Ladies and gentlemen, thank you for standing by, and welcome to the Bank OZK third quarter 2022 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question-and-answer session. To ask a question during the session, you'll need to press star one one on your telephone. I would now like to turn the call over to your host, Jay Staley. You may begin.
Good morning. I'm Jay Staley, Director of Investor Relations and Corporate Development for Bank OZK. Thank you for joining our call this morning and participating in our question-and-answer session. In today's Q&A session, we may make forward-looking statements about our expectations, estimates, and outlook for the future. Please refer to our earnings release, management comments, and other public filings for more information on the various factors and risks that may cause actual results or outcomes to vary from those projected in or implied by such forward-looking statements. Joining me on the call to take your questions are George Gleason, Chairman and CEO, Brannon Hamblen, President, Tim Hicks, Chief Financial Officer, and Cindy Wolfe, Chief Operating Officer. We will now open the lines for your questions. Let me now ask our operator, Kevin, to remind our listeners how to queue in for questions.
Ladies and gentlemen, if you have a question or a comment at this time, please press star one one on your touchtone telephone. We'll pause for a moment while we compile our Q&A roster. Our first question comes from Stephen Scouten with Piper Sandler. Your line is open.
Yeah, good morning, everyone. Thank you.
Go on, Stephen.
I guess maybe if we could start with the repayments seen this quarter, obviously down about $1 billion quarter-over-quarter, and I know that can be somewhat episodic and hard to predict, but I took the commentary in the management comments as somewhat of a positive that you don't think it will necessarily be the highest year on record. Can you tell me what you guys are seeing there and what might be driving the reduction in repayments? Is it less opportunity for your customers to refinance out, or what kind of dynamics are going on there?
Brannon, you wanna take that and
Absolutely. Stephen, thanks. Good to talk to you. Certainly, you identified one of the issues. Obviously, the finance markets, whether it be bridge or permanent lending markets, are affected as the interest rates have moved to the degree that they have. I would say that while we have repayments from a number of directions, including, you know, the sale of for-sale product condos and on a lesser level, obviously, lots and single-family homes, the refinance market is a big part of what takes out our loans. That has slowed down. We are still seeing those. Obviously, it was a material payoff quarter, but not perhaps as heavy as we'd expected.
I think as we stated in our comments, we would expect and at least for the foreseeable future that it may not be as heavy. It's hard to say. As you know, these loans are quarter to quarter a little bit lumpy. You know, you never know, Q4, we could still have a heavy one that hits a record. We just can't say for sure at this point in time. In general, I think a little bit slower.
Stephen, your assumption there that we view this generally as a positive was accurate.
Okay, great. The biggest positive I thought in the quarter, to me at least, was the relatively low deposit beta. I think that's a testament to the, you know, changes and, you know, mix changes that you've seen over the years. How are you thinking about deposit betas moving forward, even as you've had to start tapping back a little bit into the brokered deposit realm, and kinda what are you seeing on new CD yields, where we could see those moving? Thanks.
Cindy, you wanna take that?
Sure. Thank you. Yes, we were, you know, relatively pleased also. If you look at first quarter, the low of 23 basis points and, even though we've had 300 basis point increases since then, we're up 36 basis points since then. So we're pleased with that, but we don't think that's sustainable. We think that our cost of interest-bearing deposits will go up, just like we said on page 14. We're gonna continue to be very opportunistic and disciplined in our approach to how we fund the balance sheet.
I'll just reiterate what we've said before, that this is early in the cycle and towards the end of the cycle, this could, you know, this ability to avoid outpacing loan yield increases may start to lessen, but we're just gonna continue and stay the course and be very disciplined and opportunistic.
Yeah, Stephen, I would add to that. You know, I think our view is that deposit cost, as Cindy said, will rise faster in the current quarter and may ultimately rise faster than loan yields toward the end of the Fed tightening cycle. All as we've said for a couple of quarters in the comments. We are cautiously optimistic that we'll see another quarter of positive core spread and NIM expansion this quarter before we see that sort of tighten down and catch up. The real key, and what I thought was the highlight of the quarter was the strong growth in our outstanding balance of loans, almost $800 million, and the record growth in our unfunded loan commitments to $20 billion.
As margins normalize some degree toward the end and following the Fed tightening cycle, the key to us putting up continuously improving net interest income is growth. This quarter was a strong growth quarter on top of three previous strong growth quarters in that unfunded number with a little abatement in pay downs. We're beginning to see that translate into funded balance growth. Prospects for meaningful loan growth in 2023 and 2024 look very good, and I think that was the highlight of the quarter. Now, that caused us to have an EPS miss from the consensus number because we had to build reserve for that growth, but we would take that kind of miss every single quarter.
Absolutely. Yeah, it's a great NI story. Just one last clarifier if I could sneak it in. Do you guys have a number for how, like what percentage of your RESG loans you guys have required to put caps on their side of the structure? I know we've got to move past the floor story for right now, so just kinda thinking about how you guys are protected, you know, from them experiencing too much of an impact from higher rates, if you have those numbers.
Yeah, we have.
George?
We have no loans that have caps on our interest rates, but we do require our customers to purchase caps on their interest rate. Brannon, you might comment on that.
Yeah, Stephen, I don't know the percentage off the top of my head. It's definitely a majority and we have been, you know, very busy making sure those are documented as these rates have risen. Obviously we have those in place. We have an assignment of that as collateral. Important issue that we have been focused on in the past so that we're prepared for the present as it relates to these rate rises. Again, not an exact percentage for you, but it's the majority of our loans.
Great. That's fantastic. Congrats on delivering on the NI front. Great quarter.
Thanks, Stephen.
One moment for our next question. Our next question comes from Timur Braziler with Wells Fargo. Your line is open.
Hi. Good morning.
Good morning.
Starting bigger picture, we heard from some other companies that they're increasing caution on spaces like office, while Bank OZK, you know, clearly seeing record originations and new office projects. Are we in or entering an environment where you're starting to see some competition falling off? And it seems like that's the time when OZK typically does best. Maybe just talk a little bit about the broader CRE markets today.
Brannon, why don't you take that?
be happy to. Thanks for the question. That's an accurate depiction. I think even last quarter, we discussed the same topic and again, I will note, and you guys have noted our loan sizes on average are strong and growing, and our ability to do some of the larger loans as we do gives us a pretty good competitive advantage in any environment, but more specifically in the environment we're in. Now we're capitalizing on that opportunity, but not only to perhaps do some deals that we wouldn't have been able to otherwise, with you know, tremendous sponsorship.
We're still, as I said in the past, doing deals with sponsors we've not previously transacted with. Also, in an environment like this, improving our leverage, improving our pricing, as we operate in what is, to your point, a somewhat less competitive environment.
Okay, that's helpful. Maybe on the expense front, as we look for accelerating pace of RESG balances to kind of fund up over the next two years, is that infrastructure already in place, or does the personnel nature of the lending vertical warrant kind of accelerated hiring through the next couple of years?
Let me take that as well, George. You know, I would say, we've talked about this quarter-over-quarter, obviously, our job in keeping, retaining and attracting new talent has been harder this year than ever. I just wanna give a tip of the cap to my team that has done an absolutely phenomenal job in actually improving the infrastructure at RESG. We've moved some things around, strengthened certain key departments, and I would say that this year we're in better shape than we have ever been. To your, you know, underlying question, our ability to scale that is better than it's ever been.
I mean, we have yet another quarter of record number of loans that we've closed in the quarter. We have been historically and continue to look for ways to adjust and build the team such that it can continue to scale to deploy this good capital build that we've had over the years.
Okay. Maybe just lastly for me, how are valuations holding up for projects that are coming up for renewal? It seems like the pages and the management comments that kind of highlight that information were not included in this iteration.
Yeah, we took that out, Timur, because, you know, we just didn't feel like it was that material, anymore as it was in the pandemic. You know, we had that commentary in the management comments for a period of time. You know, you saw, as we have seen in the past, values going up and down on properties as they're reappraised. Brannon Hamblen, you may wanna provide a little more color on that.
Yeah. Yeah. No, I mean, it as every quarter, we have reappraisals conducted. You have some that are up, some that are down. I think, you know, for the most part, those movements were in the range that we've seen historically. There, you know, our hospitality world is the world that we continue to watch the closest. But across the other categories, really very similar results as you have been seeing in the past, where most were within an absolute loan-to-value change of, call it 5% one way or the other.
We did, Timur. If you look at the bubble chart, we did have one hospitality loan that popped up into the low 80s loan-to-value percentage, which is our highest loan-to-value loan. At the same time, just to give you the flip side of that, we had three hotel loans that were cross-collateralized that were in our chart last time that were among our highest loan-to-values, and they sort of disappeared down into the mass of loans because on reappraisal, based on improving performance in those properties, they just in price appraised significantly better. You know, it's reflecting individual property performance. As Brannon said, most of these results are, you know, kind of plus or minus 5% from where they were originally appraised.
You do have, particularly in the hotel sector, some more extreme results because some hotel properties are recovering really quickly. Business-oriented hotel properties that are dependent upon business travel are recovering more slowly toward what you would think would be a normalized level. Nothing material on that front.
Great. Thank you for the color. Appreciate it.
Thank you.
One moment for our next question. Our next question comes from Catherine Mealor with KBW. Your line is open.
Thanks. Good morning.
Good morning.
Just wanted to follow up on the prepayment conversation you had with Stephen earlier, and just think about big picture, how do you think about the risk around kind of the balance sheet moves where if pay downs really slow from here, and then you've got this big ramp in origination volumes that you could see your balance sheet balloon? I don't really worry about that from a capital perspective because you've got so much capital. Maybe from a funding perspective, you know, that could put more pressure on your need to spin up, deposits, you know, across your franchise. Just kind of thinking about how you manage the funding in that if your balance sheet does end up getting a lot bigger than expected, next year.
Well, Catherine Mealor, first I would comment that I don't think we're gonna see a huge drop-off in prepayments. You know, obviously it was $1 billion something this quarter versus $2 billion something. I think we're gonna see a pretty regular stream of prepayments on loans. Secondly, you know, I think we're very comfortable with our ability to fund our expected loan growth, even variations and cushions on that expected loan growth from deposits. Thirdly, we've got about almost $10 billion in unpledged securities, FHLB borrowing capacity and you know, various other miscellaneous secondary sources of liquidity to tap into. We've got a lot of liquidity sources.
Our deposit guys are doing an excellent job, and repayments will continue to be a source of cash flow. It will vary from quarter to quarter, but I think those are gonna continue to be pretty meaningful.
Great. Just on the cost of deposits, Cindy, can you give us any kind of discussion or color around where maybe new CDs are coming on today and, you know, where you're seeing kind of specials? I know typically you do your spin up strategy where you have different rates in different markets and you kind of do that at different times. Just generally, where new funding was coming on maybe towards the end of the quarter, and how, you know, just kind of give us a sense for the deposit betas in the next, just the next few months. Thanks.
I'm gonna jump in for Cindy on that and just say, you know, it's all over the board, Catherine. We are getting more aggressive on deposits obviously, which, you know, is in line with our comment that we expect deposit costs to rise more in Q3. We're adding some duration and have been adding some duration in there that is helping in the management of those costs. But, you know, we are gonna see higher deposit betas than the whatever it is, 21 beta we've seen over the last 2 quarters. Cindy, is that right? Is that a two-quarter number?
Yeah.
You know, that's coming there. You also might have noted in our noninterest expense an increase in advertising costs. We've got good momentum in adding core accounts, and we're putting some money in the ad budget and expect to continue to hammer that. It's brand awareness advertising. It's deposit-specific product and pricing advertising, as well as we've done a lot of advertising designed to enhance our ability to increase employment. The guys did some great work on that, and that has really helped us reduce our unfilled positions and get our retail branch infrastructure close to fully staffed.
We're never fully staffed, but we're a lot closer than we were, less than half the number of openings that we had a couple of quarters ago. That is really helping us serve customers and open new accounts and bring in deposits.
One more, if you don't mind, just on moving over to loan yields. The loan data was very high, which is expected because of your variable rate portfolio, but is this a good barometer for the pace at which we'll see loan yields perhaps increase with future hikes? Just kind of wanted to confirm that there aren't any outsized prepayment fees or anything, you know, within that number just to be aware of.
Tim, you wanna take that?
Yeah. Catherine, to your point on the minimum interest and other fees that we get from time to time from payoff, that was a fairly average number, within a range for the quarter, so nothing outsized there. To your point, we've got 78% of our loans that are variable, and the vast majority of those are off their floor. It depends on the timing of when we get Fed increases, the timing of when LIBOR moves and SOFR moves, and the timing of when our loans reprice. Most of our RESG loans reprice in the first 10 or 11 days of each month. All those kind of go into the equation of what would result in an increase in the loan yields.
There was nothing outsized from a noninterest or any other type fee that was in this quarter.
Okay, great. Very helpful. Thanks.
One moment before our next question. Our next question comes from Matt Olney with Stephens. Your line is open.
Hey, thanks. Good morning. I guess my question is similar to Catherine's question around loan yields and loan betas. I guess a different perspective. It seems like we're probably now sitting above and beyond all the floors that we had a few months ago. It seems like we could see even stronger loan betas in 4Q and 1Q than we saw in the third quarter. Any thoughts on kind of where we sit today versus perhaps earlier in the third quarter? Thanks.
Matt, I would comment, and Tim can weigh in on this. As Tim mentioned, most of our loans in RESG have monthly repricing, and they reprice on either the first, tenth, or the eleventh of the month, predominantly. Now, there are loans throughout there, but most of them reprice on the first, tenth, or the eleventh. When we disclosed Q2 data as of June 30, we still had a smidgen of loans that were at their floors at June 30, but lifted above those floors with loan repricing on July 1, 10, or 11. Again, there were some miscellaneous exceptions, but the vast majority there.
Really as of about the eleventh of July, I think we could have said the vast majority of our loans were off their floors. By, you know, August, we would have said essentially all of them are off their floors for all practical purposes. I think you had pretty much a full quarter's impact in Q3 of the floors not constraining the adjustability and variability of that portfolio. The Q3 loan betas are probably pretty indicative of Q4 loan betas. Tim, would you agree with that?
Yes, I would. Yeah.
Yeah.
Okay. That's helpful. I guess on the stock buyback plan, it was mentioned in the comment section that expires here in a few weeks, and I'm sure there's gonna be a board discussion around the buyback. Any commentary, George, about what you'll be recommending to the board with respect to the buyback next time?
I'm gonna defer that to Tim. He's as CFO, he's in charge of capital. Tim, that's yours.
Yeah, thanks, Matt. As we said in the management comments, we've been fairly active over this program. We've had over 12 million shares repurchased over the program, which was, you know, really over 9% of the outstanding shares when we began the program. We've been very active. You know, so far this quarter, we've not been very active. Had some share repurchases, but fairly minimal amounts. The program does expire on November fourth. We'll have to have that conversation with our board later in the quarter. We've not had that conversation. We'll have a conversation with them and decide what they would like to do.
As we've said in management comments in many quarters, organic growth is our primary priority for use of capital. You saw this quarter, obviously we had great funded loan balance, we had great unfunded loan balance, and that was a way to use some of the capital during the quarter. We'll continue to evaluate our program and our thoughts around that with our board as we get into later into the quarter.
Yeah. I would just echo Tim's emphasis on organic growth. You know, the good thing about our growth at this point is RESG has obviously been hitting on all cylinders over the last four quarters with, you know, four consecutive record quarters of originations. You know, I don't know if we see more records or not, but the pipeline looks relatively good there. More importantly, as you saw in the management comments, all of our other lending teams are contributing positively to loan growth. We think those guys gain momentum as we go forward. They seem to be gaining momentum now, and we expect that will continue.
We are very pleased with the success and the traction that we're finally getting on our efforts to get more diversified contributions to our loan growth in addition to RESG.
George, just following up on your commentary on loan growth. It seems like in the past, the bank's been hesitant to give specific loan growth guidance, given the variability of the pay downs, the originations, and some of these can be quite large, obviously. As we move into 2023, and you feel better about the loan growth pipelines, do you expect to be able to provide more guidance around loan growth?
Matt, I don't know. You know, we wanna make sure the information we give is good information and accurate information, and we tend to speak more in terms of direction and so forth than to give specific numbers. Certainly, as we go into 2023, you know, this is a I don't know. I've been doing this 43 years. I don't know that in my 43 years as CEO of this company, if I've ever seen an environment that has more variables and uncertainties from a political, geopolitical interest rate, economic situation. I certainly don't think it's time to step out and start giving specific growth guidance in an unprecedented environment of uncertainty.
We do feel really good about what our RESG team has done. You know, in the near-term future, we can usually see about three or four months down the road or six months down the road with their pipeline. We feel very positive about the traction that our other lending teams are getting, and they're beginning to contribute more and more to that growth. You know, it wasn't but a couple of years ago that RESG was 70%+ of our non-purchase loans. It's 60% now, and that's a good credit to the other guys that are beginning to carry more and more of the load.
Thank you.
Thank you.
Again, ladies and gentlemen, if you have a question or a comment at this time, please press star one one on your touchtone telephone. One moment for our next question. Our next question comes from Jennifer Demba with Truist. Your line is open.
Thank you. Good morning, everyone.
Morning, Jennifer.
An interesting comment you just made, George, about you don't believe you've been in an environment where there's more uncertainties. I'm curious, banking industry is expecting more normal charge-offs in the next couple of years. What do you think a normal range of charge-offs is for OZK, with your current business model and business mix?
You know, we've with one year's exception, I think we've sort of been in that high single digit to a very low double digit annualized net charge-off ratio. Gosh, Tim, what? Seven or eight, nine years, something like that. Certainly, if you just look at that chart that we give on, what is that, page 16 of figure, what's the number?
Figure 15.
Figure 15 in the management comments, I think you can sort of do a regression analysis on the last decade and decide where you think our net charge-off ratio normalized is.
Do you think the recession that we face in 2023 is going to be a garden variety of recession? Or do you think it's gonna be worse than many think?
You know, Jennifer, I studied economics, but I don't consider myself a practicing economist. It is hard to see how we get into an extreme hard recession when you have employment levels as high as you have. You know, we've got an indirect marine and RV business that's about 12% of our non-purchase loan book. I keep watching the past due and charge-off numbers from that portfolio. You know, it is barely bumping in any sort of way, up or down. It's just been pretty darn stable within a normal range of variability.
Certainly, other banks who have reported earnings already and have commented on the conditions of their consumer portfolio suggest that the consumer is very strong and holding up very well. We don't see any reason to think that's not the case, from our perspective. Our RESG portfolio, you know, continues to be very well. There was a question earlier about office. You know, I get a lot of information from that portfolio. Yesterday on one of our projects that we financed and closed just a few months ago as a purely spec project, we got notice that they had signed their second large lease for 108,000 sq ft in it. You know, business continues to get done and, people are hiring people.
People are expanding and taking new office space, and probably a lot of that is reflective of the state-of-the-art quality, modern, you know, ground-up construction office space that we're building. The financing that's the best in the markets sort of space. I'm not sure I'd wanna have a bunch of B and C grade office space in this environment. Business is still getting done, so it's hard to see from those sort of perspectives, from consumer and business perspective, you know, how you have a particularly severe downturn. You know, the Fed is raising rates to what in the last few decades are unprecedented levels, and they're doing it at a velocity that is really quick.
Obviously, you've got food and energy supply chain issues, geopolitical issues all around the world, the war in Ukraine. You've got so many things going on. It seems like there's a ton of risk out there. At the same time, the U.S. economy looks like it is humming along pretty well. The Fed seems bound and determined to raise rates till they break something. All of us are curious what that is. I'm hopeful that the Fed will complete a couple more rate increases, get to next year and stop because the lag effect of monetary policy is well documented. I think that they need to pause in early next year and let the impacts of their actions resonate through the economy and be measured and seen.
I'm afraid if they keep going and, you know, we get to 6% and 7% rates because inflation hasn't abated, that they're gonna break stuff unnecessarily. Honestly, I don't know what that is. We'll see how this plays out.
Thanks, George.
One moment before our next question. Our next question comes from Brian Martin with Janney. Your line is open.
Hey, good morning, guys.
Good morning, Brian.
Hey, just wanted to touch maybe for Brannon or I guess you, George, just on the RESG. You talked about, you know, obviously firing on all cylinders through the last four quarters. I mean, I guess with the unfunded growth where it's at, I guess, how are the pipelines there today? It sounds like they're still pretty good, maybe not at record levels like you're saying. Yeah, I guess, are you still optimistic on that ability to continue to grow today, given kind of the conditions we're seeing or what you're looking forward at here? Just some perspective there, given, you know, how strong it's been the last couple quarters.
Yeah. Brian, I'll give you my comment, and then Brannon can give you the details. The pipelines are off their peaks, and clearly, inflation is driving up the cost of construction and materials cost. We have seen some sponsors putting projects on hold because they believe that materials costs will come back down next year. Obviously, interest rates are adding to project cost and eating into cap rates and valuations. I think there are projects that are getting put on hold just because of that. Notwithstanding that, the pipelines, I wouldn't say are as robust as they were, but I would say they're still good by historical standards. Now, Brannon is on pipeline calls every week, and I'm on them occasionally.
Brannon, give some additional color to Brian on that.
Sure. Sure, Brian, you know, George has broadly hit the nail on the head. I think, you know, it depends on market. I keep bringing up our ability to do, I think, somewhat larger loans than a lot of our competitors want to do. That is often, you know, paired with a more substantial and desirable sponsorship to do a deal with. They've kind of got the staying power and the long-term approach, and the capital that allows us to do, you know, very attractive leverage loans. Not a leverage loan, don't want me to speak there, but attractive leverage on our loans.
While you know and honestly, week to week in these pipeline calls, you know, one week I'll be like: "Wow, it's just gonna keep dropping off." Then the next pipeline call we have, we've you know, the guys have pulled in, you know, more attractive opportunities that have just you know, sort of reached that stage where they're ready to move forward. It does take longer for deals to move forward these days. There are you know, sponsors are measuring 2x and 3x and 4x and 5x with respect to cost and you know, value engineering and all that sort of thing. As George said, during that whole process, interest rates have been moving up.
Again, we're off our peaks, but there are still a lot of, I think, really good opportunities to do some really nice loans, you know, across the country. Again, it's a good pipeline. It's not as strong as it was in the past, but, you know, we're taking it a quarter at a time, a deal at a time. I think we will see some nice origination opportunities out there.
Okay. Perfect. That's helpful. Maybe just one on not on RESG, but just the other diversification benefits you've gotten from these other segments. Can you talk about maybe just where you're most bullish as you look over the next maybe 12 months on, you know, all of the other businesses, if they continue to have momentum? Are there certain, you know, segments where you see more upside, depending on how things play out here, you know, going forward?
You know, our corporate and business specialties group and asset-based lending groups are areas where we've got some good traction. We've made some good progress this year. We expect that to continue. Our indirect and marine business, I think, probably grows, but at a fairly slow rate. I would guess that it kind of stays in that 10%-15% target range of our total loans and probably stays in that kind of 11%-13% range. I could be wrong giving such tight guidance on that, but you know, I think they replace what rolls off and add some and more or less grow in tandem with our balance sheet. The community banking business, you know, we've got a lot of different teams there.
Obviously, our home builder finance team is probably gonna see less volume. Some of our other lending teams there seem to be seeing more activity and some growth. I think all of these units contribute to our growth and contribute at a greater percentage to our growth starting in about 2025, 2026 and 2027. You know, Catherine Mealor, in her comments, asked about the future repayments from the wave of RESG originations we've had. You know, I think we will have and from this year's originations in late 2024, 2025 and 2026, a lot of RESG repayments.
We believe and are executing our strategy with the belief that over the next two years these non-RESG units are gonna contribute more and more originations, and that there'll be a bit of a handoff on momentum, not that RESG will not ever be our largest piece of business probably, and largest team and most effective team. I would think as we catch that next wave of RESG repayments that mute its growth for a year or two, that these other business units will really shine as our engines for growth in that period of time. Now, I'm talking three and four years out, and Tim, you know, gets nervous when I talk three and four years out because lots of things can change.
That is our strategic plan, on how we're gonna handle that next wave of RESG repayments, is have these other diversified business units continue to grow as they have done this year and contribute more and more to growth going forward. I think that balances out the growth trends of our portfolio, and I think all of our investors would like to see a more diversified, steady sort of growth rate to the portfolio.
Yep, that's helpful. Maybe just one last one for me and maybe for Tim. Just on the expenses, I know you kind of gave a little bit of color on just kind of, you know, how that trend look over, you know, the near term. Just, you know, broadly, as you look to next year on the expenses, Tim, just how should we be thinking about the growth and the inflation impact and, you know, additional hires, just kind of high level, just kind of the outlook there.
Yeah. Brian, thanks. Thanks for the question. Yeah, we were pleased with being able to increase our non-interest expense during the quarter, but also show a decreasing or improving efficiency ratio. That was a highlight. As George mentioned, we did have good momentum in hiring people during the quarter. We hired just over 120 people throughout the quarter. That was good momentum. We still have some good momentum into this fourth quarter as well, and some more open positions that we need to fill and are hopeful we'll fill this quarter. I do think our non-interest expense in total will continue to increase several million dollars a quarter.
If you really went back to our comments back in our January call, we've been saying that all year that we thought, depending on the pace of hiring, that we would continue to increase our non-interest expense several million dollars a quarter for the near term. That obviously didn't come in the first half of the year where we were not able to be successful in increasing our head count. We've got that momentum in the third quarter and continues in the fourth quarter. I believe that that will continue to increase non-interest expense in total several million dollars a quarter. Again, we're investing in our business. We're a growing bank, investing in our people.
We mentioned we would expect advertising and marketing to continue to stay at the elevated level that we saw in the third quarter to support our growth and our brand recognition. Our expense growth is to support the growth of the business as a whole, which we view as very, very positive.
Yep. Okay. That's helpful. I guess it's just the key point is it's. I guess you're not expecting outsized growth per se in 2023, just you know kind of normal growth to support the business. Nothing out of the ordinary on that front is kind of what I was getting at. Thanks for the commentary and great quarters, guys.
Thank you, Brian.
Thank you.
One moment for our next question. Our next question comes from Timur Braziler of Wells Fargo. Your line is open.
Hi. Thank you for the follow-up. Just maybe a couple of modeling questions. I was wondering if you have the spot rate on deposits exiting the quarter.
I'm not sure I understand your question, Timur.
The cost of deposits at quarter end versus the average that was provided.
You're talking about for the month of September?
Yeah, just, yeah, for the month of September, end of September.
Yeah. I think we were 20-something basis points higher in the month of September than we were for the quarter as a whole. I can't remember if it was 20 or 22 somewhere in that range.
Okay, got it. Just lastly, as we think about the allowance level for the funded RESG balances to start kind of growing in the next couple of years, it looks like the reserve on the unfunded loans is a little bit lower than what the total reserve is on, kind of a reported basis. As those loans fund up, is the expectation that additional reserves are added, or are they kind of evaluated at that time of funding?
You're right that our RESG funded allowance percentage is lower than the overall allowance percentage on funded balances. It depends on the mix of growth of whether that comes down or not, and also depends on the economic environment we're in as well. As we said in our comments, the provision expense that we had during the quarter was primarily due to growth in the funded balance and unfunded balance, and the view that you know the environment, macroeconomic environment has a lot of risks and uncertainties in it right now. As the environment improves, you know that will be helpful to our reserve levels as well.
I would comment that RESG is the vast majority of the unfunded. What's the percentage we disclose it of the unfunded loans? It's 60% of the funded loans. Part of
87% of the unfunded.
Yeah. RESG is 87% of the unfunded loan balances and 60% of the funded loan balances. Our allowance allocations on RESG loans, because they are so much lower on average loan-to-value than other loans from other lending teams in our portfolio, tends to be quite a bit lower. That, that's part of that differential in the, in the ratios there, Timur.
Got it. Thank you. Appreciate it.
Okay.
I'm not showing any further questions at this time. I'd like to turn the call back over to management for any closing remarks.
All right. Thank you, guys. We're glad you were with us today. We enjoyed getting to report on what we thought was an excellent quarter. We look forward to talking with you in about 90 days. Thank you. That concludes our call.
Ladies and gentlemen, this concludes today's discussion. You may now disconnect and have a wonderful day.