Q3 2023 SouthState Corp Earnings Call

Speaker 1: Good morning, my name is Audra and I will be your conference operator today.

Good morning, My name is Andre and I will be your conference operator today.

Speaker 1: At this time, I would like to welcome everyone to the South State Corporation Q3 2023 earnings conference call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and after session. If you would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again.

At this time I would like to welcome everyone to the South State Corporation Q3, 2023 earnings Conference call Today's conference is being recorded.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question Press Star one again.

Speaker 1: At this time, I would like to turn the conference over to Will Matthews, Chief Financial Officer. Please go ahead.

At this time I would like to turn the conference over to will Matthews Chief Financial Officer. Please go ahead.

Speaker 2: Good morning and welcome to South Stage 3rd quarter of 2023, Harnex Call.

Good morning, and welcome to South <unk> third quarter 2023 earnings call. This is will Matthews I'm here with John Corbett, Steve Young and Jeremy Lucas.

Speaker 2: This is Will Matthews. I'm here with John Corbett, Steve Young, and Jeremy Luke.

Speaker 2: John and I will make some brief prepared remarks and then we'll open it up for questions.

John and I will make some brief prepared remarks, and then we'll open it up for questions.

Sure.

Speaker 2: As always, a copy of our earnings release and presentation slides are on our investor relations.

There's always a copy of our earnings release and presentation slides are on our Investor Relations website.

Speaker 2: Before we begin our remarks, I want to remind you that comments we make may include forward-looking statements within the meaning of the federal securities laws and regulations.

Before we begin our remarks I want to remind you of the comments. We make may include forward looking statements within the meaning of the federal securities laws and regulations any such forward looking statements. We may make are subject to the safe Harbor rules. Please.

Speaker 2: Any such forward-looking statements we may make are subject to the safe harbor rule.

Speaker 2: Please review the forward-looking disclaimer and safe harbor language in the press release and presentation for more information about our forward-looking statements and risks and uncertainties which may affect us. Now I'll turn the call over to John Corbett, our CEO .

Please review the forward looking disclaimer and Safe Harbor language in the press release and presentation for more information about our forward looking statements and risks and uncertainties, which may affect us.

Now I'll turn the call over to John Corbett our CEO.

Thank you will good morning, everybody thanks for joining us.

Speaker 3: In the earnings release last night, you can see that South State delivered a solid quarter that was right in line with our previous guy.

In the earnings release last night, you can see that South state delivered a solid quarter that was right in line with our previous guidance.

Speaker 3: We'll uncover the details, but high level, we continue to see steady growth in loans and customer deposits. The quantity is stable.

We will cover the details, but high level, we continue to see steady growth in loans and customer deposits.

Liquidity is stable capital ratios are growing.

Speaker 3: Deposit funding is best in class, and our net interest margin is settling in at a pretty good spot.

Deposit funding as best in class and our net interest margin is settling in at a pretty good spot.

Speaker 3: One of the core values that we continually preached our team is to keep our eye on the long-term horizon. So we spent a lot of time talking about the big picture, talking about the economic cycle and where we have risk and where we have advanced.

One of the core values that we continually preach to our team is to keep our eye on the long term horizon. So we spent a lot of time talking about the big picture talking about the economic cycle, and where we have risk and where we have advantages.

Speaker 3: The stages of a banking cycle are simple and predictable.

The stages of a banking cycle are simple and predictable the cycle risks move from liquidity than the earnings than the credit and then finally to capital.

Speaker 3: cycle risks move from liquidity, then to earnings, then to credit, and then finally to cap.

Speaker 3: But while the stages are easy to predict, predicting the speed and the severity of the cycle, that's the tough part.

But while the stages are easy to predict predicting the speed and the severity of the cycle that's the tough part.

Speaker 3: Since March, we've clearly moved through the first phase. The liquidity tightening phase has deposits left the banking system for money market funds.

Since March we've clearly moved through the first phase the liquidity tightening things as deposits left the banking system for money market funds.

Speaker 3: Now the predictable and necessary response is that the industry trades away future earnings power as deposit costs rise.

Now the predictable and necessary response is that the industry trades away future earnings power as deposit costs rise.

Speaker 3: Now for South State, our granular deposit base has served as a ballast for our franchise and we've been able to continue to grow our deposits with a cumulative deposit beta of only 27% and a total cost of deposits of 1.44% for the quarter.

Now for South state our granular deposit base has served as a balanced for our franchise and we've been able to continue to grow our deposits with a cumulative deposit beta of only 27%.

At a total cost of deposits of 144% for the quarter.

Speaker 3: Over on the asset side, we're also about to benefit from a tailwind of loan reprised

Over on the asset side, we're also about to benefit from a tailwind of loan repricing.

Speaker 3: 70% of our loans are based on a fixed or adjustable rate, so we're going to see a significant portion of our loan portfolio reprised by more than 300 basis points as they renew and that should help offset any additional drift in deposit costs.

70% of our loans are based on a fixed or adjustable rate. So we're going to see a significant portion of our loan portfolio re priced by more than 300 basis points as they renew and that should help offset any additional drift in deposit costs.

Speaker 3: That feels like the velocity of change for deposits is moderating. And we're now shifting to the credit risk portion of the cycle.

So it feels like the velocity of change for deposits is moderating and were now shifting to the credit risk portion of the cycle.

Speaker 3: In the last year, we've set aside $151 million in reserves with only 18 million in charge of.

In the last year, we've set aside $151 million in reserves with only $18 million in charge offs.

Speaker 3: And as a result, we've built our reserves up by 28 basis points to 1.59%.

And as a result, we built our reserves up by 28 basis points to 159%.

Speaker 3: that the cycle is more severe than many are predicting. Those reserves plus our excess capital will allow South State to be opportunistic on the backside of the cycle, where the opportunities to create shareholder value are the greatest.

That the cycle is more severe than many are predicting those reserves plus our excess capital will allow south state to be opportunistic on the back side of the cycle, where the opportunities to create shareholder value are the greatest.

Speaker 3: So we're cautious now. The lag effects of the rapid rise and rates are only just beginning to work their way through this.

So we're cautious now the lag effects of the rapid rise in rates are only just beginning to work their way through the system.

Speaker 3: But at the same time, we're excited. We think that there is a tremendous opportunity on the horizon for a bank of our size, in our geography, and with our deposit franchise.

But at the same time, we're excited we think that there is a tremendous opportunity on the horizon for a bank of our size and our geography and with our deposit franchise.

Speaker 3: So I want to close by thanking our team for keeping their eye on the long-term horizon and building a franchise that can weather the storm and come out stronger on the other side. I'll pass it back to Will now to provide some color on the quarter.

So I want to close by thanking our team for keeping their eye on the long term horizon and building a franchise that can weather the storm and come out stronger on the other side I'll pass it back to will now to provide some color on the quarter.

Thank you John.

Speaker 2: We had another solid quarter with deposit costs, margin and non-interest income ending up in line with our expectations.

We had another solid quarter with deposit cost margin and noninterest income ending up in line with our expectations.

Solid P. P N R and good credit costs outside of the one sizable charge offs that impacted us in some of our peers.

Speaker 2: good credit costs outside of the one-smiles we'll charge off that impacted us in some of our peers. I'll touch on a few details.

I'll touch on a few details before we move onto Q&A.

Speaker 2: On the balance sheet, our 6% annualized loan growth moderated from the first half of the year in line with our expectation.

On the balance sheet or 6% annualized loan growth moderated from the first half of the year in line with our expectations.

Speaker 2: Deposits grew at a 2% annualized rate, or 4% if you exclude the approximately $130 million in brokered CD maturities we allowed to run off without replacement.

Deposits grew at a 2% annualized rate or 4%. If you exclude the approximately $130 million and brokerage CD maturities, we allowed to run off without replacing.

Speaker 2: Though we continue to see a mixed shift in our deposits from DDA into money market accounts, the pace of the DDA shift might

Though we continue to see a mix shift in our deposits from DDA into money market accounts.

Pace of the DDA shifts moderated a bit this quarter.

Speaker 2: DDAs represented 30% of total deposits at quarter end, down from 31% last year.

<unk> represented 30% of total deposits at quarter end down from 31% last quarter.

Speaker 2: As we mentioned previously, this figure was 28 to 29% before the pandemic.

And as we mentioned previously this figure was 28% 29% before the pandemic. So it continues to appear as if we're moving towards those pre pandemic levels or DDA as a percentage of deposits.

Speaker 2: So it continues to appear as if we're moving towards those pre-pandemic levels or DDA as a percentage of deposits.

Speaker 2: Turning to the income statement, our 350 NIM was down 12 basis points from Q2.

Turning to the income statement or $3 50, NIM was down 12 basis points from Q2.

Speaker 2: Loan yields were up 14 basis points, but deposits were up 33 basis points, which was in line with our 30 to 35 basis point guidance. Bringing our cycle.

Loan yields were up 14 basis points, but deposits were up 33 basis points, which was in line with our 30% to 35 basis point guidance.

Our cycle to date deposit beta to 27%.

Speaker 2: Our net interest income of $355 million was down $7 million from Q2 on one more day.

Our net interest income of $355 million was down $7 million from Q2 on one more day.

Speaker 2: Non-interest income of $73 million was down $4 million from Q2, though still a solid quarter.

Noninterest income of $73 million was down $4 million from Q2, there was still a solid quarter.

Speaker 2: Correspondent revenue was $13 million after $12 million in interest expense on swap collateral for $25 million in gross revenue, down approximately $3 million from Q2.

Correspondent revenue was $13 million after $12 million in interest expense on swap collateral for $25 million in gross revenue down approximately $3 million from Q2.

Speaker 2: Wealth had another solid quarter, but mortgage revenue of $2.5 million was down $1.9 million.

Wealth had another solid quarter, but mortgage revenue of $2 5 million was down $1 9 million from Q2.

Speaker 2: We had another good quarter in deposit fees, similar.

We had another good quarter and deposit fees similar to Q2.

Speaker 2: Expenses came in a bit lower than expected this quarter, largely due to a revaluation of CERP retirement plan liabilities due to higher interest rates, reducing NIE by 5.9%.

Expenses came in a bit lower than expected this quarter largely due to a revaluation of surf retirement plan liabilities due to higher interest rates producing NII by $5 9 million.

Speaker 2: We also made a $1 million donation during the quarter, for which we received a dollar-for-dollar tax credit. So NIE was higher by $1 million in the quarter, and income tax was lower by the same amount. Excluding that.

We also made a $1 million donation during the quarter for which we received a dollar for dollar tax credit. So NII was higher by $1 million in the quarter and income tax was lower by the same amount excluding that NII was in line with our expectations.

Speaker 2: Looking ahead, we expect NIE for Q4 in the mid-240s range, subject to the normal variations in expense categories impacted by non-entry.

Looking ahead, we expect NII for Q4 in the mid <unk> range subject to the normal variations in expense categories impacted by noninterest income and performance.

Speaker 2: With respect to credit, we recognize the $13 million in net charge-offs in the quarter, bringing our year-to-date total to $17.5 million, or 8 basis points annualized year-to-date.

With respect to credit, we recognized $13 million and net charge offs in the quarter, bringing our year to date total to $17 5 million or eight basis points annualized year to date.

Speaker 2: The one sizable SNCC loan charge-off that received a lot of attention earlier in the quarter accounted for all of the loan net charge-offs as we experienced net loan recoveries before overdraft losses absent that credit, both for the quarter and year-to-date.

The one sizable snick loan charge offs that received a lot of attention earlier in the quarter accounted for all of the loan net charge offs as we experienced net loan recoveries before overdraft losses absent that credit both for the quarter and year to date.

Speaker 2: We continued to build loan loss reserves with a $33 million provision, bringing the total reserve to 159 basis points of loans.

We continued to build loan loss reserves with a $33 million provision, bringing the total reserve to 159 basis points of loans.

For overall asset quality trends.

Speaker 2: NPAs were down slightly, past dues were flat, substandard loans increased, and special mention loans declined.

<unk> were down slightly past dues were flat substandard loans increased in special mention loans declined.

Speaker 2: Line utilization continues to be flat, except on construction lines, as we're not originating many new construction loans and existing projects move towards.

Line utilization continues to be flat, except on construction lines as we're not originating many new construction loans in existing projects move towards completion.

Speaker 2: We continue to have very strong capital ratios with CE Tier 1 of 11.5% or 9.25% if AOCI were included in the calculation.

We continue to have very strong capital ratios with CE tier one of 11, 5% or not in a quarter percent. If OCI were included in the calculation.

TCE ended the quarter at seven 5%.

Speaker 2: With loan growth expectations continuing to moderate, risk-weighted asset growth should be in a range that allows us to continue to grow our regulatory capital ratios and provide us with flexibility.

With loan growth expectations, continuing to moderate risk weighted asset growth should be in a range that allows us to continue to grow our regulatory capital ratios and provide us with flexibility.

Operator, we will now take questions.

Speaker 1: Thank you. At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. We'll go first to Stephen Scouten at Piper Sandler.

Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.

We will go first to Stephen Scouten with Piper Sandler.

Hey, good morning, everyone.

Speaker 4: I was curious if you could talk a little bit about what you're expecting on the NIMS side moving forward and deposit trends from a cost perspective. Obviously, it's catching up a little bit, but still extremely strong, so just kind of wondering what you're expecting in the months ahead.

I was curious if you could talk a little bit about what youre expecting on the NIM side, moving forward and deposit trends from a cost perspective.

Absolutely catching up a little bit, but still extremely extremely strong. So just kind of wondering what youre expecting in the in the months ahead.

Speaker 4: Here, Steven, this is Steve. You know, we, as you know, page 12 shows kind of a summary of our NIM over the last four quarters, and you can see it's 3.5% this past quarter, which was within our guidance, and our deposit costs were up 33 basis points this past quarter, which was in our 30 to 35 basis points guidance.

Sure Steven this is Steve.

Yes.

As you know page 12 shows kind of a summary of our NIM over the last four quarters in <unk>.

And you can see at three 5%. This this past quarter, which was within our guidance and our deposit costs were up 33 basis points. This past quarter, which was in that 30 to 35 basis points guidance.

Speaker 4: You know, we've, so far, sort of been where we thought we were. As we look forward, our guidance really is around three things, interest earning assets, the rate forecast, and deposit data. And really, you know, our interest earning assets are, you know, pretty flat, I would expect, you know, going into the fourth quarter. You know, as we think about Moody's consensus forecast, you know, we've got a lot of things

We've so far.

<unk> been where we thought we were kind of as we look forward our guy that's really around three things interest, earning assets the rate forecast in deposit beta and really.

Our interest earning assets are.

Well, you know pretty flat I would expect you know going into the fourth quarter.

As we think about Moody's consensus forecast.

Speaker 4: You know, the only change it really forecast no new rate hikes, but then it has four cuts.

The only change it really forecast no new rate hikes, but then it has four cuts starting in the late second quarter and for the fed funds rate to add the four 5% at the end of 2024.

Speaker 4: starting in the late second quarter and for the Fed funds rate to end at 4.5% at the end of 2024.

Speaker 4: And so, with all that, our deposit beta, the third component, you know, page 18 shows that our cycle-to-date deposit beta is 27 percent. We continue to expect a high 20s total beta by the end of the year. So, with that, we would expect deposit costs to increase 15 to 20 basis points in the fourth quarter. And so, with all of that, and all those assumptions baked together...

So with all that our deposit beta the third component page 18 shows our cycle to date deposit beta is 27%.

We continue to expect the high Twenty's total beta by the end of the year. So with that we would expect deposit costs increased 15% to 20 basis points in the fourth quarter.

And so with all of that and kind of all those assumptions baked together.

Speaker 4: We'd expect them to bottom in the fourth quarter somewhere in the

We would expect NIM to bottom in the fourth quarter somewhere in the five basis points lower maybe maybe around three $3 45 to $3 50 somewhere in there.

Speaker 4: five basis points lower, maybe around 345 to 350, somewhere in there.

Speaker 4: So that's sort of what we're looking for in the fourth quarter as we look into 2024 based on the Moody's forecast.

That's sort of what we're looking for in the in the fourth quarter as we look into 2024 on based on the Moody's forecast.

Speaker 4: and our growth assumptions, we'd expect our interest earning assets to average $41 billion.

Our growth assumptions, we would expect our interest earning assets averaged $41 billion.

Speaker 4: and that our NIM would stabilize in the $350 to $360 range, which is really no change to our guidance. If I take a step back at thinking about $23 versus $24, it's been such a volatile year relative to rates and NIMs and deposit betas and so on.

And then our NIM would stabilize and the $3 50 to $3 60 range, which is really no change to our guidance.

Take a step back thinking about 'twenty three versus 24, it's been such a volatile year relative to rates and nims in deposit betas and so on but you know.

Speaker 4: It looks like our NIM for the full year 23 will be in the low 360s, if in 24 it's in the mid 350s, and we'll just have a little bit more growth offset it. So anyway, those are kind of the ways we're thinking about NIM one quarter out and sort of how we're thinking about it for next year with these.

It looks like.

Our NIM for the full year 'twenty three will be in the low 360 is if <unk> 24 in the mid 300 <unk>.

We will just have a little bit more growth to offset it. So anyway. Those are kind of the ways, we're thinking about NIM.

One quarter out and sort of how we're thinking about it for next year with these assumptions.

Speaker 4: Yeah, that's helpful. And the stability that's created there, and I know John spoke this a little bit, is that the lot of that coming from the asset side repricing on that 70% alone, and have you guys given any detail around the pace of those repricings and kind of when we can kind of ratably see that benefit?

Yes, that's helpful.

And the stability that's created there and I know John John spoke to this a little bit is that a lot of that coming from the asset side repricing on that 70% of loans and have you guys given any detail around the pace of those re pricings and kind of when we can kind of ratably see that benefit.

Speaker 4: Sure, I think with a last quarter we talked about it on the call, but it's roughly about a billion dollars a quarter in loan reprisings. So, you know, what is it, four billion a year? And that step up is around 300 basis points or so. And then of course we have some securities coming in. That's probably 7,800 million, but you know, we'll likely use that to fund loan growth.

Sure I think.

Last quarter, we talked about on the call, but it's roughly about $1 billion a quarter.

Loan re pricings, so whether the $4 billion a year.

And that step up is around 300 basis points or so.

And then of course, we have some securities come in.

Coming in.

That's probably seven to 800 million, but will likely use that to fund loan growth. So.

Speaker 4: Maybe that helps you kind of just frame up. It's about a billion dollars of quarter over the next, I don't know, five, six quarters, and it's roughly a 300 basis point to pick up, but yield there's somewhere in the four and a quarter to four and a half range. And that's the adjustable. Okay.

Maybe that helps you kind of just frame up it's about.

$1 billion a quarter over the next I don't know five six quarters, and it's roughly a 300 basis point pick up that the yields are somewhere in the fourth quarter to four and a half range and that's the adjustable fixed repricing.

Speaker 5: Right, yep, understood. Okay, great. And then I guess lastly for me, any sort of, you know, as you think about that movie expectation, we start thinking about the presumably some rate cuts, any kind of higher arching balance sheet strategies to protect them when rates presumably do go down and anything around a potential bond restructuring. I think the ASCL's maybe near 816 million here today, so I'm just kind of wondering with the capital bill, if that's something you guys are thinking more about.

Right Yep understood.

Okay, Great and then I guess lastly from me any sort of you know as you think about that Moody's.

Expectation when we start thinking about the presumably some rate cut any kind of higher arching balance sheet strategies to protect the NIM.

When rates, presumably do go down and anything around a potential bond restructuring I think the <unk>.

CLS, maybe near $816 million year to date, but I'm just kind of wondering with the capital build if that's something you guys are thinking more about.

Speaker 4: What maybe I'll address, you know, NIM strategies maybe Will or John can address capital and boundary structure. You know, as we think about the NIM moving forward, we had an investor recently asked us, if, you know, if Fed funds went down to 3%, what was your, you know, what was your NIM back when Fed funds was 3% and we did some, we really didn't remember, but we looked back at it and it was in that, you know, 375.

Well, maybe I'll address.

NIM strategy is maybe.

We'll or John can address capital and bond restructure.

As we think about the NIM moving forward and we had an investor recently asked us if.

If fed funds went down to 3% what was your what was your NIM back when fed funds was 3%.

Did some rather than remember, but we look back at it and it was in that.

375% to 4% range. So it's just we're waiting for the re pricing strategy of all these fixed rate type loans, if our if our deposit paying and so as we think about.

Speaker 4: So it's just we're waiting for the repricing strategy of all these fixed rate type loans if our deposit paying in. So as we think about...

Speaker 4: We'll do things around the margin, around hedging, and those kinds of things. That won't be a huge strategy for us.

We'll do things around the margin around hedging and those kinds of things that won't be a huge strategy for us, but I think the opportunity will be as rates if rates do fall.

Speaker 4: But I think the opportunity will be as rates, if rates do fall, if we have full rate cuts next year, you know, money markets and other types of things on the incremental margin would fall a little bit. And then our fixed rate repricings of our loans would continue to, to,

If we have four rate cuts next year.

Money market and those types of things on the incremental margin would fall a little bit and then our fixed rate repricing of our loans would continue to.

Speaker 4: you have to continue to reprise up. And so as we think about the modeling and as we think about, yeah, and that's why we sort of are guiding in that range. But why don't I turn it over to Will and just maybe talk about bond restructuring accounts.

To continue to reprice up and so as we think about the modeling and as we think about yes. That's why we sort of guiding in that in that range, but why don't I turn it over to will and does maybe talk about restructuring capital, yes, Stephen Good morning, I'd say, we have flexibility, which we like we got a strong capital.

Speaker 2: Yeah, yes, Stephen, good morning. You know, I'd say we have flexibility, which we like. You know, we got a strong capital position, we got a strong reserve.

<unk>, we got strong reserve.

Speaker 2: We've got a good capital formation rate. And you know, so I give us a lot of things to think about with respect to capital deployment. I mean, you know, at current price, our stock is pretty attractive, so certainly we've purchased this.

We've got a good capital formation rate.

And so that gives us a lot of things to think about with respect to capital deployment.

At current price our stock is pretty attractive so certainly repurchases.

Speaker 2: of some some degrees on the table. And additionally, you know, with bond portfolio restructure while we're not likely to engage in a wholesale kitchen sink type thing, the certainly the ability to nibble around the edges. So we continue to think about all those options.

Some some degree is on the table.

And additionally, with bond portfolio restructure while we're not likely to engage in a wholesale kitchen sink type thing that certainly the ability to nibble around the edges. So we continue to think about all of those options.

Speaker 2: as well as some of the go-tock paintings that forwarded us by terminal on markets and the good economy in which we operate. So we like that flexibility. Okay, Jeff.

As well as some of the growth opportunities afforded us by terminal markets and the good good economy in which we operate so we like that flexibility.

Fantastic. Thanks for all the color everyone. Appreciate the time.

Thanks, Steve.

Speaker 1: We'll take our next question from Catherine Mueller at KVW.

We will take our next question from Catherine Mealor at K B W.

Thanks, Good morning, good morning.

Yes.

Speaker 6: We see a couple of smaller M&A transactions in the Southeast over the past few months. I'm curious your updated thoughts on M&A and how you're thinking about how you're positioned there in the next year.

We see a couple of smaller M&A transactions in the southeast over the past few months just curious here.

David thoughts on M&A, and how you're thinking about how you're positioned there perm into last year.

Speaker 4: Catherine is John , good morning. We're really, really okay. And no change from our prior guidance. We've seen a couple of these deals happen, but it's still really, really challenging to get the math work to work with the AORCI and the regulatory delay risk. So.

Hey, Catherine this is John good morning.

Really no change yes.

Yes, no change from our prior guidance.

We've seen a couple of these deals happen, but it's still really really challenging to get the math to work with the OCI and the regulatory delay risks so far.

Speaker 4: Our assumption is that things are going to pick up probably the back half of 2024 as we get closer to the election. And there's more certainty in the economy. Clearly the logic is there for M&A to give in the revenue pressures in the industry. And we're just going to stay out on the street visiting peer banks that possibly could be partners in the future. But it's challenging the short run.

Our assumption is that things are going to pick up probably the back half of 2024, as we get closer to the election and theres more certainty in the economy.

Operator: Good morning, my name is Audra and I will be your conference operator today.

Operator: At this time I would like to welcome everyone to the South State Corporation Q3 2023 earnings conference call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and after session. If you would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again.

Clearly the the logic is there for M&A given the revenue pressures in the industry and we're just going to stay out on the street visiting peer banks that possibly could be partners in the future but.

It is challenging in the short run.

Speaker 6: And then just a big picture earnings questions we think about next year. As you look at, you've got a little bit, a little bit of stabilization in the margin after we kind of come off a fourth quarter. You know, it seems like you still expect for there to be a little bit of balance sheet growth, but as you look at revenue growth as compared to expense growth.

And then just big picture.

Earnings question as we think about next year, you look at you've got a little bit or is it let's call. It stabilization in the margin after we cannot come out for fourth quarter.

Operator: At this time, I would like to turn the conference over to Will Matthews, Chief Financial Officer. Please go ahead.

William Matthews: Good morning and welcome to South State's third quarter 2023 earnings call. This is Will Matthews. I'm here with John Corbett, Steve Young, and Jeremy Lupus.

It seems like you still expect there to be a little bit of balance sheet growth, but as you look at revenue growth as compared to expense growth.

Speaker 6: How do you think those two marry each other in 24? Do you think this is a year where you can still create positive operating leverage? Or do you see this as a year where we'll really kind of see revenue and expense growth kind of be at the same pace or maybe even a little bit more expense growth relative to revenue? Just curious how you're thinking about that into next year.

You think this to marry each other in 2004 do you think this is a year, where you can still create positive operating leverage or do you see this as a year, where we'll really kind of see revenue and expense growth and a de emphasis.

William Matthews: John and I will make some brief prepared remarks and then we'll open it up for questions. As always, a copy of our earnings release and presentation slides are on our investor relations website. Before we begin our remarks, I want to remind you the comments we make may include four looking statements within the meaning of the federal securities laws and regulations. Any such four looking statements we may make are subject to the safe harbor rules. Please review the four looking disclaimer and safe harbor language and the press release and presentation for more information about our four looking statements and risks and uncertainties which may affect us.

Same pace or maybe even over March thanks, Chris that relative to revenue just curious how youre thinking about that into next year.

Speaker 4: Well, Catherine, this is Steve. If you could tell us what the yield curve would look like that help. I'm not sure that we do that. But, you know, I do think, you know, in the in the immediate environment.

Well Catherine this is Steve if you could tell us what the yield curve it looked like that helped.

I'm not sure of that.

Yes I.

I do think.

The immediate environment.

Speaker 4: As we've talked about NEM, if we talk about fee income, that's going to be a bit more challenging, I think, in the next quarter or so, just with the 10-year Treasury rising. One of the businesses that we're in is the Correspondent Division, and we see, with the 10-year rising, some of the swap opportunities probably aren't there, at least in this quarter. It bounces around from time to time and so on, so I'd imagine that won't be a problem.

Or as we think about we've talked about NIM. If we talk about fee income that's going to be a bit more challenging I think in the next quarter. So just with the 10 year Treasury rising one of the businesses that were out of the correspondent division and we see what the 10 year rising some of the swap opportunity is probably aren't there at least on this.

John Corbett: Now I'll turn the call over to John Corbett, our CEO. Thank you, Will.

This quarter in <unk>.

Ounces around from time to time, and so on so I would imagine that won't.

John Corbett: Good morning, everybody. Thanks for joining us. In the earnings release last night, you can see that South State delivered a solid quarter that was right in line with our previous guidance. We'll uncover the details, but high level we continue to see steady growth and loans and customer deposits liquidity is stable capital ratios are growing deposit funding is best in class and our net interest margin is settling in at a pretty good spot.

Speaker 4: I didn't actually come up, but our range of non-ash think come to assets. I think if you look back at this quarter, we guided the 55 to 65 basis points.

Eventually come up but our range of of.

Non interest income to assets I think this.

If you look back at this quarter, we guided to $55 to 65 basis points.

Speaker 4: This quarter we were at 64 basis points so I'd call it up high end. You know if I looked forward into the next quarter I would think we'd be closer to the lower end of that. And then as we think about kind of a full year picture of non-interesting income, you know, you know, I would-

This quarter, we were at 64 basis points, So I'd call. It at the high end.

I look forward into the next quarter I would think we'd be closer to the lower end of that.

Then as we think about kind of a full year picture of noninterest income.

John Corbett: One of the core values that we continually preached our team is to keep our eye on the long term horizon. So we spent a lot of time talking about the big picture, talking about the economic cycle and where we have risk and where we have advantages. The stages of a banking cycle are simple and predictable. The cycle risks move from liquidity, then the earnings, then the credit, and then finally the capital.

I would expect I think.

Speaker 4: We've been guiding in that 55 to 65 basis point range. We'll probably end up in the low 60s in the basis point to average assets. And as we think about.

We've been guiding in that 55% to 65 basis point range, we will probably end up in the low sixty's.

The basis points us to average assets and as we think about.

Speaker 4: 2024 I'd expect we would probably start a little lower and then in higher as the as if the movie's consensus is right and the 10-year treasury goes back towards 4% We'll start seeing more capital market activity. So you know kind of the way I think about it probably won't be

2024, I'd expect we would probably start a little lower and then in higher.

If the Moody's consensus is right in the 10 year Treasury goes back towards the 4% we will start seeing more capital market activity. So kind of the way I'd think about it probably won't be.

John Corbett: But while the stages are easy to predict predicting the speed and the severity of the cycle, that's the tough part. This March, we've clearly moved through the first phase the liquidity tightening phase has deposits left the banking system for money market funds. Now the predictable and necessary response is that the industry trades away future earnings power as deposit costs rise. Now for South State, our granular deposit base has served as a ballast for our franchise and we've been able to continue to grow our deposits with accumulated deposit beta of only 27% and a total cost of deposits of 1.44% for the quarter.

Speaker 4: A lot of growth in the non-interest income year-over-year, assuming this Moody's rate forecast, and I would expect that based on the NIM forecast, we just kind of went through dollar growth is probably not going to be a lot, so that's the revenue picture. Maybe I'll just talk.

A lot of growth in the.

Noninterest income year over year.

Assuming this Moody's <unk> forecast and I would expect that based on the NIM forecast. We just kind of went through dollar growth is probably not going to be alive. So thats. The revenue picture, maybe I'll just talk to the expense picture, yes. So obviously with that revenue picture. Our goal for next year is to be very.

Speaker 6: Yeah, and so obviously with that revenue picture, our goal for next year is to be very controlled in our expense growth. And we're still deep in the planning and budgeting processes. As most people are at this point, the stage doesn't have any precise guidance to give, but we would hope and expect to be in the low-demand single digit range on expense growth and try to control it as tightly as we can. No?

Controlling our expense growth.

We're still deep in the planning and budgeting processes as most people are at this point in the states that don't have any precise guidance.

Guidance to give but we would.

John Corbett: Over on the asset side, we're also about to benefit from a tailwind of loan reprise. 30. 70% of our loans are based on fixed or adjustable rates, so we're going to see a significant portion of our loan portfolio reprised by more than 300 basis points as they renew and that should help offset any additional drift in deposit costs. And as a result, we've built our reserves up by 28 basis points to 1.59%.

Hope and expect to be in the low to mid single digit range on expense growth and try to control it as tightly as we can.

Alright, great. Thank you appreciate it.

Alright, Thanks, Kevin.

Yes.

Okay.

We will go next to Michael Rose at Raymond James.

Speaker 5: Hey, good morning guys. Thanks for taking my questions. Just wanted to follow up on that last.

Hey, good morning, guys. Thanks for taking my questions just wanted to follow up on that last point on expenses.

Speaker 5: Point on expenses, you guys are in a pretty enviable position from a fundamental standpoint. You guys have been very conservative, built reserves. I think that's really well taken from my vantage point.

You guys are in a pretty enviable enviable position from a fundamental standpoint, you guys have been very conservative built reserves I think thats really well taken from my vantage point.

Speaker 5: You got capital growing. I mean, why not be more aggressive on the expense side now while revenues are under pressure? So you better position yourself. You talked about John at the outset.

Capital is growing I mean, why not be more aggressive on the expense side now while revenues are under pressure. So you better position yourself and you talked about John at the outset for what will be brighter days at some point I know, there's a lot of dislocations in the market I assume theres a lot of good lenders out there that you guys can go after why not actually be more.

John Corbett: Now, if the cycle is more severe than many are predicting, those reserves plus our excess capital will allow South State to be opportunistic on the backside of the cycle where the opportunities to create shareholder value are the greatest. So, we're cautious now. The lag effects of the rapid rise and rates are only just beginning to work their way through the system. But at the same time, we're excited. We think that there's a tremendous opportunity on the horizon for a bank of our size and our geography and with our deposit franchise.

Speaker 5: for, you know, what will be by writer days at some point. I know there's a lot of dislocations in the market. I assume there's a lot of good lenders out there that you guys can go after.

Speaker 5: Why not actually be more aggressive here on the hiring and organic growth front while you have many competitors that are capital and liquidity constrained? Thanks.

More aggressive here on the hiring and organic growth front.

You have many competitors that are capital and liquidity constrained.

Speaker 4: Yeah, okay, when I heard you say be aggressive on the expense run, I wasn't sure whether you were cutting expenses or adding expenses, Michael, but I think you're saying the opportunistic is what you're saying. Correct. Yeah. Yeah. Yeah. Yeah. And we would agree with that. And I would tell you that really...

Yeah, Okay, I heard you say it would be aggressive on the expense Brian I wasn't sure whether you were cutting expenses or added expenses, Michael but I think youre, saying the opportunistic as what you are saying correct, yes, yes, yes.

Yes.

We would agree with that and I would tell you that really.

John Corbett: So, we'll close by thanking our team for keeping their eye on the long-term horizon and building a franchise that can weather the storm and come out stronger on the other side.

Speaker 4: We're opportunistic all the time. We never stop recruiting and building the bench strength. I think you know about our management associate program we've had going for years where we bring in.

We're opportunistic all the time.

We never stopped recruiting and building the bench strength I think about our management Associate program, we've got going for years, where we bring in 35 College in terms every summer we converted 15% to 20 into management associates every year to build that bench strength on the credit team and on the lending team.

William Matthews: Now, I'll pass it back to Will now to provide some color on the quarter.

Speaker 4: 35 college interns every summer. We convert 15 to 20 in the management associates every year to build that bench drink on the credit team and on the lending team. We're always out recruiting last night. My wife and I had dinner with with a prospect of veteran prospect banker. And so we're out talking to folks all the time. And so

William Matthews: Thank you, John. We had another solid quarter with deposit costs, margin, and non-interest income ending up in line with our expectations. Solid PPR and good credit costs outside of the one size will charge off the impact of us in some of our peers.

We're always recruiting last night.

My wife, and I had better with the prospect of veteran prospect banker and so we're out talking to folks all the time and so.

William Matthews: I'll touch on a few details before we move on to Q&A. On the balance sheet, our 6% annualized loan growth moderated from the first half of the year and allow their expectations. Deposit screw at a 2% annualized rate or 4% if you exclude the approximately 130 million in brokerage CD maturities, we allow it to run off without replacing. Though we continue to see a mixed shift in our deposits from DDA in the money market accounts, the pace of the DDA shift moderated a bit this quarter.

Speaker 4: We're not going to...

We're not going to we're not going to.

Speaker 4: put a number out there on the expense growth side that would keep us from being opportunistic if that helps.

<unk> put a number out there on the expense growth side that would keep us from being opportunistic if that helps.

Speaker 5: It does. No, it makes complete sense. Just a few smaller ones. I noticed that the FHLB was essentially paid down, looks like brokered deposits came down a little bit. What other – I assume brokered deposits will come down as you grow core deposits. What's kind of a right level to think about that, and is there any other tools or actions you can take on the liability side to kind of contain the creep in interest-bearing liability costs?

Hi, guys now makes makes complete sense.

Just a few smaller ones I noticed that the FHA will be was.

Essentially paid down looks like brokered deposits came down a little bit what other yes.

I assume broker deposits will come down as you grow core deposits, what is kind of a right level to.

William Matthews: DDA is represented 30% of total deposits at a quarter end down from 31% last quarter. As we mentioned previously, this figure was 28 to 29% before the pandemic. So it continues to appear as if we're moving towards those pre-pandemic levels for DDA as a percentage of deposits. Turning to the income statement, our 350NM was down 12 basis points from Q2. Loan yields were up 14 basis points but deposits were up 33 basis points, which was in line with our 30 to 35 basis point guidance, bringing our cycle to date deposit beta to 27%.

Think about that and is there any other.

<unk> our actions you can take on the liability side to kind of contain the <unk>.

<unk> interest.

Interest bearing liability costs. Thanks.

Speaker 4: Michael, you remember in March when we had sort of the banking term while we went ahead and did a brokerage CD offering, I think it was a billion, too or so.

Yes, Michael its Steve Youll remember in March when we had sort of the banking turmoil. We went ahead and did a brokered CD offering I think it was a $1 two or so and then we also borrow $900 million of federal home loan bank and that was just sort of an abundance of caution with all the turmoil going on and what you've seen.

Speaker 5: And then we also borrowed $900 million of Federal Home Loan Bank, and that was just sort of an abundance of caution with all the turmoil going on. And what you've seen over the last couple of quarters is, one, we've paid off the $900 million of Federal Home Loan Bank as worries have died down, and then the brokerage CDs are starting to roll off.

Over the last couple of quarters is one we paid off the $900 million of federal home loan Bank.

William Matthews: Our net interest income of 355 million was down 7 million from Q2 on one more day. Non-interesting income of 73 million was down 4 million from Q2, though still a solid quarter. Correspondent revenue was 13 million after 12 million and interest expense on swap collateral for 25 million gross revenue down approximately 3 million from Q2.

Worries of died down and then.

And then the brokerage Cds are starting to roll off so.

Speaker 5: You know, we typically right now, I think our broker's CDs are around 3% of our deposits give or take. You know, I could see that coming down a little bit, that it, you know, I wouldn't, it wouldn't be a normal level for us to be around 3% of broker deposits. It could go lower, but it wouldn't be an unusual event for us to stay, hang out in that, in that general range.

We typically right now I think our brokerage Cds that around 3% of our deposits give or take.

I could see that coming down a little bit.

I wouldn't it wouldn't be a normal level for us to be around 3% of broker deposits that could go lower but it wouldnt be unusual event for us to say hang out in that in that general range and I would say and Echo <unk> comments I think some of our peers have made in their calls.

William Matthews: 2. Wealth had another solid quarter, but mortgage revenue of 2.5 million was down 1.9 million from Q2. We had another good quarter in deposit fees similar to Q2. Expenses came in a bit lower than expected this quarter, largely due to a revaluation of surplus retirement plan liabilities due to higher interest rates, reducing NIE by 5.9 million. We also made a 1 million dollar donation during the quarter for which we received a dollar for dollar tax credit, so NIE was higher by 1 million in the quarter and income tax was lower by the same amount, excluding that NIE was in line with our expectations.

Speaker 2: And I would say in echoing comments that I think some of our peers have made in their calls.

Speaker 2: We're seeing the while they're still the deposit cost pressure, the rate of change is slowed a bit and it feels like the...

We're seeing.

While there's still deposit cost pressure the rate of change has slowed a bit in the.

Speaker 2: the heaviest competition in that regard is behind.

It feels like the.

The heaviest competition in that regard is behind us.

Speaker 5: Okay, great. Maybe just finally for me, do you have a sense for what the new loan production yield was and maybe what the margin was for September ? Thanks.

Okay, Great and maybe just.

Finally for me do you have a sense for what the new loan production yield was and maybe what the margin was it.

For September thanks.

Speaker 4: Yes, so our new loan production yield for the third quarter was around 740, I think it was a little over that, 742 on the new funded yield. It is a little higher than that September .

Yes, so our new loan production yield for the third quarter was around 740, I think it was well over that 732 on the new funded yield.

William Matthews: Looking ahead, we expect NIE for Q4 in the mid-240s range subject to the normal variations in expense categories impacted by non-interest income and performance. With respect to credit, we recognize the $13 million in net charge-offs in the quarter, bringing our year-to-date total to $17.5 million, or 8 basis points annualized year-to-date. The one-size-well-snick loan charge-off that received a lot of attention earlier in the quarter accounted for all of the loan net charge-offs as we experienced net loan recoveries before overdraft losses absent that credit, both for the quarter and year-to-date.

A little higher than that September.

Speaker 5: I don't think we just have the September margin numbers, but I think it was, you know, for the most of the quarter, it was not all that far different from our ending quarter. But, you know, a few basis points here or there, and, you know, the margin moves, obviously, a few basis points on 30 days versus 31 and so on, but it was reasonably stable most of the quarter. All right. Thanks for taking my questions, guys.

I don't think.

<unk>.

September.

Margin numbers, but I think it was for the most of the quarter. It was not all that far different from our ending quarter, but a few.

A few basis points here or there in the margin news, obviously, a few basis points on 30 days versus 31, and so on but it was reasonably stable most of the quarter.

Alright, thanks for taking my questions guys. Thanks.

Thanks, Brian.

Well go next to Dave Bishop at <unk>.

Yes, good morning, gentlemen.

Good morning.

Speaker 7: I'm curious circling back to the preamble you mentioned, sort of the life cycle, the, you know, the banking industry and the

William Matthews: We continued to build loan loss reserves with a $33 million per vision, bringing the total reserve to $159 basis points of loans. For overall asset quality trends, NDAs were down slightly, pasties were flat, substandard loans increased, and special mention loans declined. Line utilization continues to be flat, except on construction lines, as we're not originating many new construction loans and existing projects move towards completion. We continued to have very strong capital ratios with CE tier 1 of 11.5%, or 9.4% if AOCI were included in the calculation. TCE ended the quarter at 7.5%. With long growth expectations continuing to moderate, risk-weighted asset growth should be in a range that allows us to continue to grow our regulatory capital ratios and provide us with flexibility.

I'm curious circling back to the preamble you mentioned some of our lifecycle the.

The banking industry.

Speaker 7: Paying attention to the credit cycle here. We saw the wall off, the credit you alluded to in the charge off, but maybe peeling back the uningest curious, you know, you're recent reviews of our financials.

Paying attention to the credit cycle here, we saw the one offs net credit you alluded to in the charge offs, but maybe peeling back the onion just curious.

Your recent reviews of our financials.

Speaker 7: Anything that's standing out from a credit deterioration perspective that maybe not showing up in the numbers, but areas where you're pulling back from or being a little bit more cautious on these days?

Anything that's standing out from a credit deterioration perspective that maybe not be not showing up in the numbers, but areas, where you are pulling back from or are being a little bit more cautious on these days.

Speaker 4: Yeah, I mean, Dave, the pipelines are trending down. I mean, I think the Fed is getting what they wanted with liquidity being tight. I think borrowers are more cautious. Banks are more cautious. So we anticipate for the industry that pipelines will shrink. Now, the interesting part is I think the

Yes.

Dave the pipelines are trending down I mean, I think the fed is getting what they want it with liquidity being tight I think borrowers are more cautious banks are more cautious. So so we anticipate for the industry that pipelines will straighten out the interesting part is.

I think the loan growth.

Operator: Operator will now take questions. Thank you. At this time, I would like to remind everyone in order to ask a question, press star, then the number one on your telephone keypad.

Speaker 4: will be a little bit disconnected from the pipeline trend.

We'll be a little bit disconnected from the pipeline trends.

Speaker 4: While pipeline trends will be going down and probably new loan production will be going down, payoffs that streets do a halt, and there's still some funding at the loan production that we did last couple of years. So I think that we're gonna see probably mid-single digit kind of loan growth continue, but it will be on lower production levels than we've had in the past. But from a credit standpoint,

While pipeline trends will be going down and probably new loan production will be going down.

Stephen Scouten: We'll go first to Steven's fountain at Piper Sandler.

Pay offs.

<unk> to a halt and theres still some funding the loan production that we did the last couple of years. So I think that we're going to see probably mid single digit kind of loan growth continue but it will be on lower production levels than we've had in the past but.

Stephen Young: Hey, good morning, everyone. I was curious if you could talk a little bit about what you're expecting on the NIMS side moving forward and deposit trends from a cost perspective. Obviously, it's catching up a little bit, but still extremely strong, so just kind of wondering what you're expecting in the month ahead. Here, Steven, this is Steve. You know, we, as you know, page 12 shows kind of a summary of our NIMS over the last four quarters.

From a credit standpoint.

Speaker 4: You know, we've talked about in the past the areas that we see having the most stress and the short term is probably a small business SBA kind of loans. That the assisted living space just never really recovered from COVID and they continue to face labor pressures. And yeah, everybody's talking about office.

Talked about in the past the areas that we see having the most stressed in the short term is probably a small business SBA kind of loans that the assisted living space just never really recovered from Covid and they continue to face labor pressures and everybody is talking about office.

Stephen Young: And you can see it 3.5% of this past quarter, which was within our guidance and our deposit costs were up 33 basis points, this past quarter, which was in our 30 to 35 basis points guidance. So, you know, we've, so far, it's sort of been where we thought we were. Because we look forward, our guidance really is around three things, interesting assets, the rate forecast and deposit data. And really, you know, our interesting assets are pretty flat, I would expect, you know, going into the fourth quarter.

Speaker 4: We think we're going in, and our loan review team is being very conservative and forward-looking on how we're looking at grading loans, and so I think it's forcing the conversations with borrowers in advance of maturities, which is the way it should work. So anyway, that gives you some picture of our sense of...

We think we're going in and our loan review team is being very conservative in forward looking on how we're looking at grading loans and so.

I think it's forcing the conversations with borrowers in advance of maturities, which is the way. It should work. So that gives you some picture are sensitive.

Speaker 8: where the credit risks are and where the production trends are headed.

Where the credit risks are and where the production trends are headed.

Stephen Young: You know, as we think about Moody's consensus forecast, you know, the only change, it really forecast no new rate hikes, but then it has four cuts starting in the late second quarter. And for the Fed funds rate to end up 4.5% at the end of 2024, and so with all that, our deposit beta, the third component, you know, page 18 shows that are cycle-to-date deposit beta is 27%, we continue to expect the high 20s total beta by the end of the year.

Great I appreciate the color.

And we'll go next to Brad dairy Preston at UBS.

Yes.

Thanks.

Speaker 9: Hey, guys, how are you this morning? Good morning. We're doing well.

Hey, guys. How are you this morning.

Doing well.

Speaker 2: Hey, I just wanted to clarify something on the expenses real quick. Will, did you say mid-240s? Is that accurate? Yeah. The exact middle point of that would be 245 million. That's the mid-240s I was referencing. Sorry, that wasn't more clear.

Hey, I just wanted to say.

Clarify something that on the expenses real quick did you say you said mid 200 parties is that is that accurate.

Yes.

Stephen Young: So with that, we would expect the deposit cost to increase 15 to 20 basis points in the fourth quarter. The five basis points lower, maybe maybe around 345 to 350 somewhere in there. So that's sort of what we're looking for in the fourth quarter. As we look into 2024 based on the Moody's forecast and our growth assumptions, we expect our interesting assets, the average 41 billion and that our NEM would stabilize in the 350 to 360 range, which is really no change to our guidance.

Yes.

The exact middle pointed out would be 245 million.

Estimate to 40 as I was referencing sorry that wasn't more clear.

Speaker 2: No, no, I just want to make sure because the live transcript picked up mid-220s, which. And let me also clarify, I should point out that it does not include, of course, the FDIC special assessment, which has not, if it gets finalized this quarter, we'll all be booking it in Q4, and for us, that's around 25 million. But that's not in those numbers, obviously.

No no no I just want to make sure because the live transcript picked up mid 200, Twenty's, which okay.

Let me let me also clarify.

I should point out that it does not include of course, the FDIC special assessment, which has not if it gets finalized this quarter will all be broken up in Q4 and for US that's around $25 million, but that's not in those numbers obviously.

Got it okay.

Speaker 9: You know, on the portfolio restructure, you said that you're not going to, you know, do the whole kitchen sink, you know, maybe nibble around the edges. You know, I guess, what does nibbling around the edges look like in terms of, you know, size and, you know, I guess maybe the securities that are coming due more near term that maybe have lower loss content to them? Like, are there, is there a sizable portion of the portfolio that's maybe lower yielding, you know, that's maybe coming due at some point in the next 12 months that you could?

On the on the portfolio restructure you said that youre not going to.

Due to the whole kitchen sink maybe nimble around the edges I guess.

Stephen Young: But if I take a step back thinking about 23 versus 24, it's been such a volatile year relative to rates and NEMs and deposit beta and so on. But, you know, it looks like our NEM for the full year 23 will be in the low 360s. If, if in 24 in the mid 350s and we'll just have a little bit more growth offset it. So anyway, those are kind of the ways we're thinking about NEM one quarter out and sort of how we're thinking about it for next year with these assumptions.

What is the what is nibbling around the edges look like in terms of size.

I guess, maybe the securities that are coming due more near term that maybe have lower loss content to them like.

Are there is there a size or a portion of the portfolio, that's maybe lower yielding.

Maybe coming due at some point in the next 12 months that you could.

Speaker 9: look to Ponton that could generate some reasonable UPS accretion.

Look some PON ton that could generate some reasonable EPS accretion.

Speaker 4: Sure, Brody. This is Steve. You know, as we've thought about it and, you know, continue to monitor and think about it, you know, I think the, yes, we're thinking about like size. I don't think it would be certainly not more than 15%, probably, you know, 10% or so of the available, or excuse me, of the investment portfolio book would be something to look at. And then I guess as we think about.

Sure Brady this is Steve.

We've thought about it and continue to monitor and think about it I think the yes. We are thinking about like size I don't think it would be certainly not more than 15%, probably 10% or so of <unk>.

Stephen Young: Yeah, that's helpful. And the stability that's created there and I know John, John spoke this a little bit is that the lot of that coming from the asset side repricing on that 70% alone and have you guys given any detail around the pace of those repricings and kind of when we can kind of radically see that benefit. Sure, I think with a last quarter, we talked about it on the call, but it's roughly about a billion dollars a quarter in loan repricings.

The available or excuse me of the investment portfolio book would be something to look at and then I guess as we think about EPS accretion and earn back all of that would be anything else. We do on the capital side, we would want that earn back that come within three years. So.

Speaker 4: EPS creation, earn back all that would be anything else we do on the capital side. And we would want, you know, that earn back to come.

Speaker 4: you know, within three years. So, you know, I think as we think about the whole

Stephen Young: So, you know, what is it for a billion a year. And that step up is around 300 basis points or so. And then, of course, we have some securities coming in. That's probably 7800 million, but you know, we'll likely use that to fund loan growth. So, maybe that helps you kind of just frame up. It's about, you know, a billion dollars a quarter over the next, I don't know, five, six quarters. And it's roughly a 300 basis point to pick up the yields are somewhere in the four and a quarter to four and a half range. And that's the adjustable and fixed repressions. Right. Yep, understood.

I think as we think about the whole options on the table relative to capital whether as will mentioned the buyback whether it's bond restructure whether it's growth whether it's M&A.

Speaker 4: Options on the table relative to capital whether as we'll mention the buyback whether it's bond restructure whether it's growth whether it's M&A, you know, we're thinking about them and inside the same lens of course on a bond restructure you have less executioner.

We're thinking about them in inside the same lens of course Autobahn restructure you have less execution risk.

Speaker 4: But at the same time, there's other pieces and parts that we're looking at from a capital management. And I'm really glad that we're in a position where capital has grown over the last year, the earnings, the PC and our earnings have been really good. And...

At the same time, there's other other pieces and parts that we're looking at from a capital management and I'm really glad.

We are in a position where capital has grown over the last year the earnings the PPE and our earnings have been really good and the loan loss provisions have been.

Speaker 4: and the loan loss provisions have been, you know, socked away, so I think we're in a good position to have some flexibility.

Socked away. So I think we're in a good position to have some flexibility.

Stephen Young: Okay, great. And then I guess lastly, for me, any sort of, you know, as you think about that movie expectation, we start thinking about the presumably some rate cuts. Any kind of higher arching balance sheet strategies to protect them when rates presumably do go down and anything around a potential bond restructuring. I think the ACLs, maybe near 816 million here today. So, I'm just kind of wondering, would the capital bill effect something you guys are thinking more about?

Speaker 10: Got it. Okay, I appreciate that. And then on the bywak, you know, just

Got it okay I appreciate that and then on the buyback.

Speaker 9: trying to think about, you know, willingness to be maybe more aggressive, just given where the share prices, you know, wasn't that long ago. I don't think it was last year. You were, you bought back some pretty decent slug of stock. Um, you know, we're pretty well below people pretty well below where, where that was. And so, you know, just given the capital generation, um, and the stock price today, you know, I guess what would you think would be the right level of buybacks, you know, to think?

I'm trying to think about.

Willingness to be maybe.

Maybe more aggressive just given where the share prices.

It wasn't that long ago.

I think it was last year, you bought back some pretty decent slug of stock.

In our.

Pretty well below.

Pretty well below where that was and so just given the capital generation.

Stephen Young: Well, maybe I'll trust, you know, NIM strategies, maybe Will or John can address capital and bond restructure. You know, as we think about the NIM moving forward, we had an investor recently asked us if, you know, if Fed funds went down to three percent, what was your, you know, what was your NIM back when Fed funds was three percent. And we did some really remember, but we looked back at it and it was in that, you know.

And the stock price today I guess.

What would you think would be the right level of buybacks to think about moving forward.

Speaker 4: Yeah, look, look, there's no gun door. I had to do anything immediately, but the stock price we think is attractive. And we are generating capital.

Yes look there is no gun to our head to do anything.

Immediately but the stock price, we think is attractive and we are generating capital. So.

Speaker 8: Stock bybacks are a day by day thing where you're looking at the economy and you're looking at credit potential risks. But right now the price looks pretty attractive to us. You know, I don't think it's the time and the cycle to do any kind of wholesale nature move, but back to nibbling around the edges. It looks okay where it is. You know.

Stock buybacks are a day by day thing, where youre looking at the economy and Youre looking at.

Stephen Young: 375 to 4% range. So, it's just we're waiting for the repricing strategy of all these fixed rate type loans if our deposit is paying in. So, as we think about, we'll do things around the margin, around hedging and those kinds of things. That won't be a huge strategy for us. But I think the opportunity will be as rates do fall, if we have four rate cuts next year. You know, money markets and those types of things on the incremental margin would fall a little bit.

Credit potential risk, but right now the price looks pretty attractive to us.

I don't think it's the time in the cycle to do any kind of wholesale major move but back to nibbling around the edges. It looks okay, where it is.

Got it okay.

Speaker 9: I think you gave this portfolio percentage in the deck. I think, I thought it was like 2%. Do you happen to have what the, of that, which you guys are the lead on?

I think you gave the snick portfolio percentage in the deck I think you I thought it was like two 2% do you happen to have what the.

What you guys are the lead on.

Stephen Young: And then our fixed rate repricings of our loans would continue to you know, to continue to reprise up. And so, as we think about the modeling and as we think about, yeah, and that's why we sort of are guiding in that range.

Speaker 4: It's just not a meaningful part of what we do at 2% of our portfolio, but we typically do not lead. Typically, when we're in these credits, these are credits that follow middle market

Hey, Barry.

Just not a meaningful part of what we do at 2% of our portfolio, but we.

We typically do not lead typically when we're in these credits. These are credits that follow middle market bankers that we've hired from bank of America Wells and truest. So in many cases, the banker that works for us used to lead the credit, but because we're trying to manage hold limits normally we're just taking a piece of the <unk>.

William Matthews: But why don't I turn it over to Will and just maybe talk about Bogger Struxford and Campbell?

Speaker 4: that we've hired from Bank of America, Wells, and Truist. So in many cases, the banker that works for us used to lead the credit, but because we're trying to manage hold limits, normally we're just taking a piece of the credit. So I think out of 39 relationships, we only lead one.

William Matthews: Yeah, Stephen, good morning. You know, I'd say we have flexibility, which we like. You know, we've got a strong capital position. We've got a strong reserve. We've got a good capital formation rate. And you know, so I give us a lot of things to think about with respect to the capital deployment. I mean, you know, at current price, our stock is pretty attractive, so certainly repurchases of some degree is on the table.

William Matthews: And additionally, you know, with bond portfolio restructure, while we're not likely to engage in a wholesale kitchen sink type thing, the certainly the ability to nibble around the edges. So we continue to think about all those options as well as some of the growth opportunities to forward to this thermal markets and you know, the good economy in which we operate. So we like that flexibility.

Credit so so I think at a 39 relationships when we read one.

Got it.

Okay.

And then I just want to clarify and sorry, if I missed this.

Earlier in the call but.

Just on the on the swap revenue.

Speaker 9: you guys have been pretty clear that you should expect correspondent to have some kind of ups and downs, up and down quarters here, but the swapping come. Is this more of the level that you would expect in the current interest rate environment you're going for?

I think you guys have been pretty clear that you should.

Do you expect correspondent to have some kind of ups and down up and down quarters here, but the swap income.

Is this more of the level that you would expect in the current interest rate environment and going forward.

Speaker 4: This is Steve, you know, it does bounce around a lot and you can see that in the quarterly numbers a lot of times in the corresponding division will have other things that offset it.

Prior to this is Steve it does bounce around a lot and you can see that in the correlate numbers.

Stephen Scouten: Thanks for all the color everyone. Appreciate the time. Thanks, Stephen.

A lot of times.

The corresponding division will have other things that offset it.

Speaker 4: But just to frame that up, on page 32 of our deck is our non-interested income trend over the last, I don't know, I guess it's five quarters.

Catherine Mealor: We'll take our next question from Catherine Mueller at KBW. Thanks. Good morning.

But just to frame that up on page 32 of our deck has our noninterest income.

Trend over the last I don't know I guess, it's five quarters.

Speaker 4: And you can kind of see it, you know, our non-string come to asset sort of bounces around. It's got, it's been at high at 69 basis points. It's been a low 57 basis points of asset. So, you know, as I, as the 10 year treasury, you know, from June 30th to, to call it now, the 10 year treasury is not quite up 1% close. That has an effect.

John Corbett: With you a couple of smaller M&A transactions in the Southeast, you know, the past few months, just curious your updated thoughts on M&A and how you're thinking about how your position there's come into next year. Catherine is John. Good morning. Really. No change from our prior guidance. You know, we've seen a couple of these deals happen, but it's still really, really challenging to get the math work to work with the AORCI and the regulatory delay risk.

And you can kind of see our noninterest income to assets sort of bounces around and it got its been as high as 69 basis points is that a low 57 basis points of assets. So.

As I said.

As the 10 year Treasury.

From June.

30 to call. It now the 10 year Treasury is not quite up 1%, but close.

That has an effect on you.

Speaker 4: You know, our capital markets teams, at least in the short run, the pipelines until everybody kind of gets it gets used to it. So I would expect, like I said, that our knowledge thing come to ask that.

Our capital markets team at least in the short run the pipelines until everybody kind of gets.

John Corbett: So our assumption is that things are going to pick up probably the back half of 2024 as we get closer to the election. And there's more certainty in the economy. Clearly, the logic is there for M&A given the revenue pressures in the industry. And we're just going to stay out on the street, visiting peer banks that possibly could be partners in the future, but it's challenging the short run.

It gets used to it so I would expect.

Like I said that our noninterest income to assets. This next quarter.

Speaker 4: This next quarter, instead of being 64 basis points, it'd be closer down to the lower end of the guide, 55 basis points. You know, we've been guiding 55 to 65. I'd say it'd be in the short run a little bit lower.

That would be at 64 basis would be closer down to the to the lower end of the guide 55 basis points. We've been kind of 55 to 65, I'd say it'd be in the short and putting a little bit lower and then as you think about next year and you look at the Moody's consensus it looks like the 10 year Treasury starts coming down towards 4% towards the end of next year.

Speaker 4: And then, as you think about next year and you look at the Moody's consensus, it looks like the 10-year Treasury starts coming down towards 4% toward the end of next year. My sense would be that...

Stephen Young: And then just a big picture earnings questions we think about next year. As you look at, you've got a little bit, let's call it stabilization in the margin after we kind of come off a fourth quarter. You know, it seems like you still expect for there to be a little bit of balance sheet growth. But as you look at revenue growth as compared to expense growth, how do you think those two marry each other in 24?

My sense would be that.

Speaker 4: those quarters would get more favorable towards that particular division and we kind of rebound. So yeah, it kind of looks, it will get a little lumpy from quarter to quarter sometimes, but from a standpoint of looking at the overall picture, that would be how I'd.

Those quarters would get more favorable towards that particular division and we kind of rebound so yes.

And we will get a little lumpy from quarter to quarter, sometimes but from a standpoint of looking at the overall picture.

That would be how I'd look at it.

Speaker 9: to thank you for that. And maybe for John , you know, just to follow up on Capstan's question on the M&A, you know, OMB bought Capstar or announced they're buying Capstar last night.

Got it thank you for that and maybe for John.

Just to follow up on Catherine's question on the M&A.

Stephen Young: Do you think this is a year where you can still create positive operating leverage? Or do you see this as a year where we'll really kind of see revenue and expense growth kind of be at the same pace, or maybe even older, more expense growth relative to revenue? Just curious how you're thinking about that in the next year. Well, Catherine, this is Steve, if you can tell us what the yield curve would look like, that helped.

RMB bar cap star or announced their buying cap star last night.

Speaker 9: It seems like a pretty reasonable, well-priced deal, some solid accretion, and the stock is actually, you know, mildly outperforming today, which is nice to see. So, you know, when you kind of see investors maybe happy about a well-priced, you know, acquisition that doesn't come with too much dilution, does that maybe make you think about wanting to do something sooner rather than later despite the current rate environment?

It seems like a pretty reasonable well priced deal some solid accretion and stock is actually.

Mildly outperforming today, which is nice to see so when you kind of see investors, maybe happy about a well priced.

Stephen Young: I'm not sure that we can do that. I do think in the immediate environment, as we think about, we've talked about them, if we talk about fee income, that's going to be a bit more challenging, I think, in the next quarter. So just with the 10-year treasury rising, one of the businesses that were at the Correspond Division, and we see, with the 10-year rising, some of the swap opportunities probably aren't there, at least in this quarter.

Acquisition that doesn't come with too much dilution does does that maybe make you think about wanting to do something sooner rather than later, despite the current rate environment.

Speaker 4: I mean it's a case-by-case basis, Brody, so we're open for business and if the right opportunity came along sooner rather than later, we would pursue it. I think it's just going to be few and far between over the next couple quarters. Anything's possible, so I wouldn't rule it out. I just think it's

Yes, I mean, it's a case by case basis birdie. So we're open for business and if the right opportunity came along sooner rather than later, we would pursue it.

I think it's just going to be few and far between over the next couple of quarters anything is possible. So I wouldn't rule it out either.

Stephen Young: It bounces around from time to time and so on, so I imagine that will eventually come up. But our range of nonage income to assets, I think if you look back at this quarter, we guided the 55 to 65 basis points. This quarter, we were at 64 basis points, so I'd call it up high end. If I looked forward into the next quarter, I would think we'd be closer to the lower end of that.

Thank you.

Speaker 4: If I was forecasting, I think activity for the industry is going to be more robust second half of 24. But we're not opposed to it. It's something attractive and accretive to our franchise came along.

If I was forecasting.

Forecasting I think I think activity for the industry is going to be more robust second half of 'twenty four.

But we were not opposed to it if something attractive and accretive to our franchise came alone.

Yes.

Speaker 9: got it. And then this is my last one. We talked about this I think on the first quarter call and I know it's again it's a very small loan portfolio for you guys so I'm more interested in it just from a commentary perspective than I am necessarily a South Bay specific perspective but the substandard and accruing portion of the nursing home portfolio keeps keeps going up. Is anything different than what we talked about last time which I think was you know costs keep going up maybe?

Got it and then just my last one you talked about this I think on the first quarter call.

Stephen Young: And then as we think about kind of a full-year picture of non-interesting income, I would expect, I think we've been guiding in that 55 to 65 basis point range. We'll probably end up in the lowest 60s in basis points to average assets. And as we think about 2024, I'd expect we would probably start a little lower and then in higher as the, as if the movies consensus is right. And the 10-year treasury goes back towards 4%, we'll start seeing more capital market activity.

And I know again, it's a very small loan portfolio for you guys. Some more interest in it just from a commentary perspective than I am necessarily southeast Pacific perspective, but the substandard and recurring portion of the nursing home portfolio keeps keeps going up is there anything different than what we talked about last time, which I think was.

Costs keep going up maybe.

Speaker 9: you know, some of the third party payers aren't paying out as much. You know, I'm just trying to think, is there anything kind of unique to senior housing right now that's kind of driving some of that weakness? Because, you know, you're seeing it elsewhere at other banks as well.

Some of the third party payers aren't paying out as much.

I'm just trying to think is there is there anything kind of unique to senior housing senior housing right. There right now thats kind of driving some of that weakness because youre seeing elsewhere at other banks as well.

Stephen Young: So kind of the way I think about it probably won't be a lot of growth in the non-interesting income year-to-year, assuming this Moody's rate forecast. And I would expect that based on the NIM forecast, we just kind of went through dollar growth, probably not going to be a lot. So that's the revenue picture.

Speaker 4: Yeah, I talked to our credit team specifically about that, but as you plan, it's less than 1% of our loan portfolio, but really it comes down to the labor. I think that's the biggest issue right now, probably labor, the nursing shortage, you hear about some of the rates that traveling nurses get, and then interest costs going up. And so you got two major...

Yep talked to our credit team, specifically about that but as you found at less than 1% of our loan portfolio.

William Matthews: I'll just talk to the expense picture. Yeah. And so, obviously, with that revenue picture, our goal for next year is to be very controlled in our expense growth. And we're still deep in the planning and budgeting processes, as most people are at this point in the stage, they don't have any precise guidance to give. But we would hope and expect to be in the low-demand single-digit range on expense growth and try to control as tightly as we can. Great. All right. Thank you. Appreciate it. Thanks, Kevin.

But really it comes down to the labor I think thats the biggest issue right now probably labor.

Sure.

The nursing shortage you hear about some of the.

The rates that traveling nurses get.

And then.

Interest costs going up and so you've got two major expense headwinds and then you still got the revenue headwind following COVID-19 about people's desire to be in a nursing home post COVID-19, but the main issue Brody is the nursing shortage of labor costs.

Speaker 3: expense headwinds, and then you still got the revenue headwind, you know, following COVID about people's desire to be in a nursing home post-COVID. So, but the main issue, Brody, is the nursing shortage and the labor costs.

Speaker 10: Awesome. Thank you very much for the color. I appreciate it guys. Have a good rest of the day.

Michael Rose: We'll go next to Michael Rose at Raymond James. Hey, good morning, guys. Thanks for taking my questions. Just wanted to follow up on that last point on expenses. You guys are in a pretty enviable position from a fundamental standpoint. You guys have been very conservative, built reserves. I think that's really well taken from my vantage point. You got capitals growing. I mean, why not be more aggressive on the expense side now while revenues are under pressure.

Awesome. Thank you very much for the color I appreciate it guys have a good rest of the day.

Alright.

Michael Rose: So you better position yourself. You talked about John at the outset for, you know, what will be right or days at some point. I know there's a lot of dislocations in the market. I assume there's a lot of good lenders out there that you guys can go after. Why not actually be more aggressive here on the hiring and organic growth front while you have many competitors that are capital and liquidity constraint.

Speaker 1: And that does conclude the question and answer session. I would like to turn the conference back over to John Corbett for closing remarks.

And that does conclude the question and answer session I would like to turn the conference back over to John Corbett for closing remarks.

Speaker 4: All right, thank you. Thanks everybody for joining us this morning. We know it's busy with all the earnings calls. If we can provide any other clarity. Don't hesitate to give us a ring. Have a great day.

Alright. Thank you thanks, everybody for joining us. This morning, we know it's busy with all the earnings calls if we can provide any other clarity.

Don't hesitate to give us the right have a great day.

Speaker 1: And this concludes today's conference call. Thank you for your participation. You may now disconnect.

And this concludes today's conference call. Thank you for your participation you may now disconnect.

Yeah.

[music].

Yes.

[music].

Yes.

Michael Rose: Thanks. Yeah. Okay. When I heard you say be aggressive on the expense front, I wasn't sure whether you were cutting expenses or adding expenses. Michael, but I think you're saying the opportunistic is what you're saying. Correct. Yeah. And we would agree with that. And I would tell you that really, we're opportunistic all the time. We never stop recruiting and building the bench drink. I think you know about our management associate program we've had going for years where we bring in 35 college interns every summer.

Yeah.

Okay.

Okay.

[music].

Michael Rose: We convert 15 to 20 into management associates every year to build that bench drink from the credit team and on the lending team. We're always out recruiting last night. My wife and I had dinner with with the prospect of veteran prospect banker. And so we're out talking to folks all the time. And so we're not going to put a number out there on the expense growth side that would keep us from being opportunistic. If that helps. I does, now makes complete sense.

Michael Rose: Just a few smaller ones. You know, I noticed that the FHLB was essentially paid down, looks like Broker deposits came down a little bit. What other, you know, I assume Broker deposits will come down as you grow core deposits? What's kind of a right level to think about that? And is there any other tools or actions you can take on the liability side to, you know, kind of contain the creep and intersparing liability costs?

Okay.

[music].

Michael Rose: Thanks. Yeah, Michael, Steve, you know, you'll remember in March when we had sort of the banking term while we went ahead and did a brokerage CD offering. I think it was a billion, too, or so. And then we also borrowed 900 million of federal home loan bank. And that was just sort of an abundance of caution with all the turmoil going on. And what you've seen over the last couple of quarters is one, we paid off the 900 million of federal home loan bank as, you know, the worries have died down.

Okay.

[music].

Michael Rose: And then the broker CDs are starting to roll off. So, you know, we typically right now, I think our broker CDs are around 3% of our deposits give or take. You know, I could see that coming down a little bit, but, you know, I wouldn't, it wouldn't be a normal level for us to be around 3% of broker deposits. It could go lower, but it wouldn't be an unusual event for us to stay hang out in that, in that general range.

Michael Rose: And I would say in echoing comments that I think some of our peers have made in their calls, we're seeing the, while they're still the deposit cost pressure, the rate of change is slowed a bit. And it feels like the heaviest competition that regard is behind us. Okay, great.

Yes.

Yeah.

[music].

Okay.

Michael Rose: Maybe just, you know, finally for me, do you have a sense for what the new own production yield was and maybe what the margin was for September? Thanks. Yeah, so our new loan production yield for the third quarter was around 740. I think it's all over that 742 on the new funded yield. It is a little higher than that September. I don't think we just have the September margin numbers, but I think it was, you know, for the most of the quarter, it was not all that far different from our ending quarter.

Michael Rose: But, you know, a few basis points here and there and, you know, the margin moves, obviously, a few basis points on 30 days versus 31 and so on, but it was reasonably stable most of the quarter. All right. Thanks for taking my questions, guys.

David Bishop: We'll move next to Dave Bishop at HubD Group. Yeah, good morning, gentlemen. Good morning. I'm curious circling back to the preamble you mentioned, sort of the life cycle, the, you know, the banking industry and the, you know, paying attention to the credit cycle here. You know, we saw the what off the credit you alluded to in the charge off, but maybe peeling back the uningenious, you know, your recent reviews of our financials.

David Bishop: Anything that standing out from a credit deterioration perspective that, you know, maybe not be not showing up on the numbers, but areas where you're pulling back from or being a little bit more cautious on these days. Yeah, I mean, Dave, the pipelines are trending down. I mean, I think the Fed is getting what they wanted with liquidity being tight. I think borrowers are more cautious banks are more cautious. So, so we anticipate for the industry that that pipelines will string.

David Bishop: Now, the interesting part is I think the loan growth. We'll be a little bit disconnected from the pipeline trends. While pipeline trends will be going down and probably new loan production will be going down payoffs of streets to a halt. And there's still some funding at the loan production that we did last couple of years. So, I think that we're going to see probably mid single digit kind of loan growth continue, but it will be on lower production levels than we've had in the past.

David Bishop: But from a credit standpoint, you know, we've talked about in the past the areas that that we see having the most stress and the short term is probably a small business SBA kind of loans that the assisted living space just never really recovered from COVID and they continue to face labor pressures. And yeah, everybody's talking about office. We think we're going in and our loan review team is being very conservative and forward looking on how we're looking at grading loans.

David Bishop: And so, I think it's forcing the conversations with borrowers in advance of securities, which is the way it should work. So, anyway, that gives you some picture of our sense of.., where the credit risk are and where the production trends are headed. Great.

David Bishop: Appreciate the color.

Broderick Preston: And we'll go next to Broderick Preston at UBS. Nice. Hey guys, how are you this morning? Good morning. Doing well. Hey, I just wanted to clarify something on the next week's expenses real quick. Will, did you say you said mid 240s? Is that accurate? Yeah, as in the, you know, mid the exact middle point, that would be 245, man, that's the mid 240s. I was referencing, sorry, that one more clear.

Broderick Preston: No, no, I just wanted to make sure because the live transcript picked up mid 220s, which uh, okay, let me also clarify, I should point out that, that it does not include, of course, the FDSE special assessment, which has not, if it gets finalized, this quarter will all be booking it in Q4. And for us, that's around 25 million, but that's, that's not in those numbers, obviously. Got it. Okay. Um, you know, on the portfolio restructure, you said that you're not going to, you know, do the whole kitchen sink, you know, maybe you nibble around the edges, you know, I guess.

Broderick Preston: What is nibbling around the edges look like in terms of, you know, size and, you know, I guess, maybe the securities that are coming do more near term that maybe have lower lost content to them. Like, are there, is there a size of a portion of the portfolio that's maybe lower yielding, you know, that's maybe coming do at some point in the next 12 months that you could look to punt on that could generate some reasonable EPS accretion?

Broderick Preston: Sure, buddy, this is Steve, but you know, as we, we thought about it and, you know, continue to monitor and think about it, yeah, I think that, yes, we're thinking about like size. I don't think it would be certainly not more than 15%, probably, you know, 10% or so of, of the available, excuse me, the investment portfolio book, I would be something to look at. And then, I guess, as we think about EPS accretion, the earned back, all that would be anything else we do on the capital side, you know, we would want, you know, that earned back to come, you know, within three years.

Broderick Preston: So, you know, I think as we think about the whole options on the table relative to capital, whether, as we'll mention, the buyback, whether it's boundary structure, whether it's growth, whether it's M&A, you know, we're thinking about them inside the same lens, of course, on a boundary structure, you have less executioner-esque, but at the same time, there's other pieces in parts that we're looking at from a capital management. And I'm really glad, you know, that we're in a position where, you know, capital has grown over the last year, the earnings, the PCNR, earnings have been really good, and the low-loss provisions have been, you know, stocked away.

Broderick Preston: So, I think we're in a good position to have some flexibility. Got it. Okay, I appreciate that. And then on the buyback, you know, just trying to think about, you know, willingness to be maybe more aggressive, just given where the share price is, you know, wasn't that long ago, anything was last year, you bought back some pretty decent slug of stock, you know, we're pretty well below, people pretty well below where that was.

Broderick Preston: And so, you know, just given the capital generation and the stock price today, you know, I guess what would you think could be the right level of buyback? You know, to think about moving forward. Yeah, look, look, there's no gun to our head to do anything in immediately, but the stock price we think is attractive and we are generating capital. So, you know, it's stock buybacks or a day by day thing where you're looking at the economy and you're looking at credit potential risks, but right now the price looks pretty attractive to us.

Broderick Preston: You know, I don't think it's the time and the cycle to do any kind of wholesale nature move, but back to nibbling around the edges. It looks okay where it is. Got it. Okay. I think you gave this Nick portfolio percentage in the deck. I think I thought it was like two percent. Do you happen to have what the of that which you guys are a little need on? I mean, you know, it's just not a meaningful part of what we do at two percent of our portfolio, but we typically do not leave.

Broderick Preston: Typically when we're in these credits, these are credits that follow middle market bankers that we've hired from Bank of America Wells and Truist. So, in many cases, the banker that works for us, used to lead the credit, but because we're trying to manage hold limits, normally we're just taking a piece of the credit. So, I think at a 39 relationships, we only need one. Got it. Okay. And then I do just want to clarify, I'm sorry if I missed this earlier in the call just on the swap revenue.

Broderick Preston: I think you guys have been pretty clear that you should expect correspondent to have some kind of ups and down, up and down quarters here, but the swap income. Is this more of the level that you would expect in the current interest rate environment going forward? You know, Bruce, this is Steve. You know, it does bounce around a lot, and you can see that in the quarterly numbers. A lot of times in the correspondent division will have other things that offset it, but you're just to frame that up, you know, on page 32 of our deck is our non-interested income kind of trend at the last, I don't know, I guess it's five quarters.

Broderick Preston: And you can kind of see it, you know, our non-interested income to asset sort of bounces around. It's got, it's been at high as 69 basis points. It's been a low 57 basis points of asset. So, you know, as I, as the 10 year treasury, you know, from June 30th to call it now, the 10 year treasury is not quite up 1% close. That has an effect on, you know, our capital of market teams, at least in the short run, the pipelines until everybody kind of gets used to it.

Broderick Preston: So, I would expect, like I said, that our non-interested income to assets, this next quarter would, would, would, would, that would be a 64 basis, would be closer down to the, to the lower end of the guide 55 basis points. You know, we've been guiding 55 to 65. I'd say it'd be in the short run a little bit lower. And then, as you think about next year and you look at the Moody's consensus, it looks like, you know, the 10 year treasury starts coming down towards 4% toward the end of next year.

Broderick Preston: My, my sense would be that those quarters would get more favorable towards that particular division. And then, you know, we can't rebound. So, yeah, kind of, kind of looks, it will get a little bumpy from quarters quarter sometimes, but from a standpoint of looking at the overall picture, that would be hot.

John Corbett: I want to thank you for that and maybe for John, you know, just to follow up on Captain's question on the M&A, you know, OMB bus, cap star or an after buying cap star last night and seemed like a pretty reasonable well priced deal, some solid accretion and the stock is actually, you know, mildly outperforming today, which is nice to see. So, you know, when you kind of see investors maybe happy about a well priced, you know, acquisition that doesn't come with too much delusions, does that maybe make you think about wanting to do something sooner rather than later, despite the current rate environment? Yeah, I mean, it's a case by case basis party, so we're open for business and if the right opportunity came along sooner rather than later, we would pursue it.

John Corbett: I think it's just going to be few and far between over the next couple of quarters. Anything possible? So I wouldn't rule it out. I just think if I was forecasted and I think activity for the industry is going to be more robust second half of 24, but we're not opposed to it. It's something attractive and accrued to our franchise came along. Got it.

Broderick Preston: And then this is my last one.

Broderick Preston: We talked about this, I think, on the first quarter call. And I know it's, again, it's a very small loan portfolio for you guys. Some more interested in it just from a commentary perspective. And I am necessarily a South Dakota perspective, but the substandard and accruing portion of the nursing home portfolio keeps going up. Is it anything different than what we talked about last time, which I think was, you know, cost keep going up.

Broderick Preston: Maybe, you know, some of the third party payers aren't paying out as much. I'm just trying to think, is there is there anything kind of unique to senior out senior housing right now that's kind of driving some of that weakness because, you know, you're seeing it elsewhere at other banks as well. Yeah, I talked to our credit team specifically about that, but as you plan, it's less than 1% of our loan portfolio, but, but really it comes down to the labor.

Broderick Preston: I think that's the biggest issue right now, probably labor. The nursing shortage, you know, you hear about some of the rates that traveling nurses get. And then interest cost going up. And so you got two major expense headwinds. And then you still got the revenue headwind, you know, following COVID about people's desire to be in a nursing home post COVID. But the main issue, Brody, is the nursing shortage in labor costs.

Broderick Preston: Awesome. Thank you very much for the color. I appreciate it guys. Have a good rest of the day. Thank you.

Operator: And that does conclude the question and answer session.

John Corbett: I'd like to turn the conference back over to John Corbett for closing remarks. All right, Audrey, thank you. Thanks, everybody, for joining us this morning. We know it's busy with all the rain's calls. If we can provide any other clarity, don't hesitate to give us a rain. Have a great day.

Operator: And this concludes today's conference call. Thank you for your participation. You may now disconnect.

Operator: [inaudible]