First Financial Bancorp. (NASDAQ:FFBC) Q2 2022 Earnings Conference Call July 22, 2022 8:30 AM ET
Company Participants
Scott Crawley – Corporate Controller
Archie Brown – President and CEO
Jamie Anderson – CFO
Bill Harrod – Chief Credit Officer
Conference Call Participants
Chris McGratty – KBW
Scott Siefers – Piper Sandler
Daniel Tamayo – Raymond James
Jon Arfstrom – RBC Capital Markets
Terry McEvoy – Stephens
Operator
Hello, and welcome to the First Financial Bancorp Second Quarter 2022 Earnings Conference Call and Webcast. My name is Breaka [ph], and I’ll be coordinating the call today. [Operator Instructions]
I now have the pleasure of handing the call over to our host, Scott [technical difficulty]. Please go ahead.
Scott Crawley
Thanks, Breaka. Good morning, everyone, and thank you for joining us on today’s conference call to discuss First Financial Bancorp second quarter and year-to-date 2022 financial results. Participating on today’s call will be Archie Brown, President and Chief Executive Officer; Jamie Anderson, Chief Financial Officer; and Bill Harrod, Chief Credit Officer.
Both the press release we issued yesterday and the accompanying slide presentation are available on our website at www.bankatfirst.com under the Investor Relations section. We’ll make reference to the slides contained in the accompanying presentation during today’s call.
Additionally, please refer to the forward-looking statement disclosure contained in the second quarter 2022 earnings release as well as our SEC filings for a full discussion of the Company’s risk factors. The information we will provide today is accurate as of June 30, 2022, and we will not be updating any forward-looking statements to reflect facts or circumstances after this call.
I will now turn it over to Archie Brown.
Archie Brown
Thank you, Scott. Good morning, everyone, and thank you for joining us for today’s call. Yesterday afternoon we announced our financial results for the second quarter. Before I turn the call over to Jamie to discuss those results in greater detail, I’m going to say a few words regarding the quarter. I’m extremely pleased with our performance in the recent period, which was highlighted by a rapidly expanding margin, strong loan growth and exceptional [indiscernible].
For the quarter, we achieved adjusted earnings per share of $0.56, a 1.31% return on average assets and a 21.26% return on average tangible common equity. Earnings improved from the first quarter as our asset sensitive balance sheet was positively impacted by recent rate increases. In addition, credit quality was stable with lower net charge-offs and nonaccrual loan balances. This led to a small provision recapture for the quarter.
We are encouraged by our fee income performance for the quarter which reflects the strength of our diversity businesses. Total fee income surpassed our expectations due to record foreign exchange income, higher income from limited partnership investments, and our growing leasing business.
While second quarter mortgage banking income increased 35% from the linked quarter, we continue to experience headwinds due to rapid rise in interest rates. In addition, recent overdraft program changes led to a modest reduction in deposit account service charges during the second quarter and we expect some further decline in the third quarter as these changes are fully integrated.
We’re very pleased with loan growth in the second quarter. Loans excluding PPP increased by $191 million or 8.3% on an annualized basis. Loan growth was broad based with increases in C&I, retail mortgage and consumer banking. This more than offset a decline in the ICRE portfolio, which was driven by elevated prepayments. In addition, we were also pleased with Summit’s growth in the quarter, which included a total of $50 million in leases and loans. Loan origination activity remains strong as we head into the third quarter.
With that, I will turn the call over to Jamie to discuss the second quarter results in more detail. After Jamie’s discussion, I will wrap up with some additional forward-looking commentary. Jamie?
Jamie Anderson
Thank you, Archie. Good morning, everyone. Slides 4, 5 and 6 provide a summary of our second quarter financial results. The second quarter was highlighted by an expanding net interest margin, strong loan growth, increased fee income and stable credit quality. As a result of the Fed rate hikes, our net interest margin increased 30 basis points during the quarter.
Given our asset sensitive balance sheet, we believe this trend will accelerate into the third quarter as the Fed increases rates further. We were pleased with 8% annualized loan growth during the period excluding PPP balances. The growth was widespread across the portfolio with the biggest increases in C&I and residential mortgage.
Fee income increased 21% during the quarter surpassing our expectations. In particular, Bannockburn had a record quarter, while leasing business income increased 19%. Mortgage banking income increased compared to the first quarter. However, we do not expect this trajectory to continue as originations will be negatively impacted from higher interest rates.
Additionally, service charge income was relatively flat compared to the first quarter as we made several changes to our overdraft program that are expected to reduce fees in the coming periods. Noninterest expenses were slightly higher than our expectations, due primarily to incentive compensation tied to elevated fee income.
We were pleased on the credit front as net charge-offs declined to 8 basis points and nonperforming assets declined to 31 basis points of total assets. These two factors drove $800,000 of provision recapture during the period.
From a capital standpoint, our regulatory ratios remain in excess of both internal and regulatory targets. Similar to the first quarter, accumulated other comprehensive income declined significantly, negatively impacting both tangible book value and our tangible common equity ratio.
Slide 7 reconciles our GAAP earnings to adjusted earnings, highlighted — highlighting items that we believe are important to understanding our quarterly performance. Adjusted net income was $53 million or $0.56 per share for the quarter. These adjusted earnings account for $1.1 million of losses on investment securities, and $900,000 of Summit related and other costs not expected to recover, such as severance and branch consolidation expenses. As depicted on Slide 8, these adjusted earnings equate to a return on average assets of 1.31%, a return on average tangible common equity of 21% and an efficiency ratio of 61%.
Turning to Slides 9 and 10. Net interest margin increased 30 basis points from the linked quarter to 3.47%. This increase was primarily driven by an increase in asset yields during the period resulting from rising interest rates. The increase in asset yields was partially offset by a slight increase in funding cost, and a decline in PPP forgiveness fees.
As a result of rising rates, asset yields surged during the period with loan yields increasing 34 basis points. In addition, investment yields increased due to the — due to higher reinvestment rates and slower prepayments on mortgage backed securities. Our cost of deposits was relatively flat when compared to the first quarter, where we expect these costs to increase in future periods and reaction to competitive pressures from an increasing rate environment.
Slide 11 details the asset sensitivity of our balance sheet. We remain well-positioned for expected rate increases as approximately two-thirds of our loan portfolio will reprise fairly quickly. Slide 12 details the betas utilized in our net interest income modeling. And while we didn’t realize a drastic increase in costs from the initial rate hikes, as additional rate increases occur, we expect our deposit beta to be approximately 30% over the full cycle.
Slide 13 illustrates our current loan mix and balance changes compared to the linked quarter. As I mentioned before, loan balances increased 8% on an annualized basis, excluding PPP. With the exception of ICRE, every portfolio grew compared to the linked quarter. The largest areas of growth were in the C&I retail mortgage and [indiscernible] portfolios. However, we were also pleased with the trajectory of the consumer, franchise and Summit books.
Slide 15 shows our deposit mix as well as the progression of average deposits from the first quarter. In total average deposit balances declined $246 million during the quarter, driven by a $136 million decline in brokered CDs, and a $104 million decline in money market accounts. These were isolated to a handful of larger accounts.
We were pleased with the growth and lower transaction — in lower cost transaction deposits during the quarter, which included a $36 million increase in noninterest bearing accounts and a $31 million increase in savings accounts.
Slide 16 highlights our noninterest income for the quarter. As I mentioned previously, second quarter fee income surpassed our expectations, primarily due to record foreign exchange income, higher mortgage banking income, and an increase in other noninterest income.
In addition, Wealth Management remained elevated and derivative fees increased 69% from the prior period. While mortgage banking exceeded first quarter levels, increasing rates and record production in prior years have softened mortgage demand significantly. And we continue to expect industry-wide pressure on this business for the remainder of 2022.
Deposit service charge income was steady in the second quarter. However, as I mentioned before, we expect reductions in this income going forward as program changes are fully realized. Noninterest expense for the quarter as outlined on Slide 17.
The second quarter was relatively quiet on the noninterest expense front. On an operating basis and excluding Summit expenses increased $1 million compared to the linked quarter due primarily to additional incentive compensation resulting from higher fee income at Bannockburn.
Turning now to Slide 18. Our ACL model results in a total allowance which includes both funded and unfunded reserves of $135,000,000 and $800,000 in total provision recapture during the period. This resulted in an ACL that was 1.25% of total loans at June 30. The provision recapture was driven by stable credit quality, the lower net charge-offs during the period.
Net charge-offs as a percentage of loans decreased to 8 basis points on an annualized basis, while nonperforming assets declined to 31 basis points of total assets. Classified assets increased slightly during the quarter due to the downgrade of two credit in the hotel and health care industry. However, these borrowers have good liquidity and are exhibiting improving trends.
Our view on the ACL and provision expense remains unchanged. We acted aggressively when building reserves in response to the pandemic and have been steadily releasing reserves as credit has stabilized. We expect increasing provision expense in the back half of 2022.
Finally, as shown on Slides 20 and 21, regulatory capital ratios remain in excess of regulatory minimum and internal targets. During the second quarter, tangible book value and the TCE ratio continued to decline. These declines were caused by a $101 million decline in accumulated comprehensive income as a result of unrealized losses on the investment portfolio from rising interest rates. Absent this decline, the TCE ratio would have been 7.1% at June 30, compared to 6.4% as reported.
We returned over 40% of our earnings to our shareholders during the period and believe our dividend yield is attractive to potential shareholders. We do not anticipate any near-term changes to the common dividend. However, we will continue to evaluate various capital actions as the year progresses.
I’ll now turn it back over to Archie for some comments on our outlook going forward. Archie?
Archie Brown
Thanks, Jamie. Before we end our prepared remarks, I want to comment on our forward-looking guidance which can be found on Slide 22. Loan demand remains strong and we expect balances to grow mid to high single digits over the third quarter, while deposit balances are expected to decline modestly over the near-term.
Our asset sensitive balance sheet continues to position us very well to benefit from further increases in interest rates. A significant portion of our loan portfolio was indexed to short-term rates. And although there are many variables that can impact the magnitude and timing, we expect the margin to continue to expand to a range of 3.5% to 4% in the third quarter. As we get later in the cycle, we’re expecting to see some pressure on deposit rates, which will moderate the margin expansion.
Regarding credit, much uncertain remains regarding inflation, and the impact of rate hikes to the economy and our customers. Over the remainder of this year, we expect continued improvement in our credit quality trends, which were already strong and an increase in provision expense.
We expect fee income to be between $46 million and $48 million in the third quarter with continued strength in our fee producing businesses. Rate headwinds will continue to put pressure on overall mortgage banking income, and we expect a further decline in overdraft income of approximately $1.2 million due to the updates to our program.
Specific to expenses, we expect to be between $102 million and $104 million. This could fluctuate with fee income performance. As our operating lease portfolio grows, we will also see corresponding depreciation expense growth. Regarding Summit, our outlook is unchanged, and we expect the acquisition to have a minimal impact on overall 2022 earnings with a modestly positive impact to the third quarter.
We continue to expect Summit to provide $4 million in annual originations, which should provide a strong lift to overall loan growth. Lastly, our capital ratios remain strong and we expect to maintain our dividend at current levels.
Before I finish, I want to thank our associates for their excellent performance so far this year. And as we head into the back half of 2022, we are optimistic that our balance sheet is positioned to further benefit from additional rate increases and loan activity remains strong. We remain diligent in our credit monitoring and are prepared to manage a downturn in the economy, should it occur later in the interest rate cycle.
With that, we’ll now open up the call for questions.
Question-and-Answer Session
Operator
[Operator Instructions] We have the first question from the phone line from Chris McGratty from KBW. Your line is open.
Chris McGratty
Hey, good morning.
Archie Brown
Hey, Chris.
Chris McGratty
Jamie, maybe start with a margin noninterest income question. The margin upgrade was — I would say, significantly above expectations. I’m interested just kind of how you get there. Obviously, I think you’ve got the ability to shrink the bond portfolio. So I’m interested in kind of in a comment about the size of the balance sheet, and the funding of the growth. And then also, just more broadly, your net interest income went up $200 [ph] million, this quarter. If we think about it that way, like, it would presumably, the sequential increase should accelerate in the back half of the year? I just wanted to confirm that was it.
Jamie Anderson
Yes, yes. So — yes, that’s 100% true. I mean, we are, at this point, not saying a — any real significant increase in deposit costs, that’s going to — that’ll change, obviously, and that’ll start to ramp up here in the third and fourth quarter in the back half of the year. But we are expecting the margin at this point. The increase from the second quarter to the third quarter to be greater than what we saw from the first quarter and the second quarter.
And from a funding perspective, I mean, I think it’s really a couple of things. I mean, we have — obviously, we have capacity on the borrowing side, on the wholesale side, from a short-term borrowing capacity. And then our plan is to kind of slowly bleed down the investment securities portfolio to also fund — to fund some of that, either — to fund either some of that growth on the loan side, or fund some of the deposit runoff. So we are forecasting some runoff here in the third quarter.
And on the deposit side, we’re — I think we’re putting in 2% or 3% down in total deposits. And so that will be again funded from both short-term borrowings and bleeding down the securities portfolio. But we’re not going to — I think that’ll just be kind of slowing down and/or stopping the reinvestment of cash flow off of the investment securities portfolio.
Chris McGratty
That’s helpful. And how much is thrown off the bond book every quarter?
Jamie Anderson
Yes, at a minimum, it depends on some of the calls and whatnot. But at a minimum, it’s about $50 million a month. So between $600,000 and $700,000 — $600 million, $700 million a year.
Chris McGratty
Okay, great. And then if I could, could you provide the spot rates at June 30 for deposits loans, and also if you had like a June margin?
Jamie Anderson
So help me out when you’re saying the spot rate when you’re like …?
Chris McGratty
Right. So where were loan yields for the month of June? Where were deposit cost for the month of June versus the average for the whole quarter?
Jamie Anderson
Yes, I got it. Okay. Yes. So, just so — let me maybe start [indiscernible] because I need to find that those actual yields. But on the margin, our net interest margin for June was 364 compared to the full quarter r of 347. And then — can you give me those two numbers quickly? And then — but when you think about even that, even for the month of June, Chris, I mean, that was increasing as the month went on with the rate hike in the middle of the month.
And if you look at even maybe more significant, the margin if you want to call it like heading into the third quarter, or as of June 30, or July 1 would have been closer somewhere to like around 375.
Chris McGratty
Okay. That’s awesome.
Jamie Anderson
And then quick — quickly on the loan yields. Our loan yields for the month of June were 434 and deposit costs were 11 basis points.
Chris McGratty
Okay. And that’s deposit beta you — that 30%, is that a interest bearing deposit or is that a total?
Jamie Anderson
That’s full. Yes. And that was — and when we say 30%, obviously, that is for the entire cycle. We have seen, call it 2% to 5% data so far, but that obviously now starts to ramp up. But for the full cycle, we are forecasting a 30% beta.
Chris McGratty
And that’s on interest bearing, Jamie, or total deposits sorry?
Jamie Anderson
That’s on total.
Chris McGratty
Okay. Wonderful. Thank you.
Jamie Anderson
Yes. You’re welcome, Chris.
Operator
Thank you, Chris. We now have a question from Scott Siefers with Piper Sandler. Please go ahead when you are ready, Scott.
Scott Siefers
Good morning, guys. Thanks for taking the question.
Jamie Anderson
Hey, Scott.
Scott Siefers
Jamie, I think — hey. I think I must sort of misinterpreted in the guide, how quickly the margin was going to get up to that level as well. So that is really just sort of a profound increase since it’ll be in the third quarter. I guess, number one, I think we’ve been thinking about maybe 8 basis points benefit for rate hike previously. It looks like it’s really coming in even significantly better than that cycle to date. So, Jamie, were there any, like what were the surprises to you as you do watch the margin continue to drift higher? And then, I guess by the time we get done with the third quarter, at least based on the forward curve, we’ll be mostly done with rate hikes, but not fully done. So will you guys still be asset sensitive? I’m guessing the answer is yes, at the end of the third quarter, but what’s sort of the marginal benefit vis-à-vis? What you’ve got now?
Jamie Anderson
Yes, so maybe I’ll start at the end again. I mean, yes, we will still be asset sensitive at the end of the rate hikes. But — and we are just when it comes to the market, we are showing based on the, I guess, the Fed Fund Futures and the projected rate hikes that are kind of built into the market right now, we are showing that our margin will peak somewhere in the fourth quarter and round in the beginning of the first quarter.
But — and then, I guess, to your question about the — what, maybe surprised us? I mean, I guess — I mean, the other the other thing, when we were kind of talking the last time about the margin and rate hikes, and we were talking about, let’s say, 8 basis points of benefit to the margin per 25 basis point rate hike, that was — it also kind of assumed a little more, I guess, methodical type of rate hike, where you’re getting 25 basis points at a time.
And when we get these large increases of 75 basis, 50 to 75 basis points, mean, you really get — really no movement at all on the funding side on the deposit side, and you’re getting two-thirds of the loan book repricing immediately. And then we do have about 15% to 20% of the securities portfolio and floaters that blew through their floors as well, that are starting to reprice.
So I think it’s really kind of the culmination of that is that they — it’s the magnitude and the frequency of those rate hikes that — the last time we talked to just surprised, it just surprised everybody.
Scott Siefers
Yes.
Jamie Anderson
And so as we get further along, that starts to mitigate and those 25 basis points, we’re getting, 5, 6 basis points of benefit. But they just came so fast and furious that it kind of — the loan book kind of overwhelmed things.
Scott Siefers
Yes. Okay, great. All right. That’s good color and I appreciate it. Certainly it was something you can maybe walk through sort of the puts and takes in fees as well, There’s sort of a lot of moving parts between 4x, clearly [technical difficulty] presuming that’s getting more toward like a steady state now, but we would be curious to hear your thoughts. So maybe some of those that have been a little more volatile or I guess newer within the scheme of the business line.
Jamie Anderson
Yes, I mean, the — I mean, foreign exchange business, Bannockburn, they did have a very good quarter at 13.5 million. We still — we think that businesses, and that sets the record quarter, first of all. So, maybe we’re not expecting that every single quarter. They can have some choppiness to their business, but we think they’re in that $11 million to $12 million a quarter type of range. Obviously, we’re seeing, even though it increased from the first quarter, we’re seeing pressure on the mortgage side. So, we’re expecting that to come down in the back half of the year, the third and fourth quarter. We mentioned the changes we’ve made on the — within service charges and our overdraft program. We’re going to see, we’ll see some pressure there about a $1 million or so decline in the — on the overdraft side, which flows to that service charge. Those — that service charge line.
And then on the summit side, as they build the balance sheet and are putting on retaining their leases as opposed to their old model of selling them. Now, they have a combination of finance leases and operating leases. So the operating leases that income flows through what that income is, and the income on the leases that they continue to sell, flows through the close to fee income, and that’s increasing, call it 15% to 20% per quarter now, as they’re building those balances up, and that also flows through the expense side as well. That the depreciation expense related to those operating leases flows to the expense side. So that’s why you’re seeing a little bit of increase. I think it’s about — it’s a little around a $1 million a quarter increase on the expense side as well. So that will — that’s kind of the offset to that. We have the fee income related to it increasing, call it a $1.5 million to $2 million a quarter, but then you have the depreciation expense on the other side.
Scott Siefers
All right, that’s perfect. So thank you for all that color there. Appreciate it.
Archie Brown
Yep. All right. Thanks, Scott.
Operator
We now have a question from Daniel Tamayo of Raymond James. Please go ahead. [indiscernible] your line, Daniel.
Daniel Tamayo
Hey, good morning, guys. Thanks for taking my question.
Archie Brown
Good morning.
Daniel Tamayo
Maybe we start on the deposits. You talked about just transaction deposits coming down here in the third quarter. Still got a lot of [indiscernible] () on the loan deposit ratio though. Just kind of interested in your thoughts bigger picture about how — where you see that loan deposit ratio going over the next year or so? And the plan to allow deposits to runoff if they’re not kind of core or maybe they’re more rate sensitive? Thanks.
Archie Brown
Yes, Daniel, this Archie. I don’t know how [indiscernible] variable here on these deposits and how they move around. We didn’t see when it comes to core deposits, we really didn’t see much move, but it was more brokered CDs. I think we had about three larger business oriented money market accounts. So that was sort of temporary part money that exited during the quarter. So we probably see a lot more pressure on the rate sensitive side. Certainly we’ll start to see some rate movement, I would love to deposit ratio, we’re high 70s now, that’s — it’s going to move into the 80s. Don’t know exactly how fast we’ll get there, but we’ll move into the 80s based on our current thinking next quarter. We got room to go low, I think certainly for us to get into 90% range or low 90s, we still be comfortable at that level. So we’re going to watch pricing. Make sure we’re keeping all our accounts. And as Jamie said, we have some flexibility on how we make up deposits or funding if we need to on some of the maybe the more money kind of deposit accounts.
Daniel Tamayo
Got it. Okay, thank you. And then switching gears here to capital. You talked about being comfortable with capital here. And on the regulatory side, certainly you’ve got a cushion there. But with the TCE ratio now in the mid six range, does that impact your ability or willingness to invest in the business or in loan growth? Or is that just kind of put aside given the reason for getting down there?
Archie Brown
Yes, Daniel, it’s Archie again. We don’t think it changes anything in terms of how we’re currently operating the business. We stopped buybacks at the end of the year more of the time, because we just acquired Summit, and we wanted to let some time settle and then with the, of course, the major rate movements and impact on AOCI. We’ve had to buy that off the table for now. We will continue to do that. But as far as funding the business and growing the business, our loan growth is solid, but it’s not at a level that we think creates any sort of problems in terms of how we operate the business in the near-term.
Daniel Tamayo
Okay. And not feeling any regulatory pressure with the TCE ratio in those levels? I’m assuming, I know the answer here, but …
Archie Brown
Yes, not at all.
Daniel Tamayo
Okay. All right, terrific. That’s all I had. I appreciate it.
Archie Brown
Thank you.
Operator
Thank you. We now have a question from Jon Arfstrom of First Financial Bank. Please go ahead, Jon.
Jon Arfstrom
Well, with a quarter like that, I wish I was at First Financial Bank. RBC Capital Markets, it’s who I represent, anyway. Jamie, the loan fees and accretion, is that included in that 3.85 to 4 thinking for the Q3?
Jamie Anderson
Yes, that would be the all-in margin, Jon, yes.
Jon Arfstrom
Okay. Can you talk about — they’re not to ask it, but like the residual benefit of the most recent 75 basis point hike, how long does that take to get fully reflected in your margin? I know, it’s kind of open ended. But just kind of curious how long it takes for all those benefits to flow through?
Jamie Anderson
Yes, yes, it is — I mean, to say it’s an immediate is fairly close [indiscernible], maybe a month or so to follow through and some depending on when — on some of the resets. But like we said, we have about call it 60%, 65% of the loan, that reprices off of the call to the short end, call it LIBOR, or [indiscernible] at this point on some of those and we ended — just like I said, just depend on the resets, but it’s — that it’s not months, it’s weeks, might be 2 to 4 weeks. So it’s not very long at all. So that’s why when we were — when we’re talking about that acceleration in the margin in the — that the third quarter, when we’re looking at the third quarter, we’re expecting that to be more significant than that increase from the first to the second quarter.
Jon Arfstrom
Okay, okay. Yes, I’m just trying to get a feel for if we get 75 next week, we’re going to get 2 months of it, and then there’s going to be some benefit that rolls into 4Q plus maybe some hikes after that. So that’s I think you’re — that’s why you’re saying probably a peak in 4Q or 1Q, right?
Jamie Anderson
Correct. That’s correct. Yes.
Jon Arfstrom
Okay. Maybe for Bill or Archie. Just curious on the provision magnitude. What’s your thinking there? And maybe an overall assessment of what your clients are saying? Because, obviously, financial media and maybe the public has kind of a dour mood about the economy. And when we look at the bank numbers, it’s obviously very clean, and you’re telling a pretty good story. So help us think through the provision and then kind of what you’re hearing from clients.
Archie Brown
Yes. Jon, this is Archie. I’ll start and I’ll continue to [indiscernible] that Jamie’s been conducting answers this morning, I’ll start from the back and [multiple speakers]. Look, credit is really strong right now, we’re not seeing any — what I would call cracks and what’s happening with regard to credit, spending time with clients over the last few months. I think most of them would say things very good. We’ve had the residual problems of wage pressure, labor shortages, supply chain issues, I think those continue to hamper some of our clients. But their business is strong. And I think they look out over the near-term, that’s what they see. But in the back of their mind, they’re reading the news, just like you are and we are and so they’re worried about something coming down the pike. And I think they’re starting to act a little bit on some of those concerns. But right now, when you ask them how their business is, their business is really strong.
Jon Arfstrom
Okay.
Jamie Anderson
Jon, on the provision expense, I mean, when you look at where our coverage is now, our loan loss reserve to loans is at 125. If you look at where we started, day one, CECL was 129. So we are just slightly below that, not significantly below that. But at this point, we think that generally we are at the bottom of that coverage ratio for us. And so, if you think about that thing going forward kind of the drivers of what — so we think we’ve hit the inflection point in terms of the provision recapture is over and we start to see that swing the other way. And if you think about, then that where we are at that point, and the drivers of what provision expense would be, we’re looking at either a — changes, I guess in the forecast, we use the Moody’s forecast, and then but the other thing that’s going to drive that as well as what we’re seeing, and what we’re seeing in loan growth. So that’ll fluctuate with that a little bit, but it’s really, really those two things that will kind of dictate what the provision expense will be here going forward.
Jon Arfstrom
Okay. Okay. And Bill anything, I don’t know, [indiscernible] that you’re concerned about or worried about or do you see things is very solid as well?
Bill Harrod
Yes, I do at this point see things is very, very solid, and our customer base and our loan portfolio, now a lot of [indiscernible] that are ahead at this point. Collections, sort of sounds a little bit tough, but nothing systemic that’s, putting their head out here.
Jon Arfstrom
Yes, okay. All right. Thanks, guys. Appreciate it.
Archie Brown
Thanks, Jon.
Operator
Thank you, Jon. [Operator Instructions] We have the next question from Terry McEvoy of Stephens. Please go ahead when you’re ready.
Terry McEvoy
Thanks. Good morning, everyone.
Archie Brown
Hey, Terry.
Jamie Anderson
Hey, Terry.
Terry McEvoy
Jamie, we’ve talked a lot about the margin expansion as rates go up over the next couple of quarters. I’m just wondering how do you plan on managing kind of your rate sensitivity looking out into next year, assuming the Feds done raising the rates, and ultimately how do you protect the margin? And why I ask that question at the bottom of Slide 12, you show the loan betas and the deposit betas and there was some margin got off compression during that period.
Jamie Anderson
Yes, yes, good question. That’s something that we are looking at now, because if you go back to pre March, or right when the pandemic was heading March of ’20, our margin went down fairly significantly when we saw the rate cuts. So we are looking at that and evaluating options that we have, kind of across the board in terms of trying to look at what — at the backside of this and trying to mitigate that assets, its activity and buying some — potentially buying some protection on the downside, extending out some on the investment portfolio to mitigate some of that risk and what we are reinvesting. And so, everything is kind of I think on the table there. But, yes, we are kind of looking at all those options to try to manage that going forward and potentially at this point reduce some of that asset sensitivity for when things start to go the other way. So it’s nothing really, I would say, that we’ve executed yet that [indiscernible], but evaluating that and I’m sure you’ll see something coming through here in the next quarter or two.
Terry McEvoy
Great. That was the only question left on my list. Thanks, guys.
Jamie Anderson
All right. Thank you.
Operator
Thank you. We have no further questions. So we’d like to hand it back to Archie Brown for some closing remarks.
Archie Brown
Thank you, Breaka. I want to thank everyone for joining today and your interest in our company, and we should have a nice day and a great weekend and we look forward to talk to you next quarter. Bye now.
Operator
Thank you for joining. That does conclude today’s call. You may now disconnect your line.
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