Opus Bank (OPB) CEO Paul Taylor on Q2 2019 Results - Earnings Call Transcript

Jul. 29, 2019 4:06 PM ETOpus Bank (OPB)
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Opus Bank (NASDAQ:OPB) Q2 2019 Earnings Conference Call July 29, 2019 11:00 AM ET

Company Participants

Brett Villaume - Director of Investor Relations

Paul Taylor - President & Chief Executive Officer

Kevin Thompson - Executive Vice President and Chief Financial Officer

Brian Fitzmaurice - Vice Chairman and Senior Credit Officer

Conference Call Participants

Matthew Clark - Piper Jaffray

Luke Wooten – KBW

Tim O'Brien - Sandler O'Neill and Partners

Kevin Swanson - Hovde Group

Operator

Good day, ladies and gentlemen. And welcome to the Opus Bank Second Quarter 2019 Earnings Conference Call. My name is Bikcytria and I will be your conference operator today. At this time, all participants are in a listen-only mode. Speaking on today’s call will be Paul Taylor, President and Chief Executive Officer, Kevin Thompson, Executive Vice President and Chief Financial Officer, Brian Fitzmaurice, Vice Chairman and Senior Credit Officer.

Today’s discussion will cover the company’s performance during the second quarter of 2019 and information contained in the earnings press release issued earlier this morning. A Slideshow presentation that will - that accompanies today’s call is available on the Opus Bank Investor Webpage at investor.opusbank.com/presentations. The call will be recorded and may available for replay after : 2 o'clock Eastern Time on July 29, 2019 through August 29, 2019 at 11:59 PM Eastern Time by dialing 1855-859-2056 passcode 6638938. The discussion during the call today may entail forward-looking statements which are intended to be covered by the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. You will find a discussion of these forward-looking statements in our recent FDIC filings and in the earnings press release issued earlier this morning. Today’s call will include a question and answer session following management’s prepared remarks.

Now, I would turn the call over to Paul Taylor, President and CEO for our opening remarks. Sir, you may begin your conference.

Paul Taylor

Thank you, Bikcytria and good morning to everyone listening to our second quarter earnings conference call. I am Paul Taylor, President and CEO of Opus Bank.

Since this is my first earnings conference call at Opus, I would like to briefly introduce myself and provide some of my background and experience. I’ll then hand the floor to Kevin Thompson, Executive Vice President and Chief Financial Officer and Brian Fitzmaurice, Vice Chairman and Senior Credit Officer who will go into details of our financial performance and credit metrics.

To begin with, let me firs say that I am pleased to be presenting today with my colleagues both Kevin and Brian and I am excited to be working with all of the Opus and PENSCO team members located in California, Washington, Oregon, Arizona and Colorado.

I joined the Bank on May 1st this year as President and CEO, succeeding Paul Greig who served as Interim President and CEO and will continue exclusively as Chairman of the Board. Prior to joining Opus, I was the President and CEO of Guaranty Bancorp in Denver Colorado for approximately eight years and also served as the Company’s Chief Financial Officer for several years before that.

While at Guaranty, I managed the acquisition of six banks to approximately double the size of the bank and improved the company’s profitability which have been struggling when I first took it over as CEO.

For the first quarter of 2019, Opus recorded net income of $8.7 million or $0.23 per diluted share compared to net income of $10.9 million or $0.28 per diluted share in the first quarter of 2019. During the quarter, we incurred expenses related to strategic actions, which reduced our reported net income by approximately $4.6 million or $0.12 per diluted share.

These actions included, a cost reduction initiative we executed during the quarter to improve the efficiency and profitability of the Bank, which also resulted in severance expense. On an adjusted basis, excluding these costs, our earnings per share came in at $0.35 for the second quarter of 2019 compared to adjusted EPS of $0.32 for the first quarter.

Our performance for the quarter was driven by strong loan growth from our multi-family lending division, solid deposit growth, and positive contributions from PENSCO and our Escrow Exchange division.

Additionally, our credit quality improved during the second quarter as non-performing assets decreased 9% from the prior quarter and measured 27 basis points of total assets as of June 30. Other important news, the Bank has been managing down a troubled portfolio of enterprise value loans and that current balance of that portfolio is $65 million at the end of the quarter and is well reserved for.

While we still have a lot of work ahead of us to improve Opus’ profitability, our capital ratios are healthy and can support future growth and Opus’ multi-family loan portfolio and lending operations continue to serve as a foundation of stable low risk loans. In the few months I’ve been at Opus, I have visited all of our geographies and met many of our employees.

Meeting them gives me confidence and the ability of our team to achieve our strategic goals. Our markets, are economically strong and there are many levers we can pull to take advantage of opportunities to grow earnings and improved shareholder returns.

With that, I will now turn the discussion over to Kevin Thompson to go into our financial performance for the quarter.

Kevin Thompson

Thank you, Paul. Turning to Slide 4, average loans increased $478 million from the prior quarter driven by new loans lending for $704 million offset by loan pay-offs of $239 million. Loan growth was primarily driven by multi-family loans, which increased $354 million, we continue to opportunistically build this high quality portfolio as we maintained a heightened focus on our retention program and as competition remained less active during the quarter.

Competition has now clearly returned to the market and with the intensified rate environment, we do not expect growth to be as strong for the remainder of the year. Our commercial and specialty banking divisions originated $92 million during the quarter and we continue to see progress from the build out of this important initiative that began in 2018.

Total loan yields decreased 12 basis points in the second quarter to 4.3% driven by multiple factors including a lower interest rate environment, less interest recovered on non-accrual loans and lower prepayment fees.

On Slide 5, we show the average balance and yield of investment securities both of which decreased slightly in the quarter largely due to repayment activity. As you may recall, we repositioned our securities portfolio during the fourth quarter of 2018 to increase the overall deals and extend duration slightly. This resulted in over a 120 basis point increase in our securities yields and a 67% increase in interest income from securities for the first six months of 2019 compared to the same period in 2018.

Turning to Slide 6, average deposits increased $225 million in the second quarter or 4% driven by growth in interest-bearing demand, money markets and time deposits. Deposit growth was broad based from fiduciary, municipal, escrow and exchange and commercial banking divisions, some seasonal deposit outflows occurred near the end of the quarter and these balances are expected to return as they do each year.

Our cost of deposits increased 14 basis points to 1.06%, which was the primary driver of the decrease in our NIM. Higher deposit costs were seen across deposit tides as we responded to continued competitive rates being offered by our peers as well as strong loan growth, our loan-to-deposit ratio increased to 93%.

Turning to Slide 7, net interest income decreased 0.6% during the second quarter to $50.5 million. Our loan interest income increased $4.2 million or 7% benefiting primarily from higher average balances while interest expense rose $4.3 million or 27% driven by both higher interest paid on deposits for an FHLB borrowing.

Net interest margin decreased 27 basis points from the prior quarter to 2.88%. This was driven mainly by an increase in deposit rates and balances. Interest income from higher loan balances was slightly offset by less interest recovered on non-accrual loans and lower prepayment fees. Income from investment securities was impacted by slightly lower average balances and yields due to higher prepayments.

Finally, the NIM was negatively impacted by four basis points due to day counts in the quarter.

Proceeding to Slide 8, non-interest income was $12 million, compared to $11.1 million in the first quarter, the first quarter included an impairment charge on sublet properties of approximately $0.5 million. Our diverse sources of non-interest income representing 19% of total revenues provided continued stable contribution including $6.8 million in trust administrated fees from PENSCO and $1.5 million from our Escrow and Exchange division.

Turning to Slide 9, included in non-interest expense of $46.3 million with $4.9 million of expenses related to strategic actions, of which $4.3 million comprise severance expense. Excluding these costs, and adjusting for the legal settlements in the first quarter, non-interest expense decreased 6% from the prior quarter. The cost reduction initiatives included a reduction in headcount of around 5%.

The initiative will enable Opus to operate more efficiently while reinvesting some of the anticipated savings to fund necessary initiatives such as infrastructure enhancements. Adjusting for strategic action-related expenses, our efficiency ratio was $63.5%.

On Slide 10, we show our capital ratios at quarter end including tangible common equity of 8.87% and total risk-based capital of 14.77%. Tangible book value per common share increased $0.36 to $18.32 due to the contribution of net income and a $7.3 million increase in other comprehensive income.

The Board has approved the payment of $0.11 dividend per common share payable in the third quarter which is unchanged from the prior quarter. On Slide 11, we display some of our asset liability metrics, which includes durations and our simulation of net interest income assuming instantaneous parallel ratios. The anticipated duration of our assets and liabilities has decreased slightly as a result of a slight mix shift and the change in yield curve.

We continue to closely assess our position as we navigate this difficult interest rate environment.

I will now turn the discussion over to Brian Fitzmaurice to go into more detail on our loan portfolio and credit metrics.

Brian Fitzmaurice

Thank you, Kevin. This morning, I will review our second quarter credit performance which depicts our continued progress towards the normalized credit environment. This progress is highlighted by a reduction in enterprise value loans of 39% or $40.5 million, leaving a 64.5 million portfolio. A reduction in classified loans of $16.1 million or 12.9% and a $2.2 million or 9.3% reduction in non-performing assets.

Net charge-offs totaled $4 million, special mentioned loans increased by $1.4 million or 5% and provisions for loan and lease losses totaled $3.3 million. We continue to expect our enterprise value loan portfolio will reduce through the rest of fiscal year 2019. During the quarter, we did not have any new special mentioned substandard or non-accrual EV loans.

The loan growth for the quarter occurred predominantly in our multi-family loan portfolio and the new loans that were originated were underwritten using our existing prudent underwriting criteria. As I previously mentioned, we recorded a provision for loan losses of $3.3 million, compared to $2.2 million provision expense last quarter.

The material factors driving the provision this quarter were net charge-offs of $4 million, changes in portfolio mix and loan funding of $3.5 million, additions to specific reserves of $1.5 million and risk rating migration of $1.2 million. These factors were partially offset by $7.7 million of release due to loans exits.

As of June 30, 2019, our allowance for loan losses totaled $57.7 million or 1% of total loans held for investment, a reduction of $759,000 or seven basis points from the prior quarter and we had $6.7 million of specific reserves for 32% of non-accrual loans compared to $5.3 million or 23% from the first quarter of 2019.

I continue to be optimistic that our credit performance of fiscal year 2019 will be favorable to 2017 and 2018 and that we will continue to make progress in aligning our credit metrics with peer bank performance. Please remember that notwithstanding our continued reduction in enterprise value loans we can still incur losses in one or more of these loans.

I’ll now hand the discussion back over to Kevin.

Kevin Thompson

Thank you, Brian. On Slide 14, we present a summary of our outlook for the future. We assume the continuation of the current economic environment and one interest rate cuts in mid-2019, the conditions in our markets remain solid despite some uncertainty in the overall economy. We expect loan growth to moderate in the second half of the year with prepayments and competitive pressure returning to the levels we have experienced over the past few years.

The overall loan growth for the year should be in the mid-teens. We believe with the federal reserve potentially lowering rates, the deposit cost could moderate later in the year while subject to competitive pressure. We estimate our net interest margin for the full year 2019 will be approximately 2.9% revised from the previous estimate of 3% due to the impact of the rate environments on loans and deposit pricing and the lack of repricing benefits on variable rate loans we would experience in an increasing rate environment.

We continue to anticipate the flattening yield curve and elevated prepayments in the coming quarters. With the pressure on net interest margin, we are very focused on disciplined expense management and revenue initiatives to increase our operating leverage. We expect our core efficiency ratio for the full year 2019 to be in the range of 64% to 65% and we expect full year core operating expenses to be lower than those in 2018.

Regarding credit quality, we expect our credit metrics to be more aligned with peer bank performance by the end of 2019. We remain focused on maintaining a strong risk management infrastructure including preparing for the implementation of CECL. We anticipate that our core effective tax rate will be approximately 25% for the full year 2019.

Finally, regarding our capital position, we carefully manage our dividend payment based our capital levels, loan growth, our risk profile and market conditions.

This concludes our prepared remarks. Operator, would you please open the line for questions?

Question-and-Answer Session

Operator

[Operator Instructions] And already in queue we do have a question from Matthew Clark.

Matthew Clark

Hi, good morning.

Paul Taylor

Good morning.

Matthew Clark

Paul, I think, in your opening comments, you talked about wanting to improve profitability. Achieving the strategic goals, I guess, the strategic goals of Opus changed at all since your arrival. Can you just through how you kind of plan to manage the balance sheet and improve profitability since you joined?

Paul Taylor

Sure. And thanks for the question. So, as we look at it, I mean, if you look at the balance sheet of Opus Bank today, today Opus Bank is predominantly a multi-family lender. So, as I look at that asset side, we need to diversify that. We are always going to be a multi-family bank.

This is one of our core competencies, but we need to add a more robust commercial C&I portfolio onto the balance sheet which will diversify the left side and going to the right side, I mean, if you look at our deposits, the cost is too high.

We don’t have enough non-interest-bearing deposits and we need to increase that. So we are working today on a new retail strategy in the company in order to try to generate more non-interest-bearing deposits.

Now in saying both those things, commercial loans, and non-interest-bearing deposits are probably the most competitive areas in banking today. But we believe that we can make great strides at improving the commercial loan portfolio and better mixing the – in particular the demand deposits – adding demand deposits.

As you look at the income statement, some of our actions we took in this last quarter, we increased almost every fee in the bank that we could. So we should start seeing that bleeding into the financials as we go forward. We got to continue to be very vigilant on those fees and keep them increasing and staying in the market there.

Expenses we took a lot of strides in today trying to reduce those, control those, we’ve looked at facilities, we’ve looked at branches, we’ve looked at people and probably the biggest variable we have is the net interest margin. On Wednesday, the Fed meets and gives us their decision. Whether they are going to keep rates the same or lower them, we’ll have to see.

But we are very tied to the yield curve as all banks are or most banks are. And we will have to see where that goes in order to improve the overall condition of the income statement. But those are really our strategic plans. I mean, it’s really the nuts and bolts of banking just trying to improve what we have.

The other interesting company that I didn’t fully understand the power of it is PENSCO when I first came on. PENSCO is an IRA custody business that deals in more of the alternative investments available to customers in the IRA world and again, I think that’s a pretty terrific company and one of our strategies will be to grow that and make that a much more profitable company as we go forward.

Matthew Clark

Is there any appetite to slow the loan growth to some degree and take that pressure off the funding side and allow your deposit costs to maybe go down here after the Fed cuts?

Paul Taylor

Yes. Recently, we’ve – we are working with raising the – not the fees but the interest rates on the multi-family portfolio. Obviously, we can only effect the new loans coming on and we have to realize there is a period of time for those to take effect. But I can tell you that, in the third quarter, you will see much less growth in the loan portfolio than you saw in the first and second quarter.

Matthew Clark

Okay. And then just on the expenses, I think you mentioned that, core expenses will be lower year-over-year. I guess, my question is, how much lower? And I guess, it’s another way of asking, if there are some additional cost saves coming in addition to the ones that were inactive this past quarter?

Paul Taylor

You know, there will be – I mean, we are going to reduce non-interest expense as much as we possibly can. That’s going to become a daily culture in this bank as we move forward. So I think that, you will see continuing forward, lower expenses.

Matthew Clark

Okay. Thank you.

Paul Taylor

Thank you.

Operator

And your next question comes from the line of Luke Wooten with KBW.

Luke Wooten

Good morning.

Paul Taylor

Good morning.

Brian Fitzmaurice

Good morning.

Luke Wooten

I was wondering if you could just – this is just kind of a cleanup. Just could you identify the amount of the severance expenses after-tax number? I know it was $4.3 million pretax just looking for the after-tax number.

Paul Taylor

Yes, that’s a little bit of a complex question and I am not going to answer that directly, because the income taxes are straight answer. So, normally, you would just apply our core effective tax rate of 25% to that. There is an unusual item this quarter in that, we had some higher – few higher paid employees as part of the reduction in force and they trigger the section 162 non-deduction of some expenses. So that portion increased our tax rate by 7% and if not for that, our tax rate would have been 25%. That’s a better way to look at it.

Luke Wooten

Okay. That’s helpful. And then just, sticking on expenses, is the new – the new salaries and benefits line excluding the severance impacts, which comes to about $25 million, is that a good runrate or do we expect more compression on that going forward?

Kevin Thompson

I would say, there is a lot of movement in that line as banks, we defer some of our costs field FAS 91. And so, of course we had a good amount of production in the quarter. So that decreased that amount. We have some seasonal movements in that line, as well. So, on an average basis, that maybe a way to look at it. But as we strategically look at our expenses there maybe some flux in that line and other lines as we decide how to invest some of the expenses we have over time.

Luke Wooten

Okay. That’s helpful. Thanks. And then, it looks like some of the savings from the FTEs coming down was kind of deployed into the data processing line. Is that kind of how we should see that going forward with increased investment in those initiatives?

Kevin Thompson

That is one line. That was – we had a lower expense in the first quarter. So the expense for this quarter was more of our runrate. But to your point, that is one of the areas where we are looking at investing in customer experience, technology initiatives that may make us more efficient and help us with revenue initiatives as well.

Luke Wooten

Okay. That’s really helpful. Thanks. And then, just a quick one, just kind of on the margin. Could you identify what the new loan yields coming on were this quarter?

Kevin Thompson

Yes, the new loan yields actually were fairly flat first quarter and second quarter. We maintained that yield on average of about 430. 4.3%.

Luke Wooten

Okay. Thanks. And then, just kind of talking a little bit about that with the potential for a Fed recut. I mean, imagining the majority of the production was through multi-family. Is that said to be impacted by the possibility of recut or should we kind of see that as moving less than, obviously the commercial lines but also other lines of business? Apologies.

Kevin Thompson

That could be impacted. It’s getting increasingly difficult to estimate that in this volatile rate environment. The multi-family - loan rates in general move quickly in this current rate environments while the customer deposit rates have not. They have held fairly strong. Multi-family lending is very tied to the mid-range of the yield curve to that LIBOR which has been depressed already.

So, you could argue some of that loan pricing impact is already priced into the market. However, as we may see a little more movement in that, if the Fed lowers rates. So, we are currently in the way we are talking about our guidance, we are currently assuming that the current yield curve, this slanting yield curve continues into the future.

And we are hopeful there is some upside that there is – if there is some easing on interest rates that we see a more normalized rate curve that gives us some benefit to our net interest margin. We are hopeful also that, deposit betas as they did in the past three rate easing cycles moved fairly quickly. However in our guidance, we are not putting that in.

We are conservatively looking in that and conservatively preparing for that in our strategy.

Luke Wooten

Okay. That’s really helpful color. Thanks. Thank you for taking my questions.

Operator

[Operator Instructions] And your next question comes from Tim O'Brien from Sandler O'Neill and Partners.

Tim O'Brien

Good morning.

Paul Taylor

Good morning, Tim.

Brian Fitzmaurice

Good morning, Tim.

Tim O'Brien

Would you guys happen to have the – I saw the percent reduction in FTE count. Do you happen to have at the end of the quarter count and the start of quarter count, the hard numbers?

Kevin Thompson

The end of the quarter was around 730. And the start of the quarter was around 760. So there is some obviously flux in not only reduction in force, but in other increases and decreases within the firm.

Tim O'Brien

And more specifically, also, would you by any chance have commercial banker headcount at the end of the quarter versus the start of the quarter?

Kevin Thompson

Approximately 30, Tim.

Tim O'Brien

30 at the end of the quarter. And was there any change in that headcount during the quarter?

Kevin Thompson

No. There was some flux in movement, but it was around on average the same amount.

Tim O'Brien

And can you remind me who is leading that group?

Paul Taylor

Jim Haney.

Tim O'Brien

Great. All right. And then another question I have for you is, so the 290 guidance you gave reflects one, expected rate cut, correct? Not any more than that.

Kevin Thompson

That’s correct. Just one we are anticipating at this point in mid-2019, one rate cut by the Fed. And to reiterate, we assume the same yield curve going forward that same shape of the yield curve as it is today and that we don’t see any kind of relief on the kind of normalizing that yield curves in our guidance.

Tim O'Brien

Okay, great. And then, just kind of a detailed question, so, the $4.3 million in strategic expenses this quarter for severance and stuff, that was captured in the 29 million competition and benefit line. Is that right or was it a combination of – did it accrue there and in other parts of the non-interest expense total?

Kevin Thompson

Yes, so, the $4.3 million, so $4.9 million total of strategic initiatives, of which $4.3 million impacted severance expense and yes, was in the compensation line and the other impacted more professional fees. Of course, there was a tax impact as well, that we call out kind of an unusual Section 132 item.

Tim O'Brien

And again, that was down below. And then you also alluded to this that there were obviously some other dynamics involved in that final $29 million number including some seasonal cost. Does that have to do with annual merit, perhaps it impacted in the second quarter or what we are talking about there and can you quantify that a little bit or break it out?

Kevin Thompson

I don’t have actual numbers. There is a lot of movements on these lines. It is one of the big factors though is deferred fees, the FAS 91 when you have high loan production. But then you have the first quarter to second quarter differential in tax kind of seasonally high tax in first quarter versus second quarter. And other movements you do have bonus payments potentially impacting especially the tax side in the first quarter.

Tim O'Brien

Going forward, is there any chance that you guys are going to call out for isolate, identify deferred comp expense as a piece of the total comp and benefit, just because it’s been so significant in the past for Opus. Any chance of that or is it going to – are you guys going to report the same?

Paul Taylor

I think we could consider that, if that is helpful. We have not done that in the past, but of course we track that closely.

Tim O'Brien

Obviously, I’ll leave it to you guys judgment, but investors have thought it was important in the past and maybe it’s something worth considering now. I’ll just leave that one to you. And then, one last question, sticking with non-interest expense, so, professional services costs were down $1.2 million in the – or $1.1 million in the quarter. That was nice. Is that a good new kind of baseline runrate you are going forward? Or have you guys turned a page on all of the professional service cost accrued at a higher level through this what you’ve been through and are we going to see those lower here going forward?

Kevin Thompson

I would say two things. I would say, yes, we have turned a quarter – a corner. We are seeing fewer legal expenses and less of a need to outsource some of our processes and so, we have gone to a better spot there. However, there are some unusually lower expenses in the second quarter. So, going forward, you won’t see a too much difference from the first quarter. That’s probably a better range. But again, that is materially less than we’ve spent in the past. And that is the line item again where we are considering some strategic initiatives to continue to invest in our future.

Tim O'Brien

Great. And then, I am going to throw one more at you. On the – in the fee income piece, other fee income was up a little bit. Is that $1.2 million? Is that’s going to remain volatile, isn’t it? Because you guys have some kind of volatile items that hit pretty regularly through that line, right?

Kevin Thompson

Yes, there is less volatility than there has been in the past. As a reminder, in the first quarter, there was one offset there was a lease asset impairment of about $0.5 million. And so, the current quarter, second quarter is a more of a runrate. Now we had merchant banking in there in the past that caused some volatility. You won’t see that volatility going forward. There is still some items of course, again any bank would have in certain valuations. But the second quarter’s runrate is a good figure possibly used for the future.

Tim O'Brien

Great. Thanks for answering my questions guys.

Paul Taylor

You bet.

Brian Fitzmaurice

Thank you.

Operator

Your next question comes from the line of Matthew Clark with Piper Jaffray.

Matthew Clark

Hey. I just have few follow-ups. On deposit cost, is your expectation that deposit cost will peak in the third quarter and then start to move lower. Just want to get a sense for how much of 25 basis point rate cut do you plan on passing along to depositors?

Paul Taylor

That’s very market-driven, but if there is a cut on Wednesday, there is some level of that 25 that we can take out, it’s not all the 25. It might be 10 to 15 basis points that we could start reducing. But we plan to be extremely proactive on that and save as many dollars as we can there.

Matthew Clark

Okay. And then just the loans that were transferred to held-for-sale, are you planning to do a large securitization on the multi-family front? If so, how big timing and what the coupon is on those loans that were transferred?

Paul Taylor

We are not doing the securitization. We are selling the whole loans. And then, at this point in time, that’s all the loans that we have identified to sale.

Matthew Clark

Okay. And do they happen to be lower yielding or just my question is, whether or not that it’s going to be somewhere leased in the loan yield overall?

Kevin Thompson

So, with our strong loan growth, we opportunistically look to the market to see if there were opportunities. And so these are actually potentially at a gain we are finalizing sells as we speak. And so we looked at opportunistically selling some of our lower yielding loans. At the same time, we have such high prepayments and low duration on these assets that it didn’t make sense for us. So we feel comfortable with our current level of multi-family assets.

Matthew Clark

Okay. And then on the efficiency ratio guide, is that 64% to 65%, is that still on an adjusted basis excluding CDI and gain on sale and all the other kind of noise?

Kevin Thompson

That is correct, on an adjusted basis.

Matthew Clark

Okay, great. Thank you.

Operator

Your next question comes from the line of Kevin Swanson with Hovde Group.

Kevin Swanson

Hey guys.

Paul Taylor

Good morning.

Kevin Swanson

Just kind of one follow-up question, most of my other ones were answered. But on the credit side, I think, prior to, like early 2016, you guys kind of operated at a little bit below one on an allowance ratio. I think in the past couple quarters you’ve come down a little bit and now we kind of sit right at that level. Just curious where you see that number going? And then maybe, just in general, if you could kind of comment on the credit environment that you are seeing right now? Thanks.

Paul Taylor

Yes, it’s going to sort of hug 1% as we go forward and the credit environment is very strong at this point in time. We see really no deterioration in our markets.

Brian Fitzmaurice

And this is Brian. The allowance is obviously very mathematically driven. So, we are very heavily weighted towards multi-family. So, if we continue to have good progress in the reduction of our substandard assets, those would be possibly resolving them would end up. We do think the allowance a little bit because there is no reason to hold reserves. And they are quite high given our loss experience. So, it could come down a little bit, the coverage.

Kevin Swanson

Okay, great. Thanks guys.

Paul Taylor

Thank you.

Operator

Okay. Your next question is a follow-up from the line of Luke Wooten with KBW.

Q - Luke Wooten.

Hi, sorry. Just a couple quick follow-ups. Just wanted to talk a little bit about the loan-to-deposit ratio. We saw a pickup in that in the quarter. I think there was a little talk about how it kind of try to match for the deposit growth to loan growth from the first quarter. How should we look at that ratio going forward?

Paul Taylor

I think that you will see the ratio stay probably in the mid-90s for the foreseeable future. It may rise a little bit as we get out a little further. But, again, our hopes is to grow deposits and that would be great to reduce that ratio. But right now, it’s going to stay in that similar region.

Q - Luke Wooten.

Okay. That’s helpful. And then, just kind of on that deposit growth, I mean, you guys saw solid interest-bearing demand deposit increase quarter-over-quarter. Is that through a campaign? Or are you guys – just solid growth without a campaign?

Paul Taylor

Well, I think it’s both. We do have a campaign going on right now in our business banking group and our retail group. So that is getting some traction. But it’s mostly just normal fluctuations.

Q - Luke Wooten.

Okay. That’s helpful. Those all the questions I have. Thank you.

Paul Taylor

Yes, thank you.

Operator

And there are no further questions. I will now hand the call back over to Paul Taylor.

Paul Taylor

I want to thank everybody for joining the call. Hopefully, we have answered all of your questions and we look forward to speaking to you in the future. If anybody has any further questions, do not hesitate to contact Kevin or myself. Thank you.

Operator

Thank you for your participation. This concludes today conference call. You may now disconnect.

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