Independent Bank Corp. (NASDAQ:INDB) Q2 2022 Earnings Conference Call July 22, 2022 10:00 AM ET
Christopher Oddleifson - President and CEO
Mark Ruggiero - CFO
Conference Call Participants
Mark Fitzgibbon - Sandler O'Neill
Laurie Hunsicker - Compass Point Research
Christopher O'Connell - KBW
Good morning and welcome to the Independent Bank Corp. Second Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions]
Before proceeding, please note that during this call we will be making forward-looking statements. Actual results may differ materially from these statements due to a number of factors, including those described in our earnings release and other SEC filings. We undertake no obligation to publicly update any such statements.
In addition some of discussion today may include references to certain non-GAAP financial measures. Information about these non-GAAP measures including reconciliation to GAAP measure may be found in our earnings release and other SEC filings. These SEC filings can be accessed via the Investor Relations section of our website. Finally, please also note that this event is being recorded.
I would now like to turn the conference over to Chris Oddleifson, President and CEO. Please go ahead sir.
Good morning everyone and thank you for joining us today. I'm once again accompanied by Mark Ruggiero, our Chief Financial Officer; and Rob Cozzone, our Chief Operating Officer.
Our second quarter performance is a strong one which is driven by the business fundamentals of our franchise. Net income for this past quarter came in at $61.8 million or $1.32 per share, nicely above both prior quarter and prior year results.
Mark will be covering the quarter in greater detail, but highlights include underlying loan activity remains encouraging with net growth of 5% on an annualized basis exclusive of PPP loan runoff.
My colleagues are quite active in meeting the credit needs of our customers. In fact, loan closings in the second quarter grew by 35% over the first quarter volumes to nearly $1 billion and loan pipeline stand at healthy levels as well.
Core deposits have now reached 87% of total deposits and remain a source of great strength and economic value. Higher cost CDs continued to iterate [ph] allowing us to maintain a very low five basis points total deposit costs.
Our balance sheet management has enabled us to clearly benefit from rising rates as evidenced by the notable increase in net interest margin this quarter. And we were positioned to continue to benefit from further rate increases that are widely expected. Mark will comment on this in a moment.
Fee revenues were strong this quarter across a range of sources. Our investment management business continues to excel and we're encouraged by the volume of new inflows along with the ongoing success of our internal referrals.
Expense levels remained well-managed as our operating efficiency measured declined to 52% this quarter. Credit quality continues to be benign with minimal net losses and stable non-performing levels experienced in the second quarter, and capital levels remain in fine shape, which gave us the confidence to proceed with a modest share buyback in the second quarter.
We continue to make progress in several important fronts. The assimilation of East Boston Savings Banks continues to proceed very smoothly. My new branch colleagues have adapted quite well to our processes and platforms, all major systems have been fully integrated, and we are actively pursuing new business opportunities we've identified in our expanded markets and acquired customer bases, all of which we're very excited about.
We successfully opened our new branch of Westborough in Maine in May, bringing our total retail prices to eight in Worcester [ph] County. Our expansion into this market and the broader Metro West area is an important part of our growth strategy. Customer reception to our brand and offerings has been very encouraging thus far.
We've been hard at work enhancing our digital banking capabilities with respect to account access and opening as payment networks and are your banker platform to ensure we remain responsive to customer preferences. We're also in the process of streamlining our front end processes, especially related to our lending platforms and continue more fully leverage salesforce throughout the company.
Turning to the economic picture, now the labor market as we all know is showing continuous strength, the focus remains heavily on the inflation. Inflation surged again in June and the Fed has reiterated their commitment to combat increased pricing with rate hikes.
The Fed is expected to continue with rate increases, but market uncertainty is on the rise. The price spot here is at each increase provide a tailwind to income as Mark will discuss in a moment.
We feel we've positioned ourselves was in a flexible manner to deal with a highly uncertain operating environment. And should we enter a period of pronounced slowdown or begin to witness unfavorable competitive practices, especially in the lending side, we will react with as much discipline as we have in the past, which has served us well over the long-term.
In the meantime, we remain highly focused on serving our loyal and growing customer base. We build strong relationships with our customers and provide them with award-winning level of service for our highly motivated Rockland Trust colleagues.
In fact, a point that as well worth mentioning, again, is that during the first quarter, we received the number one ranking in New England at J.D. Power 2022 U.S. Retail Banking Customer Satisfaction Study.
Before signing off, and handing it over to Mark, I'd like to acknowledge our Director, Frederick Taw, who has reached retirement age. I have valued his insight and support during his tenure on our Board and we wish him well.
And with that, I'll turn it over to Mark.
Thank you, Chris. And similar to last quarter, my comments will refer to the information contained within the earnings presentation deck that was included in our 8-K filing last night, and it's also available on our website and today's investor portal.
So, jump into slide four of that deck. 2022 second quarter GAAP net income was $61.8 million and diluted EPS was $1.32, both reflecting notable increases from the prior quarter operating results. Worth noting there were no non-GAAP related items within the second quarter.
Our key drivers for the quarter include 4.9% annualized net loan growth when excluding PPP loans, driven by strong consumer loan activity. In addition to overall reductions in cash balances, we continued modest cash deployment into the securities portfolio, continuing to remix the balance sheet for enhanced profitability.
The core net interest margin, which excludes purchase accounting and PPP-related impact, increased to 3.23% for the quarter, up from 3% in the prior quarter and the reported margin was up nicely as well. And I'll provide some more detail into the impact and benefit of the rising rate environment here and a little bit.
New core deposit account activity remains strong with the overall reduction in deposit balances being driven primarily by lower time deposit balances. Provision for the quarter was zero, reflecting continued strong asset quality metrics.
In addition, the quarter included higher fee income and a modest increase in operating expenses, both of which I'll provide more detail on shortly. And lastly, the company bought back 1.3 million shares under its share repurchase program during the quarter.
So, in summary, we certainly view the quarter's results as a great reminder of our strong core fundamentals and evidence of a balance sheet positioned to increase profitability and shareholder value moving forward.
On both the GAAP and operating basis, the results reflect a 1.24% return on assets and 8.49% return on average common equity and a 13.01% return on tangible common equity for the quarter.
And similar to last quarter, in addition to the aforementioned share repurchase activity, tangible book value was also negatively impacted by other comprehensive losses attributable to the available for sale, security unrealized losses, and hedge fair valuation declines net of tax. These factors drove an $0.84 decrease in tangible book value to $40.31 as of June 30th.
As we move to slide five, we'll dive into some key components of the quarter results. And as shown here, inclusive of PPP, the loan portfolio increased slightly to $13.7 billion. Excluding PPP, as I mentioned, total loans grew at a healthy 4.9% annualized rate for the quarter.
As you can also see on the slide, the consumer portfolios were the primary drivers of the overall increase, as the vast majority of residential production was retained on balance sheet, while demand for home equity offerings and line utilization increased meaningfully in the quarter.
Also, excluding PPP loans, strong growth occurred in the C&I category as well as construction, with both categories also benefiting from increased line utilization. Commercial real estate balances dropped 106 million or 1.3% in the quarter, as pay-off activity on both the East Boston portfolio and legacy portfolios remains elevated.
Slide six provide some additional details around loans activity for the quarter. As noted on the left side of the slide, commercial loan origination activity was exceptionally strong for the quarter with total closed commitments of $557 million.
With much of that production coming from construction and other line of credit type fundings, total outstandings did not reflect the same level of increase in the second quarter, but bode well for increased utilization going forward. In addition, the approved commercial pipeline at June 30th was $372 million, up notably from the prior quarter level of $307 million.
Now, as for our opportunities in our market, we continue to see the majority of commercial real estate and construction activity centered around one to four family, condo, and apartment asset classes. While on the C&I side, the retail trade industry continues to provide solid deal flow.
Also noted on the slide, you can see the PPP balances paid down to $31 million as of June 30th, generating $1.8 million of net fees recognized this quarter compared to $3.5 million in the prior quarter, with remaining unearned net fees now only totaling $600,000.
On the right side of the slide, we reflect some key metrics around the strong consumer book activity for the quarter. Given the company's balance sheet position and secondary market pricing dynamics during the quarter, approximately 92% of the quarter's mortgage activity was retained in the portfolio. And as history has proven out in prior cycles, as the refinance market slows down amidst the rising rate environment, we see the natural hedge and our strong home equity products that really show its value as well.
So, along those lines after a prolonged period of challenging growth, the second quarter saw real solid closing activity, which along with increased line utilization led to the home equity balance growth I just previously mentioned.
As we move to slide seven, deposit activity for the quarter was in line with expectations with decreases in time deposits and money market, driving an overall decline in deposits for the quarter. And as we enter into a rising rate environment, the long standing focus on core deposit relationships will likely lead to some level of rate sensitive money exit in the bank over the remainder of 2022 and allow for adequate levels of funding, while effectively managing our overall cost of deposits.
With core deposits comprising 86.8% of total deposits as of June 30th, the cost of deposits for the quarter remained low at only five basis points for the fourth consecutive quarter.
This serves, I think, as a nice segue as we move to slide eight and focus on the net interest margin results for the quarter. And as we presented in prior quarters, this slide provides some details over the reported margin as well as a breakdown of volatile or non-recurring items to reconcile back to a core net interest margin.
And as you can see here, both the reported and core net interest results increased nicely over the prior quarter. In particular, we highlight the core net interest margin results, which when excluding the PPP fees and purchase accounting impact, increased 23 basis points as compared to the prior quarter margin -- core margin. This increase is a reflection of the company's asset-sensitive positioning as well as a favorable remixing of its excess liquidity.
As an update on the margin guidance provided last quarter, the bottom right section of this slide provides the key aspects of the company's assets sensitivity. So, in summary with any movement in short-term interest rates, primarily Fed funds, one month LIBOR, term SOFR, or prime, we would see immediate repricing benefit in our Federal cash balances -- Federal Reserve cash balances of $1.3 billion and approximately 34% of our loan book that is tied to these indices.
During the quarter in an effort to balance its interest rate risk positioning and current earnings, we closed on another $300 million of macro level loan hedges with $150 million of that being straight variable to fixed rate instruments and $150 million of interest rate call or hedges. This strategy partially offsets the loan benefit of rising rates in the long run, while still providing some level of immediate earnings improvement in the near-term.
So, regarding the longer term impact, the total macro hedge portfolio of $1.2 billion, combined with a small subset of loans with index floors that are currently in the money, would offset a portion of the asset repricing benefit I just described.
So, in summary, approximately 20% to 25% of total loans on a net basis would immediately benefit from rising rates. And as we have noted previously, market pressures will certainly heavily influenced the pace of deposit rate increases through this rate cycle.
Moving to asset quality, slide nine provide some key metrics that are worth highlighting. Non-performing loans stayed relatively consistent at $55.9 million as of June 30th, net charge offs were a mere $200,000 or one basis point on an annualized basis, total delinquencies ticked up slightly to 0.4% of the portfolio, and total loan deferrals at June 30th decreased another $108 million to $197 million or 1.4% of the total portfolio, with the majority of that set to mature prior to 2023.
So, in conjunction with these stable metrics and modest loan growth, zero provision for loan loss was recognized maintaining the allowance for credit loss as a percentage of loans at 1.06%.
Shifting gears now to non-interest items, slide 10 provides details on non-interest income results for the quarter, a few of which I will quickly highlight. Deposit account interchange and ATM fees all increased nicely from the prior quarter, driven primarily by seasonal increases in activity.
And despite a market-driven reduction in assets under administration from $5.7 billion last quarter to $5.2 billion as of June 30th, overall investment management fee income increased nicely in the quarter, driven by strong retail and insurance commission income as well as seasonal tax prep fees.
Also on a positive note, despite the challenging market conditions, we have experienced strong inflows of new money in 2022. The season sales reps combined with new hires have really seen success in our legacy markets as well as increased momentum in the newly acquired markets and geographies.
And lastly, as mentioned earlier, the company's capacity to absorb straight fixed rate lending products has challenged both mortgage banking and loan level swap income during the second quarter.
Turn into the next slide. Total operating expenses $90.6 million, reflect a 2.4% increase from the prior quarter when excluding last quarter $7.1 million of merger-related expenses.
Some notable items in the second quarter expenses when compared to last quarter include increased incentive compensation within salaries and benefits, decreased snow removal costs within occupancy and equipment. And within the other non-interest expenses, the increase was primary -- was driven primarily by increased consulting costs associated with certain operational initiatives, increased unrealized losses on equity securities, and annual director equity awards.
Lastly, the tax rate for the quarter increased slightly to 24.8% due to the increase in projected earnings.
So, finishing up on slide 12, I'll provide a few updates with regards to 2022 guidance. Regarding commercial loan growth inclusive of PPP and small business, total commercial loans are down approximately 1.8% on a year-to-date basis. And as we've described, that's been driven mostly by PPP and East Boston acquired commercial real estate runoff as we expected.
We do anticipate flat to low single-digit growth in the second half of 2022, which would result in a relatively flat to low single-digit percentage decrease in balances for the full year.
Regarding residential loan growth, despite reduced demand expected in the second half, we anticipate additional growth in the mid-single-digit rate range, which would peg 2022 full year growth at around 20%.
And as for home equity, we anticipate the Q2 positive momentum to continue into the second half of 2022, with low to mid-single-digit percentage growth for that six-month window, resulting in full year 2022 growth in the mid to high single-digit percentage range.
As for deposit growth, we are extremely pleased with our success of generating new core operating accounts in both our legacy and acquired markets. Having said that, the likely rising rate environment and excess levels of liquidity allow us to be strategic in letting some level of time deposits and rate sensitive balances to tried out, resulting in relatively flat to modest decreases in total deposits expected in the second half of 2022.
Also with the June rate increase and future rate hike expectations at virtually near certain levels, the guidance we provided earlier regarding the immediate asset repricing impact and strong deposit franchise will continue to drive core net interest margin benefit going forward.
In terms of provision levels, though overall asset quality remains strong, looming recessionary fears are real. Though it's certainly tough to predict the impact with so many moving pieces, based on today's environment, we anticipate current allowance levels to hold steady for the foreseeable future, with current charge-offs serving as the proxy for provision in levels going forward.
Regarding non-interest items, total non-interest income could experience modest decreases, driven primarily by decreased investment management income and continued pressure on mortgage banking income. In addition, as we talked about last quarter, we are also assessing likely changes to our overdraft program, though the final impact is not fully determined at this point and timing of any changes would likely be later in the calendar year.
And finally, non-interest expenses are expected to increase in the second half at a low to mid-single-digit percentage rate, driven mostly by wage and other inflationary factors. And lastly, the tax rate for the second half of the year will likely approximate 25%.
That concludes my comments and we'll now open it up to questions.
We will now begin the question-and-answer session. [Operator Instructions]
Our first question will come from Mark Fitzgibbon with Sandler O'Neill. Please go ahead.
Hey, guys, good morning and Happy Friday.
Happy Friday, MARK.
First, I wondered if you could share with us what the commercial line utilization rate was in the second quarter, I think it was 30% in the prior quarter?
Sure. Yes. So, it only upticks slightly, but certainly trending in the right direction. So, a couple of components within the commercial buckets, Mark, our general C&I line of credit utilization was 31.5%.
We also look at our ABL subset within C&I or asset-based lending. That went from 48.9% to 49.2%. So, just a modest uptick there. And on the construction side, that was slightly modestly up as well from 57.1% to 57.9%. So, all just generally, up nominally, but still well below pre-pandemic levels.
Okay, great. And then secondly, I wondered if you could give us an update on that one large $24 million syndicated loan that went non-accrual last quarter. I think you had said previously you thought it would sort of cure in the next quarter or two. Any update on that?
Yes, it's still going through negotiations. This is -- as you mentioned, a larger syndicated credit, so we are not the lead bank on that relationship. But the expectation is still a full refinance, but the timing has pushed out a bit. So, we're now looking at potentially an early fourth quarter resolution versus the original guidance, but certainly we expect no losses on it and a full resolution. It's just pushing out a bit later in the calendar.
Okay, great. And then next Mark, we don't see a lot of banks buying back stock at two times tangible book. Can you kind of walk us through your thinking on buying stock back at that level? I guess I'm curious, why not let capital build up, especially given what you described as kind of looming recessionary fears, or pay it out in the form of a dividend, so -- to avoid the tangible book dilution? Just curious on that.
Certainly a valid question and something we were very careful in assessing and reviewing when we make that decision. I'd say it's a combination of a couple of things, Mark, but the first being we certainly are operating at what we would still continue to deem as excess levels of capital versus our optimal operating level.
So, I think a level of repurchase activity, we've always felt made sense given our overall levels of capital. And I think really, as this -- despite the rest of recessionary concerns, the rising rate environment gives us significant earnings power going forward.
So, we are comfortable that when you look at the buyback levels at the rate we did, we believe our earnings power will accrete that value back in a reasonable amount of time that we still believe good shareholder value in the long-term. So, it is at a higher level, but I think our earnings power accretes that back in a reasonable and sufficient timeline.
Okay. And then lastly, of the $226 million resi mortgages you guys booked on the balance sheet this quarter, are those mostly hybrid arms? Or is there some 30-year volume in there? And maybe what is the average rate look like on that stuff?
Yes, that's almost all 30-year volume for the most part, Mark. And the average rate in the second quarter had uptick to the high threes, that still sounds low given today's -- certainly the new volume is coming on significantly higher than that, but for most of the second quarter, we were still talking mid to high three percentages. So, that's what came on in Q2.
Great. Thank you.
Our next question will come from Laurie Hunsicker with Compass Point Research. Please go ahead.
Yes. Hi, good morning.
Good morning Laurie.
Wondered if you could help us think about accretion income. Yes, any direction you can give us on accretion income, obviously saw reversal this quarter, just because it's so impactful into NII?
Yes. Sure. So, the purchase accounting for the current quarter, we actually had -- we don't have too many of these left in the portfolio, but there are still some individual loans that have a premium fair value mark associated with them, primarily on the East Boston acquired loans.
So, as those were -- the more higher propensity to reap to prepay given the rate environment and refinance, we did see a few loans there with higher premiums on them pay off in the current quarter driving that negative purchase accounting impact.
I continue to feel comfortable that in the long run, we still have significant net discount or credit marks within the portfolio that will accrete positive purchase accounting. And I think I would peg that my expectation would be somewhere in the in the $1 million per quarter range. I'd say Q2 was hopefully an anomaly in terms of having that negative impact.
Okay, that's very helpful. And then looks like on your expenses, your occupancy went down, can you just remind us I know you had originally said you were targeting 80% cost save with EBSB acquisition by 2022? Are we already there yet? Are you ahead of schedule? Or how should we be thinking about that number?
No, we're there -- all the occupancy cost saves have been achieved. But the biggest driver, to be quite honest, is the snow removal. So, the first quarter number within those results was $1.2 million. So, $1.2 million of that, I believe $1.7 million decline is literally tied to snow removal costs.
And then just the timing of some of the final exits we had on the East Boston portfolio that probably accounted for $200,000 to $250,000 of benefit Q1 versus Q2. But as we sit here on June 30th, all those cost savings have been achieved and you should see now Q2 serving has a good run rate going forward.
Okay, that's perfect. And then just kind of more macro is we're starting to see some warning signals, some cracks in credit, can you can you help us think about a few things maybe give us a refresh on your office, any details around office, including what's right in Downtown Boston, anything on leverage lending?
And then just generally any stressors within the legacy EBSB book, I know they were very, very discounted on an LTV basis. But any stressors you're seeing there, they had larger CRE loans compared to you? Just anything you can help us think about on those three buckets?
Sure. I think you hit on some buckets that we certainly are -- have always paid close attention to, but I think we would view as making sure we understand where there may be emerging risk.
The first asset class you referred to on the office space side, in terms of just big picture metrics that makes up about 15% of the commercial real estate book. So, that's about $1.5 billion of outstanding balances in higher on the exposure side.
We have very little Downtown Boston exposure within that book. Less than $300 million of that is in Boston Proper, there's probably another $100 million or so that is in neighboring Greater Boston cities like Brighton and Jamaica Plain et cetera. But when you pull in some of those neighboring towns, it's still well under $400 million of Downtown Boston exposure.
So, most of our office spaces suburban office. Those properties still seem to be doing well. We haven't seen any worsening conditions there. We typically see those with shorter lease terms, which give us some greater comfort on the underwriting side.
And we've always through the good times and during risky times, we always try and get personal guarantees. We look to limit our exposure to single tenant relationships. We look to match up no terms and have evidence of lease terms that extend close to the maturity date.
So, I think that discipline serves us very well and it's -- as you mentioned, it's an area we're going to continue to monitor closely. But our overall LTVs are still very strong and that portfolio as a whole, closer to around 60% and -- given today's value, so I think we feel as good as we can right now.
In terms of some other categories you mentioned, the leveraged lending is actually down to only about $150 million as of June 30th. So, we've had a few relationships exit there.
If you recall, a big piece of that is primarily our security alarm lending and that is always first lien on tangible and intangible assets. On the security side of it, we have very defined borrowing base certificates that are tied to contractual cash flows that drive the ability to lend on those relationships. So, it's very nominal exposure right now, but it's a credit bucket that we continue to feel good about.
And then lastly, I think the East Boston reference, as we've been saying all along, no secret, they did some larger deals, part of that is embedded in those office exposure metrics I gave you. We had some fairly conservative credit marks on that, that we think protect us. But we have seen -- we've seen a lot of outflow in that category. So, that certainly limits the ongoing or future exposure related to Downtown Boston.
But where -- there's a few credits there that we're staying close to. But again, all-in-all, we're not seeing any mass migration of negative credit asset quality. This is, like I said, there's a handful that we're just monitoring more closely, but nothing widescale at this point.
That's great. That's super helpful. And then just last question. Chris, can you help us think about M&A and how you potentially are thinking about it differently if you're thinking about it differently with the thought of higher interest rate marks laying on tangible book and obviously you very, very strong stock currency, how you would think about credit marks? You're a very disciplined, very strong acquirer and so we just love your high level thoughts on generally how you're thinking about it. Thanks.
Very, very high level the -- we've had a tremendous success with our M&A transactions over the years. You're right, we are very disciplined. We do believe though, we would like that to continue over time. I mean the -- and as franchises become available, we'd like to be at the table.
Having said that, the uncertainty, so when you're looking down the barrel of the next couple of years, certainly would warrant no further discussion and probably some additional scenario thinking about some of the implications of that. And so I can't tell you exactly where we come out on any particular scenario, but you're right in saying that it would require a lot more thought now than I think it has in the past. Mark, would you have anything to add to that?
No, I think you summed it up well, Chris.
Yes, I mean, we still have a nice currency advantage or I'd like to be able to use it.
Great. Thank you.
Our next question will come from Chris O'Connell with KBW. Please go ahead.
Hey, good morning, gentlemen. Circle back, at I may have missed it with the initial buyback question. But did you guys indicate if you guys would be continuing to utilize that buyback going forward or not?
We didn't provide direct guidance there, Chris, but through Q2, the level of activity amounted to about 75% of what we had originally authorized. So, right now, there would be fairly modest impact if we were to continue repurchasing in the third quarter.
But again, it'll be--
As always, it's going to be dictated by stock price and our decision at what the appropriate level the buyback is.
Okay, got it. And of the legacy EBSB loans that you guys are kind of continuing allow to fall off in the back half of this year, what's the average rate on those?
Inclusive of the marks we put on for the most part, I believe they were in the -- I don't have the exact numbers to be honest, Chris, but I'm guessing they were around 3%, 4% because of the marks on them.
And to be quite honest, we're seeing a pretty competitive environment out there. So, what we are seeing exit is often priced very competitively and at rates that in many instances where we haven't been willing to compete at.
Got it. And I guess on that front, could you give us an update on where origination yields are coming on out on both the commercial side and the resi side?
Sure. No, it's been -- we've been able to really mirror what you've seen occur on the curve. So, when you look at the swap curve or the FHLB curve, that five to seven year part of the curve is up 50 to 60 basis points on average quarter-over-quarter. So, we are experiencing that type of lift in terms of our new originations.
So, on the commercial side, we've been getting in the mid 4% range. On the resi, we've moved up on portfolio pricing into the high 4%, close to 5% range in terms of recent volume coming on the books. So, certainly, we've seen nice increases in terms of new originations quarter-over-quarter.
Great. And then on the deposit costs, obviously, have held flat so far and the runoff should help in terms of managing that going forward. Have you got -- have you guys thought about when there might be more widespread increases in your deposit costs, the timing of that? And how you see it progressing in the near-term?
Yes. No, very on-point question there, Chris. We've already made decisions, as of late that will certainly increase deposit costs heading into the third quarter. Just the timing of those decisions manifest themselves yet in the Q2 results.
So, we do anticipate based on just the decisions we've made to-date, the cost of deposits increasing by about four or five basis points in the third quarter, so going to about 10.
If we do get another rate increase here in July, which is very highly likely, I would expect we'll be making additional moves in the quarter. The timing is a bit TBD there, but I think you'll see cost of deposits certainly start to move north of 10 basis points and likely uptick towards the 15 basis point range depending on what we get for rate increases.
Okay, that's very helpful. Thank you. And then I know you guys have -- deferrals have come down quite a bit. In the vast majority, it seems like are set to mature in the fourth quarter of this year. Have you guys evaluated those recently? And how do you think that'll play out in terms of coming back on as full thing?
Yes, for the most part, we would expect the majority of that to come back to full payment status. If you recall a number of those at the time were in asset classes like hotel and accommodation and we took a pretty proactive approach and extending those out for a fairly lengthy amount of time under the CARES Act provisions. That's an asset class space that has really bounced back very strongly, in fact, a lot of our hotel book is really performing at a very strong levels.
So, I don't have all of the breakdown, but I do know that was a meaningful component of our deferral and I would expect those asset classes to bounce back without any issues. But I can provide more details if needed, Chris, after the call.
Okay, that's great. That’s all I had for now. Thank you.
There no more remaining questions at this time. And with that, we will conclude our question-and-answer session. I'd like to turn the conference back over to Chris Oddleifson for any closing remarks.
Thank you, Joe and thank you everybody for joining us today. We look forward to chatting with you in three months regarding our third quarter 2022 results. Have a good weekend. And for those of you in hot area of the country, which I imagine as most of you, stay cool this weekend. Be safe. Bye.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.