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spk06: Good morning and welcome to the FB Financial Corporation's third quarter 2023 earnings conference call. Hosting the call today from FB Financial are Chris Holmes, President and Chief Executive Officer, and Michael Mati, Chief Financial Officer. Also joining the call for the question and answer session is Travis Edmondson, Chief Banking Officer. Please note FB Financial's earnings release supplemental financial information and this morning's presentation are available on the investor relations page of the company's website at www.firstbankonline.com and on the Securities and Exchange Commission's website at www.sec.gov. Today's call is being recorded and will be available for replay on FB Financial's website approximately an hour after the conclusion of the call. At this time, all participants have been placed in a listen-only mode. The call will be open for questions after the presentation. During this presentation, FB Financial may make comments which constitute forward-looking statements under the federal securities laws. Forward-looking statements are based on management's current expectations and assumptions and are subject to risks, uncertainties, and other factors that may cause actual results and performance of achievements of FB Financial to differ materially from any results expressed or implied by such forward-looking statements. Many of such factors are beyond FB Financial's ability to control or predict, and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks that may cause actual results to materially differ from expectations is contained in FB Financial's periodic and current reports filed with the SEC, including FB Financial's most recent form, 10-K. Except as required by law, FB Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events, or otherwise. In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G, a presentation of the most directly comparable GAAP financial measures, and a reconciliation of the non-GAAP measures to comparable GAAP measures is available in FB Financial's earnings release, supplemental financial information, and this morning's presentation, which are available in the investor relations page of the company's website at www.firstbankonline.com and on the SEC's website at www.sec.gov. I would now like to turn the presentation over to Chris Holm, FB Financial's president and CEO.
spk11: All right. Thank you, Jason. Good morning. Thank you all for joining us on the call this morning. We always appreciate your interest in FBA Financial. From quarter, we reported EPS of 41 cents per share and an adjusted EPS of 71 cents. We've grown our tangible book value per share, excluding the impact of AOCI at a compound annual growth rate of 14% since our IPO. In recent quarterly calls, I've discussed priorities of maintaining the strength of the balance sheet and improving internal processes and procedures with the goals of efficiency and scalability. We've made significant progress on both of those priorities. First, let me talk about the balance sheet. Our capital positions are strong across the board, including a CET1 ratio of 11.8% and a tangible common equity to tangible assets ratio of 9.2%. And in doing that, we haven't reclassified any of our available for sale securities as held to maturity. Our capital and reserve levels are prepared for difficult times, but we don't expect economic conditions to become as severe as our preparation allows for. Our liquidity position, which is detailed on page 11 of the financial supplement that we provide each quarter, continues to be strong. We keep our securities portfolio plus our loans as a percent of deposits near or under 100% to keep from over leveraging our deposit base. If you use that metric to compare banks, you'll find that we have one of the lowest levels of leverage, often the lowest, on our deposit base among our peers. When you consider that our deposit base is quite granular and we make very little use of brokered and internet deposits, this keeps us in a strong liquidity position. Our credit portfolio continues to perform well, although we did move one C&I loan to non accrual in the quarter. Outside of that credit, we haven't seen significant changes quarter to quarter. Again, we're positioned very well with an ACL of 1.57% of our HFI loan portfolio. We also reduced our CRE and construction exposure over the last five quarters. CREs within our long-term tolerance level and construction will be there by the end of the year. And so, as we enter the fourth quarter, the balance sheet feels well-positioned. We built some momentum there, and we're excited about the growth opportunities that lie ahead of us. From an operational perspective, we feel as strong as we ever have and we're focused on improving profitability and returns. In the late third and early fourth quarter, we executed on pieces of two broader initiatives to both increase revenue and reduce expenses. While actions were taken in the third quarter, the majority of the benefit will be felt in the fourth quarter and beyond. On the revenue side, as you've seen in the earnings release, we executed a securities trade that will lead to improvement in net interest income in Q4 and in 2024. Trade also resulted in a pre-tax loss of $14.2 million in the third quarter, and we'll let Michael discuss our strategy there in more detail, but we continue to look for ways to continue to enhance our profitability. The net interest margin has been difficult to forecast over the last several quarters, not only for ourselves, but for others as well, based on the discussions we've had with our peers. The margin is becoming somewhat less volatile because the velocity of change in the variables has slowed. Models have been tweaked and, in some cases, overhauled, and confidence in the forecast is increasing. Funding costs will continue to increase as long as we remain in this rate environment, but the rate of increase on our deposits has slowed materially, and we expect the NIM to remain in the same relative band that we experienced in the last two quarters for the next couple of quarters. Again, Michael is going to provide some deeper analysis in his commentary. On expenses, and significantly, we reduced our run rate on core banking non-interest expenses by $15 million. The realization of most of those expense savings begins in late October, so we expect a couple of months of benefit in Q4. By mid-January, we anticipate achieving an additional $5 million in annualized expense reduction, so $20 million annualized in total. We currently expect core banking non-interest expenses of $255 million to $260 million in 2024, which compares to third quarter core banking expenses of $66.2 million or $265 million annualized. M&A conversations seem to be picking up across the industry, and we're in increasingly receiving inbound calls asking to engage in those discussions. As we've said before, we don't believe in acquiring for the sake of growing our asset size, but there are some banks across our geography that we respect and believe would be great cultural and strategic fits. Following our internal efficiency and scalability initiatives of the last couple of years, we're very confident in our ability to effectively execute on M&A should the right opportunities arise. So to summarize, before handing the call over to Michael, we spent time and resources focused on internal improvements and enhancing our balance sheet. We made ourselves a better place to bank for our customers, a better place to work for our associates, and in that process, we've improved our operational efficiency. At the same time, we built our capital, maintained strong reserves, and put ourselves in a great liquidity position. Increasing profitability, and returns are in focus for us, and we're ready to execute on attractive opportunities that may come our way. Now I'm going to let Michael go into our financial results in a little more detail.
spk12: Thank you, Chris, and good morning, everyone. It's a bit of a noisy quarter due to our securities trade and the charges related to our efficiency initiatives, so I'll take a minute to walk through this quarter's core earnings. We reported net interest income of $100.9 million. reported non-interest income was $8 million. Adjusting for the $4.2 million loss on sales securities and $115,000 gain on a sale of Oreo, we had core non-interest income of $22.1 million. Of that $22.1 million, $10.1 came from banking. We reported non-interest expense of $83 million in adjusting for $4.8 million in charges related to the efficiency initiatives We had core non-interest expense of 78.2 million. Of that 78.2 million, 66.2 came from banking. So we delivered consolidated core pre-tax pre-provision earnings of 45 million and banking core pre-tax pre-provision earnings of 44.8 million. Going into more detail on net interest income and our margin, I'll touch first on our securities trade. We sold 77 million of securities at a 14.2 million pre-tax loss at the end of September. So given the timing, we did not see any real benefit to net interest income in the third quarter from that transaction. The trade should deliver approximately 4 million in additional net interest income annually. At this point, we're continually examining how we can increase our yield on our liquidity. We would be comfortable with another loss in the 10 to $20 million range if the trade met our parameters on earn back, expected duration, earnings accretion, and capital dilution. We wouldn't do a trade that would not meet our parameters as there will be many options to deploy capital over the next couple of quarters. Next, our contractual yield on loans increased by 16 basis points during the quarter to 6.32%. For the month of September, our contractual yield on loans held was 6.35%. Yield on new commitments for the month of September were coming in a little over 8%. Remember, 48% of our loan portfolio remains floating rate, which leaves 4.9 billion in fixed rate loans. Of that 4.9 billion in fixed rate loans, we have about 200 million maturing in the fourth quarter at a yield of about 6.7%. 300 million maturing in the first half of 2024 with a yield of 6.05%. and about $175 million maturing in the second half of 24 with a yield of 5.65%. So about $680 million maturing through year-end 2024 at a weighted average yield of about 6.13%. Cost of deposits continue to rise, but as Chris mentioned, we've seen that rate of increase moderate recently. For the quarter, our cost of interest-bearing deposits increased by 27 basis points to 3.33%. For the months of July, August, and September, our cost of interest-bearing deposits was 3.2, 3.43, and 3.35, respectively. Incremental interest-bearing deposits for the month of September were coming onto the balance sheet at around 3.6%. As a reminder, we'll have public funds accounts beginning to build in the fourth quarter. We would expect $400 million to $500 million to come back onto the balance sheet in the fourth quarter with a cost of a little over 5%. Those gives and takes left our margin for the quarter at 3.42%, effectively flat for the second quarter. With all the moving pieces that I laid out above, we anticipate margin being in the 330 to 340 range for the next couple quarters. Moving to non-interest income, non-mortgage non-interest income continues to perform in the 10 to $11 million range, and we expect that to remain in the band plus or minus the next few quarters. Our non-interest expense also needs more explanation than is typical of this quarter. At this point, we've taken $15 million in annual expenses out of our run rate, most of which occurred in September and early October. We've also acted on an additional $5 million in annual expense reduction that will be realized by the end of January. These reductions have come through a combination of a voluntary early retirement program and some position eliminations, reduction of redundant processes limiting utilization of professional services, and contract renegotiations and cancellations. Most of the expense reductions still to be realized will come from a closure of seven branches, which we have communicated internally and to customers. For the fourth quarter, we expect banking non-interest expense to be in the $64 million to $66 million range. And for 2024, we anticipate annual banking non-interest expenses of $255 million to $260 million. To achieve this reduction, we took a $4.8 million in charges in the third quarter in connection with the early retirement program and related severance costs. We also took $1.4 million in charges related to this project in the second quarter, so we're at about $6.2 million so far. We anticipate an additional $5 to $7 million in charges through the fourth and first quarters as we continue our focus on efficiency and profitability. On the ACL and credit quality, our ACL to loans held for investment increased by six basis points for the quarter or a 5.5 million increase in the allowance. Much of that 5.5 million was related to a specific reserve on the credit that Chris mentioned earlier. That credit was also almost entirely responsible for our 10.4 million increase in non-performing loans held for investment this quarter. Excluding this credit, our ACL to loans held for investment would have remained roughly flat as economic indicators remained in line with the prior quarter. I'll close by speaking to the progress that we've made in the past year on our recent priorities of balance sheet strength through liquidity and capital management. In the past 12 months, we've increased our TCE to tangible assets by 60 basis points and total risk-based capital by 110 basis points. Our loan to deposits have declined from 91% to 87%. Our construction development to bank level tier one capital plus allowance has declined from 124% to 104%. And we'll continue to move lower and closer to our long-term operating target for that ratio of 85 to 90%. On balance sheet liquidity to tangible assets has increased from 7.4% 12 months ago to 11% today. And we have grown our available sources of liquidity from 6.2 billion in the third quarter of 2022 to 6.8 billion today. As Chris said, we feel very well prepared for any economic downturn. And our current view is that any downturn we experience will be milder than what we have prepared for. I'll now turn the call back over to Chris.
spk11: All right. Thanks, Michael, for that caller. And to summarize before going into questions, our balance sheet is situated in a position of strength. We're focused on improving profitability and returns. We're excited about the future. And from a financial perspective, we feel very prepared to execute on any opportunities that may come our way. So, both financially and operationally. So, that concludes our prepared remarks. Again, thank you for your interest. And operator, we'll open up the lines for questions.
spk06: Thank you. We'll now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Steven Scouten from Piper Sandler. Please go ahead.
spk09: Hey, good morning, guys. Appreciate the time this morning. I wanted to get some more information on the security sale. I think last quarter you had said kind of, bands you were looking at was nine to 27 months on the earn back. It looks like this is a little higher than that. Kind of curious a couple of things. What sort of securities did you reinvest in at that 643 yield? And maybe what did you sell that kind of precipitated that, that longer earn back where these, you know, was it a longer duration portion of your securities book? That'd be helpful.
spk12: Yeah. Steven. Good morning. Yeah, it was a little bit longer, but a little over three year earn back and, And so what we, as we went through the process, we thought about even if rates moved down 300 basis points, these securities we sold, which are mostly mortgages and some CMOs, would be with us in any rate environment. So they had extended out so far that it just made sense to kind of get rid of the dogs, as I'm calling them internally. Reinvestment in some agency, government agency stuff, FHLB type paper, And so that's where the yield came from, although we are seeing kind of current market securities all in that range. And so all well within our guidelines and duration, not any extra credit risk there.
spk09: Okay, that's helpful. And then maybe thinking about just that one CNI credit that you noted that kind of encapsulated a lot of the movement to credit metrics. Any additional information you can give us there, kind of what sector that is, and if there's any kind of lingering issues along the same lines in any other similar sectors?
spk11: Sure, Stephen. Chris, good morning. And Travis Edmondson, our chief banking officer, is in here with us as well. So let me just make a comment. It's a C&I credit. You're familiar with a – there was a bankruptcy that reportedly was Mountain Express. We are not involved in that credit. As you guys, I think, know, we were not involved in that at all. We do have a client of which that bankruptcy, they was a vendor to that client. And so that was that was the one CNI credit. It's roughly a $10 million credit for us. And it is actually pretty well secured and has guarantors on it, as just about all of our credits of that type do. But once it goes into bankruptcy, we're fairly conservative. And this is not, but there's a major vendor that is in bankruptcy. And so... We're fairly conservative with how we handle those, and so we went ahead and just put it on non-accrual and took some extra reserve on it, even though we are pretty optimistic on it.
spk09: Got it. Okay. And I know I think Michael said no real changes in your ACL kind of mindset and underlying economic scenarios, but obviously you took the reserve up. even in light of only two basic points of charge of. So it feels like a lot, most of that is really just conservatism on your end, and you never know what you don't know is coming down the pipe. Is that the right way to think about it, or would we expect additional reserve build moving forward? Yeah.
spk12: Go ahead, Lloyd. Well, I think we're well positioned, Stephen, and I think this range, it didn't move up significantly, because of the credit we're talking about, individually evaluated loan. But I think you'll stay in this range. We feel comfortable with where we are. And like you said, we haven't seen deterioration in the portfolio. And so right now, that 150, 155 range where we've been is likely where we'll stay.
spk11: Yeah, Steven, I would just add, and Michael and I both alluded to this in comments, both our capital levels and reserves, we're prepared for difficulties moving forward. We don't really actually expect things to get that difficult, but our preparation allows for things to get more difficult than we anticipate they will. Yeah, that's great. Perfect. All right, guys. Thanks a lot. I appreciate all the color. Thanks, David. We appreciate it.
spk06: The next question comes from Catherine Mueller from KBW. Please go ahead.
spk00: Thanks. Good morning, everyone.
spk01: Good morning, Catherine.
spk00: I just wanted to ask about your outlook for balance sheet growth. You've been really conservative on your outlook for loan growth over the past couple of quarters, and new cell loans pull back again this quarter. Just curious, you know, how much, you know, how many more quarters you think your gut would be that we'll see a decline in loan balances before we kind of hit that inflection and start to see growth again.
spk11: Yeah, so Catherine, just a couple of comments. You're right. We have been conservative on the loan growth side. And we've said right now for us, and I talked about when I was talking about liquidity, not over leveraging our deposit base. And so that's a real governor for us. And so we have been conservative on that side. We still see opportunities. We still see some growth. But remember, we're also taking balances down, particularly in our construction portfolio, and we're not growing our overall CRE portfolio. So when you put those dynamics in there, it's going to probably be muted for another quarter, maybe two, but we do expect some growth in 24. And so, and again, that will come on C&I, and we'll be in a little different position. Also, you know, it also depends on economic circumstances, and we'd like to see clear through interest rate increases, and we'd like to see clear through not seeing significant economic deterioration into some kind of thrown out recession. So, Travis, do you have anything to add to that?
spk05: First off, good morning, Catherine. Nice to talk to you. Nothing much to add to that. I think you're spot on. We still have a lot of opportunities in our markets. We're in a lot of growth markets, Birmingham, Huntsville, Memphis, Knoxville, and the list goes on and on. It's more of a self-imposed governor at this point. And when we decide that the economy looks better for us, where we can see more clearly into the future, we will turn on some more growth initiatives internally.
spk00: Are you seeing opportunities on the CNI side? It seems like, you know, you're You talked about construction and CRE that you're really not lending in right now. Can you just kind of talk generally about what the landscape is in C&I lending today?
spk05: Yeah, we're seeing a lot of opportunity. Of course, there's a lot of competition in that space today. A lot of other institutions are de-risking their balance sheets, similar to what we're doing. But we're seeing a lot of opportunities, and we've actually grown significantly. committed balances in the CNI space by a little over 100 million last quarter. So we continue to really engage in that space, and we're seeing some positive momentum.
spk00: Great. And then on the deposit side, your MIM guide was really helpful and seems like we're stabilizing, which is great. Can you just talk about just the incremental cost of deposits and just kind of what you're seeing within the behavior of your client? You know, maybe... One, where you're seeing the most, maybe the most stress in terms of higher deposit costs versus where things are really starting to ease, maybe in product or kind of deposit type.
spk12: Yeah. Hey, Catherine. It's Michael. Good morning. I'll start and then Travis can jump in. You know, I mentioned public funds. Most of our deposit outflows in the third quarter, we're down $230 million, but $300 million outflows in public funds, so all of it centered around that. As those come back on, I mentioned 5% range. Those are mostly expected to be Fed funds minus a little bit, so highly competitive, expecting full market rates there. Large customers, commercial, corporate markets, you know, are expecting five plus percent on deposits that you get in large balances. The challenge we face, and I know we've talked about this before, is you look across our footprint, pockets of banks, whether they're community banks or smaller or some of the larger institutions, the community banks have CDs priced at 5.75 for six months, right? And so that's impacting our retail. And then you get the money market and stuff that's, is still over 5%. What we've seen is, because the velocity of rate increases have slowed, that the constant request for repricing is moderated. And so that's been a benefit. And as long as there's stability, I think you continue to see that. But new deposits, new customers, they expect market rates.
spk05: Correct. Just one quick thing to add. A lot of the people this time last year were chasing yield where they could get much higher yield, right? We're talking from one percent to four percent. It's been somewhat stabilized over the last few quarters where you might go from five and a quarter to 5.75, and there's not as many people chasing that incremental yield in the footprint. So that's helped us a little bit.
spk00: That's great. All right, thank you for all the coloring. Go ahead, Chris.
spk11: Yeah, I'm going to make one. So as we look forward, as Michael said, the velocity of change is really slow. One of the key variables for us over the next two quarters, I'd say, is public funds and that the flow in and out of public funds. Sometimes we see, not sometimes, all the time, we see a flow out of in the second quarter. That's a combination of the way the funds come into most of our public entities as well as some folks making a market share play for reporting purposes, and then they come back in in the third and fourth quarter. And those tend to be, when they come back in, they're at higher – those are some of our highest priced. And so we're going to manage through that in the third and fourth quarter.
spk00: So it's really a function of your public funds that are driving the market Modest but more margin pressure in the back half of the year more so than your retail and kind of core customer base That would that be a fair comment?
spk11: That's right. Exactly.
spk00: Okay. Okay All right, very helpful.
spk06: Thank you The next question comes from Brett rabbiton from hub D group, please go ahead Hey guys, good morning morning Brett Wanted to start off
spk10: It's college football season, and I know you guys follow that quite a bit, and I know there's been some desire to get FBK back in the college playoffs, so to speak. And so I wanted to ask, you've obviously taken some actions here in 3Q on offense and defense with the securities portfolio and the expenses. I wanted to see what else you might be considering doing to get, quote, back in the playoffs in 24, or if you feel like what you've done is kind of what what you're able to do, and if maybe you end up in the playoffs in 25 instead.
spk11: Yeah. Hey, Brett, this is Chris. You're right. It is college football season. We are fans, and we do have the Monday morning ribbing of everybody that's on the losing end, so it's no fun on Monday morning around here when you lose. And it's no fun day in and day out when you lose in banking relative to how we perform. And so if you go back and look at our historical performance, it doesn't just go back actually two or three years. If you go back to when we start the call, we talk about where our compound annual growth rate of our book value of the tangible book value of our stock is since we become a public company, we go back and we actually look further back than that. And we've always been a premier performer. And that's one of our key foundational tenants here is we're going to be an elite performer. We did over the last, I'll say, four quarters or so, four or five quarters, said, hey, there are some things that we need to do to make sure that we have the scalability of the company and the foundations of the company where they need to be. So we spent some money, which we knew would hurt our performance. And we have taken, as we say, we took our foot off the accelerator. We've done some things, but we feel uh, hopefully you're beginning to hear, uh, when we talk about our confidence moving forward and when we talk about some momentum moving forward, uh, uh, we're, we are, um, uh, we'll be back in the playoffs and competing for the championship. And so that's, uh, that, that's game on from our standpoint, uh, just keeping with your, your, um, metaphor there. It's, it's game on from our standpoint. Uh, you see, uh, You saw improvement last quarter that was meaningful. You see improvement, some improvement this quarter that was meaningful. You see the steps that are already going to improve next quarter in 24. And so we continue to generate leverage. When we talk about strengthening our balance sheet, what we're doing is creating levers that we can pull as we go through 24 to improve our profitability and and make sure our returns are where we want them to be. You know, we're shareholders and those returns are, they have, our bar is higher than any of the investors out there. Our internal bar is higher than any of the investors. And so, again, we appreciate the metaphor and we are playoff caliber at this point and competing for the championships.
spk10: That's, uh, that's good to hear. Sounds like you're, you're expecting 24 to be a lot improved. So that's good to hear. Um, wanting to ask back on credit, you know, you've got the slide in the deck about the office portfolio, but I'm actually curious. It's, it's slightly smaller, but wanted to ask actually about hotels and just, you know, if we have any kind of consumer consumer driven weakness, you know, in the next year, 18 months would seem like hotels might actually be somewhat somewhat at risk. And so I was curious if you guys have done any work on rev par or occupancy cushions for the hotel portfolio and maybe how you think about that book.
spk11: Yeah, so we do have a hotel book. Again, that one also is not outsized for us in terms of where it sits kind of on a comparative basis. I don't have those specific stats, and we don't have our chief credit officer with us today. But we have been watching HOTEL, and we frankly haven't been doing much new there over the last couple of years for all the things that you just mentioned. We do have a few, but we're pretty much restricted to really strong flags in in nice in good in good areas we've got some suburban stuff we don't we do have a little bit of central business district hotel stuff but and Travis I'm thinking the ones I can think of we've got a Hampton Inn and a central business district and but but it's that it's that type of flag if we've got if we've got that so
spk05: Yeah, good morning, Brett. This is Travis. One other thing I would add is it wasn't too long ago it was the pandemic where hotels were on everybody's mind. And we did a thorough analysis during that time frame to make sure that our borrowers were able to withstand that pandemic. And what we found was we have very strong borrowers in this asset class that did everything that they said they were going to do. We continue to monitor that portfolio. We're not seeing any struggles to date on REVPAR. We are mindful as the consumer spending goes down in 24 that that's something we need to definitely keep our eye on, but no alarms at this time.
spk11: Yeah. And, Michael, just remind me, we have done in the last, say, year, 18 months, one, again, I guess I can say it's a Hilton, and it's with just fantastic, parameters around it that has we had extremely high expectations for it and it's crashed through them and so it's again that's the only one we've done here very recently.
spk10: Okay. If I could sneak in one last one just around M&A and Chris it sounds like you're more interested in expansion if it makes sense strategically and so I think everyone in the environment realizes that's kind of the The tough thing is that the marks on the balance sheet. Can you guys talk about, or maybe Chris, just how you think about dilution to tangible book or, you know, what kind of parameters would be acceptable to you relative to an opportunity?
spk11: Yeah, Brett, yeah. Certainly there's a lot, you know, there's conversations that seem to be picking up and seem to be a lot of that going on. I think folks are thinking, I think, you know, I think 24 is going to force a lot of that. And I know it is forcing a lot of that. And I think folks are having to think strategically. And the landscape continues to change. And I think you have to think more and more strategically as we think about it. and I made this comment, we only think about it strategically. So we're not thinking about just asset size. Unless it makes really good strategic sense for us, we don't engage in a deep way. And so when we think about it, it's going to be strategic, and usually those aren't going to be – you know, I'll call them tangible book value type deals because they're going to be valuable properties. Um, and so we've always thought about it as a three year earn back, uh, is kind of the, the, the, where we, uh, draw the line. Uh, I will tell you one of the most frustrating things that I deal with is because we say this on the, we say that on this call and, uh, and therefore investment bankers hear that and so they just automatically go out and calculate what a three-year tangible book value is and then they go out and tell everybody here this is what they what here's what they can afford to pay for you uh and and generate conversations around that and then my the line i use often is because that's what we can afford to pay doesn't mean that's what you're worth uh and so we have that conversation Sometimes, and again, I draw the analogy of selling your house. If Elon Musk is interested in your house, he can afford to pay a lot, but that doesn't necessarily mean your house is worth more than the comps around your house. We get into that. When we think about it, we think about that as kind of a parameter, but we're thinking about, hey, what does this mean to us? And it could, you know, in some cases, I suppose it could take us over that. It never has. But we think about it quite strategically, and then our parameters is really, you know, obviously we want to see EPS accretion, and we want that to be, you know, again, on a reasonable size institution, you'd like for that to get up in the double-digit EPS accretion, and then On a smaller institution, it might not reach that because it just doesn't have the impact. But then we really focus on what happens to our tangible capital level. And one other point there that is part of what you're alluding to is that that's a harder computation than it used to be because of AOCI and what that does. It can create more tangible book value dilution, but that also tends to come back much more quickly in the way that that comes back to you on your earnings in GAAP accounting.
spk10: Okay. That's really helpful. Thanks for all the comments.
spk06: Sure. The next question comes from Alex Lau from J.P. Morgan. Please go ahead.
spk01: Hi. Good morning, everyone.
spk11: Hey, Alex. Morning.
spk01: What are the key areas of the bank where you're seeing the expense reduction coming from? Can you give some color as to how much of this retirement or cuts are coming from front office, back office? And also, what are the types of projects or investments that you're putting on the back burner for now? Thanks.
spk12: Hey, Alex and Michael. Good morning. Yeah, I mean, it's broad-based across the company, front and back offices, but Early retirement was probably more management-driven activity, but again, it's front and back offices, some leadership type stuff and change. Yeah, positions, as you look across, obviously, we've had slower loan growth, so we've seen some reduction in relationship managers, but not very much, and some of that's just a product of, uh, of the environment. Um, you know, I've mentioned the branches, uh, that's a piece of it. And then, you know, just, uh, just some, uh, some other back office stuff. But I think if you, if you think about projects, yeah, Chris mentioned the investments we've made. I mean, we're, we're still positioning ourselves for, uh, becoming a larger, more scalable institution. So we've invested a lot in risk management, a lot in data, um, a lot in, uh, audit functions. And so those continue. We're just in a really sustainable, scalable place at this point operationally. And so we're looking to capitalize on that. But yeah, it's just making sure that we're well positioned for next year and the years after.
spk11: Hey, Alex. If I could just add just a couple comments. Some of the Some of the expense reduction comes from it. Remember this. So remember we over, you know, since we did our IPO in late 2016, we have quadrupled in size. We have made four acquisitions, the last one being 40% our size. And so, and then we went through a pandemic right after that. And so when you do all that, you put a lot together. And so the expense reductions, which we have been very thoughtful about. Notice we haven't built up and tried to build a lot of anticipation around this because we've been very thoughtful about that now over a number of months. And it's something that comes and frankly has been the execution has been over time as well. And so they come across the board both geographically as well as operationally in terms of how those. And then I want to mention just a couple of investments that we won't put on the back burner. You said ones that you do, and frankly, I can't think of ones that we're looking around the table going, we can't think of ones that we have, but we have made substantial investments, particularly in data. the data side of the business and making sure that we have actionable data to manage the business. And I talked in my comments about, you know, when we were talking about liquidity and we talked about, I said some of the models have been tweaked and some have been overhauled. So we've done a lot of overhauling of models, again, making sure we have the right and actionable data The risk management side of our business, we've made really substantial investments over the last two-plus years. And just third-line defense investments have been substantial as the company gets larger. And as you plan to scale the company from here, those foundations are what we've spent. One of the other ones, Michael, I'm not sure if you mentioned, was professional services. One of the big reductions is we've spent a lot in professional services. You can see that actually, again, if you look at that expense line or supplement, you'll see the decrease there. That was intentional spend from some of the best international consultants out there on things that we wanted to make sure we got right. And so when it comes to back burner, frankly, I can't think of what we would put on the back burner. We hadn't done a lot of branch expansion would be one thing. That's about the only thing I can think of.
spk01: Thanks so much for that, Keller. And I had a question on security sale. Can you update us on the parameters that you look for in terms of an acceptable earn back period? And then separately, As bond yields were rising in the quarter, when in the quarter did you sell these securities, and what is the appetite for more sales at the current yield curve? Thank you.
spk12: Yeah. Really, the parameters haven't changed that much. We want to be around a couple years. We did kind of move a little bit off that just because, as I mentioned earlier, The securities we sold were so low yielding that it really didn't matter the rate environment. The duration was the duration. And so we saw some opportunity. But I think as we look forward, it's going to be in that couple year range on earn back. We sold, it's kind of probably middle September and it was before the 10 year and everything shot up at the end. And so we really paused reinvesting. We put about 90 million to work you know, in mid-September, and we paused that last couple weeks. Now, subsequently, you know, the 10 years come back down, you know, 25, 30 basis points. So we're comfortable in this range, but it's about finding, you know, the right investments. You know, our portfolio has gotten smaller. It's about 10.8% of total assets. You know, that's fine. It depends on what other options are, and so we're not –
spk01: not growing the book to 20 you know we're not shrinking to five and it'll stay in this range thank you and then just to follow up on the public funds uh if you look at uh last year's fourth quarter that grew in the 400 million dollar range is that a fair amount to assume for this year or is there something different going on in the fourth quarter yeah that that's fair we expect 400 to 500 million or so um and
spk12: Yeah, we're managing that with profitability and liquidity and, you know, competitive environment. So it's a daily grind, I'll say. But yeah, that's, yes, we kind of forecast out that's what we'd expect. And we're kind of managing through all the moving pieces there.
spk11: Yeah, I'd just say, yeah, I'd say you're right on our assumption. Yeah, Alex, I mean, it's going to be right in that range. Well, yeah. That's what we anticipate it will be.
spk01: Great. Thank you for taking my questions.
spk11: All right, sir. Good to talk to you.
spk06: The next question comes from Kevin Simmons from DA Davidson. Please go ahead. Hey, guys.
spk03: Good morning. Good morning. Thank you. I just want to – so I know we've had a few questions on this, but I just want to think – make sure i'm thinking about this correctly so we're going to have um you know a positive tailwind for the margin from the securities transaction but this is being outweighed in fourth quarter by the the public funds right being a drag on in terms of being higher cost and coming in and um we still continue to see a deposit mix shift right but but however you know the the the velocity or the pace of deposit rate increases is abating, it seems like you're saying. So if we look, you know, I appreciate that margin range, but apart from the effect of the public funds, are we at a point where, you know, where margin is going to trough here in the next quarter or two and then position maybe in the first half of 24 to start expanding. I know, I know that's a big preamble. I'm just trying to, um, make sure I'm catching all the variables. Thanks.
spk12: I appreciate the preamble. Uh, cause those are, those are all the things we talk about.
spk11: Yeah. I think, I think, I think you got it. I think you nailed it. And, and it was one thing I would say there was something, uh, you said, uh, that the public funds should outweigh the securities trade. And it will certainly, those two will work against each other. Michael, will it totally outweigh it?
spk12: Yeah, because it's kind of a rate volume challenge, right? The volume of the public funds we expect to come on is 4 or 5x the securities trade. Yeah, that's true.
spk11: Okay. And so the rest of that, Kevin, is what's going on. And you called it a preamble, but, you know, it's those and other factors which are all filtered into the model to help us, you know, forecast where it's headed. And that's why we use a range, and we've described it as kind of range bound over the next couple of quarters. But, again, I think you said it. And then after that, we'd expect it to begin to increase, and that would be the case at getting into 24.
spk12: I will say the mixed shift, yeah, if you think about from non-interest bearing to interest bearing, it's as moderated as well. And we've been in this 22% range for a couple quarters now. So the velocity of deposit or the velocity of rate increases has slowed. We've seen that. moderate as well. Yeah, I always point back to kind of pre-pandemic. You know, as we talked about the combination with Franklin, we expected that number to be around 20%. So I would say this range feels about right for migration from NIB to interest-bearing. We do see some move between products, you know, interest checking, the money market more so. A little bit in CDs, but we're trying to keep those fairly short. But competition there, as I mentioned earlier, some community banks and then treasuries, but not to as much outflow anymore to treasuries. Got it. Got it.
spk03: Thanks. And one follow-up I wanted to ask about M&A. Chris, in the past, you've kind of described it as you guys have certain targets in mind over a long term time horizon and it's a matter of when the right time for them to be willing to sell and but yet you sound you sound much more confident there will be opportunities coming and so is that a matter of you guys are getting a sense some of these attractive properties are getting ready or having starting to have conversations or or and or that just given the environment and the position you're in, you're kind of expanding that spectrum of potential opportunities.
spk11: You know, it's the former. It's not that we're really – we still have the same things that we look for, and when we're – so that means that there's going to be a limited – number of institutions that have the parameters that we're looking for. So that list really hasn't changed. It's just that when we look out into 24 and we talk to everybody in the industry and conclude for ourselves what we think is going to happen, we just think that some of those are likely to decide, hey, it's time to seek out my options. And so it's really the latter. It's not that we're expanding and going, okay, we're not expanding our parameters either from a geographic perspective or from what we're looking for.
spk03: Yeah, okay. Got it. Thank you. And one last thing. You mentioned a couple times that you've made these deliberate moves to strengthen the balance sheet for difficult times, but you feel now that things won't likely get that difficult. Has that been more of an ongoing thought, or is that something based on recent observations that you're feeling like, all right, we're glad we prepared, but it's probably not going to be as bad as what we might have thought a couple quarters ago?
spk11: Yeah. And I'm going to alter that just a little bit to say we're prepared for things to get difficult. We don't think they'll get as difficult as we're prepared for. And so because we're prepared if things get – if we find ourselves stuck back in 2008 and 2009, that kind of environment, we think we're – knock on wood, we think we'd be prepared for that at this point. Right. You know, going back to what happened in March of this year, you know, again, we feel like we're well-prepared for whatever comes at us. And our point is we don't think those things are going to happen. We actually do think things will get slower from here, okay? So we do think that things will get slower. We just don't think – we're saying if it gets really slow and really difficult, we're prepared for that, okay? But we don't really anticipate it getting as bad as we're prepared for. So that doesn't mean we don't think it's going to get slower. Okay. Got it. Got it. Understood.
spk03: Okay. Thanks for that clarification. Thank you, guys.
spk11: Thanks, Kevin.
spk06: The next question comes from Matt Olney from Stevens. Please go ahead.
spk08: Hey, great. Thanks. Good morning, guys. Just want to follow up on the capital discussion. We've talked about potential for additional securities transactions and M&A conversations heating up. So can we assume that as far as any kind of share repurchase program, that in the near term, that's going to be less likely? Or how would you characterize the appetite of the buybacks?
spk11: I'd say less likely. And that's really related, again, to... just not being able to predict the future. Uh, and, and we, uh, we don't want to, you know, I think if somebody goes out, if anybody, if we went out and did a lot, did started buying back now and credit got really difficult for the whole world, uh, we wouldn't look too smart if we had to raise capital after that. And so we, we want to make sure that, uh, that, so we're, we're going to be conservative there, uh, on how we use this capital until we think that the industry feels brighter from a credit perspective and, again, interest rates. We feel like interest rates have hit their peak.
spk08: Okay. That's helpful, Chris. And then I guess also circling back, On the deposit discussion, I think you gave us lots of good details around the public funds, and that's kind of where the focus is now. What about on the customer time deposits? I think there's a $1.4 billion balance. That average cost in the third quarter still feels quite a bit below most of your peers. Can you just kind of walk through the repricing dynamics there with maturing more near term, and then what are the current rates that you're seeing for your customers?
spk12: Yeah. Matt, good morning. This is Michael. If you remember, we did a fairly decent-sized deposit campaign last year, and we had some CDs, some CD specials. It was September, October last year. It was kind of 13-, 18-month, 24-month papers. The weighted average term on that was about 18 months, and the cost was, at the time, market. We haven't moved off those rates a whole lot yet, And we're still seeing renewals in historic kind of renewal rates. And so I kind of mentioned this earlier. We've certainly raised some CD rates, but it's just been shorter in terms. So we, you know, if customers come in and want a shorter term CD at slightly higher rate, you actually see it looks like the yield curve. It's a little bit inverted. And so if you stay in those terms that you were in last year, you're getting a very similar rate. And, of course, our model is customer-focused, and so the field can take care of customers if they need to in competitive situations, and we stick by that so that we're doing right by the customer, right by the company. And so there's some flexibility there.
spk08: And then, Michael, just to follow up on that, as you look at some of the renewal timelines, is it spread evenly the next few quarters, or is there any quarter or two where you see more volumes set to reprice?
spk12: It's spread pretty evenly fourth and first. There's a little bit of a lump in the second quarter of next year. But it's already higher priced stuff than what's renewing in the fourth and first quarter.
spk08: Okay. That's helpful. And then I guess I guess thinking on the deposit pricing pressure theme, your footprint's a good kind of mix of more metro markets and also some rural communities. Just any general commentary for us as we think about deposit repricing pressure and some of your general markets where the pressure is greater today and where it's maybe not as great as it once was?
spk05: Hey, Matt. Good morning. This is Travis. It's really interesting. Initially, we saw the most pressure from the smaller communities, kind of the rural markets. We're now seeing some larger regional banks putting out some specials in the fives. So it's really across the board, either urban or rural, that we're seeing deposit pressures. And they're all generally in that five and a quarter to five, seven, five range on the specials.
spk08: Okay, that's helpful. That's it for me. Thanks, guys.
spk11: Thanks, Matt.
spk06: The next question comes from Steve Moss from Raymond James. Please go ahead. Good morning.
spk07: So most of my questions have been asked and answered here. Just one thing on office here. Just curious if you could give any color as to when the rent in that portfolio start to come up for renewal in any color around that dynamic there?
spk11: Steve, I'm sorry. Our chief credit officer is not here. I will say just generally on renewal, Michael went through kind of where we were on our fixed rate portfolio. That is not office specific. And so when we did look at office, you know, I'm not thinking about rent renewals. I was thinking about the loan renewals. And so I'd have to get a little more detailed information to get back to you. Is that, Travis, is that fair?
spk07: That's fair.
spk11: Okay. Great.
spk07: Okay. That's pretty much my last question. So appreciate all the color here today.
spk11: All right. All right, Steve. Thanks for being with us.
spk06: The next question comes from Fetty Strickland from Janie Montgomery Scott. Please go ahead.
spk02: Hey, good morning, gentlemen. Morning, Fetty. How are you? I'm good. I'm good. I wanted to start off, I saw borrowings and brokerage CDs declined during the quarter, which I'm sure helped on the funding cost side. Did those just mature and you didn't renew them? And could we see more of that rolling off in future quarters, just given you've got loans to deposit, so it's around 87%?
spk12: Yeah, that's right, Petty. Some of them rolled off and we have some more coming due in November. If you remember last quarter, we increased some of that just because it was cheaper than retail deposits, quite frankly. So Chris mentioned this and it is, We keep our powder dry on sources of liquidity so that we can leverage it when we want to, need to. And so sometimes when we see brokered market is cheaper or FHLB funding is cheaper, we'll do that. And so that levers out there. But we do have, I believe it's $100 million rolling off in November. Whether we renew it or not, as TBD, certainly don't need it. To your point, we freed up a lot of liquidity from collateral standpoint as well during the quarter. Good work by the team there to further create sources of liquidity.
spk02: Understood. That's helpful. And switching gears a little bit here, as we look at these expense reductions coupled with So the securities portfolio restructuring and some of the other trends we talked about in the margin, everything else going on. Do you think efficiency at the core bank X mortgage can get into the mid-50s range by the end of 2024 from the, I think I pegged around 60% today?
spk11: Yep. Yes, is the answer. We do. We think on the core, just core bank, yes. We think we can get below the mid-50s even.
spk02: Got it. And one last question for me. It sounds like we should expect to see the unfunded loan commitments in the C&D space continue to come down. As a consequence, do you think we'll see the unfunded commitment reserve continue to decline as well?
spk12: Yeah, that's right. If you look at the ACL slide, you'll see we actually increased our reserve on the construction bucket, but we released from the unfunded strictly due to volume. And so you'll see that continue to decrease and then we'll, you know, we'll probably land in that, you know, 80, 85% range to tier one plus ACL. So, and it would normalize from there.
spk02: Understood. That's helpful. Thanks for taking my questions, guys. Thanks, buddy.
spk06: The next question is a follow-up from Steven Scouten from Piper Sandler. Please go ahead.
spk09: Hey guys, thanks for letting me hop back in. I'm not sure if you have this number, but I just wanted to follow up as you referenced you at CNI Credit had some exposure to the SNCC loan in the industry that went bad. But do you guys have numbers on your total SNCC exposure? And if so, like kind of how much of that you lead of the SNCC exposure that you may have?
spk05: Yes, good morning again, Stephen. It's Travis. We have roughly 175 million in SNCCs. We lead approximately 80 of that is for round numbers.
spk11: And so, and importantly there, we don't do any SNICs without some compelling, we don't do SNICs for growth. We only enter a SNIC because we've got some client that, or some relationship that gets us into the SNIC. And And I'll give you a couple of examples, two specific examples without using names. One, significant client here in our footprint. We know the owners of the company. We know the officers of the company. And they said, we really want you in our credit. And so we got that. We're in the credit because it's a major name that everybody would know in our geography. Second one, a company that we banked from the startup of the company until they became a publicly traded company. We still have the bulk of their deposits, including their operating account. But their line of credit now is over a billion dollars. We don't lead it. We have part of the SNCC. Those would be two examples. And so it's only those kinds that we get into. We don't just put SNCCs on. We generally are SNCC adverse is the way I would put it. When we do it, it's because we have some compelling reason that says we need to do this.
spk09: Yeah, well, I think that's the right mindset. Thanks for the color there. That's helpful to know kind of the logic behind it. So appreciate that. All right. Very good. Thanks, Steve.
spk06: This concludes our question and answer session. I would like to turn the conference back over to Chris Holmes for any closing remarks.
spk11: Okay. Thanks, everybody. We really appreciate, again, your interest in the company. We appreciate everybody's questions and answers today. And if we have things that need clarification, we're glad to get on the phone with anybody that we need to. So don't hesitate to reach out. All right. Everybody have a great rest of your day. And you analysts have a great rest of your earnings season.
spk06: The conference has now concluded. Thank you for attending today's presentation.
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