Q3 2022 First Bancshares Inc (Mississippi) Earnings Call
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
[music].
Okay.
Good day and thank you for standing by welcome to the review of the third quarter 2022 financial results. At this time all participants are in a listen only mode.
After the speaker's presentation, there will be a question and answer session to ask a question. During this session you will need to press star one one on your telephone please be advised that today's conference is being recorded.
Now like to hand, the conference over to your speaker today hobby called CEO . Please go ahead.
Thanks, Amy and good morning, everyone. I certainly appreciate you dialing in the little time, we used to talk about the results of third quarter. We've got a number of our team members with US today, we've got duty Lowery, our CFO J J Fletcher, our chief lending Officer, George Newton, Our Chief Credit Officer. We also have a couple of team members from Paresh.
Southeast Bank, which is a pending merger.
That we have currently and we have their CEO letter Marlin and we have Paul hearing their chief risk and credit officer. So we've got a lot to talk about this morning.
The agenda will be I'll give some high level comments about the quarter and how we saw it in the performance of the company and then I'll turn it over to each of our team members to give a little more detail or color.
Oh in their respective areas and then finally there'll be a Q&A session at the end.
Let's go ahead and get started there was a lot of noise in the numbers for the quarter, but a really strong quarter all around in terms of both.
Our improvement in core profitability and continued execution of our strategic plan. We closed the beach Bank acquisition on time and on schedule with very smoothly weeks cause that effective August one.
In the last quarter and that continued.
Our trend of.
Smith from announcement to close a roughly a 90 day time period that we've been successful in that in the past that acquisition continued on that same sort of timeline.
We also announced that.
We talked about last time signing of a definitive agreement to acquire excuse me here to southeast Mike Heritage of being a $1 $7 billion bank headquartered in Atlanta.
Georgia with market share in Atlanta.
South East Coast of Georgia, Savannah down the South East Coast Jacksonville, So we feel like we're in really good shape in terms of progress relative to an expected closing or projected closing in the first quarter of 'twenty three.
And then system integration to follow either at the end of.
The first quarter or early in the second quarter.
Great legacy loan growth again $97 million net.
For the quarter 12, and a little less a 12, 5% annualized our net interest margin expanded 41 basis points.
You know doing interest rate increases.
Really low deposit betas.
And all of those factors producers to.
All of those factors convenient producer really strong increase in our core profitability pretax pre provision operating earnings were up $5 million quarter over quarter or 24.5%. So.
Very pleased with the performance of the company during the quarter again, we feel like we're right on plan in terms of both integration of the Beech acquisition and closing of the heritage Southeast acquisition. Both of those together those companies, who will provide more than $2 billion of assets to our currently so we will be over.
$8 billion.
On closing of heritage southeast and as you'll remember those two companies.
Built additional significant density in the Florida Panhandle in terms of deposit market share, but then opened.
Some of the more faster some of them more attractive faster growing markets in the southeast with Martin sharing Tampa and again Jacksonville Savannah.
Savannah and Atlanta, So a.
A lot of stuff going on great quarter, a lot of hard work went into it in the results I think speak to that so with that maybe I'll turn it over to you for a little more detail of our financials great. Thanks, Happy obviously as Harley said, we had lots of noise in our quarters and that always seems to be archway and because we always have acquisitions going on but.
We did yes, happy which includes the beach transaction during the quarter and with that we issued about $3 5 million shares.
For that transaction and then we announced the heritage transaction.
And so with you know with these trends.
And there's a lot of as we talked about the noise in the quarter and a lot of our different research analysts have.
We're all over the board with our numbers as well so to try to pinpoint what.
The consensus that is but we feel like we had a great quarter as have been mentioned and very proud of what the results were for the quarter.
And so going into that we did report earnings of 14 million or 61 cents per diluted share, but when you look at that on an operating basis. So excluding the acquisition charges of $2 7 million net of tax and then the day one initial provision for credit losses for the beach loan portfolio of $2 90.
Net attacks.
That puts our earnings at $19 6 million or <unk> 85 per diluted share.
You compare that operating results.
To the second quarter of 2016, and a half million or 80 cents per share, we increased $3 $1 million in earnings or 18% on a year to date basis, our operating earnings.
Sure.
About 6% year over year.
Part a couple of the drivers for the additional income for the expansion at our income was the additional income from Deutsche Bank debt. We added two months in the quarter and also our expansion of our net interest margin.
You mentioned, the $3 50, or 41 basis points part of that increase was the result of a large relationship that had been on non accrual status.
Great that to accrual status, which.
As a result of $1 $5 million of additional interest income in this quarter. So that accounted for 10 basis points of that margin increase.
Our yield on earning assets increased 47 basis points during the quarter and our cost of funds increased only five basis points at the very low beta.
There for the for the <unk>.
Quarter.
One thing I would like.
We are anticipating an increase in our deposit beta or our cost of funds for the fourth quarter.
Just because we.
A couple of factors going on we raised some some of our deposit rates right at the end of the third quarter. So that'll have an impact for the fourth quarter. We also had some advances.
In the end of the third quarter, which will carry through the fourth quarter and that is typically if you recall in the previous years, we've always had the seasonality of our public fund deposits, where typically borrowed in the fourth quarter.
So we should see a little could see some slight contraction in the fourth quarter of our margin.
But then we see that expansion by the first quarter, we will have.
Then flow back of our public funds and we will also have the closing the anticipated closing on track right now for heritage to close.
Effective one 123, and so we expect to see back.
That expansion in our margin.
With our.
Fed funds.
<unk> modeling at 450, we're projecting our margin to be in the range of $3 50 to 360 next year and you know basically starting right now at 340, when you back out that one time relationship.
Average balances.
In our other banks that is reflected in our margin tables.
The excess the cash liquidity part.
Decrease that $290 million during the quarter.
150 that was deployed into the loan portfolio and.
Excluding the beach portfolio, obviously that was acquired and then a $130 million of that was used to cover our decreases in our deposits and.
20% of our decrease was related to our seasonality of our public funds deposits and we had.
About 50 million of run off in the beach portfolio, but that was.
About half of that was planned departure of some higher some higher rate accounts that are we knew that that would be that would be leaving after close.
So I just want to highlight a couple of other ratios.
During the quarter that and I'm going to talk about using operating results and so our ROI operating hours 123 for the quarter and our Aro <unk> Aro <unk> was $18 49.
For the quarter and our efficiency ratio was $54 55 for the quarter.
Our capital ratios remained strong our CET one was $12 six our leverage ratio was 9.3, our total risk base was $16 seven.
And then our TCE was six five.
And we feel very good about our ratios, where we are today and would like to comment on our tangible book value. We did have a decrease in that for the quarter, which was the result of our the increase in our ASC.
That increased about 50 million for the quarter, but if you look at.
If you exclude the change in ASC.
Tangible book value actually increased due to our acquisition with with beach with with the capital that was.
The capital that was added modest the intangibles, we would've had an increase of about 71 stands and our tangible book value per share or about 30%. If we did not have that change in <unk>. So I just kind of wanted to now take that I think thats I have all my prepared comments happy I'll turn it back.
Thanks, David.
JJ would you like to give us a little color around the loan production for the quarter, yes, Sir Thank you Holly.
The takeaway for the third quarter was much like what we saw in the second quarter.
Continued demand new and expanding relationships.
Really saw some benefit from adds to staff on the commercial and the private bank teams one bright spot the cadence.
Listening from late last year.
<unk> proved to have a lot of benefit this quarter as well really making some penetration of that north Sydney market have a really strong pipeline up there I think the other thing is we continue to see ahead of the maybe not ahead, but during the interest rate increasing cycle a lot of people are trying to push loans and projects to get closed.
And we're still seeing that.
<unk> as well.
As Hap he said.
$97 million for the quarter originations averaged about 100 105.
Lastly throughout the quarter.
Nice diversity, we had some really nice class a retail opportunities awesome.
He's in hospitality, a number of owari or excuse me the owner occupied CRE and then the Big thing I saw we had an integration with.
Beach in the healthcare lending platform, which we were able to integrate into our private banking division and on a percentage basis. The private banking group really was the top performer again this quarter throughout the bank. So really pleased with the results there.
Yes.
Sorry.
Most of my stuff.
The other benefit we saw as we hope to see the payoff and Paydown trend continued to decrease.
As you know we monitor all payoffs over 200000.
Account for those.
For this quarter, we saw a real downturn in that in September .
We're about 30, 40% off of the prior two months. So those two things together really help the growth strategy.
Trailing 12 month closed unfunded commitments.
<unk> strong about $357 million on the books, we were at $3 41 at the end of Q2.
Most of that of course is construction that will be funded out over the next 12.
<unk> months or 18 months. So we've got some runway there and then pipelines as we would expect.
About 15% at the end of the quarter when compared to the previous couple of months, but I think thats with growth and then with general market conditions, that's probably in line with what we expected to see.
With that I'll turn it back over to you Bobby.
Thanks JJ for context.
The cadence branch acquisition, we closed last December was approximately $400 million in deposits, but only about $25 million in loans and so we've made significant progress in growing.
Not only funded loans, but that pipeline in the north Mississippi market. So really good performance there.
George we tried to give us a little Colorado credit metrics. Please.
The heartbeat.
Generally our credit metrics for the company have shown stable and moderately improving.
No.
At the end of the third quarter.
Delinquencies, certainly a leading indicator of kantar.
The hover under the 40 basis point more throughout the year.
October looks strong as well.
Our criticized and classified loans.
Particularly in the legacy side.
We had about almost a $34 million improvement.
<unk> down to about $104 million.
Total criticized and classified on the legacy side.
A lot of that was driven by we had taken some precautionary risk right.
Downgrades during the pandemic, particularly in the leisure hospitality food and beverage sectors.
That those sectors that a return to normal operations now and over the past three or four quarters, we've been able to return that back to.
If not their prior risk rated at least a positive move so there has been a.
Certainly a driver.
In our criticized and classified.
Movements.
In nonperformance, all we've seen notable improvement driven by several larger relationships.
Returning again.
Acceptable performance mentioned, one large non accrual relationship.
That we were able to bring back on accrual status.
In itself was a it was a $10 million of pivot for us in non accruals. So we've seen.
On the legacy side of the buying total NPA has moved from.
The first quarter about 27 million down two.
18 million then with the addition of.
H.
<unk>.
<unk>.
We are really still below where we started the year. We're at about 26 million. However, as a percentage of total loans.
Okay.
We're 71 basis points on our total npa's.
Good good solid improvement throughout the year.
And lastly.
As credit metric to run over.
Year to date, we're still in a net recovery position of charge offs to recovery.
Just under a $1 9 million. So we hope to end the year looks like though we will continue that trend for the rest of the year.
Net loss position.
<unk>.
Preparing obviously with maybe some economic head wins were.
We're going to be monitoring credit quality very closely.
<unk> 2023, as we've already started that process.
So look for any stresses that might be enthused.
Inflationary and Rytary.
<unk> for our borrowing base.
We can already see.
That construction and term loan projects.
Previously met our credit loan guidelines for LTV in LTC margins as well as coverage. They are just going to require more equity from the borrowers to move forward in 2020 through to that Ian.
<unk> earlier.
Earlier this week in the Tampa market at one of our new markets.
The chance to talk to couple of larger.
Commercial real estate investors and developers.
And they both.
The indicators they fully expect their projects to see 40, if not 50% equity contributions.
Just to make the projects work and be buying but we think thats going to be a central theme throughout the year in.
In 2023, the more equity in these projects.
So for them to move forward.
A real driver.
We are doing right now to actually just finish some stress modeling and looking at our maturing loans in 2023 approximately on the legacy side is some 300 million or so and maturing.
For the four quarters in 2023.
Looked at our top 150 loans in that category, it's about $174 million.
And we were pleased to see that.
The large majority of those customers with as much as.
250 basis point rate shock could still add quality service.
We'll continue to look at that we will go further out in our tranches.
And keep that is very much part of our protocol.
We're going to stick with our long standing.
Guidelines for coverage and LTV margins amortization terms and require that the variable and all that will be on the equity contribution side.
No.
For a for a good 2023.
Thank you George good comment, we'll switch over now that to hear to southeast Bank.
And a little more on their CEO letter.
Thank you happy.
Just to mention again, we're roughly a $1 $7 billion institution located in Georgia, and North Florida.
Just shy of $1 billion in assets in Metro Atlanta, and the remainder in southeast Georgia.
Concentrated in the coastal area, all the way down to Jacksonville.
We operate under three trade names provenance Bank Heritage Bank of the Heritage Bank in the state.
The headline for us for the quarter and again, we have noise in our numbers as well this transaction plus.
Are there other noise throughout the year, but the.
Headline earnings were up 68% over the prior quarter and were <unk> 77 per diluted share.
So just to just to highlight a few things we reported $5 6 million and earnings.
This compares to $3 3 million.
The primary drivers were expansion of net interest margin to 385% and lower operating expenses, if the transaction expenses associated with our merger with first.
Were excluded.
Alluded earnings per share would have been 83 cents.
A little bit about our net interest margin the yield and earning assets grew 59 basis points in the quarter, while cost of funds increased eight basis points. Two primary drivers being the fed rate increases and second we continue to have strong growth in loans of $31 million during the quarter and year to date, just shy of 100.
And growth, which is a nine 4% growth since year end.
Growth has continued in noninterest bearing deposits, which were up just shy of $70 million year to date and this represents about 37% of our total deposit base.
On our lower operating expenses. The company has continued to recognize operating efficiencies.
Starting with our three bank merger in 2019.
Quarter, 2022 was inflated by $1 $2 million of separation payments.
Q3 was a more normalized operating run rate and our efficiency ratio exclusive of merger related expenses was 59%.
Other key takeaways for the quarter, our ROA, excluding transaction expenses was 137% return on tangible common equity was 23, 1% and our tangible equity to tangible assets was six 3% our allowance to nonperforming loans coverage is 700.
Third, 48% and a few bank level ratios, our leverage capital ratio was 10, 2% tier 112, eight 2% and total risk base 13 nine 4%.
Our pipelines continue to be strong they are down roughly 20% to 25% over what we consider normal operating levels typically we run a pipeline.
$110 million to $120 million 90 day pipeline $110 million to $120 million, we're seeing that now just below $100 million.
But we continue to see high quality.
Requests, especially in the Metro Atlanta market.
And I would agree with what George said borrowers are continuing to add equity to deals to make the deals work for our bank.
With those comments I'll turn it over to Paul Harry.
Chief risk and credit officer for comments on credit quality.
Excuse me. Thank you monitor similar to George's comments, we continue to see strong and stable asset quality.
And at quarter.
Delinquency was 31 basis points I'll also note that.
That included about 15 basis points that was an administrative item alone has since paid off so in terms of early indicators not seeing any weakness in our portfolio non.
Nonperforming assets 17 basis points.
And there are also a very positive outlook $900 million of that.
Oh, sorry, which is under contract to sell in first quarter, and then our largest nonaccrual, which has always been contractually on time.
We're seeing positive results in our financial performance.
And outlook for a likely return to accrual status and upgrade in first quarter.
So again feel very good about overall asset quality continued to see those results hold up through the third quarter.
Last comment I'll make consistent with what George said, we are seeing in the environment right now as construction projects are requiring additional equity much like the first we underwrite to stabilize cash flow.
And in order for those metrics to be Matt, we're seeing equity move up from 30% to somewhere in the range of 45% to 50% the encouraging news is.
The borrowers that we're meeting with are able to meet that equity requirement and move forward with their projects.
Thank you Paul.
That's it for us thank you.
Thank you Leonard Paul that.
That concludes our prepared comments and so I think we'd open it up for questions now.
Thank you as a reminder to ask a question you will need to press star one one on your telephone please standby, while we compile the Q&A roster.
And our first question comes from the line of Kevin Fitzsimmons with D. A Davidson your line is open.
Hey, good morning, everyone.
Morning, Kevin.
Sure.
I am good happy hope Youre well.
<unk> also.
I guess just the first.
Quarter of the last three that you haven't had a deal to announce with earnings so.
Maybe it may take them one quarter off at least.
Okay.
Just wanted to ask about.
Just a couple on the margin guidance so.
The outlook.
For fourth quarter margin, but it might come in a little is that versus a 340 <unk> without the non accrual benefit or is that versus the reported testing.
That would be versus the 340.
Okay.
The core margin, so I would say it could be a little bit in the fourth quarter contraction, there and thats really like I said due to the.
The seasonality in public funds going out right now and then the borrowed position and then we see that going away the borrowed position going way back to the first quarter.
And then the influx of the cash liquidity from heritage and then the seasonality of the public deposits so Kevin.
Followed us awhile.
It's the sort of inversion of historically what's happened.
<unk> seen a little margin compression in the first quarter because of the public portfolio a public deposit portfolio.
Average cost of that was slightly higher than what we can invest in fed funds and so what our where our loan growth was a bit muted you would see margin compression during the first quarter because it kind of comes all in and it kind of dribbles out over the rest of the year peer Reits have flipped so we're paying.
Probably much less for what.
We can invest on that so is it right and typically our margin would expand in the fourth quarter when rates were inverted or costs reverted and then it would.
The depressed in the first quarter. This was flip them because rates have changed so that money that goes out we'll be at the margin barring some a little bit to cover that.
Cash flow deficit, but then when it comes back it will come back it I believe the average rate in the quarter was like 69 basis points.
Roughly almost a little less than a $1 billion of public money. So on average we're paid 69 bps on that end during the first quarter, we'd be able to invest in at much higher with that so really.
I'd like to.
We are concentrated on looking at the margin or at least at two quarter span because there is some seasonality in that funding side.
Okay I appreciate that color and then the other.
Outlook of the $3 50 to 360, <unk>, So I would assume.
That.
That's obviously heritage coming onboard and they have a higher margin.
But partly offset by.
Probably an outlook for deposit betas to accelerate.
Just given industrywide.
What's happening is that more of a is that range more of like.
I know a lot of moving parts, but is it more like $3 50, moving up to $3 60 or is it more of just kind of flat towing and fighting to keep it stable during 2003.
Okay.
It would be.
Probably more.
Towards that 350, and then moving up toward as we go through the year with.
Increasing at that point.
So Kevin when you look at our loan book.
Irrespective of the two.
Partners or at least beach back in then.
Some degree hurt to southeast banks, they have more metropolitan exposure were more C&I and their book, particularly Beach Bank and so.
We historically did not have a lot of pure floating rate loans that we do have a short average life of our <unk>.
Portfolio and again most of it with what you would see.
A combination of a lot of small community banks put together and so the repricing interval particular doesn't happen maybe as quickly as some other banks who have more.
Pure floating rate loans, but it does we have like a <unk>.
I think we are calculating the average life of.
Loan portfolio of about 2.8 years.
So you've got a significant repricing.
Ill.
Roughly a little less than half of portfolio will reprice during the year over the next 12 month period. So.
Sure.
As we see the margin potentially because of the borrowings compressed during the fourth quarter opened back up during the first quarter and then as we continue to reprice and hopefully even with some increase bite as we think we can move.
A little higher than that 360 range I believe.
So kind of how we feel about you agree yes Zachary.
Okay, alright, thanks, Thanks, Bobby.
One more just kind of more top level question. If you can.
Obviously, you talked about how with heritage coming on your roughly $8 billion or a little more and.
Looking looking at still relatively healthy growth going forward how are you viewing.
Balancing that.
$10 billion asset threshold with.
With maybe potential other merger opportunities that might come along.
Given the strength here.
Great question, Kevin I'm glad I'm glad you brought up a really should probably have some of the prepared comments, but I'm glad you asked it.
One of the things that both Beech bank and heritage provide we've talked an awful lot about the financial metrics and what that means to us financially, but the more we interact the more I continue to be impressed.
Excited about the experience level the quality of the experience level of the banking teams that will be joining us spoken beach and adhere to southeast.
A number of.
We've run we've grown quickly and at the executive and the C suite executive level, we've run fairly thin.
Because a lot of the banks that we have partnered with have been much smaller.
Community banks.
We're gaining a level of management expertise here. That's really in addition to the financials for the company is going to be very accretive to the depth of management and a number of those folks.
We have experience in larger plus 10 billion dollar institutions and so we're.
They are offering additional.
Additional depth and expertise that we prior to these acquisitions did not have we.
We have already started with the federal reserve in fact, I was on a call yesterday with our ERC as you know we changed charters.
Earlier in the gear.
Have laid out a prescription for what their expectation would be as we move closer to.
10 billion.
And so they have it's interesting.
<unk> view of I'd hoped pleased with the view of the fed and sort of the way they think about it.
And they very much are high.
Giving you. These outlaws 'cause we want you to be prepared that they really have not had a sort of gotcha mentality they've been very prescriptive.
In helping us and we saw that at $5 billion. When they were not our primary regulator at the bank level, but they were at the holding company and they were the very first regulators say, Okay. You guys are 5 billion now approaching Fob here's here's some things we expect when you get a little larger so we have started what we call our <unk> Committee, which meets.
Actually I'll meet with quarterly Theyre subcommittees under that.
From functional lines across the company.
I got a note from composites more that we're seeing in our RFP for our GAAP analysis between where we are today in terms of what the what we need to be 10 billion, having said that.
We have to be prepared for that in our strategic view as always as <unk>.
<unk>, it's been the same.
To make the decisions about.
Creating the most value for shareholders and that's a long term view and and so we run it like we would own it forever, but at the same time.
The company, we will entertain whatever makes the most sense for shareholders. I think you know that and we have a long history of advertising that so when we think about in terms of optionality, we have to be prepared but we're always looking for the ability to increase shareholder value.
We remain nimble.
In order to respond to those opportunities.
Great. Thanks.
Thank you chip.
Yes.
Thank you one moment for our next question.
And our next question comes from Brett Robinson with Holt Your line is open.
Yes.
Hey, good morning, everyone more growth.
Hobby wanted just to go back for a second to the deposit rate increase in the fourth quarter and then maybe.
Understand a little better post the combination in.
<unk>, how youre thinking about the progression for deposit betas and how more competitive do you think you have to be relative to where you are today.
Well.
Yes, certainly.
Positive cost we were able during the third quarter to really sort of hold the line you saw that in the numbers. We did have some run off particularly in the money market areas.
During the third quarter that continued.
For continue that.
Beginning of the fourth quarter, and so a number of banks.
Dan just first vessel starting to price for I guess.
Sure.
You should go a named threat at this point.
Sure.
Let's call them blue with a farmer.
They saw maybe some really large runoff and so all of a sudden.
Our core markets, we saw some real increase in deposit competition. So we have marginally increase rates and were trying to hold our betas.
Relative basis, because of our highly retail granular oriented diversified across the south east deposit base.
We feel like we're just below those so if we can keep our depositors somewhat just below what some of the high of the market is we think that certainly we'll keep those core relationships and we want to keep those core relationships.
At the end of the day, that's the value of our franchise really are a lot of the value of our franchise.
You lose that money.
It could be hard to get back I'll tell you one thing that this time of course never.
Not lived through a scenario quite liked it I guess.
Many others have not.
Last time it happened I was in college I Wonder are too worried about it.
But in any event.
The <unk>.
What's been interesting. This time it is historically, we haven't seen a whole lot of money.
<unk>, our core deposit base and go to brokerage house, and that's where a lot of the initial surge in that win.
And so what we've seen is kind of a decreasing after that initial surge I think it's a decreasing rate of run off all those continue to be a little run off in the retail sector as we've changed our rates higher so maybe your thoughts around that.
Big picture, but yes.
I think kind of looking at what we've done so far is happy mentioned towards the end of the third quarter, we made some.
Some adjustments and so kind of looking at where we were it is hitting and affecting asset park. They October .
I think we were.
Definitely I think we would be south of 20% beta and that's kind of historically, where we were.
Last time around and so on.
I think that we would be less than that and then looking at our modeling forecast.
If we are at 450.
As far as our modeling is showing you know we'd be in that 20% to 25% beta so.
Got.
Kind of what we know right now and we stress that.
Obviously.
Asset liability modeling.
Both in terms of Beethoven decay rates, and we still so asset sensitivity.
Even under some fairly severe.
Stress scenarios, so we feel like we're well positioned.
Given our balance sheet structure, given the nature of our funding.
<unk>.
Relative basis relative to peers to to.
Hopefully potentially perform in line or maybe have an opportunity to outperform there.
Okay. That's that's all great color and then wanted to ask you talked about the $10 billion.
Question.
When you talk about the core profitability numbers this quarter, they're obviously improving.
As you get close and integrate the deal in the first quarter.
Seem like you.
Your profitability could get even better than maybe your efficiency ratio dipped below 50 is that a fair.
What are you thinking about things or can you guys, maybe give a little color on how you think about the profitability track as to margin expands from core levels in the third quarter.
I will say, having beaten overhead that we wanted to be.
I haven't taken the bathroom mirrors.
We call it <unk> 45 50.
Go ahead.
We do what we can obviously and I want to say, yes, with the increase in the income side of that.
We should see some deeper.
Decrease in that efficiency ratio lower efficiency ratio and efficiency ratio.
<unk>.
And I think that would probably be.
Kind of what Youre looking at operating our core, but core, but probably definitely be more improvement towards the last part part of the year, because we've got a lot of.
Beta scheduled to have their core conversion.
<unk>.
The first week of December and so we would expect easily two months post that to kind of wrap up most of those.
I realize saves and then heritage is currently scheduled to close to one one.
This conversion at the end of.
March and so youre looking at really through the second quarter before you can start wrapping up to see what you're getting your cost saves and so I think that would kind of be more towards the last part of the year next year.
Great.
<unk>.
It's kind of nice at least in my mind, it's kind of nice given the cycle, we see potentially some increase in core profitability based on spreads assuming that hey look our friends in the deferred.
What day rig.
Nobody knows where thats coming from you've heard the credit reports and I know you guys have been insensitive those other bikes credit still looks good and we're watching closely where that Cuba, but accepting some level of elevated credit costs that we currently don't forecast it.
It feels good to have some spread income.
Potentially increasing our core profitability, but then bringing of bringing on these two new income streams.
Over the next year really puts us in a good shape to your point to exponentially I think increased the core profitability.
As we move forward, so you've got it not only from realizing spread adjustments spread widening but.
Entirely new income streams with cost saves in.
As a real income driver.
Okay, great color. Thanks.
Greg.
Thank you one moment for our next question.
Okay.
And our next question comes from the line of Catherine Mealor with <unk>. Your line is open.
Thanks, Good morning.
Okay.
One follow up to the margin conversation just thinking about the size of the bond book and I think we had.
Previously talked about.
Investing some of your excess liquidity into the securities book, but the world's changed a little bit since that Scott.
Curious on your appetite for increasing our shrinking the bond book from here.
Well, so we set the new I mean, you can go ahead, now and if and when we get to the numbers part.
Okay.
Thanks.
No what we saw.
Catherine we set that bond portfolio to provide a pretty substantial cash flows so about 50.
Five or so percent of that matures and pretty in a ladder fashion. So that's over $1 billion with tours Atlanta latter fashion over the next four to five years and so.
The idea was again before we knew that rates were going to be where they were but the idea was we set that up.
With the.
Providing cash flow and essentially remixing the balance sheet from the bond book into the loan portfolio.
We're still in that strategy and in fact the rate the rate arbitrage has gotten better because it's coming out of that bond portfolio to or slightly less than two and of course. If you look at the margin. We are new loans that we're putting on have at least a six or a lot of them have a seventh in front of them and that's back to that.
Ben.
Im not going to say amazing but.
Interest current encouraging to me.
C.
The amount of Georgia, and Paul were talking about the amount of equity that folks are putting at new projects.
To make them so that we can stay within our credit metrics and then the additional yield we're getting off of that so.
That gets bad or a little bit in terms of the arbitrage of the carrier between coming out of the bond portfolio and going into the deal.
Loan book and that's why we're talking about.
Certainly we will we always look for growth opportunities, but in order to make our projections. We don't really have to grow the balance sheet. A lot. We can remix the balance sheet, given that 63% or 4% loan to deposit ratio that we currently have.
And make our make the returns we've talked about.
In terms of ROA and return on tangible common.
No I don't think we will be in fact, so we had.
Relatively speaking to peers.
We had such liquidity.
Accumulated over the years.
Really reorient fragmented deposit base across the southeast.
We have our bond portfolio relative to the size of our assets is higher than a lot of our peers. Most of our peers are in the low twenty's mid twenty's and ours is in the low thirty's and that's been the effect on our OCI is not the construct of the portfolio in fact convexity.
Impact on market value loss has been as good or better than peers.
It's allows us a little bit outsource part of our asset base.
That becomes more normalized.
Cash flow goes into the bond book out of the bond book in the loan portfolio, but then also as we add assets and we liquidate the portfolios of the two companies that we have.
We've acquired.
Post <unk>.
South East it looks like the bond portfolio comes into about 24% or a little less of that in total assets.
<unk>.
We don't.
We don't think we're going to be increasing unless there was some sort of a liquidity event that.
We couldnt understand that but it looks like to me.
Can hold the line a bit on deposits.
If we lose a little bit.
That's okay, because we've got a lot of cash flow coming out of the bond portfolio to help fund our growth yes. The only thing I would add just as a reminder, basically we.
On the cadence that's having a majority of the cadence portfolio that we acquired the deposit side of that.
That was the strategy.
You put those.
The funds from those deposits into the bond portfolio. So that was about 360 million that we had planned to put in the portfolio because that cost of funds was in the 20 basis point range.
And we were putting in in the bond portfolio over 2%. So we were getting a pretty good spread on that and that was so that was part of that increase was for that portfolio and Katherine the bulk of that strategy went into HTM.
That was the original plan and it went there so it's not impacting the mark as much as some of those securities.
Okay that is all really really helpful. Thank you.
And then.
My other question is just this is another question, but just the borrowings that are going to come on short term just to fund the <unk>.
So the whole for the public funds pulling out what's the right.
And it looks like of 90 million at quarter end.
Yes, and thats kind of been running.
Like 340 range right now.
And that could change a little bit next week.
With rates, but.
We're staying short windows, where we're not extending what our wholesale sources are there.
He used to get the best.
First execution, we're not.
We're staying.
Two months three months, but relatively short because.
We've got liquidity coming back to us and we don't feel like we'll need that high rate money.
First quarter so.
Great.
Got that alright, and then on the margin and then other.
A question just on the expenses any any guidance you can give DD on just on expenses I know we've got.
One more month of beach coming in and then of course, you've got here. It is coming in in the first quarter. So maybe at least the fourth quarter outlook on where you think expenses go and then.
Anything you can kind of.
Direction, you can give us as youre thinking about the puts and takes on the expense base next year.
Thank you.
No.
No.
Yes.
Do you know of and controlling expenses.
Yes.
Brad.
Yeah.
So looking at.
The expenses well.
Actually when you kind of take out Tucker.
What's happening interesting kind of wage we mentioned.
And then add another quarter another mountain for beach, it looks like kind of our core might be about the same spot in the fourth quarter as the third quarter.
But looking at expenses for next year I was I was trying to look at what was out there for Factset and.
And then.
We're working on all of the budgets now we've got the three banks to budget together with us for next year and kind of looking at there.
Their expenses and looking at the cost savings that we projected.
And then I was looking at our expenses could kind of compare to what it looks like to me on Factset.
If I'm looking right was about $170 million trying to follow that and I think we I think that's a reasonable by looking at kind of what this quarter was modest merger charges.
For four quarters with an increase and then kind of looking at what heritage in nature of dawn and taken their.
Annualized and that with the cost saves I think that looks pretty reasonable to me at this point I'm still in the budget process. So.
Hey, Leonard you might want to start saving your empty water bottles.
You can bring them home and fill them up after the water surface goes away in January .
Alright, Thats all very helpful. Alright, I think I think I'll go with my questions. Thanks, So much and congrats on a great quarter guys.
Thanks, Kevin appreciate it.
And as a reminder to ask a question. Please press star one one.
One moment for our next question.
And our next question comes from Matt Olney with Stephens, Inc. Your line is open.
Hey, Thanks, good morning, everybody.
Format.
Hi.
Just to go back to that last question on expenses I think you mentioned that.
Fourth quarter would be similar to the third quarter core number call. It 30, just over $32 million, if I catch that right.
Did that was really kind of looking at the kind of profitability because I don't have right in front of me exactly what.
Beach as expenses were for the two quarters. So I was just saying kind of core profitability.
By taking Tucker out and adding another month of beech net pre tax gain company and we'd be about the same spot. So I don't technically have exactly what their expense number is for the fourth quarter, but overall core profitability and shipping pretty relative.
Okay, well I guess just following up on that I think you disclosed.
The beach expenses were just over $2 million in the third quarter. So I'll assume I think it's another extra extra months and in the fourth quarter. That's right that's right. So.
Another $1 million did note there or any other puts and takes on the <unk> expenses beyond that I should be thinking about.
Typically there might be a couple hundred thousand or so the fourth quarter. We always have some things that kind of chewing up for year end for audit, but I mean that could be just a few hundred thousand dollars vacation incentive accrual true ups performance, yes, because we have so.
I think that ran last year, if I am thinking for 500000, just off top my head, but that was really the only thing I foresee.
Yes.
Okay. That's helpful and then as far as the upcoming timelines DD gave us good color on closing dates conversion dates and I think you are still assuming the heritage has been closed Jan one that used to be.
Few weeks ago, now I guess remind us of the approvals you already have an approval here got to get the next few weeks just trying to appreciate how much confidence you have in that Jan one closing date.
So yes, good question Matt.
We do not have.
The regulator approval, yet we are under been consulting with them on the top you mentioned Keith has several calls we'll be filing our application with FDA.
The federal reserve on Monday.
We're anticipating currently that they would be able to have their approval by mid December .
We filed our preliminary is for.
If you limit call as the joint proxy. So we both have to have shareholder meetings.
There was no review from the SEC for that so we are following.
Our.
As for updated next week with an effective date of next Friday.
That would line up with the mill days with both shareholder meetings being the last week of December so.
We're anticipating no issues, we had met several weeks ago.
Ask us to submit the application.
In draft form.
Not a not a formal submission but.
So it didn't start a clock for them they have looked through that they have.
But given us back some questions to address in the application that we're going to file a <unk> 31. So we feel we're pretty confident with the fed's already.
Gone through it.
They've asked us to address the things they want us to address.
No there was.
This one because of the size the federal reserve will do visitation too.
Its a heritage southeast and that's been completed we feel good about that we have called an extra call it less so.
We have a pretty good degree of confidence that.
We're in good shape, there and our expectation is that we would stay on our closing timeline.
Okay. That's good.
Great.
Busy busy December but.
And then also how are you guys.
Yes.
It seems like it always is exactly.
And just a little clarification around the margin outlook, the $3 50 to $3 60.
Missed it that's a reported number with purchase accounting adjustments are about the core number.
That would just be the.
Reported fully tax equivalent to $3 50, right, where we reported this.
This quarter of $3 50.
And I believe that's just a fully tax equivalent not.
Netting out the.
Purchase accounting adjustments. So those are included.
Starting at $3 40, when you take out the Tucker relationship that $1 5 million okay.
Okay, Great and then I'll hop back late so this may have been mentioned began the call I missed it but.
With the closing of heritage again, the cost saves I think we talked about achieving that full dollar run rate by late 'twenty three just any updated thoughts.
Based off the <unk> results that Youre seeing from.
You guys in heritage and also the kind of a changing macro environment.
Yes.
Yes.
Qualified like I said earlier about the credit cost this year.
I really don't know, but what we see in terms of core profitability.
Central cost save opportunity.
I think we're still comfortable with that.
The real variable being credit costs although.
We think we are.
We feel like our balance sheet is well positioned not only from a liquidity funding standpoint, but also extremely well capitalized, especially.
George.
In the credit group.
They are doing some work and they did a presentation to the board last board meeting and they talked about well last year. We originated 2000 in the last 12 months 2000, new notes not renewals not.
Modifications brand new originations.
2000, 1500 were $500000 or less.
And so sometimes our headline percentage growth doesn't look as good maybe.
Boy.
500 does it takes a lot of $500000 loans, given the size of our capital not that it can't happen to kind of get you in trouble. So.
It makes me I guess my point is it makes me feel good that we're able to make the returns we do.
With a sort of highly small business oriented.
Well diversified.
No heavy concentrations.
In our loan portfolio given the given all that credit can always be an issue but.
On a diversified basis it feels a little better now look we've got as we've gotten larger.
The balance sheet today.
<unk> can support.
Some of these most recent acquisitions that open up some of these faster growing markets for us so.
Again irrespective of what happens with the credit it feels like we are.
In really good shape for what might come.
Yes, great.
Okay. Thanks, guys.
Thanks, Matt.
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