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spk06: Good day and welcome to the Cadence Bank third quarter 2023 webcast and conference call. All participants will be in a listen only mode. If you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Will FitzAckerley, Director of Finance. Please go ahead.
spk01: Good morning, and thank you for joining the Cadence Bank third quarter 2023 earnings conference call. We have members from our executive management team here with us this morning, Dan Rollins, Chris Bagley, Valerie Tolson, Hank Holmes, and Billy Braddock. Our speakers will be referring to prepared slides during the discussion. You can find the slides by going to our investor relations page at ir.cadencebank.com where you'll find them on the link to our webcast, or you can view them at the exhibit to the 8K that we filed yesterday afternoon. These slides are also in the presentation section of our investor relations website. I would remind you that the presentation, along with our earnings release, contain our customary disclosures around forward-looking statements and any non-GAAP metrics that may be discussed. The disclosures regarding these forward-looking statements contained in those documents apply to our presentation today. And now I'll turn to Dan for his opening comments.
spk05: Good morning, everyone. Thank you for joining us. We would like to take some time this morning during our third quarter 2023 earnings conference call to also discuss the announcement of our agreement to sell Cadence Insurance to Arthur J. Gallagher and Company. Following our prepared remarks, our executive management team will be available for questions. The first several slides in our deck today provide some detail regarding the sale of our insurance agency. The total deal value of nearly $1 billion represents a multiple of 5.4 times the last 12 months revenue. The achievement of this multiple is a tremendous testament to the growth and accomplishments of Cadence Insurance under the leadership of Marco McKnight, Chris Boone, Amy Kilpatrick, and their entire executive team. While we've repeatedly said We like the insurance business. The opportunity to monetize this business at historically high valuation levels is a huge win for our shareholders. It's also a tremendous win for our insurance teammates and clients, with access to additional resources and product offerings of an agency with the size and scale of Gallagher. We value the relationships we've built with these teammates, and we look forward to continuing to work with them in their new roles as Gallagher will be the preferred insurance partner of Cadence Bank. From a shareholder perspective, we are able to significantly enhance our capital metrics and tangible book value per share while focusing our efforts on supporting and growing our core banking business. Valerie will provide some more color on the pro forma impact of the transaction as well as plan uses of the proceeds in just a moment. As we move to financial results for the quarter, we reported quarterly net income available to common shareholders of 90.2 million or 49 cents per diluted share. and adjusted net income available to common shareholders of $103.9 million, or $0.56 per diluted common share, with the primary difference being non-routine expenses largely associated with our efficiency initiatives that we've discussed on our second quarter call. Our balance sheet was relatively stable for the quarter. Loans were essentially flat for the quarter at $32.5 billion, while reported deposits declined $357 million. The deposit decline included our intentional reduction in brokered CD balances, as well as a seasonal decline in public funds. Before the impact of those, total core customer deposits actually increased just over 500 million, or 5% annualized. This growth reflected success in both our corporate and community banking segments, particularly given the ongoing competitive environment for deposits. Deposit trends also reflected a slower pace of deposit mix shift compared to the most recent quarters as non-interest bearing deposits represented 25.2% of total deposits at the end of the third quarter compared to 26.4% three months ago. These balance sheet trends contributed to stability in our net interest margin, which was 2.98% for the third quarter. The third quarter increase in deposit costs slowed considerably, representing roughly half of the increase we experienced during each of the first two quarters this year. We anticipate this margin stability to continue in the fourth quarter as well. From a credit quality standpoint, net charge-offs were elevated as a result of the charge-off of two CNI credits that were previously identified as impaired. These two credits have been on our radar and reflected in our credit metrics for several quarters now. Otherwise, both of our non-performing as well as our criticized and classified asset totals were stable compared to the second quarter of 2023. We reported a provision for credit losses of $17 million for the quarter, driven by slower loan repayment expectations and credit outlook. Overall, despite the volatility in the macro environment, our risk identification process is working well and credit quality expectations remain stable. Finally, we continue to make progress in our efficiency initiatives. This progress is evidenced in our headcount declines. Total FTEs have declined over 300 during the third quarter and over 400 since the end of last year. We expect a decline of additional 80 headcount prior to the end of this year. We expect the fruits of these efforts to be more visible in our numbers during the fourth quarter and the first part of 2024. Before factoring in the insurance sale impact, we are working hard toward holding our 2024 expenses flat through these and other efforts.
spk04: I'll now turn the call over to Valerie for her comments. Valerie?
spk06: Thank you, Dan.
spk07: I would like to start by making a few brief comments on the pro forma financial impact and expected uses of proceeds on the cadence insurance transaction, which is highlighted on slides five through seven. The financial metrics of this transaction are extremely attractive. We estimate that the transaction will result in additional capital of approximately $620 million including a net book gain of approximately $520 million, which represents approximately 160 basis points of additional CET1 and 24% tangible book value accretion. Further, we estimate the transaction to be net neutral to earnings by simply applying the cash proceeds toward the pay down of wholesale funds before any use of the generated capital. Referencing slide seven, upon completion of the sale, In addition to the pay down of borrowings, we anticipate executing on a securities repositioning of at least $1.5 billion of the securities portfolio, whereby we would use a portion of the generated capital to sell securities yielding under 1.2% and use the proceeds to reinvest in earning assets at market value rates, likely with higher yielding securities. The pro forma earnings and margin impacts of these actions are impressive. Using consensus estimates for 2024, we estimate EPS accretion of 11%, an incremental net interest margin pickup of over 20 basis points, and an improvement in the efficiency ratio of 530 basis points. After factoring in an estimate of the related loss associated with the sold securities, The pro forma net impact to our CET1 is still nearly 120 basis points. We also anticipate both the gain from the insurance transaction and the subsequent loss from the securities sales to occur in the same reporting period in support of efficient tax management. On the remaining generated capital, we ultimately aim to maintain capital strength and flexibility. whether it be in additional securities, portfolio restructuring, share buyback, or various other forms of future growth. If I sound excited, I am. This is a unique opportunity that we believe has meaningful shareholder value. Moving on to our financial results for the quarter, looking at our balance sheet and margin highlights beginning on slide 18. We reported net interest income of $329 million for the third quarter, a decline of $4.5 million compared to the second quarter of 2023. Our net interest margin was 2.98% for the third quarter, down five basis points from our second quarter margin of 3.03%. Our total cost of deposits increased to 2.14% at 27 basis points from the second quarter, which is roughly half of the increase we experienced in each of the first two quarters of the year. While it's clearly still very competitive, pressure on deposit balances and pricing seems to have moderated over the last several months. We also saw a reduction in the pace of migration from non-interest bearing products to interest bearing products. Non-interest bearing balances represented 25.2% of total deposits at the end of the third quarter compared to 26.4% at the end of the second quarter. Our yield on net loans, excluding accretion, was 6.31% for the third quarter, up 13 basis points from the prior quarter. A slowing in new originations contributed to a reduction in the pace of loan yield increases compared to prior quarters. Non-interest revenue, highlighted on slide 21, was $119 million on a reported basis, excluding $6.7 million in facility and signage write-downs associated with the branch closures during the third quarter, which is reflected in the other income line item. Total adjusted non-interest revenue was $125.6 million, a $6.6 million decline from the prior quarter. About half of this decline was driven by mortgage banking income, with the remainder being driven by a combination of other revenue sources, including credit-related fees and brokerage income. Mortgage banking production and servicing declined by a million, primarily as a result of slowed purchase activity. Additionally, the MSR asset adjustment was a negative $0.2 million for the third quarter, compared with a positive $1.6 million for the second quarter. Moving on to expenses, which are highlighted on slides 22 and 23, total adjusted non-interest expense was $301 million for the quarter, reflecting stability across most of the major expense categories. Salaries and employee benefits increased $1.3 million compared to the second quarter, as the headcount declines that Dan mentioned earlier allowed us to stay relatively flat on compensation expense, despite the July 1 effective date for annual merit increases. We reported a $2.7 million increase in deposit insurance assessment expense, which was driven by an increase in uninsured deposits, higher second quarter loan balances, and changes in certain of the credit quality metrics that impact the assessment. Dan spoke to the progress on our efficiency initiatives, but to briefly recap, we expect our total FTE to be down by over 480 since the end of last year, or an 8% reduction excluding insurance. We also closed 35 branches in the third quarter, reducing our total branch count by 12% since merger. And of course, all of this is before factoring in the impact of the pending sale of the insurance company. We believe the combination of these and other efforts will provide a meaningful, positive impact on our performance and efficiency. Finally, speaking to credit quality on slide 16, Dan addressed most of this. Provision for the quarter was $17 million, up slightly from the $15 million provision in the second quarter of this year. Net charged off increased to $34.2 million this third quarter, or 0.42% of average loans on an annualized basis, primarily due to two credits that were identified as impaired and reserved for in prior quarters, as Dan mentioned. Are non-performing loans and non-performing asset totals were stable linked quarter at 0.49% of loans and 0.33% of assets, respectively. Our criticized loan totals were also stable compared to the second quarter, while our classified loans increased slightly to 2.10% of total loans. We saw some migration from special mention to substandard, primarily the result of higher interest rates and inflationary pressures on loan grades. We continue to monitor credit quality very closely. While higher rates and other macro factors have clearly impacted certain borrowers, our near-term outlook on credit remains stable. Our allowance coverage is solid at 1.37%, and we continue to appreciate the diversification of our loan book, both in type and geography. In closing, I can't help but use the word excited again because we simply are. It has been nice to see the stabilization in our balance sheet and margin this quarter, highlighting the value of our core deposit franchise and our efficiency initiatives are progressing as planned. Finally, and importantly, the pending insurance sale transaction is a transformative step in our efforts to improve our performance and enhance shareholder value. Operator, we would now like to open the call to questions.
spk06: We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. In the interest of time, please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. The first question today comes from Manan Ghazalia with Morgan Stanley. Please go ahead.
spk05: Hey, good morning.
spk08: Hey, good morning. I was wondering, can you talk through the rationale for the insurance sale? You know, why now? You know, was it a function of rates rising further and reaching a break-even point for you? Or, you know, were the the economics of the deal much better than you would have originally got, say, at the start of the year? Maybe help us think through that?
spk05: Sure. I think we've talked about it on this call for the last couple of quarters, that we like the insurance business. We've always liked the insurance business. We knew we had what we thought was the premier bank-owned agency as we continued to talk to potential partners that were out there. The valuation just continued to be a big number, and when we look at the multiples that we received, I think it proves the process out that we did have the premier bank-owned insurance agency out there, and the numbers that we're publishing out here can show that. The value of the agency represents about 25% of our total market cap, and the agency produced 5%, give or take, of our net incomes. So the disconnect there was just too big, and the benefit that it brings to our shareholders, we work for our shareholders. We've got to be shareholder-focused. As we look at our performance, we know we've got to continue to improve our performance. We're not pleased with where we are, and this is an opportunity for us to benefit our shareholders.
spk08: Got it. And in terms of the capital benefits, you're generating a pretty meaningful 160 basis points of capital through the deal. You're using about a quarter of that, and I think you're suggesting that there's some upside to that as you use more of that capital freed up over time. But can you help us think through any constraints that you might have there? So, for instance, if there's a higher level of CET1 that you want to hold over time, or if there's a certain level of liquidity you want to hold, how are you thinking about the asset sensitivity and doing more of the... securities, yield resets, et cetera. So maybe help us think through that as well.
spk05: Yeah, we've got some examples in the deck that we've published this morning, and I think that the securities repositioning is something that we're going to do that gives us lots of options. I think today we don't have a number that we need to hit. We don't have a capital number that we're worried about. This is a tremendous benefit to us, and it puts all the options in front of us.
spk08: But are there any constraints? Like, why not do even more?
spk05: We certainly can. As far as I know, there are no constraints. We want to make sure that we take all the information that we have before us and make good decisions.
spk04: Got it. Thank you.
spk06: The next question comes from Michael Rose with Raymond James. Please go ahead.
spk03: Good morning, Michael. Hey, good morning, everyone. Hey, good morning. Thanks for taking my questions. Maybe, Valerie, I just haven't had a chance to run through all the numbers yet, but what were the expenses, the annual expenses associated or expected for the insurance business next year? Obviously, we forecast the revenues, but maybe not explicitly break out the expense. Just wanted to get a sense for what that is, and then just separately, if you could discuss kind of the appetite for potentially using some of the proceeds for a buyback, or is it just a better use to maybe look at... you know, investing in lenders or the franchise and in other ways. Thanks.
spk05: I'll take the second half of that one, and then Valerie can give you some numbers on the expenses side. I think we want to have all the tools in our toolkit, and so we would not want to say that we're not interested in doing buybacks. I think we want to make sure that we've got that option in front of us, but we want to make smart decisions. So I think this, where we have not been in the buyback game, I think this gives us the opportunity, should the market move against us, to be able to execute on a buyback. if we wanted to. Valerie, you want to talk about expenses?
spk07: Yeah, sure. So, Mike, I want to make sure, too, that you saw the updated deck that we sent out that has the updated slides that include not only our earnings release slides, but also the three different interest slides at the beginning of that. And on page six of that deck, up in the top right corner, there's some discussion there of the adjusted revenue and adjusted income for the last 12 months. So if you look back at the last 12 months, their total expenses were about $140 million.
spk03: Okay. Sorry, I missed that. Thanks for pointing that out. Maybe just separately, if you could just give a little more detail on the securities restructuring, maybe how you came up with that amount, just the process there. I certainly appreciate the benefit that the transaction provides you. Thanks.
spk05: Well, I think this is all estimates today. We haven't closed the transaction. It's going to take some time to get the transaction closed. We certainly want to make sure that we make that we take advantage of the opportunity in front of us to offset this tax loss in the same quarter. And so depending upon when we close, which we currently expect that we can do this quarter, then we would want to make sure that we can execute in this quarter and the market can move between now and then. So you've got a whole bunch of what-ifs built into this. And as the last question for Monin was, there's no right size here. This is just an example. We're committed to doing securities repositioning. What we've shown in here was the lowest yielding, quickest payback that we could do, and then we can look and see what else we could do.
spk03: Okay, helpful. I'll step back. Thanks for taking my question.
spk05: Thanks, Michael.
spk04: The new deck was posted out this morning if you didn't pick it up.
spk06: The next question comes from Kevin Fitzsimmons with DA Davidson. Please go ahead.
spk13: Hey, Kevin. Hey, good morning, Dan. Hope you're all doing well. Maybe just shifting gears, looking at the funding side. So you guys highlighted that proactive reduction in brokered deposits. I'm just curious if that is more, you got it down to a level you'll probably keep, or could you see further, could there be further proactive reductions there? Thanks.
spk05: I'm not a fan of brokered CDs in any form or fashion. I think the team here knows that well. I'm really proud of what we did in the last quarter in growing deposits. The corporate bank, the community bank, the whole team is focused on deposits. You heard in my comments, if you pull back the loss of brokered CDs and the seasonal decline in public funds, core customer deposits was up $500 million in the quarter. We're really proud of that. I think we've got the ability to continue to play in a highly competitive deposit game. And I would like to see our team continue to win those customer deposits in. And I'd like to see us move those broker deposits further down. That clearly is dependent upon what we can do on the loan desk. And you saw loans were flat this quarter. We clearly intend to continue to grow loans. We're seeing opportunities out there, but it's much slower than it was before. But on the funding side, I'm really proud of what the team's doing.
spk11: Chris or Hank, you want to jump in on deposits? Nothing to add on the deposit side, Dan. I think you explained it well. I think on the loan side, you know, I think rates have definitely clearly moderated some of the opportunities, but we're still seeing opportunities. But we're also focused on deposits as part of those opportunities, and we're assessing the economic impacts that are out there right now. And we still have good year-to-date loan growth, so I think we've got the engine. I think it's just been a bit of a picking and choosing right now. Thank you.
spk14: Let me just build on that a little bit. I would say certainly loan activity is down. I would call it moderate activity. Really the focus and the drive on the deposit side, and when you look at the pipelines, especially on both corporate and community bank, they're very active in gathering the deposits. So I'm optimistic, and obviously we had a good quarter in deposit growth as well.
spk07: I would just add that of the cash proceeds from the insurance sale, we do intend on bringing down our borrowings, and that would include brokered CDs.
spk13: Right. Right. That's in that base case, right, Valerie?
spk07: Yep, exactly. We've got about 830 million of brokered CDs that mature between in the fourth quarter and January.
spk13: Got it. Okay. One quick follow-up just with the, you know, that credit, that one lumpy credit issue with you. of the number of banks. I'm just curious what your shared national credit exposure is now, if you can have it handy in dollars or percentage of loans or both, hopefully. Thanks.
spk05: Billy, you want to jump in on that? Valerie?
spk07: Well, I'll give you the numbers, and then Billy can jump in with a little more color. We've got $4.3 billion in our shared national credit portfolio at 13%. That's pretty consistent with where we've been running. Do you have any color to that?
spk12: Yeah, and I mean... The one color I would add is usually the follow-on is how active are we? And shared national credit is just one piece of our multi-bank exposure. The bulk of our multi-bank exposure is actually smaller clubby deals that aren't shared national credit. And within those, we're almost 30% of those we lead. So we have a controlling basis in a lot of our multi-bank deals that fall outside of that shared national credit exposure.
spk04: Thanks, Billy. Thank you. Appreciate it, Kevin.
spk06: The next question comes from Catherine Miller with KBW. Please go ahead.
spk04: Morning, Catherine.
spk09: Hey, good morning. One question on expenses. Appreciate the commentary to keep flat expenses year over year. Just as we think about the fourth quarter, I think we're going to see more, I assume, of kind of the branch closures and the cost of the initiatives that you've put through. So any kind of near-term guide on where you think the fourth quarter expenses should land within a range?
spk05: With the noise that we're going to create in the insurance world, it's going to be a noisy quarter, I can assure you. So let's just talk through the things that you've already seen. So the headcount reduction that you saw with the lower headcount at the end of the third quarter, We're seeing benefit of that this quarter. So salaries and benefits should be off. We've still got more headcount reduction that will take place in this quarter outside of the insurance change. So as we get to one Q, we'll see the full benefit of the people piece of that puzzle. On the branch side, those branches all closed on July 31st, I think. And so that's fully baked into the fourth quarter run rate altogether. So there's no more to do there. So you've got some down pressure there. Valerie, do you want to talk numbers?
spk07: Well, I think you're exactly right, and those will drive the core expenses down in the fourth quarter. To Dan's point, it is going to be a noisy quarter, so just bear with us, and we expect that first quarter of 24, assuming that the insurance transaction does close in the fourth quarter as we anticipate, that first quarter should really be much, much cleaner. Okay.
spk09: And then one clarification on the capital gain from the insurance sale, does that 620 million capital impact, does that include taking out the 90, I think it's like 91 million of goodwill associated with the insurance? Yeah, it does. Okay, so that includes that number.
spk07: Yes. Great. That's right. Okay.
spk09: Okay, great. And then just to circle back on the capital, is there a capital ratio that you target, be it be it CET1 or TCE that you just, I mean, this is a great capital accretive event. And so now that we've got our capital ratios back up to levels that I think we all feel better about, is there just a bottom in either of those ratios that you really don't want to get below as you think about bond restructuring and buybacks into next year?
spk05: No, I think we want to make good decisions. And I don't think we want to be trapped by one basis point or two basis points on some We want to make good, intelligent, smart decisions at the time.
spk09: Great. Okay. Cool.
spk06: Thank you so much.
spk04: Thanks, Catherine.
spk06: The next question comes from Brody Preston with UBS. Please go ahead.
spk15: Hey, Brody. Hey, good morning, everyone. Congrats on the deal. I wanted to ask Valerie just maybe if you could – Phil Kleisler, Talk a little bit about the moving parts on on n I was wondering where the the spot rate on interest bearing deposits were. Phil Kleisler, At quarter end and also could you talk about the loan repricing expect going forward, we had previously spoken about a 50% loan beta cycle, the date, but I think you're running closer to 44% now. Phil Kleisler, So any kind of commentary, you can give around those two items i'd appreciate.
spk07: Yeah, sure. So, you know, we did see our non-interest bearing mix moderate pretty meaningfully during the quarter, where non-interest bearing really only came down, well, it was 26, a little over 26% in the second quarter, a little over 25% in the third quarter. And so that obviously is a positive impact. And, you know, as we also mentioned, the cost of deposits, you know, while it went up 27 basis points, it was half of what it had done in the prior quarters, prior couple of quarters. So all of that is meaningful. If you take a look at slide 20, you know, that shows, you know, the standard repricing that we've talked about and kind of where things are in the floating category and then where things are in the next 12, three to 12 months. And that obviously flows into our margin and helps improve that loan yield. One of the things that we saw this quarter was because we didn't have net loan growth, the pace of that loan yield increase was down from or with moderated impact. Anyway, that impact was moderated because of the lack of the new loans. And so that is bringing down our beta assumptions as we go forward. The loans excluding accretion direct for the third quarter was flat. The beta was flat at 44% compared to the second quarter. As we look towards year end, you know, it's probably going to inch up a little bit. And again, some of that depends on the volume of loan growth. But probably, you know, it'll be sub-50, I think, at this point from what we saw this quarter. But, you know, it'll be up a couple of percents probably, two, three, along that line. On the deposit beta side, you know, again, that slowed. It was 35% on the cumulative basis in the second quarter, 38% now. Similarly, I think it, you know, will probably move a little bit between now and year end. But, you know, two, three basis points kind of thing. or percentage points.
spk04: Does that help you, Brody?
spk15: Yeah, that's helpful. And then, Dan, I wanted to ask just, you know, how do you think about, you know, we talked about buybacks, we talked about securities restructure, we haven't talked about whole bank M&A at all. I think that we've seen, we saw at least one other bank kind of, you know, use proceeds of an insurance sale to buy another bank up in the Northeast. At BXS, you'd been a kind of prolific buyer of smaller banks, and then you did the MOE. So any thoughts around using some of the proceeds for a bigger kind of inorganic transaction? And then secondly, I did want to get your thoughts about how you think about overall levels of profitability and where you'd like to drive those to at some point over the medium term. I think the ROA target, when you did the deal, The MOE was like a 1.3 ROA. I think with this transaction, it gets you back to one. So just trying to think about longer term, how do you get back to that kind of trajectory that you had laid out before?
spk05: Yeah, I think we'll take that one first. We clearly have room to improve, and we need to continue to focus on that. That's why we're working through the initiatives that we've been working through to eliminate expenses, to consolidate branches, to take advantage of opportunities there in front of us, and we still need to continue to improve. There's no question about that. I think when we look at where we want to be, again, you used the word target. We've never had any targets. We had some pro forma numbers that we put out at the time of the merger. Those were not targets. Those were based upon what we saw at the time and based upon the economic environment at the time. Obviously, things have changed a little since then. But when you look at us and you compare us to what's going on in the market, we're not where we want to be. Nobody's willing to hide from that. We've got to improve, and I think this transaction gives us some tools in our toolkit to allow us to improve, and I think when we look at what we've got going in the future, I think we can continue to make headway on that. When you talk about M&A activity that's out there, there's not a lot of activity out there. There's nobody knocking our door down, and we're certainly not out chasing anything at this point. I think we think we need to take care of our business right here at home And we think that's probably the best use of what we've got in front of us today.
spk15: Got it. That's very helpful. I appreciate that. And if I could squeak just one more in, I did want to just ask around the SNCC portfolio, what percent of that are you guys kind of the lead agent on? And then has any of that been reviewed by regulators lately? There's been some discussion around the industry this morning about SNCC reviews taking place.
spk05: We're like every other bank that has those. Absolutely. The regulators are in and looking at them all the time. I don't know that we have a number on what we're leading. Billy was given some of that information a few minutes ago. I think when you look at our overall loan portfolio, we're no different than anybody else that's out there. It's getting looked at every day.
spk12: Thank you, guys. I appreciate it.
spk04: Thanks much.
spk06: The next question comes from Brandon King with Truer Securities. Please go ahead.
spk00: Hey, Brandon. Hey, good morning. So I wanted to get some commentary on what you're saying as far as deposit trends within the corporate versus community bank, just to get a sense of how those flows have behaved recently. I know last call you mentioned how you wish things were more rational. So I just wanted to get a sense of how things are shaping up between the two sides.
spk05: Well, I think, as I said a minute ago, the fact that we grew core customer deposits, you know, half a billion dollars in the quarter, and that came both in the community bank and in the corporate bank, I think the depositors are calming down. Chris, Hank, I'm happy for you guys to jump in here on this.
spk14: Yeah, on the corporate side, we've definitely seen a reversal. We're able to get many of those deposits back that left earlier in the year. We're continuing to really focus on the deposit growth and certainly, you know, rates. We have attractive rates for our borrowers. But there's a stabilized and improving is the way I would categorize it in the corporate sector. Stabilized and improving. That's good.
spk11: I think I would agree with that across the whole bank. I mean, the difference when we consider our secret sauce is the relationship bankers in the field. So we've got great bankers across our complete footprint, and they're in those communities. They know everything. the clients that have opportunities to grow deposits, and they're out there calling on them, and everybody's focused on deposits 100%.
spk05: Yeah, that's executive management all the way down. Some of our executive management team is out asking for deposits from customers all the time. So it works all the way up and down the line.
spk00: Got it. And just given the success you've seen this quarter, how does that inform kind of your expectations for the deposit mix next year, particularly when we talk about non-interest-bearing deposits?
spk05: Well, I think we've been pretty open on our forward look on non-interest-bearing deposits, Valerie. You've got numbers we've been talking about for some time as we model out where we're going.
spk07: Yeah, so given the slowed pace that we saw this quarter, we are projecting that to probably be just a little south of 20% by the end of next year. That's just what's in our modeling. That's based on an assumption that there continues to be significant deposit pressure in the industry. based on some of the macro environmental factors. But that's really kind of what we're modeling out today, kind of on a gradual pace. Okay.
spk00: And is that assuming rates stay stable next year, Fed funds?
spk07: We are projecting some declines in the latter half of next year based on the forward curves. That's really, you know, we primarily rely on the forward curves for use in our modeling.
spk00: Okay. Thanks for taking my questions. You bet. Brandon, appreciate it.
spk06: The next question comes from Steven Scouten with Piper Sandler. Please go ahead.
spk02: Hi, Steven. Morning. So I just wanted to get some clarity on the expenses. Flat expenses sounded like a goal or a target, but I don't want to misconstrue that. And then Is the best way to think about that just stripping the $140 million out from the insurance business and thinking about that basis flat year over year?
spk05: I think that's a good way to do that. Yes, the expense drive to hold expenses flat is excluding insurance. So, yes, I think that's a good way to look at that. Valerie, you want to tag in?
spk07: I think you said it well. Looking at our adjusted expenses for 2023, we'll be working hard to keep those flat 2024. And again... excluding insurance and all that.
spk02: Great. Perfect. And then my only other question is around franchise finance lending. You know, another bank that I consider somewhat of a peer had maybe a little bit of a weakness or took up reserves around that business. I'm just curious if you're seeing any degradation in your book or anything that gives you a pause around that segment of the business.
spk14: It does. Good. Well, typically when you have that industry, it's a little higher leverage, and certainly with interest rates moving where they were, we have seen some pressure. I think they've worked through most of their kind of issues as far as expense and are able to also increase some pricing. But, yes, we have seen some pressure in that area of the bank. Okay.
spk02: Any major change in the reserves related to those loans, I guess, accordingly?
spk14: No material change in those reserves. Just going through our process that we indicated earlier, we're active in looking at them and where we need to increase reserves, we're doing that throughout the bank.
spk02: Okay, great. Thanks for the color and congrats on the insurance. You bet. Thanks, Stephen.
spk06: As a reminder, if you wish to ask a question, please press star then one to enter the question queue. The next question comes from John Armstrong with RBC Capital Markets. Please go ahead.
spk10: Thanks. Good morning. Good morning, John. Dan, you don't have to talk about how the insurance business impacts your efficiency ratio going forward. I think I've heard that about 20 times. The numbers are in the deck for you this morning, John. Yeah, I appreciate that. Just had a couple of follow-up questions. One on CNI. I understand the big loan that you identified last quarter that moved out, but balances were still down a little bit What's going on in CNI? Is it the market? Is it you?
spk05: There were two credits that we've talked about for the last couple of years that both got charged off and moved out. And then thank you for using me to talk about where we are production-wise.
spk14: Yeah, John, I appreciate the question. And I would say, as I mentioned earlier, we have an active portfolio, but it's moderately active. We're managing the growth there, obviously, based on the funding. kind of funding kind of outlook that we have. And so there are deals out there. It's very competitive. We're obviously working through the deposit side as well. So any new credit or any credit we're looking at is going to have a liability associated with it as well. And we're managing our growth. But, I mean, the activity is there, but I would say it's down from the peak clearly. Let me just add to that a little bit. We do have plenty of capacity, too, with the relationship managers that we have, and they continue to focus on the existing relationships to build on that. So going out and needing new additional teams, we obviously at this point don't see that as something that we would be active in, but unless it presents itself in an area that we could grow in. Okay.
spk10: So other than needing new teams, it's probably a little better outlook in that category, CNI?
spk05: Yeah, I would want to brag on the team. We've got a great team. They're producing business every day. The market certainly has pulled back and slowed down, and people are asking more questions, which is all healthy and good. But the markets that we serve are going to continue to give us opportunities. We had a great quarter for production down from where we've been, and that's why you didn't see growth in the quarter.
spk14: But I think the team is out there mixing it up every day. Agreed. And we're able to get into some credits where the pricing may be better than it has been historically, and terms are certainly that way as well.
spk10: Good to hear. You know, Stephen asked a commercial segment question, so I'll ask on energy as well. I mean, it's 5% of the company, but it seems like it's a pretty dynamic environment right now. What's your appetite like there, and what are terms and pricing like in energy? Terms and pricing are better.
spk14: Yeah, I would say they are. If you're willing to extend credit, you can get decent terms and credit, decent terms and decent pricing. We're active in alternatives and not as much in energy service but in upstream, and certainly we have an existing client base that we're going to continue to build on. So I think there are opportunities there.
spk10: Last one, any changes in your economic assumptions or overlays in your reserve this quarter, or is it just largely the same as last quarter? Valerie, I think it's the same as past.
spk07: I mean, there's always a little bit of movement, but I would say there's nothing notable to call out on that.
spk04: All right. Thank you. Congrats. Thank you. I appreciate your time.
spk06: This concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
spk05: All right. Thank you all again for joining us today. We manage our company for our shareholders, and as I've said for some time, we know we had the premier bank-owned insurance agency, and this obviously proved true with the valuation multiple that we were able to achieve. The ability to improve our capital position, improve our earnings position, and improve our efficiency was just too good to pass up. This unique opportunity where everyone is a winner. Our shareholders win, our insurance teammates win, our insurance clients win, the communities we serve win. As we look forward, we're committed to improving our performance. Our planned bond restructuring will obviously be a benefit to us, as the options this transaction provides will allow us to fast-forward some of our improvement plans and reward our shareholders.
spk04: Thanks again for joining today. We look forward to visiting with you all soon.
spk06: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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