Greetings, and welcome to First Foundation's Third Quarter 2022 Earnings Conference Call. Today's call is being recorded. At this time, all participants are placed in a listen-only mode and the floor will be open for your questions following the presentation. Speaking today will be Scott Kavanaugh, First Foundation's Chief Executive Officer; Kevin Thompson, Chief Financial Officer; and David DePillo, President. Before I hand the call over to Scott, please note that management will make certain predictive statements during today's call that reflect their current views and expectations about the company's performance and financial results. These forward-looking statements are made subject to the safe harbor statement included in today's earnings release. In addition, some of the discussion may include non-GAAP financial measures. For a more complete discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements and reconciliations of non-GAAP financial measures, see the company's filings with the Securities and Exchange Commission. And now I would like to turn the call over to CEO, Scott Kavanaugh.

Good morning, and welcome. Thank you for joining our third quarter 2022 earnings conference call. The results we reported this morning reflect the strength of our core businesses and the meaningful relationships that we have built with our clients. That said, there is no question the Fed's actions over the last 6 months have had a notable impact on the banking sector. Against that backdrop, I am pleased to report our earnings for the third quarter were $29 million or $0.51 per share. Total revenues were $99.9 million for the quarter, a 5% increase from the second quarter of 2022 and an 11% increase year-over-year. Our tangible book value per share ended the quarter higher at $15.96. We also declared and paid our third quarter cash dividend of $0.11 per share. Our fundamentals remain strong with excellent credit quality. Our NIM for the quarter was 3.10%. We continue to experience a steady pipeline across banking, wealth management, and trust services. Our clients' success is our success, and we are grateful for the trust they continue to place in us. Our strategic focus heading into the fourth quarter is centered around protecting the balance sheet, building liquidity, competitively pursuing deposits, and the continued retention of valuable clients. Our lending activity for the quarter was strong with loan originations coming in at $1.6 billion. NPAs remained low at 14 basis points for the quarter as our lending team does a fantastic job maintaining our high credit standards. We have established a balanced loan portfolio that continues to perform well. As we look ahead for the next few quarters, we intend to bolster liquidity and preserve capital by strategically managing our loan growth going forward. With that, I must emphasize that we anticipate loan growth will be slower in the coming quarters than what we have experienced in recent record quarters. This is a prudent decision given the macroeconomic cycle, and it is certainly not a reflection of our clients, the industries we serve, or the products we offer. Dave will touch more on the current composition of the loan portfolio later in the call. Looking at deposits, as I have mentioned before, it's tough out there, and we recognize it's a dogfight. There's no question there are outflows in the overall banking sector. However, I am proud that our team has been able to maintain our base of $9.5 billion and we're continuing to fight to attract new clients through some very attractive channels, including online, retail and commercial. Our wealth management and trust business continued to provide meaningful contributions to the firm. We have been successful in retaining existing clients and attracting new ones. It's times like these, when the market is most volatile, that clients turn to us for guidance. We have been proactively communicating with them and strategically managing their portfolios as necessary. As a result, we are seeing strong client retention across our entire wealth management platform. Assets under management ended the quarter at $4.6 billion. The all-weather portfolios we manage for our clients performed relatively well with respect to their benchmarks, even as the S&P 500 and the NASDAQ composite saw significant declines during the quarter. Let me take a minute to discuss our responses to Hurricane Ian, which made landfall in our newly acquired locations of Naples, Florida. Upon first learning about the storm, we immediately activated our business continuity and disaster recovery plans. I am pleased to report that we performed extremely well. Once all of our employees were accounted for and safe following the storm, we reopened all our locations except for our Fifth Avenue branch in Naples, which will be closed for the foreseeable future as we repair from the damages. As it relates to our clients, we do not expect to see a meaningful impact on our portfolio and are only setting aside small provisions for potential loan losses. While our initial assessment looks good, we want to be helpful to any clients who might have been impacted. Along these lines, we have also been in contact with our deposit clients to assess any way we can help while the community rebuilds. We have been touched by the outpouring of generosity among our employees, clients, and within the local community. And we are fully resolved to help navigate the road to recovery. To conclude my opening remarks, I want to reiterate that this leadership team has been through many economic cycles, including a rising rate environment like the one we are experiencing. Many interest rate environments, although I believe the Fed fund actions are the most aggressive that we've perhaps ever seen. Our business model of offering clients financial solutions whenever they might be in their financial journey is designed to deliver results in any market conditions. And finally, I want to take a moment to note that this month marks the 15th anniversary of First Foundation. Over that time, we have established a great group of talented and dedicated professionals committed to serving our amazing clients and building a valuable business. It continues to be an honor to lead this organization. Now let me turn the call over to our CFO, Kevin Thompson.

Thank you, Scott. As mentioned, earnings per diluted share was $0.51 in the third quarter. The return on assets was 98 basis points, with a return on tangible common equity of 13.2%. During the third quarter, the balance of loans held for sale was transferred to loans held for investment as we no longer intend to sell the loans due to the current rising rate environment. Credit metrics remained strong in all our loan portfolios. The allowance for credit losses for loans decreased by $265,000 in the quarter to $232.9 million, primarily as a result of the release of specific reserves related to purchased credit deteriorated loans from prior acquisitions, offset by increased loan balances. The reserve ratio decreased from 37 basis points to 32 basis points of total loans. The net interest margin declined by 8 basis points to 3.1% in the quarter, with the unprecedented increases in interest rates. Our cost of deposits increased by 36 basis points to 0.64% while our average loan yield increased by 21 basis points to 4.07%. Our net interest income grew 7% to $87.7 million. Customer service costs also increased from $4.6 million to $13.6 million in the quarter due to the increasing rate environment. Our noninterest income for the quarter was $12.2 million, driven primarily by wealth management revenues of $6.8 million, $2.1 million in trust administration and consulting fees, and the balance in banking-related fees. Wealth management revenues decreased by $900,000 as a result of lower assets under management balances. Our advisory and trust divisions achieved a combined pretax profit margin of 11% in the quarter, excluding the $313,000 expense related to a trading error, the profit margin would have been 14%. Noninterest expense was $60.3 million, up $11.5 million from the second quarter. Customer service costs increased by $8.9 million due to the increase in the earnings credit rates paid on the related deposit balances. Compensation and benefits expense increased by $1.9 million, primarily due to a decrease in deferred loan costs as a result of lower loan originations in the quarter. The efficiency ratio for the quarter increased to 60%, primarily as a result of the higher funding costs. Finally, our effective tax rate decreased to 26.6% compared to 27.9% for the prior quarter. We are just beginning to realize benefits from our tax strategy that should continue to grow over the next several years. I will now turn the call over to David DePillo.

Thank you, Kevin. As Scott mentioned, loan originations were $1.6 billion for the quarter. Looking at the breakdown of the loans that we originated during the quarter, the percentages are as follows: commercial, including owner-occupied commercial real estate, 43%; multifamily, 46%; single-family, 6%; land and construction, 1%; and 4% other. Contributing to loan originations during the quarter, our commercial business division funded $688 million of new commercial loans during the third quarter, of which 45% were adjustable commercial revolving lines of credit. The remaining C&I originations comprised $196 million of public finance loans, $115 million of commercial term loans, $29 million of owner-occupied commercial real estate loans, and $39 million of equipment finance loans. As mentioned last quarter, the heightened originations in the public finance channel that we experienced in July of $180 million normalized in August to our historical run rate of about $15 million a month. It's always important to note that we accomplished this without changing our high underwriting standards, and our NPAs fell to a low of 14 basis points at the end of the quarter. Speaking more specifically about loan yields, we achieved a weighted average rate of 4.63 on originations, which increased substantially from the second quarter, which was 3.73. This quarter, we have started to see the impact of higher yields on loan origination due to the increase in the long end of the yield curve and as prior lower-yielding loans funded out of our pipelines. As of September 30, our loans held to maturity include 49% multifamily loans, 33% commercial business loans, 7% non-occupied commercial real estate, 10% consumer and single-family loans, and 1% land and construction. Looking at our deposits, deposits held steady at $9.5 billion for the quarter. Deposit growth was tempered as we are experiencing the effect of SFS liquidity leaving the banking system. As Scott referenced, there is increased competition across all deposit channels. While across the bank we are working hard to bring in deposits, the reality is that we anticipate slowing loan production going forward to balance funding growth and to bolster liquidity given the economic uncertainty. Our loan-to-deposit ratio measured 108% as of September 30. This represents an increase from historical lows experienced during the last few quarters but is still in line with our pre-COVID levels. Given lower levels of loan production going forward, we plan to actively manage this ratio. While there is economic uncertainty, our credit quality remains a key focus heading into the fourth quarter. And to reiterate Scott's comments, I am very grateful to our team's dedication to delivering excellent client service when it matters the most. At this time, we are ready to take questions, and I'll hand it back to the operator.

Our first question is coming from Matthew Clark from Piper Sandler.

Maybe just on the loan-to-deposit ratio and the outlook there. You mentioned you're planning to manage it. I guess how should we expect that ratio to trend here over the next couple of quarters? Is there an internal limit? And are you looking to get that back down to 100% or sub-100%? Just trying to get a sense for kind of your outlook for the pace of slower loan growth in deposits.

Yes. So what I would say is 108 is already up to a level, which is why we're taking a much more cautious approach to our lending. I don't know that there's an internal limit. But I would say that we already feel like we're either there or very close to it. Last quarter, when we did our earnings announcement, I was confident that our pipeline was pretty full in terms of deposits that we had on tap. And I got to say that pretty much 100% of what we thought we had in the pipeline did not come to fruition. That being said, we've already taken great strides to continue to operate on it. But I think what you're going to see is just a continued slowing of loan growth over the next several quarters to the point that getting it back under 100% is our goal.

I would say that we're looking at between 100% and 105% as an operating range in the near future. As noted in previous years, we do have some cyclical outflows in the fourth quarter related to some of our larger MSR clients that have taxes that are due during the period. The good news is we're starting to receive pretty decent inflows from some of the channels that Scott had mentioned before, specifically retail and online to offset some of that. That being said, we're selling production on a relative basis. The current plan is to be in the $3.3 billion to $3.5 billion range, down from a $6 billion run rate that we're currently on and slightly ahead of what our historical run rate in the $2.5 billion to $3 billion range. So although we're slowing loan originations at least on a planned basis, on a relative basis, it's still going to represent some pretty significant originations for us going forward.

And one thing I will add is during a time of rising rate environments, you often see, as expected, prepayments decrease drastically. We still have a portfolio that turns over even in a rising rate environment over time. However, I think a lot of borrowers are taking a pause to see where the Federal Reserve goes. So our prepayment speeds have slowed drastically, and we expect them to increase over the next several quarters as things stabilize somewhat. People will get a clue where the Federal Reserve is headed, and we start on that treadmill again. So between the seasonal outflow of deposits, the slowing of prepayments, and the good production we had this quarter, we believe this is the height of our loan-to-deposit ratio for the foreseeable future.

Yes, agreed.

Our next question comes from Gary Tenner from D.A. Division.

To follow up on the loan growth discussion, David, could you provide context about the mix of loan growth we might expect moving forward? Clearly, you have been expanding the commercial business lending segment significantly. However, as you intentionally reduce loan growth, where do you anticipate the growth will originate from?

That's a good point. We are going to have an emphasis on commercial loan growth, at least in the foreseeable future. The majority of that will be in variable-rate SOFR-based loans. Part of the issues we face and the income property channel is when we're originating at 4.5%, that seems like a good rate until the Fed increases, and then 5.5% seems like a good rate until the Fed increases. And now we're kind of settling in the high 5s and low 6s, and we're not sure that's going to be a good rate depending on where the Fed is moving forward. So we are going to continue to support our franchise. However, there will be less of an emphasis on income property growth and more of an emphasis on C&I growth. So we're probably going to have 60% growth in C&I and about 40% in other channels. At least that's what we're forecasting. But demand is still extremely high. On the commercial side, there's still a lot of free cash flow, and companies are doing very well. So we're going to tend to focus more on the commercial originations until we can get some guidance from the Fed on when they're going to moderate their pace.

And then a question on the customer service charge expense line; I just wanted to clarify that because the increase there was bigger than we had and I think broadly expected. But is there any sort of cap on where that goes as the Fed rises? Or do those fees based on cost basically participate all the way through as far as the Fed goes?

It's an interesting point. I think most of us participating in that space have been pretty much writing dollars for dollar as the Fed increases, and in some cases, some have increased beyond so more than 100% beta for some point, not necessarily related to us. Our expectation is that those will continue as the Fed increases to have close to 100% beta on the larger clients. But we do anticipate at a certain point given that most people are kind of tempering and moderating their growth, that that beta should start slowing down. But due to the operational liquidity in the system, a lot of banks have been very protective around these books because they take years to establish. They are valuable clients that, unfortunately, we're going to continue to probably have to ride with them until the Fed moderates the increase.

Gary, I would say that obviously, you've got heightened awareness from clients, the higher the Fed goes with rates. Talking to my peers out there, they're experiencing demand from clients for higher deposit costs. I think it's just starting to permeate throughout the industry. So we’re trying our best to keep betas as low as we can. But when you're talking about retention or going backwards in terms of your deposits, as I said, it's a dogfight out there. I think it's becoming more accentuated.

In previous rate cycles, we had more time to adjust, but the beta has increased at a slower pace, and clients haven't been as aggressive. The competition, as Scott highlighted, among banks has not been as intense, yet we are observing it in the current rate cycle, with money center banks offering very high betas to sophisticated clients to maintain those relationships. Remember, most banks our size lack the advanced systems and processes to cater to these types of clients. We have those capabilities, and we value these clients and want to keep them. Eventually, the Federal Reserve will pause its rate increases, and we will be pleased that we managed to retain these important clients. For now, however, we need to remain cautious and prudent.

One of the other comments we would make is we aren't anticipating significant growth in that channel and are pivoting into our retail, online, and other channels to kind of make up for the higher costs that we're seeing through the commercial deposit service channel. So, I think you'll see a pivot more towards online and retail in the next few quarters.

Our next question comes from Andrew Terrell from Stephens.

I've got several questions about the margin. To start, I think it would be helpful to know what range you expect the margin to settle in during the fourth quarter, considering all the moving parts involved.

It depends on several factors, including how the Fed acts in February and December. As we have discussed, we are strategically managing our loan growth, focusing on high-quality, higher-rate loans. We are also developing a deposit strategy to secure lower-cost funding while maintaining our high-quality deposit portfolio. Prepayments will play a role as well. We are currently preparing our budgets for next year, which will include the fourth quarter of this year. We will have more information soon, but I expect we will go below 3% in the fourth quarter.

Yes, we have funding in the fourth quarter due to rate locks at rates lower than the current market, which is adjusting almost daily as we've noticed in the mid end of the curve increasing. Some of the funding from the current pipeline, although significantly higher than last quarter, will have a slight impact in the fourth quarter. As we grow larger, even with significant funding, it becomes more challenging to influence the margin because of the overall size of our balance sheet.

I want to emphasize that the issues we are facing are short-term in nature. We are in unprecedented times with the Federal Reserve increasing rates. Our exposure to commercial and industrial loans is not as high as that of some other banks, where their rates adjust immediately. We have approximately $1 billion in loans on our books that can be adjusted right away. It will take some time to adapt and ramp up our loan production. However, we expect to benefit from this rising rate environment once everything stabilizes and we can align our loan production with our deposit betas.

So maybe some near-term pressure, but expanding kind of from there.

That's right.

Do you have the spot deposit costs, either interest-bearing or total at the end of the third quarter? And then on the FHLB, I saw you guys added in the quarter, I guess just given some of the commentary around deposit growth in the fourth quarter, would you expect to reduce any of the FHLB position going forward? Or should it be relatively consistent?

The spot rate on interest-bearing deposits is 1.25%. In terms of FHLB, we are strategically managing the funding portfolio. In some cases, FHLB is less expensive and more flexible than we have other access to broker deposits and other wholesale funds. Of course, we’re looking at our branch deposits as well. Every day we’re looking at the best way to fund our business and being really smart and strategic about it. We do anticipate still needing to use some wholesale funding over the next while. We'll probably use more broker deposits and bring down FHLB funding to lock in some rates.

Yes, I would expect to see the home loan bank advances decline over this next quarter.

Yes, I believe we are forecasting that this is about the peak level for advances for us. We are currently about 97% core funded, so there is some flexibility, as Kevin indicated, to attract some later broker deposits to stabilize the rate environment until we determine the Fed's direction. But I would say this is likely a high point for us.

Maybe just if I could sneak one more in. Just on the efficiency ratio overall. I know that talking last quarter, it sounds like it could be pressured near term. I guess as we think about kind of going into the fourth quarter, should we expect a similar kind of I guess, magnitude of pressure on the efficiency ratio quarter-on-quarter? And then is it fair to think about the efficiency ratio kind of is holding the same trajectory as what you'll see from a margin standpoint where it could be pressure over the next couple of quarters and then kind of rebound from there?

Yes, that's correct. There are really two areas that have affected us. The higher deposit service cost is the most significant. Additionally, our average loan size has likely doubled compared to what we've seen historically, which has influenced our FASB deferral. If there are movements in November and possibly December, it will likely have some short-term effects on customer service costs.

Our next question comes from David Feaster from Raymond James.

Could you just help us just following up on that expense question? As you kind of take this all together, including the likelihood for November and December hikes. I guess, how do you think about the run rate in 2023? If we do have this slower pace of originations, which leads to fewer deferrals? We also got some inflationary pressures. Just curious how you think about expenses, especially as we start looking into 2023.

Yes. We have already begun reviewing our overall expense profile. The challenge is that we operate with a relatively lean structure. Our customer service costs have significantly increased and affected our efficiency ratio. However, we are analyzing every aspect of the bank, including possible delays in initiatives that could substantially impact our general and administrative expenses. Consequently, you can expect our overall compensation, benefits, and other expense lines to remain fairly stable, potentially even decreasing. We are not observing major cost impacts in our structure that have affected us significantly. This comes down to two main factors: deferral and customer service. The deferrals tend to fluctuate; we anticipate that over time, even with lower volumes, the average loan sizes may revert to historical levels, though on a relatively smaller scale. Therefore, it’s really about managing the customer service costs. Eventually, those will stabilize. For the rest of our cost structure, we have been prudent in maintaining an efficient operating platform and do not foresee any significant cost impacts in the near future.

And then you touched on an interesting point about talking about the portfolio continuing to reprice higher. I guess just based on the current backdrop and Fed forecast, when would you expect the NIM to trough? I mean, is that a mid-2023 or late 2023 event? Or is that more realistically 2024 or at some point around there?

No, I think it's a 2023 event and probably in the first half of 2023.

You mentioned a strong pipeline in wealth management and trust services. Given the current market challenges related to valuations, how do you perceive growth in these areas, particularly in the new markets of Florida and Texas, and what opportunities do you see there?

Well, Florida is coming along nicely. We've had some trust people and some investment management people join us. Unfortunately, we seem to fight through things like Hurricane Ian and dealing with the community rebuilding, which is first and foremost, I think at this point. I am pleased to say that the referrals over on that side have been fairly significant, even given the challenges of going through a major event like that. Texas, we still haven't added either a trust or investment management. We continue to look. But what I would say is, here, with the staffing that we've had on that side, we've already achieved $500 million to $600 million of new client assets this year. So we've had not only strong retention but quite a bit of new assets coming into the system. And that's great. But also at the same time, you got a backdrop where the S&P is down over 20%. And so every time we take in a new dollar, unfortunately, assets under management have also declined because losses on the $5.7 billion we used to have have impacted us to the point that I think we ended at $4.6 billion. But I'm very optimistic with the clients this time; I would say, in past events, when we have been in a rising interest rate environment, and the cycles have been extremely tough, we have had way more outflows than we have this time around. I think our folks are doing an incredible job of maintaining those relationships, getting in front of clients, talking through what the issues are. All I can say is they've done a tremendous job in terms of retention.

An interesting phenomenon that happened in the early 2000s when the market was so good; you saw an outflow of wealth advisory clients from the banks to the brokerage houses. Then when the great financial crisis happened after that, you saw that flow back to banks. Customers wanted to work with their trusted bank with someone who they felt was more conservative. I suspect we may see that kind of flow back to banks again. Our portfolio has outperformed the S&P 500 because of our conservative approach. Our clients appreciate that, and it may be a really good time as a bank to be in the wealth advisory business.

I want to mention that in terms of trust, we're receiving considerable attention and referrals from CPAs, attorneys, and larger firms. As you know, most of our assets under management are held at Schwab. We have a strong relationship with Charles Schwab, and we keep in regular contact with them. Therefore, I am very optimistic and believe that the trust division will continue to attract the attention that has taken years to establish.

If I could just squeeze one more in. I was hoping you could give us an update on the multifamily market. I've spoken with some investors that are a bit cautious on multifamily. I think there's just some misunderstandings on regional dynamics across the country. I was just hoping you could give us an update on the competitive landscape, just the health of multifamily on the West Coast and any overall insights or thoughts on that space?

Sure. The competitive landscape is interesting; the same regional players have really been active in the market. We've noticed JPMorgan Chase is back a little more competitive than they have been in the past on a relative basis. They are still the market leader, and us and a few others continue to service the market well. There's relatively strong demand in the market. However, with the long end of the curve moving up so quickly, some of the demand has slowed due to the rate shock by borrowers. What we are seeing is there's still high demand for refinancing for individuals who have fixed-rate debt that's rolling over and they need to refinance. So it's more of they have to versus playing the rate environment. Also, people are kind of scoring into the market trying to lock in rates because there's a fear that maybe rates will continue to go up. So there's still demand there. But there has been some disruption in the market due to the rate shock we've seen over the last 3 or 4 months, especially in the last month or so, where rates have accelerated. Sale activity is still relatively strong. Performance-wise, at least in California, market demand is extremely high; rent appreciation is still outpacing inflation at this point. We haven't seen any weakness in any of the markets that we serve, and we predominantly serve workforce housing. Even the pricing that we see on sales hasn't seen any impact at this point. From our borrowing base, the durability of cash flow is extremely high. Our expectations are, as the consumers start to weaken, and we're certainly seeing that in other aspects of the economy as their savings get depleted and costs start to impact them, there will be some impact down the road, we believe, in overall rents over time. We actually feel this is a good thing. We want to see certain levels of moderation in rent growth over time. That being said, what it tends to lead to is individuals trying to double up in occupancy as affordability continues to erode. From a cash flow performance standpoint, our portfolios are as strong as they've ever been. We don't see any econometric modeling that would show any weakness in the foreseeable future.

Our average LTV is 54%. There is some confusion; we focus on workforce housing, which typically has lower rents compared to the high-end market. Rents are remaining stable. It's important to understand that as housing rates rise, affordability declines, particularly in California. Therefore, while rents for multifamily housing have performed well, we do anticipate a moderation in rental prices. There has to be a point where rents cannot keep increasing alongside the rising costs of food and other essentials.

We are seeing anecdotally in some of the other markets that we don't necessarily participate in throughout the United States that there are some pharma rent concessions coming back into the markets. Our owners are being a little more defensive around their active portfolio management and not necessarily aggressively going on and buying in a lot of these markets that kind of, I'd say, over-accelerated during this kind of rapid growth period. So there are some pockets of weakness in some of the Sunbelt states that we've seen, but on a relative basis, it's fairly immaterial. We're going to continue to support the high demand markets where the supply and demand imbalances appear to continue for the foreseeable future. They can’t create enough supply to satisfy the demand. As residential real estate has become less supportable because of interest rates, it has pushed potential owners back into the rental market. So as the economy weakens, multifamily typically does extremely well in times when affordability on residential real estate tempts to push them into that market. So we're still very bullish on it. I think the biggest issue for us is not relative to performance; it's more of trying to find a sweet spot to lend aggressively again without worrying about where the Fed is going in their next meeting. So we're going to take a more cautious approach mostly around yield versus expectation of market performance.

Our next question comes from Matthew Clark from Piper Sandler.

Sorry about that, the call dropped. Returning to customer service costs, can you provide the average deposit balances linked to those earnings credits? What were they on average this quarter compared to the second quarter? This will help us refine our analysis.

They're fairly flat at about $2.2 billion, on average.

Is it correct to assume we had 150 basis points of rate hikes in the third quarter? The timing is slightly different with the first one in July and the second one in September. This time, we will have hikes in November and December, likely similar in amount. Should we anticipate a corresponding increase in customer service costs based on another 150 basis points of hikes, give or take?

That is what we anticipate at this point. Of course, we will work strategically to lower that as much as possible.

And then just last one for me on expenses. I think in the first quarter, you tend to have a decent step up seasonally in compensation. What are your thoughts in terms of the magnitude of increase this coming year in the first quarter, given inflation and given your desire to obviously manage expenses more aggressively now?

We do have a seasonal increase in the first quarter. We still anticipate that as part of paying bonuses and then the tax impacts, etc. However, we are seeing some sign in the inflationary pressure around compensation. I think there's some strategic work we can do there to ensure that we're not increasing too much. As we're controlling expenses across the board and being very smart, of course, with our strategic loan approach, that helps us control expenses in other areas as well. But that is offset, of course, by the lower loan production. We have a lower amount of loan deferral expense. So that will impact us negatively as well.

Our last question comes from Andrew Terrell from Stephens.

Thanks for the follow-up. Scott, I know you mentioned in prepared remarks one of the priorities was bolstering kind of capital position. I guess some of that will be done by just a slower kind of pace of balance sheet growth. I'm curious if you could provide a kind of a target of where you'd like to grow capital to. And then do you foresee doing that all on an organic basis or any kind of inorganic capital needs?

We're still evaluating that. We're more towards the end of our budgeting process than the beginning, but it still is a question mark as to whether or not we would want to go out to the marketplace. I think given the slower growth that we anticipate, along with fewer payoffs but still having payoffs, I think there's a reasonable chance that we could grow capital or accrete capital without having to go to the markets, but we're still evaluating that.

This concludes our allotted time for today's question-and-answer session. I will turn the call back over to Mr. Scott Kavanaugh for closing remarks.

Thank you again for participating in today's call. As we entered the last quarter of 2022, I am confident we are well positioned to end the year strong. We have the right team in place, the best clients in our markets, and a strong business model that is highly competitive. Thank you, and have a great remainder of your day.

Thank you, ladies and gentlemen. This concludes today's conference. You may now disconnect.