, I would like to thank all of our Berkshire Bank colleagues for their continued hard work and passionate commitment to our vision of becoming a high-performing, leading, socially responsible community bank.
Their commitment to our strategy and dedication to our customers is what is driving our ongoing and accelerating performance improvements. We've made progress. With that, I'll turn the call over to Brett to discuss our financials in more detail. Brett?
Brett Brbovic (Chief Accountant and Interim CFO)
Thank you, Nitin, and good morning, everyone. Slide four shows our quarterly income statement. Please see the appendix for a reconciliation of GAAP and adjusted financials. My comments will be on an adjusted basis and not GAAP. Revenues were up 10% quarter-over-quarter and about 17% year-over-year.
Net interest income grew 13% sequentially due to loan growth, increased asset yields, and stable funding costs. Fee revenues were down about 3% versus the second quarter, and I'll speak to those in more detail in a moment.
Expenses were up low single digits on both a quarter-over-quarter and year-over-year basis and close to the higher end of the $68 million-$70 million quarterly range we've guided to in the past. Our efficiency ratio was 62% in the quarter, 2% above our best target of 60 for 2024.
We recorded restructuring charges of $11.5 million pre-tax and $8.7 million after tax, or approximately $0.20 per share due to the consolidation of five branches in Firestone exit. At this time, we do not anticipate any material restructuring charges in the fourth quarter. We had a provision expense of $3 million this quarter, and our credit allowance remained relatively stable at $96 million.
Adjusted after-tax income rose about 19% and 9% quarter-over-quarter and year-over-year, respectively. We also had positive operating leverage quarter-over-quarter and year-over. Slide five highlights the changes in our earning assets. As Nitin mentioned, we had another quarter of loan growth with a 5% increase in average loans, with growth across most of our business lines.
Residential mortgage balance growth continued even in a difficult environment, largely driven by new loan officers hired over the last few quarters. Loan yields rose 55 basis points versus the second quarter as a result of the rising rate environment and the shift in our balance sheet from lower yielding cash investments to higher yielding loans, which also drove the growth in our NIM and NII.
Slide six shows our average liabilities. Total deposits declined 1% and 3% quarter-over-quarter and year-over-year, respectively. Non-interest bearing deposits were flat both quarter-over-quarter and year-over-year. Our cost of deposits was at 33 basis points, up 16 basis points from the second quarter. The Fed raised rates by 150 basis points in the quarter, so our deposit beta for the quarter was about 12%.
While our deposit costs have remained relatively stable due to high deposit market share and relatively less competitive markets, we do expect deposit costs to increase over the coming quarters. We still expect deposit betas through the cycle in the 30%-40% range. Slide seven shows more detail on our net interest income and margin. Net interest income grew 13% and 29% quarter-over-quarter and year-over-year, respectively.
While we were pleased with the lift in our NIM, we expect a relatively modest lift going forward in the fourth quarter. Turning to slide eight, we show our fee revenues, which were down about 3% versus the second quarter. Strength in deposit related fees and other fees, which includes both adjustments, were offset primarily by declines in loan fees and wealth management fees. Deposit related fees were higher on more consumer activity and interchange income.
Loan fees were down on lower SBA gain on sale and lower swap fee revenues, which are currently running well below our normal run rates. On slide nine, we show our expenses, which are up low single digits both quarter-over-quarter and year-over-year. We continue to benefit from expense saves from vendor management, branch consolidations, and other real estate optimization efforts, which have resulted in lower occupancy and equipment costs.
Compensation was up mid-single digits on modest wage inflation and commission expenses related to sales and origination activity. Slide 10 is the summary of our asset quality metrics. Our credit quality remains solid. Delinquent and non-performing loans were down 16% versus the second quarter and flat year-over-year. Delinquencies at 74 basis points of loans remain well below our long-term historic range of 85-115 basis points.
The increase in non-performing loans and the $6 million in net charge-offs primarily reflect a small number of isolated. While we are monitoring credit closely, we are not seeing any broad-based portfolio credit deterioration and are encouraged that accruing delinquent loans or early-stage delinquencies were down 51% versus the second quarter.
Slide 11 shows details of our liquidity and capital positions. Our loans to deposit ratio was 80% this quarter. Our common equity tier one capital ratio ended the quarter at an estimated 12.7%. Our TCE ratio ended the quarter at 8.1 and included cumulative OCI bond marks of $183 million on an after-tax basis. The cumulative bond marks include $61 million booked in the third quarter.
We believe our bond marks have been in line with peers, and those bonds will pull to par over time, and the marks are not included in our regulatory capital ratios. Our tangible book value per share ended the quarter at 20.4. I want to be clear that this is a non-GAAP adjustment, but excluding the AOCI mark, the total tangible book value per share would increase by $4, making it the highest TBV per share historically for Berkshire at 24.5.
We provided a GAAP to adjusted TBV reconciliation in the appendix. Our top priority is to deploy capital to support organic growth. We are biased to opportunistic stock repurchases given our relatively low stock valuation and tangible book value. We repurchased about 705,000 shares for $20.2 million in the second quarter.
As Nitin mentioned, we also expect to grow our cash dividends over time. Finally, we're going through our annual budgeting process over the next month or so, and we'll share 2023 guidance on our fourth quarter call in January. With that, I'll turn it back over to Nitin for further comments. Nitin?
Nitin Mhatre (President and CEO)
Thank you, Brett. On slide 12, we have our BEST program North Star chart, which shows our progress on five key performance metrics. As you will see, our financial metrics of ROFC and ROA are just below the low end of our stated three-year goal. We're also encouraged that our annualized PPNR was $154 million, well above the $102 million in 2021, and heading towards our $180 million-$200 million BEST target in 2024.
Our ESG score remained in the top quartile at 23rd percentile nationally, and we've enhanced our NPS score measurement processes through J.D. Power to provide us with a net promoter score directly through our surveys. With an increased sample size, we hope to have a relative ranking versus New England banks by first quarter 2023.
On slide 13, you can see some examples of how we are reinvesting our expense through BEST optimization initiatives in people and technology. On investments in people front, we continue to complement our strong existing team of frontline bankers with new bankers with solid experience in the market who want to join our purpose-driven transformational journey.
We have benefited from the disrupted market environment with high-quality talent hired across our business lines, commercial, 44 BC, wealth management, private banking, retail, and mortgage lending from a broad spectrum of banks. We have also made significant investments in coaching and promotions of our bankers. Technology investment front, the right-hand side of this slide highlights how we are bringing our DigiTouch architecture to life.
What that essentially means is we are well on our way to create a top-notch digital experience offered by large banks while creating an ability to retain the personal touch of a community bank. It's possible because the investments made in the foundational elements with best-in-class partners and platforms, which include data warehouse through Snowflake, middleware integration through MuleSoft, digital acquisition and onboarding through Narmi, CRM and sales platform through salesforce.com, et cetera.
We truly believe that in medium term, our technology solutions will become a differentiating mode for Berkshire Bank. I'll close my remarks with comments on the economy. As the Fed raises rates to battle inflation, we are seeing a wide dispersion of outlooks for near to medium term. The equity market seems to be pricing in a hard landing.
We are fortunate to be operating primarily in the steady-eddy New England market, which remains on a solid relative footing. As we talk to our customers, we are seeing a bit more caution driven by high inflation and supply chain concerns, but the corresponding demand still seems to be supported by the recovery from the pandemic doldrums. We're also supporting the comeback for various communities across our footprint and are highly encouraged by the initiatives by local leaders in those markets.
In markets like Syracuse, we're excited about investments being made through local government and private companies like Micron that will be investing over $100 billion in creating one of the largest microchips plants in the nation. We are and will continue to remain vigilant and stand ready to navigate through the changes in the macro environment while providing exceptional service to our customers and continue our progress towards becoming a high-performing, leading, socially responsible community bank. With that, I'll turn it over to the operator for questions. Nadia?
Operator (participant)
Thank you. If you would like to ask a question today, please press star followed by one on your telephone keypads. If you choose to withdraw your question, please press star followed by two. When preparing to ask your question, please ensure your phone is unmuted locally. Our first question today comes from Billy Young of RBC. Billy, please go ahead. Your line is open.
Billy Young (Equity Research Analyst)
Hey, good morning, guys. How are you?
Nitin Mhatre (President and CEO)
Good, Billy. How are you?
Billy Young (Equity Research Analyst)
Good. I might have missed a comment on what some of the drivers were for the higher NPAs and NCOs this quarter. I apologize if I missed this, but did you disclose what types of credits these were?
Brett Brbovic (Chief Accountant and Interim CFO)
Yep, Billy, this is Brett. Those were primarily related to C&I.
Billy Young (Equity Research Analyst)
C&I.
Brett Brbovic (Chief Accountant and Interim CFO)
Greg, I don't know if you wanna provide any additional color.
Gregory Lindenmuth (CRO)
Yeah. Absolutely. Thanks, Brett. Yes, the NCOs for the quarter were really episodic in nature. Some were driven by C&I loans on the portfolio. I think it's also important to note that management was also proactive in its credit risk management practices. We took advantage of a very attractive market to sell troubled assets this quarter. Roughly about $1 million of the charge-offs do relate to problem loan sales that we took advantage of at almost higher than $0.90 on the dollar for those loans. Some of that is a proactive decision on the part of management.
Billy Young (Equity Research Analyst)
Any particular sectors that these credits were exposed to? It sounds like these may have been known issues.
Gregory Lindenmuth (CRO)
Oh, yes. All were known issues and included in our prior classified criticized balances, which we do expect to trend lower.
Billy Young (Equity Research Analyst)
Okay. Thank you. Appreciate that. Can you maybe elaborate a little bit on the expectations or your expectations for the model shift in 4Q spread revenues? Do you expect to see more of a bigger step up in deposit betas versus the pretty low levels today?
Nitin Mhatre (President and CEO)
Bill, the short answer would be yes. Expect the betas to grow as compared to third quarter. Like Brett said in his remarks, I think we're blessed to have good market share in a relatively less competitive market. We've been able to contain our betas well. Our beta for the quarter was about 12, and our cumulative beta so far in this cycle is about six. I think that's a reflection of the fact that the markets that we are in and all the programs that our retail team has put together to proactively manage the customer relationships.
Billy Young (Equity Research Analyst)
Got it. Lastly, just a quick question on loan activity and growth. Obviously, bottom line trends are solid and consistent with your outlook. It seemed most of the growth this quarter was driven by resi mortgage side, and it seemed there were a little bit more pressures on commercial. Can you just speak to maybe some of the drivers of growth in general over the next few quarters and what you're seeing in commercial? Does mortgage perhaps drive a bigger piece of growth in the near term with your expanded mortgage team?
Nitin Mhatre (President and CEO)
Sure. Billy, we couldn't hear you well, but I think I got the gist of the question. The quarter was relatively soft on the commercial originations, but the pipeline has built by the end of the quarter. We expect to have a stronger quarter for commercial going into the fourth quarter. The residential quarter would be similar to the levels that we saw in the third quarter. The overall fourth quarter should be stronger than the third quarter, and we're pleased with the momentum that we're seeing across the board.
Billy Young (Equity Research Analyst)
Okay. Thank you for taking my questions.
Nitin Mhatre (President and CEO)
Thanks, Billy.
Operator (participant)
Thank you. Our next question goes to Mark Fitzgibbon of Piper Sandler. Mark, please go ahead. Your line is open.
Mark Fitzgibbon (Managing Director and Head of FSG Research)
Hey, guys. Good morning. I wondered if I could follow up.
Nitin Mhatre (President and CEO)
Good morning.
Mark Fitzgibbon (Managing Director and Head of FSG Research)
Good morning then. Wondered if I could follow up on one of the last questions about the C&I delinquencies. I'm not sure, Greg, you had answered that in terms of which sectors of the C&I portfolio were negatively impacted by, you know, or showed up in delinquencies there. Any particular industries, any particular geographies or types of C&I lending?
Gregory Lindenmuth (CRO)
No, actually. It's just a one-off transactions, not related to any portfolio or segment deterioration whatsoever. It's very specific to the borrowers in question.
Mark Fitzgibbon (Managing Director and Head of FSG Research)
Okay. Secondly, Brett, I wondered if you could share with us, if you have at your fingertips, what the spot deposit rates today are. I don't think I have those right here. I can get back to you on that.
Nitin Mhatre (President and CEO)
Are you talking about the cost of deposits, Mark?
Mark Fitzgibbon (Managing Director and Head of FSG Research)
Yeah. Today, you know, currently.
Nitin Mhatre (President and CEO)
Yes. Today, I think we ended the quarter at about 33. I think today's spot would be about 41-42.
Mark Fitzgibbon (Managing Director and Head of FSG Research)
Okay, great. I know you had said there would be no more charges in the fourth quarter, but do you have plans for more branch consolidations, maybe in early 2023 or beyond?
Nitin Mhatre (President and CEO)
You'll recall, Mark, you've been tracking us for a while. We used to be about 130 branches network. The network is now close to 100. We believe the overall number will be relatively steady. I think we might still have some consolidations and relocations, but they will be awash.
We don't expect the number to change now in terms of the branch count. I think branches will continue to play an important role to us as a community bank. The roles of the bankers have changed from being transaction processing to solutions providers and digital ambassadors. We believe that, we're pretty much very close to that inflection point.
Mark Fitzgibbon (Managing Director and Head of FSG Research)
Okay. Lastly, Nitin, given that you know, the bank has continued to see some turnover in recent years, I guess I wondered if you could comment on what sorts of things, you know, the organization is doing to stem that.
Nitin Mhatre (President and CEO)
Yeah. You know, we've done a tremendous number of things in terms of employee engagement and starting with different types of engagement activities, town halls, communications, keeping a real good mix of, you know, folks with institutional knowledge and the new folks that are coming in and how we enable them to interact in this relatively hybrid work environment that we are in.
We actually just completed our employee engagement survey. We're actually waiting to see what that shows us. We ended up last year at about 68% employee engagement rate. Typically, if you're 70 and above, it's you're in the top quartile. We expect, we're hoping that we'll get there this year. It's a wide slew of activities and the team is pretty energized about the future.
Mark Fitzgibbon (Managing Director and Head of FSG Research)
Thank you.
Operator (participant)
Thank you. Our next question goes to David Bishop of Hovde Group, LLC. David, please go ahead. Your line is open.
David Bishop (Director)
Yeah. Good morning. How are you, Nitin?
Nitin Mhatre (President and CEO)
Morning, Dave.
David Bishop (Director)
Hey, a quick question. Noticed the past couple of quarters, from a funding perspective, looks like you're leaning on the securities book to fund loan growth and some of the deposit outflows. We expect that the overall balance of securities to continue to attrit into the fourth quarter, maybe into next year. Just curious how you're thinking about funding in incremental loan growth?
Stephen Finocchio (Treasurer)
Yeah. David, this is Stephen Finocchio. Yeah, I think that has been part of the strategy is to let the loan portfolio continue to run down. Obviously that pace has slowed down. Sorry, securities loans, and that portfolio has obviously slowed down a little bit, but we continue to use that as part of the strategy in the short run.
David Bishop (Director)
Do you know what the cash flows are per month?
Stephen Finocchio (Treasurer)
About $25 million a month.
David Bishop (Director)
Got it. Just looking, turning back to the margin discussion, noted what you said in terms of the deposit front, but sort of circling in on the loan yields. I noticed residential mortgage loan yields were down and, obviously, mortgage rates are trending up. Anything driving that phenomenon where we're seeing a sort of the decline or decrease in residential mortgage yields?
Brett Brbovic (Chief Accountant and Interim CFO)
This is Brett. What we actually noticed was last quarter we had a little higher than normal deferred costs, late charges and purchase loan accretion in Q2 that did not reoccur in Q3.
David Bishop (Director)
The expectation is, do you think that trends up over time, though? Just curious what and maybe if you like review the types of mortgage loans you're putting on the books, the tenor duration yields. Thanks.
Brett Brbovic (Chief Accountant and Interim CFO)
The residential loans were currently on around, I believe, 4%.
Nitin Mhatre (President and CEO)
Yeah. The third quarter branch originations and that invariably has the lag were about four handle. The fourth quarter should have, you know, five to six handle.
David Bishop (Director)
Got it. Just in terms of the movement in the deposit rates there, are you seeing, I should say sort of a, you know, a dichotomy in terms of rates across maybe your core Massachusetts footprint in Upstate New York? Just curious if there's a big differential in terms of deposit pricing within those markets.
Nitin Mhatre (President and CEO)
Yes. I think our core markets in Central Mass, you know, the Worcester, the Berkshires, Springfield, they're relatively less competitive, and we have the flexibility to then price them accordingly while managing the customer relationships. The ultra-competitive markets, whether it's, you know, Boston and New York, we are staying competitive. I think the focus is on relationships.
Kevin Conn (Investor Relations and Corporate Development Officer)
I think our retail team, commercial team is doing a great job of managing that. Commercial team is also focused on getting operating accounts every time we have lending conversations. All of that is helping us expect, and we feel reasonable in that our betas will continue to be lower than the market.
David Bishop (Director)
Got it. One final question for me. I think it, you know, to the preamble. Expense run rate probably near the top end of the guidance for the quarter at a little bit about $70 million. Any thoughts in terms of where we should be thinking about the expense run rate moving forward off this level? Thanks.
Brett Brbovic (Chief Accountant and Interim CFO)
Hi, this is Brett again. I think we're comfortable with the guidance that we provided last quarter. I think we expect to see, you know, expenses in that range.
David Bishop (Director)
That's the $68 million-$70 million range, correct?
Brett Brbovic (Chief Accountant and Interim CFO)
Correct.
David Bishop (Director)
Got it. Thank you. I'll hop off.
Operator (participant)
Thank you. Our next question goes to Laurie Hunsicker of Compass Point. Laurie, please go ahead. Your line is open.
Laurie Hunsicker (Analyst)
Great. Hi. Thanks. Good morning.
Kevin Conn (Investor Relations and Corporate Development Officer)
Good morning.
Laurie Hunsicker (Analyst)
Wondering if we could start with the $11 million of restructuring charges you took. What was the breakdown between Firestone write-down and the 5 branch closings? How did that break out?
Brett Brbovic (Chief Accountant and Interim CFO)
The Firestone Financial was about $2 million split between lease terminations and severance, and the remaining was primarily related to the five branches.
Laurie Hunsicker (Analyst)
Got it. Okay. Okay, that's helpful. Then can you just give us a refresh on, you know, specifically Upstart and Firestone in terms of where they are on a non-performing loan balance and also charge-offs in the quarter? I'm just kind of looking, obviously. I think others had asked this question, but linked quarter your C&I nonperformers went from $5 million to $21 million, and your C&I charge-offs in the quarter went from $200,000 last quarter to $4.9 million. I'm thinking a lot of it is there, but can you help us think about specifically what the dollar amount of nonperformers are in both of those categories and then the charge-offs in the quarter?
Kevin Conn (Investor Relations and Corporate Development Officer)
Hey, Laurie, this is Kev. We're not sharing any of the delinquency or non-performing loan data on either of those books because the books are in really good shape. They continue to run down. So we're happy to share exposure data on loan buckets because I know you usually have questions on many loan buckets. But for any of the buckets, we're not going to share delinquencies or charge-off numbers or anything like that at this time.
Laurie Hunsicker (Analyst)
Okay. Well, maybe can you comment specifically on the jump in C&I linked quarter nonperformers and charge-offs? What was that? How should we be putting that together?
Gregory Lindenmuth (CRO)
Yeah. Greg?
Laurie Hunsicker (Analyst)
In terms of loan loss provisioning?
Gregory Lindenmuth (CRO)
Hi, Laurie. Yeah, again.
Kevin Conn (Investor Relations and Corporate Development Officer)
Greg?
Gregory Lindenmuth (CRO)
Yes, thanks. Hi, Laurie. Again, Laurie, it's just a handful of one-off C&I credits that's related to that we've you know previously identified as problem assets.
Laurie Hunsicker (Analyst)
Okay. Great. I'll leave it there. Thank you. Actually, I'm so sorry.
Gregory Lindenmuth (CRO)
Thanks, Laurie.
Operator (participant)
Laurie, I'm going to reopen your line now.
Laurie Hunsicker (Analyst)
Oh, great. Sorry. One last question. Can you just refresh us on your total SBA and what the unguaranteed piece of that is? Thanks again.
Kevin Conn (Investor Relations and Corporate Development Officer)
Laurie, I've got 15 loan buckets of exposure that we can share with you. That is one that we do not share. Sean can provide some color commentary on that one.
Brett Brbovic (Chief Accountant and Interim CFO)
Sure. You know, we've had strong historic performance. You know, I do think it's important to know we booked the unguaranteed portion at fair value. Good recovery history, and we can pro rata apply that to the stub. Weighted average coupon, 10 + 2.25, and 40% of this is secured by real estate.
Laurie Hunsicker (Analyst)
Great. Thanks for taking my questions.
Kevin Conn (Investor Relations and Corporate Development Officer)
Thank you, Laurie.
Operator (participant)
Thank you. Our next question goes to Christopher O'Connell of KBW. Chris, please go ahead. Your line is open.
Christopher O'Connell (Director)
Morning.
Kevin Conn (Investor Relations and Corporate Development Officer)
Morning, Chris.
Christopher O'Connell (Director)
I just wanted to start off on the deposit flows, and if you guys could give an update on what the overnight payroll deposit balances were at the end of the quarter.
Brett Brbovic (Chief Accountant and Interim CFO)
End of the quarter, they were approximately around $1 billion. That's generally in line with what we've seen in previous quarters.
Christopher O'Connell (Director)
Got it. Yeah. Moving forward, do you expect that book to be more stable?
Brett Brbovic (Chief Accountant and Interim CFO)
I would say the payroll always has a little bit of lumpiness to it. However, you know, we've really around the $1 billion-$1.1 billion range most quarters.
Nitin Mhatre (President and CEO)
Yeah, Chris, I would say first quarter.
Brett Brbovic (Chief Accountant and Interim CFO)
Got it.
Nitin Mhatre (President and CEO)
There was an upward spike. Outside of that, I think your end of period is typically about $1 billion and the average is $750 million, and that's been consistent over pretty much the last eight quarters. I think we've seen maybe marginal improvement, just as more of the workforce I think comes back into the labor market, but otherwise it's been relatively steady.
Christopher O'Connell (Director)
Got it. On the margin guide for next quarter, wondering if you could, you know, provide a little bit of detail around, you know, what exactly like modest lift is encompassing given how large the increases have been the past couple quarters. What exactly the sub-debt impact of the redemption is on the margin for next quarter.
Nitin Mhatre (President and CEO)
I think, Chris, I won't give specific NIM guidance, but I'll say it'll be higher. It won't be higher at the same clip as we saw in the second and third quarter. We expect it to continue because the loan betas will continue to outpace the deposit betas. What we could say from a modeling perspective is the combination of balance will continue, albeit at a slower rate, and the margin expansion fourth quarter. I think net income could be higher in fourth quarter compared to third quarter by, you know, 3%-5%.
Christopher O'Connell (Director)
Got it. I guess just given, you know, those comments around the margin, and the reaffirmation of the overall guidance provided last quarter. I mean, it seems like the NII guide, you know, should be moving higher, you know, given what you guys have already put up for this year, and the 9%-11% GAAP growth for the year. Any updates on that NII guidance?
Nitin Mhatre (President and CEO)
Yes. I think we will refresh the guidance, Chris, as we said, in January 2023, as we give the full year guidance for 2023. I think you will certainly hear it at that point of time. We would complete our internal budgeting process by then. For fourth quarter, like I said, we expect it for.
Brett Brbovic (Chief Accountant and Interim CFO)
Yeah.
Nitin Mhatre (President and CEO)
3%-5%.
Christopher O'Connell (Director)
2022 guide. Okay.
Nitin Mhatre (President and CEO)
Yeah.
Brett Brbovic (Chief Accountant and Interim CFO)
Chris, I believe you asked about the sub-debt.
Christopher O'Connell (Director)
Yeah.
Brett Brbovic (Chief Accountant and Interim CFO)
I believe, you know, we called the sub-debt, the $75 million sub-debt in September, about a $1.25 million expense for the quarter.
Christopher O'Connell (Director)
Great. On the fee guidance for the year, you know, just wondering, you know, what you think the swap and loan fees will do from here based on the customer activity that you're seeing. If, you know, you see a, you know, a substantial uptick in kind of the overall, you know, fee levels to get to the, you know, adjusted 10%-15% guide.
Nitin Mhatre (President and CEO)
I think fees are under pressure, especially with our loan fees, swap fees, and wealth management. All of them have the macro headwinds. Even within that context, I would say we expect just based on the pipeline, a modest uptick on the loan fees and swap fees. Should be relatively similar quarter in the fourth quarter, maybe modestly higher.
Kevin Conn (Investor Relations and Corporate Development Officer)
Chris, I don't know if it's helpful but some of the line items in that loan fee and revenue are running at well below normal levels. If you look at the last eight quarters, we average about something around $7 million in that line item. Obviously we're running about half that this quarter. We do expect. There's nothing broken. It's just macros impacting wealth management, the SBA gain on sale book. You know, there are definitely a few line items in there that are running below normal.
Christopher O'Connell (Director)
Great. On the loan yields, I mean, the uptick in CRE was fairly substantial. Anything unusual or, you know, one-off driving that uptick this quarter? If you could provide the entirety of the loan portfolio that's percentage-wise that's floating or variable.
Brett Brbovic (Chief Accountant and Interim CFO)
I don't think there was anything that kind of stood out from that side. Nothing significant. We are currently booking, you know, somewhere in the mid-high for the commercial loans. To answer your second question, we're about $3.2 billion in three-month adjustable, which is mostly indexed.
Christopher O'Connell (Director)
Great. Lastly, you know, I think you guys have mentioned on last quarter's call that, you know, all else equal, you know, you intended to finish off the current buyback authorization by the end of the year. I believe you have around $35 million left. Any change in that outlook?
Nitin Mhatre (President and CEO)
No, Chris O'Connell, we're going to continue to manage through the origination opportunistically in the quarter.
Christopher O'Connell (Director)
Great. That's all I had. Thank you.
Nitin Mhatre (President and CEO)
Thank you, Chris.
Operator (participant)
Thank you. We have no further questions. I will now hand back to Nitin Mhatre, CEO, for any closing remarks.
Nitin Mhatre (President and CEO)
Thank you all for joining call today, and thank you for your. Be well.
Operator (participant)
Thank you. This now concludes today's call. Thank you for joining. You may now disconnect your lines.