Q3 2023 FB Financial Corp Earnings Call

Good morning, and welcome to the FB Financial Corporation's third quarter 2023 earnings Conference call.

The call today from FB financial or Chris Holmes, President and Chief Executive Officer, and Michael <unk>, Chief Financial Officer also joining the call for the question and answer session is Travis Edmondson Chief Banking officer.

Please note FB Financial's earnings release supplemental financial information and this morning's presentation are available on the Investor Relations page of the company's website at Www Dot first bank one line dot com and on the Securities and exchange Commission's website at Www Dot FCC Delek us.

Today's call is being recorded and will be available for replay on FB Financial's website, approximately an hour after the conclusion of the call.

At this time all participants have been placed in a listen only mode. The call will be opened for questions. After the presentation.

During this presentation FB financial May make comments, which constitute forward looking statements under the federal Securities laws forward looking statements are based on management's current expectations and assumptions and are subject to risks uncertainties and other factors that may cause actual results and performance or achievements of FB financial to differ materially.

From any results expressed or implied by such forward looking statements.

Many of such factors are beyond FB financial's ability to control or predict and listeners are cautioned not to put undue reliance on such forward looking statements a more detailed description of these and other risks that may cause actual results to materially differ from expectations is contained in FB financial's periodic and current reports filed with the U S.

C C, including FB Financial's, most recent Form 10-K.

Except as required by law FB financial disclaims any obligation to update or revise any forward looking statements contained in this presentation, whether as a result of new information future events or otherwise. In addition, these remarks may include certain non-GAAP financial measures as defined by SEC regulation G.

One of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to comparable GAAP measures is available in F. B Financial's earnings release supplemental financial information and this morning's presentation, which are available on the Investor Relations page of the company's website at www dot for span.

<unk> online dot com and on the Sec's website at Www Dot FCC Dot Gov I would now like to turn the presentation over to Chris Holmes, FB Financial's, President and CEO .

Alright, well. Thank you Jason good morning. Thank you all for joining us on the call. This morning, we always appreciate your interest in FB financial.

For the quarter, we reported EPS of <unk> 41 cents per share and an adjusted EPS of <unk> 71 cents.

We've grown our tangible book value per share excluding the impact of Aoc I at a compound annual growth growth rate of 14% since our IPO.

In recent quarterly calls Ive discussed priorities of maintaining the strength of the balance sheet and improving internal processes and procedures with the goals of efficiency and scalability we've.

We've made significant progress on both of those priorities.

First let me talk about the balance sheet our.

Our capital position are strong across the board, including a C. T CET one ratio of 11, 8%.

And a tangible common equity to tangible assets ratio of nine 2%.

And in doing that we haven't reclassified.

Any of our available for sale securities as held to maturity.

Our capital and reserve levels are.

Our prepared for difficult times, but we don't expect economic conditions to become as severe as our preparation allows for.

Our liquidity position, which is detailed on page 11 of the financial supplement that we provide each quarter continues to be strong we keep our securities portfolio, plus our loans as a percent of the.

Deposits.

Near or under a 100% to keep them over leveraging our deposit base.

If you use that metric to compare banks, you'll find that we have one of the lowest.

Levels of leverage often the lowest.

On our deposit base among our peers when.

When you consider that our deposit base is quite great granular and we make very little use of brokered and internet deposits. This keeps us in a strong liquidity position.

Our credit portfolio continues to perform well, although we did move one C&I loan to non accrual in the quarter.

Outside of that credit, we haven't seen significant changes quarter to quarter again, we're positioned very well with an ACL of 1.57% of our age up our loan portfolio.

We also reduced our C in CRE and construction exposure over the last five quarters.

Within our long term tolerance level and construction will be there by the end of the year.

And so if we enter the fourth quarter the balance sheet bills well position, we built some momentum there and we're excited about the growth opportunities that lie ahead of us.

From an operational perspective, we feel as strong as we ever have and we're focused on improving profitability and returns.

In the late third early fourth quarter, we executed on pieces of two broader initiatives to both increase revenue and reduce expenses while actions were taken in the third quarter. The majority of the benefit will be felt in the fourth quarter and beyond.

While the revenue side as you've seen in the earnings release, we executed a security stray that will lead to improvement in net interest income.

Q4, and in 2024 trade also resulted in a pretax loss of $14 2 million in the third quarter I will let Mike will discuss our our strategy there in more detail, but we continue to look for.

Ways to continue to enhance our profitability.

The margin net interest margin has been difficult to forecast over the last several quarters not only for ourselves, but for others as well based on the discussions we've had with our peers.

The margins, becoming somewhat less volatile because the velocity of change in the variables is slow.

Models had been tweaked and in some cases overall and confidence in the forecast is increasing.

Funding costs. So we will continue to increase as long as we remain in this rate environment, but the rate of increase on our deposits has slowed materially and we expect the NIM to remain in the same relative band that we experienced in the last two quarters. The next couple of quarters again, Michael it's going to provide some deeper analysis in his commentary.

On expenses.

And significantly we reduced our run rate on core banking non interest expenses by $15 million.

The realization of most of those expense savings begins in late October .

So we expect a couple of months of benefit in Q4.

By mid January by mid January we anticipated achieving an additional $5 million in annualized expense reductions so $20 million annualized in total.

We currently expect core banking non interest expenses of 255 million to $260 million in 'twenty 'twenty, four which compares.

Third quarter core banking expenses of $66 2 million or $265 million annualized.

Oh, M&A conversations seem to be picking up across the industry and.

And we're increasingly receiving inbound calls asking to engage in those discussions as we said before we don't believe in acquiring for the sake of growing our asset size, but there are some banks across our geography that we respect and believe would be great cultural and strategic bets.

Following our internal efficiency and scalability initiatives of the last couple of years.

We're very confident in our ability to effectively execute on M&A should the right opportunities arise.

So to summarize before I hand, the call over to Michael We spent time and resources focused on internal improvements and enhancing our balance sheet. We've.

We've made ourselves a better placed to bank for our customers a better place to work for our associates and in that process. We've improved our operational efficiency at the same time, we built our capital maintain strong reserves and put ourselves in a great liquidity position, increasing profitability and returns are in focus for us and we're ready to act.

Cute or attractive opportunities that may come our way.

Mike will go into our financial results in a little more detail.

Thank you, Chris and good morning, everyone.

A bit of a noisy quarter due to our securities trade and the charges related to our efficiency initiatives. So I'll take a minute to walk through this quarters.

Core earnings.

We reported net interest income of $100 9 million.

Ported noninterest income was $8 million adjust.

Adjusting for the $4 2 million loss on sale of securities and $115000 gain on the sale of Oreo.

Had core noninterest income of $22 1 million.

Of that $22 1 million.

Pinpoint one came from banking.

We reported noninterest expense of 83 million and adjusting for $4 8 million in charges related to the efficiency initiatives, we had core noninterest expense of $78 2 million.

And that 78.2 million 66.2 came from banking. So we delivered consolidated core pretax pre provision earnings of $45 million and banking core pretax pre provision earnings of $44 8 million.

Going into more detail on net interest income in our margin I'll touch first on our securities trade, we sold $77 million of securities at a $14 2 million pre tax loss at the end of September so given the timing we did not see any real benefit to net interest income in the third quarter from that transaction.

The trade should deliver approximately $4 million in additional net interest income annually.

At this point, we're continually examining how we can increase our yield on our liquidity.

We would be comfortable with another loss in the $10 million to $20 million range at the trade met our parameters on earn back expected duration earnings accretion in capital dilution.

We wouldn't do a trade that would not meet our parameters there will be many options to deploy capital over the next couple of quarters.

Next our contractual yield on loans increased by 16 basis points during the quarter to $6 three 2%.

For the month of September our contractual yield on loans held.

It was $6 three 5%.

Yield on new commitments for the month of September were coming in a little over 8%.

Remember, 48% of our loan portfolio remains floating rate.

Which leaves $4 9 billion in fixed rate loans at that $4 9 billion of fixed rate loans, we have about 200 million maturing in the fourth quarter at a yield of about six 7%.

300 million maturing in the first half 2024 with a yield of 6.5% about 175 million maturing in the second half of 'twenty four with a yield of 565%.

So about 690 million maturing through year end 2024 at a weighted average yield of about $6 one 3%.

Cost of deposits continue to rise, but as Chris mentioned, we've seen that rate of increase moderate recently for the quarter, our cost of interest bearing deposits increased by 27 basis points to 333%.

For the month of July August and September our cost of interest bearing deposits was three point to 343 and 335, respectively.

Incremental interest bearing deposits for the month of September were coming out of the balance sheet at around three 6%.

As a reminder, we'll have public funds accounts begin to build in the fourth quarter, we would expect $400 million and 500 million to come back onto the balance sheet in the fourth quarter with a cost of a little over 5%.

There's gives and takes lift our margin for the quarter at 342% effectively flat with the second quarter with all of the moving pieces that I laid out above we anticipate margin band in the 330 to $3 40 range for the next couple of quarters.

Moving to noninterest income non mortgage noninterest income continues to perform in that $10 million to $11 million range and we expect that to remain in the band plus or minus the next few quarters.

Our noninterest expense also need more explanation that is typical at this quarter.

At this point, we've taken $15 million in annual expenses out of our run rate most of which occurred in September and early October we've.

We have also acted on an additional $5 million in annual expense reduction that will be realized by the end of January .

These reductions have come through a combination of a voluntary early retirement program and some position eliminations reduction of redundant processes limiting utilization that professional services and contract renegotiations and cancellations.

Most of the expense reduction is still to be realized will come from a closure of seven branches, which we have communicated internally and to customers.

For the fourth quarter, we expect banking noninterest expense to be in the $64 million of $66 million range for 2024, we anticipate annual banking noninterest expenses of $255 million or $260 million.

To achieve this reduction we took a $4 8 million in charges in the third quarter in connection with the early retirement program and related severance costs.

We also drove $1.4 million in charges related to this project in the second quarter.

We're about $6 2 million so far.

We anticipate an additional $5 7 million in charges during the fourth and first quarters as we continue our focus on efficiency and profitability.

On the ACL and credit quality, our ACL that loans held for investment increased by six basis points for the quarter or 5.5 million increase in the allowance.

Much of that $5 5 million was related to a specific reserve on the credit that Chris mentioned earlier.

That credit was also almost entirely responsible for our $10 4 million increase in nonperforming loans held for investment this quarter.

Excluding this credit our ACL to loans held for investment would have remained roughly flat as economic indicators remained in line with the prior quarter.

I'll close by speaking to the progress that we've made in the past year on our recent priorities of balance sheet strength liquidity and capital management.

In the past 12 months, we've increased our TCE to tangible assets by 60 basis points and total risk based capital about 110 basis points.

Our loan to deposits have declined from 91% up to 87%.

Our construction development the bank level tier one capital plus allowance has declined from 124% to 104%.

And we'll continue to move lower and closer to our long term operating target for that ratio of 85% to 90%.

On balance sheet liquidity to tangible assets increased from 7.4% 12 months ago to 11% today.

And we have grown our available sources of liquidity from $6 2 billion in the third quarter of 2020 to $6 8 billion today.

As Chris said, we feel very well prepared for any economic downturn and our current view is that any downturn, we experience will be milder than what we have prepared for.

I'll now turn the call back over to Chris.

Alright, thanks, Michael for that color.

And to summarize before going into questions or balance sheet situated in a position of strength.

We're focused on improving profitability and returns we're excited about the future.

And from a financial perspective, we feel very prepared to execute on any opportunities that may come our way.

Both financially and operationally so that concludes our prepared remarks again. Thanks, you. Thank you for your interest and operator, we'll open up the line for questions.

Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.

If you're using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

At this time, we'll pause momentarily to assemble our roster.

Our first question comes from Stephen Scouten from Piper Sandler. Please go ahead.

Hey, good morning, guys.

I appreciate the time this morning, I wanted to get some more information on the security sale I think last quarter, you had said kind of <unk>.

Bands you were looking at with 9% to 27 months on the earn back it looks like this is a little higher than that.

I'm kind of curious a couple of things what sort of securities did you reinvest in it that fix forty-three yield and maybe what did you sell that kind of precipitated that longer earn back where these.

Was it a longer duration portion of your securities book that.

That'd be helpful. Thanks, Stephen good morning.

Yeah, It was a little bit longer so about a little over three year earn back and so what we as we went through the process we thought about it.

Even if rates move down 300 basis points. These these securities we sold were mostly mortgages.

<unk> would be with us in any rate environment. So they that has extended out so far that it just made sense to kind of get rid of the dogs.

I am calling them internally.

Re and bathroom some agency government agency stuff FH L B type paper.

And so that that's where the yield came problem. Although we are seeing got it.

Current Mark market Securities all in that range and so all well within.

Our our guidelines and duration not any extra.

Extra credit risk there.

Okay. That's helpful.

And then maybe thinking about just that one C&I credit that you noted that that kind of encapsulate a lot of the move into credit metrics.

Additional information you can give us there kind of what sector that is and if theres any kind of lingering issues, along with same lines and any other similar sectors.

Sure sure Steven.

Chris Good morning, and Travis absolutely Edmondson, our chief banking officer here with us as well so let me just make a comment.

It's a C&I credit.

Youre familiar with Oh.

Our bank group.

There was a bankruptcy that reportedly.

Was mountain Express we are not involved in that credit as you as you guys. I think no. We were not involved in that at all we do have.

A client.

Which.

That.

A bankruptcy.

They was a vendor to that client.

So that that was that was that the one C&I.

C&I credits, roughly a $10 million credit for us.

And it is actually.

Pretty well secured and has guarantors on it is just is just about all of our our credits of that type do.

But once it goes into bankruptcy.

We are fairly conservative and this is not but theres a major vendor that is.

In bankruptcy and so we were fairly conservative with how we handle those and so we went ahead and just put it on non accrual.

And in and took some extra reserve on it.

Even though we are pretty optimistic on it.

Got it Okay, and I know I think Michael said, no real changes in your ACL kind of mindset and economic underlying economic scenarios, but obviously you took the reserve up even in light of only two basis points of charge offs.

It feels like a lot most of that is really just conservatism on your end and you never know what you don't know what's coming down the pipe is that the right way to think about it or would we expect additional reserve.

Build moving forward.

Yeah.

Great well I think we're well positioned Steve and I think this this range it did move up a bit.

Because of the credit we're talking about individually evaluated.

Loan.

But I think youll see us stay in this range, we felt comfortable with with where we are and like I said, we haven't seen.

Deterioration in the portfolio.

And so right now that $1 50 155 range.

Where we've been is likely where we'll stay.

No Steven I would just add.

And Michael and I, both alluded to this in.

Comments, both our you know our capital levels in reserve, we're prepared for difficult difficulties moving forward, we don't really actually expect things to get that that difficult.

But our preparation allows for things to get more difficult than we anticipate they will.

Yeah, that's great perfect Alright, guys. Thanks, a lot I appreciate all the color.

Thanks, David I appreciate it.

The next question comes from Catherine Mealor from K B W. Please go ahead.

Thanks, Good morning, everyone.

Good morning Catherine.

Oh, you're asking about.

Our outlook for our balance sheet credit he didn't really conservative on your outlook for loan growth over the past couple of quarters can you just outline pullback again this quarter just curious.

Yeah, how much yeah.

Many more quarters, you got would be that we'll see a decline in loan balances before we kind of hit that inflection and start to see growth again.

Yes, so catherine.

Catherine just a couple of comments Ah you're.

You're right we have been.

Uh huh.

Conservative on the loan growth side, and we've said.

Right now for Us and I talked about when I was talking about the liquidity not over leveraging our deposit base and so that's a that's a real governor for us and so we have.

Unknown Executive: Good morning and welcome to the FB Financial Corporation's third quarter 2023 earnings conference call.

Unknown Executive: Posting the call today from FB Financial are Chris Holmes, President and Chief Executive Officer and Michael Mettee, Chief Financial Officer.

Ben.

Conservative on that side, we still see opportunities.

Unknown Executive: Also joining the call for the Question and Answer session is Travis Edmondson, Chief Banking Officer. Please note, FB Financial's earnings release supplemental financial information and this morning's presentation are available on the Investor Relations page of the company's website at www.firstbankonline.com and on the Securities and Exchange Commission's website at www.scc.gov. Today's call is being recorded and will be available for a replay on FB Financial's website approximately an hour after the conclusion of the call.

We still see some growth, but remember we're also taking balances down particularly.

Particularly in our construction portfolio and we're not growing our our overall CRE portfolio. So when you put those dynamics in there.

It's going to probably being muted for another quarter.

Quarter, maybe too, but we do expect some growth in 'twenty four.

And so.

And again, we will see in our in and will be at a oh.

Position also.

Unknown Executive: At this time, all participants have been placed in a listen only mode and the call will be open for questions after the presentation. During this presentation, FB Financial may make comments which constitute for looking statements under the Federal Securities laws. For looking statements are based on management's current expectations and assumptions and are subject to risk uncertainties and other factors that may cause actual results and performance of achievements of FB Financial to differ materially from any results expressed or implied by such forward-looking statements.

Also depends on economic circumstances and.

We'd like to see clear through our interest rate increases and we'd like to see clear through a.

Unknown Executive: Many of such factors are beyond FB Financial's ability to control or predict and listeners are cautioned not to put undue reliance on such forward-looking statements. A more detailed description of these and other risks that may cause actual results to materially differ from expectations is contained in FB Financial's periodic and current reports filed with the SEC, including FB Financial's most recent form 10K. Except as required by law, FB Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events, or otherwise.

Not seeing significant economic deterioration into into some kind of thrown out recession. So driving is that you have anything to add to that.

First off good morning, Catherine let's talk to you I mean, nothing much nothing much to add to that I think you're spot on.

We still have a lot of opportunities in our markets, where in a lot of growth markets, Birmingham, Huntsville, Memphis, Knoxville, and the list goes on and on it's more of a self imposed governor at this point and when we decide that.

Economies.

It looks better for us where we can see more clearly into the future. We will turn on some more growth initiatives internally.

Are you seeing upper teens on the C&I side.

Like in a year.

After that construction and CRE that you're really not lending in right. Now can you just kind of talk generally about what the landscape is in C&I lending today.

Yes, we're still we're seeing a lot of opportunity of course theres a lot of competition in that space today, a lot of other institutions are derisking their balance sheet similar to what we're doing but we're seeing a lot of opportunities and we've actually grown committed balances in the C&I space by a little over $100 million last quarter. So we continue to really engage.

Unknown Executive: In addition, these remarks may include certain non-GAP financial measures as defined by SEC regulation G. A presentation of the most directly comparable gap financial measures and a reconciliation of the non-GAP measures to comparable gap measures is available in FB Financial's earnings release. Supplemental is financial information and this morning's presentation, which are available in the investor relations page of the company's website at www.firstbankonline.com and on the SEC's website at www. SEC.gov.

And in that space and we're seeing some positive momentum.

Great.

On the deposit side here.

That was really helpful and themes like we're stabilizing which is great can you just talk about just the incremental cost of deposits.

Christopher Holmes: I would now like to turn the presentation over to Chris Home, FB Financial's president and CEO. All right. Thank you, Jason. Good morning. Thank you all for joining us on the call this morning. We always appreciate your interest in FB Financial. From quarter, we reported EPS of 41 cents per share and an adjusted EPS of 71 cents. We've grown our tangible book value per share, excluding the impact of AOCI at a compound annual growth rate of 14 percent since our IPO. In recent quarterly calls, I've discussed priorities of maintaining the strength of the balance sheet and improving internal processes and procedures with the goals of efficiency and scalability. We've made significant progress on both of those priorities.

Just kind of what you're seeing within the behavior. After you and your clients you know, maybe one where you're seeing the most.

And the stress in terms of.

Higher deposit costs first as where things are really starting to eat medium and products that we're looking.

Okay.

<unk>.

Yeah, Hey, Catherine Michael Good morning.

I'll start and then traffic congestion.

You know I mentioned public fun.

Most of our deposit outflows in the third quarter were down $230 million, but 300 million outflows and public funds so that all of it.

Centered around that yes.

Yes. It does come back on I mentioned, 5% range that those are mostly expected to be fed funds minus a little bit so highly competitive.

Christopher Holmes: First, let me talk about the balance sheet. Our capital position is growing across the board, including a CET-1 ratio of 11.8% and a tangible common equity, a tangible assets ratio of 9.2%. And in doing that, we haven't reclassified any of our available for sale securities as held in maturity. Our capital and reserve levels are prepared for difficult times, but we don't expect economic conditions to become as severe as our preparation allows for.

Expecting full market rates are there large.

Customers commercial corporate.

Are you expecting part plus per set.

On deposits when you get in large balances.

The challenge we face in.

Talked about as far as you look across our footprint pockets or bags, whether they're community banks or smaller or some of the larger institutions.

Community banks have Cds priced at 575 or six months right and so that's impacting our retail.

Christopher Holmes: Our liquidity position, which is detailed on page 11 of the financial supplement that we provide each quarter, continues to be strong. We keep our securities portfolio plus our loans as a percent of deposits near or under 100% to keep from overleveraging our deposit base. If you use that metric to compare banks, you'll find that we have one of the lowest levels of leverage, often the lowest, on our deposit base among our peers.

And then you get the money market and stuff.

There's still over 5% what we've seen is because of the velocity of rate increases have slowed that the constant request for re pricing has moderated and so that's been a benefit and as long as their stability I think you continue to see that but new deposits new customers they expect market rates.

Correct.

One quick thing to add a.

A lot of the people. This time last year, we're chasing yields where they could get much higher yield right. We're talking from 1% to 4%. It's been somewhat stabilize over the last few quarters, where you might go from five in the quarter to $5 75, and there's not as many people chasing that incremental yield in the footprint.

Christopher Holmes: When you consider that our deposit base is quite granular, and we make very little use of brokerage and internet deposits, this keeps us in a strong liquidity position. Our credit portfolio continues to perform well, although we did move one C and I loan to not a true and the quarter. Outside of that credit, we haven't seen significant changes quarter to quarter. Again, we're positioned very well with an ACL of 1.57% of our HIPI loan portfolio.

So that's helped us a little bit.

That's great.

Color he can.

Go ahead, Chris.

Yeah, I'm going to make one so.

Christopher Holmes: We also reduced our C and CRE and construction exposure of the last five quarters. CREs within our long-term tolerance level and construction will be there by the end of the year. And so, as we enter the fourth quarter, the balance sheet feels well positioned. We built some momentum there and we're excited about the growth opportunities that lie ahead of us.

As we look forward.

As Michael said the velocity of change has really slowed.

One of the key variables for us over the next two quarters I would say is as public funds.

And that the flow in and out of public funds.

Sometimes we see not sometimes all the time and we see a flow out of.

Christopher Holmes: For an operational perspective, we feel as strong as we ever have and were focused on improving profitability and returns. In the late third and early fourth quarter, we executed on pieces of two broader initiatives to both increase revenue and reduce expenses. While actions were taken in the third quarter, the majority of the benefit will be felt in the fourth quarter and beyond. On the revenue side, as you've seen in the earnings release, we executed a security trade that will lead to improvement in net interest income in Q4 and in 2024.

In the in the second quarter, that's a combination of the way the funds come into most of our public entities as well as.

Some folks make it a market share play.

For reporting purposes, and then in and then they come back in the third and fourth quarter and those tend to be when they come back in there at higher.

Those are some of our highest priced and so where we're going to manage through that in the third and fourth quarter.

So it's really a function of in your public funds and are driving.

Christopher Holmes: Trade also resulted in a pre-tax loss of 14.2 million in the third quarter. I'm going to let Michael discuss our strategy there in more detail, but we continue to look for ways to continue to enhance our profitability. The margin, net interest margin has been difficult to forecast over the last seven quarters, not only for ourselves, but for others as well, based on the discussions we've had with our peers. The margin is becoming somewhat less volatile because the velocity of change in the variables has slowed.

Modest more margin pressure in the back half of the year more so than your retail and kind of core customer base that would that be a fair comment that.

That's right exactly okay. Okay.

All right very helpful. Thank you.

The next question comes from Brett Rabbit ton from Humpty Group. Please go ahead.

Hey, guys good morning.

Good morning, Brett.

Wanted to start off.

It's college football season, and I know you guys are all of them are quite a bit and I know there's been some desire to get to the F. B K back in the college playoffs, so to speak and so I wanted to ask you've obviously taken some actions here in <unk> on offense and defense with the securities portfolio.

Christopher Holmes: Models have been tweaked, and in some cases, overall, and confidence in the forecast is increasing. Funding costs will continue to increase as long as we remain in this rate environment, but the rate of increase on our deposits has slowed materially, and we expect them to remain in the same relative ban that we experienced in the last two quarters, the next couple quarters. Again, Michael is going to provide some deeper analysis in his commentary.

Expenses wanted to see what else you might be considering doing to get back in the playoffs in 'twenty four or if you feel like what you've done is kind of one <unk>.

Christopher Holmes: On expenses, and significantly, we reduced our run rate on core banking, non-interest expenses, by $15 million. The realization of most of those expense savings begins in late October, so we expect a couple of months of benefit in Q4. By mid-January, we anticipated achieving an additional $5 million in annualized expense reduction, so $20 million annualized in total. We currently expect core banking, non-interest expenses of $255 million to $260 million in 2024, which compares to third quarter core banking expenses of $66.2 million or $265 million annualized.

What you're able to do and if maybe you end up in the playoffs in 'twenty five instead.

Yeah, Hey, Hey, Brett this is Chris.

Right.

It is a college football season, we are fans and we do.

Yeah.

The.

Monday morning, Ribbing, everybody, that's OMA, losing in so it's no photo Monday morning. He wrote here when you lose.

And it's no fun day in and day out when you lose in in banking relative to.

How we how we how we perform and so.

So if you go back and look at our historical performance. It doesn't just go back actually two or three years. If you go back to when we when we start the call we talk about where are.

Christopher Holmes: M&A conversations seem to be picking up across the industry, and we're increasingly receiving inbound calls asking to engage in those discussions. As we've said before, we don't believe in acquiring for the sake of growing our asset size, but there are some banks across our geography that we respect and believe would be great cultural and strategic fits. Following our internal efficiency and scalability initiatives of the last couple of years, we're very confident in our ability to effectively execute on M&A should the right opportunities arise.

Our compound annual growth rate of our of our book.

Book value of the tangible book value of our stock.

Is since we became a public company, we go back and we actually look further back than that.

And we've always been a premier performer and we that's.

One of our key foundational tenets here, we're going to be an elite performer.

We did over the last.

I will say.

Four quarters or so four five borders said hey, there are some things that we need to do.

Christopher Holmes: So to summarize, we'll hand in call over to Michael. We spent time and resources focused on internal improvements in enhancing our balance sheet. We made ourselves a better place to bank for our customers, a better place to work for our associates, and in that process, we've improved our operational efficiency.

To make sure that we have the scalability of the company and the foundations of the company, where they need to be so we spent some money.

We knew would would.

Hurt our performance.

And we have taken and we say we took our foot off the accelerator, we've done some things and but we feel.

Christopher Holmes: At the same time, we built our capital, maintains strong reserves, and put ourselves in a great liquidity position. Increasing profitability and returns are in focus for us, and we're ready to execute our attractive opportunities that may come our way.

Hopefully you are beginning to hear when we talk about our confidence moving forward and we would talk about some momentum moving forward.

Michael Mettee: Now I'm going to let Michael go into our financial results in a little more detail.

Where we are.

We'll be back in the playoffs and competing for the championship and so that's that's game one from our standpoint, just keeping with your your metaphor there it's game on from our standpoint, you see.

Michael Mettee: Thank you, Chris, and good morning, everyone. It's a bit of a noisy quarter due to our securities trade and the charges related to our efficiency initiatives. So I'll take a minute to walk through this quarter's core earnings. We reported net interest income of 100.9 million reported non-interest income was 8 million, adjusting for the 4.2 million law from fellow securities and 115,000 are gained on a sale of Oreo. We had core non-interest income of 22.1 million of that 22.1 million.

We saw improvement last quarter that was.

Meaningful you see improvement some improvement this quarter that was meaningful you see the steps that are already going to improve next quarter in 'twenty four and so are we.

We have it.

Continue to generate leverage when we talk about strengthening.

Strengthening our balance sheet, what we're doing is generally it is creating levers that we can pull as we go through 'twenty four to improve our profitability and make sure. Our returns are where we want them to be where shareholders are.

Michael Mettee: 10.1 came from banking. We reported non-interest expense of 83 million, and adjusting for 4.8 million in charges related to the efficiency initiatives. We had core non-interest expense of 78.2 million. At that 78.2 million, 66.2 came from banking, so we delivered consolidated core pre-tax pre-provision earnings of 45 million, and banking core pre-tax pre-provision earnings of 44.8 million. Go into more detail on net interest income in our margin. I'll touch first on our securities trade.

And those returns R. R.

They are.

Our bar is higher than any of the investors out there.

Our internal bar is higher than any of the investors and so.

Again, we appreciate the metaphor and we are.

Playoff caliber at this point and competing for the championship.

Michael Mettee: We sell 77 million of securities at a 14.2 million pre-tax loss at the end of September. So given the timing, we did not see any real benefits in that interest income in the third quarter from that transaction. The trade should deliver approximately 4 million in additional net interest income annually. At this point, we're continually examining how we can increase our yield on our liquidity. We would be comfortable with another loss in the 10 to 20 million dollar range as the trade met our parameters on earn back, expected duration, earnings accretion and capital deletion.

That's that's good to hear it sounds like Youre expecting 24 to be waterproof sounds good to hear wanted to ask back on credit you know you've got the slide in the deck about the office portfolio, but I'm actually curious if it's slightly smaller but wanted to ask actually about hotels.

And just you know if we have any kind of consumer consumer driven weakness you know in the next year 18 months would seem like hotels might actually be somewhat somewhat at risk and so I was curious if you guys have done any work on revpar occupancy.

Michael Mettee: We wouldn't do a trade that would not meet our parameters. There will be many options to deploy capital over the next couple quarters. Next, our contractual yield on loans increased by 16 basis points during the quarter to 6.32%. For the month of September, our contractual yield on loans held was 6.35%. Yield on new commitments for the month of September were coming in a little over 8%. Remember, 48% of our loan portfolio remains floating rate, which leads 4.9 billion in fixed rate loans.

Cushions for the for the hotel portfolio and maybe how you think about that book.

Yes. So so we do have our hotel book again that one also.

Is not outsized.

Oh for us in terms of weird.

It sits kind of blown up.

Michael Mettee: At that 4.9 billion in fixed rate loans, we have about 200 million maturing in the fourth quarter at a yield of about 6.7%. 300 million maturing in the first half of 2024 with a yield of 6.05%. About 175 million maturing in the second half of 2024 with a yield of 5.65%. So about 680 million maturing through year in 2024, it awaited average yield of about 6.13%. Cost of deposits continue to rise, but as Chris mentioned, we've seen that rate of increase moderate recently.

On a comparative basis I don't have those specific stats.

And we are we we don't have our chief credit officer with Us today.

But we we have been watching a hotel and we frankly haven't.

Been doing much new there over the last couple of years for all the things that you you just mentioned, we do have a few but when we were pretty much restricted to <unk>.

Really strong flags.

In in.

Nice and good and good areas, we got some suburban stuff.

We don't we do have.

A little bit of Central business District hotel stuff, but.

Michael Mettee: For the quarter, our cost of interest bearing deposits increased by 27 basis points to 3.33%. For the month of July, August and September, our cost of interest bearing deposits was 3.2, 3.43, and 3.35 respectively. Incremental interest bearing deposits for the month of September were coming out of the balance sheet at around 3.6%. As a reminder, we'll have public funds accounts begin to build in the fourth quarter. We would expect 400 million to 500 million to come back out of the balance sheet in the fourth quarter with a cost of a little over 5%.

And Travis I'm thinking the ones I can think of we got a Hampton Inn in the Central business District correct.

But it's that it's that type of flag, if we get if we get that.

Yes, good morning, good morning, Brett as trends, but one other thing I would add is it wasn't too long ago. It was the pandemic, where hotels were on everybody's mind and we did a thorough analysis during that timeframe to make sure that our borrowers were able to withstand.

Michael Mettee: Those give and take left our margin for the quarter at 3.42%, effectively flat with the second quarter. With all the moving pieces that I laid out above, we anticipate margin bearing in the 3.30 to 3.40 range for the next couple quarters. Moving to non-interest income, non-mortgage non-interest income continues to perform the 10 to 11 million dollar range, and we expect that to remain in the ban plus or minus the next few quarters.

That pandemic and what we found was we have very strong borrowers in this asset class did everything that they said they were gonna do.

We continue to monitor that portfolio, we're not seeing any any struggles to date on revpar. We are mindful as the consumer spending goes down in 'twenty. Four then that's something we need to definitely keep our own but no alarms at this time.

Michael We just reminded me that we have done in the last say.

Michael Mettee: Our non-interest expense also needs more explanation that is typical of this quarter. At this point, we've taken 15 million and annual expenses out of our run rate, most of which occurred in September and early October. We've also acted on an additional 5 million and annual expense reduction that will be realized by the end of January. These reductions have come through a combination of a voluntary early retirement program and some positional eliminations, reduction of redundant processes, limiting utilization of professional services, and contract renegotiations and cancellations.

Okay.

You're 18 months.

One.

Again.

I can say, it's a hilton.

With with.

Fantastic.

<unk> around that that has.

We had extremely high expectations for it and it crashed the Roman so it's.

That's the only one we've done here.

Here very recently.

Okay.

I, if I could sneak in one last one just around M&A and Chris It sounds like you're more interested in expansion if it if it makes sense strategically and so I think everyone in the environment realizes that's kind of the.

Michael Mettee: Most of the expense reduction still to be realized will come from a closure of seven branches, which we have communicated internally and to customers. For the fourth quarter, we expect banking non-interest expense to be in the 64 million to 66 million range. And for 2024, we anticipate annual banking non-interest expenses at 255 million to 160 million. To achieve this reduction, we took a 4.8 million in charges in the third quarter in connection with the early retirement program and related severance costs.

The tough thing is that the marks on the balance sheet can you guys talk about or maybe Chris just how you think about dilution to tangible book or what.

What what kind of parameters would be acceptable to you relative to an opportunity.

Yeah Brett.

Certainly theres a lot there there's conversations that seem to be picking up and seemed to be a lot of that going on I think folks are thinking I think.

Michael Mettee: We also took 1.4 million in charges related to this project in the second quarter, so we're about 6.2 million so far. We anticipate an additional 5 to 7 million in charges to the fourth and first quarters as we continue our focus on efficiency and profitability. On the ACL and credit quality, our ACL that loans health for investment increased by six basis points for the quarter, or a 5.5 million increase in the allowance.

Yeah.

I think 24 is going to force a lot of that and I know it is forcing a lot of that and I think folks are having.

Having to think strategically.

Michael Mettee: Much of that 5.5 million was related to specific reserve on the credit that Chris mentioned earlier. That credit was also almost entirely responsible for our 10.4 million increase in non-performing loans, health for investment this quarter. Explaining this credit, our ACL to loans health for investment would have remained roughly flat, as economic indicators remained in line with the prior quarter. Our queries by speaking to the progress that we've made in the past year on our recent priorities of balance sheet strength through liquidity and capital management.

And the landscape continues to change and I think you have to think more and more strategically as we think about it.

I made this comment we only think about it strategically so we don't we're not thinking about just asset size. It unless it makes really good strategic sense for us we don't see engage.

In a deep way and so and then when we think of it. So when we think about it it's going to be strategic and and.

Usually those aren't going to be.

I'll call it tangible book value type deals because theyre going to be valuable properties.

Michael Mettee: In the past 12 months, we've increased our TCE to tangible assets by 60 basis points and total risk-based capital by 110 basis points. Our loaned deposits have declined from 91% to 87%. Our construction development to bank level tier 1 capital plus allowance has declined from 124% to 104%. And we'll continue to move lower and closer to our long-term operating target for that ratio of 85 to 90%. On balance sheet liquidity to tangible assets has increased from 7.4% 12 months ago to 11% today.

And so we've always thought about it as a three year earn back.

It's kind of the the where we are.

Draw the line I'll tell you one of the most.

Frustrating things that I deal with us because we say this we say that on this call.

And therefore investment bankers here that and so they just automatically go out and calculate what a three year tangible book value is and then they go out and tell everybody here. This is what they what here's what they can afford to pay for you.

Michael Mettee: And we have grown our available sources of liquidity from 6.2 billion in the third quarter of 2022 to 6.8 billion today. As Chris said, we feel very well prepared for any economic downturn in our current view is that any downturn we experience will be louder than what we have prepared for.

And.

Generate conversations around that and then my the line use often is.

Because that's what we can afford to pay doesn't mean, that's what you are worse and so we have that conversation.

Christopher Holmes: I'll now turn the call back over to Chris. All right. Thanks, Michael, for that color.

Sometimes it again under all the analogy of selling your house you know Elon Musk is interested in your house you can afford to pay a lot, but that doesn't necessarily meet your house is worth more than it and then you know the comps around your house and so we get into that and so that's when.

Christopher Holmes: And to summarize, we'll go into questions about sheet situated in position of strength. We're focused on improving profitability and returns. We're excited about the future. And from a financial perspective, we feel very prepared to execute on any opportunities that may come our way. So both financially and operationally.

When we think about it.

We think about that as kind of a parameter, but we're thinking about hey, what does this mean to us.

Unknown Executive: So that concludes our prepared remarks. Again, thanks you. Thank you for your interest. And operator will open up the lens for questions. Thank you.

And it could you know in some cases I suppose it could take us over that never asked.

Unknown Executive: We'll now begin the question and answer session.

But we are we think about it quite strategically in there are parameters is really we want obviously, we want to see.

Unknown Executive: To ask a question, you may press star then one on your touchstone phone.

Unknown Executive: If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two.

EPS accretion.

And we want that to be.

Unknown Executive: At this time, we'll pause momentarily to assemble a roster.

<unk>.

It is again, a reasonable size institution you'd like for that to get up into double digit EPS accretion and then a.

Stephen Scouten: Our first question comes from Steven Scouten from Piper Sandler. Please go ahead. Hey, good morning, guys. I appreciate the time this morning. I wanted to get some more information on the... Security Sale. I think last quarter you had said kind of, bands you were looking at was 9 to 27 months on the earn back. It looks like this is a little higher than that. Kind of curious a couple things. What sort of securities did you reinvest in at that 643 yield? And maybe what did you sell that kind of precipitated that longer earn back? Were these, you know, was it a longer duration portion of your securities book? That'd be helpful. Thank you.

Smaller institution it might not reach that because it just doesn't have the impact, but then we really focus on what happens to our tangible.

Tangible capital level.

One other point there that is what you are part of what Youre alluding to is that that's a harder computation that it used to be because of.

And what that does it can create more tangible book value dilution, but that also tends to come back much more quickly.

In the.

The way that that comes back to you on your full year earnings and GAAP GAAP accounting so.

Stephen Scouten: Stephen, good morning. Yeah, it was a little bit longer, but a little over three year earn back. And so what we, as we went through the process, we thought about even if rates moved down 300 basis points, these securities we sold, which are mostly mortgages and some CMOs would be with us in any rate environment. So they did extended out so far that it just made sense to kind of get rid of the dogs as I'm calling them internally.

Okay. That's really helpful. Thanks, Rommel thanks for all the comments.

Sure.

The next question comes from Alex Lau from Jpmorgan. Please go ahead.

Hi, good morning, everyone.

Valerie.

What are the key areas of the bank, where you're seeing the expense reductions coming from can you give some color as to how much of this retirement or cuts are coming from front office back office and also what are the types of projects or investments that you're putting on the back burner for now thanks.

Stephen Scouten: Reinvestment of some agency government agency stuff, FHLB type paper. And so that's where the yield came from, although we are seeing kind of current market securities all in that range. And so all well within our guidelines and duration, not any extra credit risk there. Okay, that's helpful.

Hey, Alex Michael.

Yeah, it's broad base across across the company, our front and back office.

It's early retirement was probably more.

Management driven.

Stephen Scouten: And then maybe thinking about just that one C&I credit that you noted that kind of encapsulate a lot of the movement, the credit metrics, any additional information you can give us there kind of what sector that is. And if there's any kind of lingering issues along the same lines and any other similar sectors.

Activity.

But again, it's it's front and back offices some leadership.

Type stuff and change.

Yeah positions.

As you look across obviously.

We've had slower loan growth. So we've seen some reduction then in relationship managers.

But not very much and some of that's just.

Stephen Scouten: Sure. Sure, Stephen. It's Chris. Good morning. And Travis, that's Edmonds and our chief banking officer in here with us as well. So let me just make a comment. It's a, the C&I credit. You're familiar with a bankrupt. There was a bankruptcy that reportedly was mountain express. We are not involved in that credit. As you guys, I think, no, we were not involved in that at all. We do have a client of which that bankruptcy, they was a vendor to that client.

Product of.

The environment.

And the branches that's a piece of it.

And then just.

Just some other back office stuff, but.

I think if you if you think about projects Yeah, Chris mentioned the investments we've made I mean, we're still positioning ourselves for.

Becoming a larger more scalable institution. So we've invested a lot in risk management a lot of data.

A lot in our audit functions inside there.

<unk>, we're just in a really <unk>.

Stable scalable place at this point operationally is that we're looking to capitalize on that.

Stephen Scouten: And so that was, that was the one C&I credit, roughly a $10 million credit for us. And it is actually pretty well secured and has guarantees on it as just as just about all of our credits of that type do. But once it goes into bankruptcy, we're we're fairly conservative. And this is not, but but there's a major vendor that is in bankruptcy. And so we're fairly conservative with how we handle those.

But yeah, it's just making sure that we're well positioned for next year and the years after.

Hey, Alex.

If I could just add just a couple of comments.

Some some of the.

So some of the road.

<unk> production comes from remember this so remember we go over you know since we did our IPO in late 2016, we have quadrupled in size, we have made four.

Acquisitions in the last one being 40% of our size.

Stephen Scouten: And so we went ahead and just put it on a cruel. And took some extra reserve on it. Even though we are pretty optimistic on it. Got it. Okay. And I know I think Michael said no real changes in your ACL kind of mindset and you cannot underline economic scenarios, but obviously you took the reserve up even in light of only two basic points of charge. So it feels like a lot of most of that is really just conservatism on your end and you never know what you don't know is coming down the pipe.

And so and then we and then we went through a pandemic right after that and so.

When you do all that you put a lot together and so.

The expense reductions.

Which we have been very thoughtful about noticed we did we havent built up and tried to tried to build a lot of anticipation around this because we've been very thoughtful about that now over a number of months and it's something that comes.

And frankly, it's been Ben the execution has been over overtime as well and so.

Stephen Scouten: Is that the right way to think about it or would we expect additional reserve? and Bill Miven forward. Well, I think we're well positioned, Stephen, I think this range, it didn't move up because of the credit. We're coming out individually, evaluated, alone. But I think you'll stay in this range. We feel comfortable with where we are. And like I said, we haven't seen deterioration in the portfolio. So right now, that 150, 155 range, where we've been, is likely where we'll stay.

Hum.

And so they come across the board.

Both geographically as well as operationally in terms of how those and then I want to mention just a couple of investments that we.

That we won't put on the Backburner, you said ones that you do and I frankly, I can't think of ones that we're looking around the table, who can't think of ones that we have but we have made substantial investments, particularly in data.

The data side of the business and making sure we have actionable data to manage the business and I talked in my comments about.

Stephen Scouten: Yes, Stephen, I would just add, in Michael, I'm both alluded to this in comments. Both are, you know, our capital levels in reserve were prepared for difficult difficulties moving forward. We don't really actually expect things to get that difficult. But our preparation allows for things to get more difficult than we anticipate they will. Yeah, that's great.

You know when we were talking about liquidity and we talked about asset some of the models had been tweaked and some of them been overhaul.

That's that's what we so we've done a lot of overhauling of models again, making sure we have the right and actionable data the risk management side of our business. We've made really substantial investments over the last the last two plus years and just third line third line defense investments have been.

So as you know as a company gets larger and as you plan to scale. The company from here those foundations are what we've spent the other one the other ones Michael I'm not sure. If you mentioned was professional services.

Stephen Scouten: All right, guys, thanks a lot. I appreciate all the color. Thank you, David. We appreciate it.

Catherine Mealor: The next question comes from Catherine Mealor from KBW. Thank you. Please go ahead. Thanks. Good morning, everyone. Good morning, Catherine. I just wanted to ask about your outlook for balance sheet growth. You've been really conservative on your outlook for long growth over the past couple of quarters. And you saw loans pull back again this quarter. Just curious. How many more quarters you've got would be that we'll see a decline in loan balances before we can hit that inflection and start to see growth again.

Yeah, you know one of the big reductions as we spent a lot in professional services you can see that actually again, if you look at that expense line or supplement youll see that decrease there and thats that was intentional spend from some of the best.

International consultants out there.

On.

Things that we wanted to make sure we got right and so.

And so when it comes to Backburner, frankly, I can't think of what we would put on the backburner, we hadn't done a lot of branch expansion.

Catherine Mealor: Yes, so Catherine, just a couple of comments. You're right. We have been conservative on the loan growth side. And we've said right now for us. And I talked about when I was talking about the liquidity, none over leveraging our deposit base. And so that's a real governor for us. And so we have been conservative on that side. We still see opportunities and we still see some growth. But remember, we're also taking balances down, particularly in our construction portfolio. And we're not growing our overall CRE portfolio.

<unk> would be one thing.

That's about the only thing I can think of.

Thanks, so much for that color and then I had a question on security sale can you update us on the parameters that you look for in terms of an acceptable earn back period, and then separately as bond yields were rising in the quarter when in the quarter did you sell these securities and what is the appetite for more sales.

At the current yield curve. Thank you.

Yeah.

Really the.

The parameters haven't haven't changed that much but you want to we want to be around a couple of years, we've had kind of.

Catherine Mealor: So when you put those dynamics in there, it's going to probably be muted for another quarter, maybe two. But we do expect some growth in 24. And so, and again, now if someone see and I and we'll be in a different position. Also, it also depends on economic circumstances. And we'd like to see clear through interest rate increases. And we'd like to see clear through not seeing significant economic deterioration into some kind of grown out recession.

Maybe a little bit off that just because as I mentioned earlier.

The Securities we sold were so low yielding that it really didn't matter of the rate environment. The duration was the duration and so we saw some opportunity, but I think as we look forward, yes. It can be in that a couple year range on an earn back.

We sold it's got probably middle of September and it was before the 10 year and everything has shot up at.

And so we really paused reinvesting.

We put about $90 million to work.

In mid September and we pause that last couple of weeks now subsequently that yeah. The 10 years come back down 25, 30 basis points. So we're comfortable in this range, but it's a right it's about finding the right investments.

Catherine Mealor: So, Travis, you have anything to add to that? First off, good morning, Catherine. Nice to talk to you. I mean, nothing much, nothing much to add to that. I think you're spot on. We still have a lot of opportunities in our markets. We're in a lot of growth markets, Birmingham, Huntsville, Memphis, Knoxville, and the list goes on and on. It's more of a self-imposed governor at this point. And when we decide that the economy looks better for us where we can see more clearly into the future, we will turn on some more growth initiatives in turn.

Our portfolio has gotten smaller it's about 10, 8% of total assets.

Yeah, but that's.

That's fine, but it depends on what other options are and so.

We're not we're not growing the book the 20% you know, we're not shrink into five and it will stay in this range.

Thank you and then just to follow up on the public funds.

If you look at last year's fourth quarter that grew in the $400 million range is that a fair.

Catherine Mealor: Are you seeing opportunities on the CNI side? It seems like, you know, you talked about construction and CRE that you're you're really not lending in right now. Can you just kind of talk generally about what the land tape is and CNI lending today? Yeah, we're seeing a lot of opportunity. Of course, there's a lot of competition in that space today. A lot of other institutions are derisking their balance sheet similar to what we're doing, but we're seeing a lot of opportunities that we've actually grown committed balances in the CNI space by a little over 100 million last quarter.

Amount to assume for this year or is there something different going on in the fourth quarter.

Yeah, That's fair, we expect 400 to 500 million or so.

And yeah, we're we're managing that with profitability and liquidity and in a competitive environment and so.

It's a daily grind.

But yeah. That's that's yes, we kind of forecast out that's what we'd expect in and we're kind of managing through all the moving pieces. There yeah I would just say, yes, so you're right on our assumption yeah, Alex I mean, it's going to be right in that range.

Catherine Mealor: So we continue to to really engage in that space and we're seeing some positive momentum. Great. And then on the on the deposit side, your name guide was really helpful and seems like for stabilizing, which is great. Can you just talk about just the incremental cost of deposits and just kind of what you're seeing within the behavior of your client, you know, maybe one where you're seeing the most, maybe the most stress in terms of higher deposit costs versus where things are really starting to ease, maybe in products or we're kind of deposit type.

Well, that's what we with what we anticipate it will be.

Great. Thank you for taking my questions.

Alright, Sir could you just talk to us.

The next question comes from Kevin Simmons from D. A Davidson. Please go ahead.

Hey, guys good morning.

Good morning again.

Just wanted to say.

So I know we've had a few questions on this but I just want to.

Catherine Mealor: Yeah, I had Gaffin's Michael good morning. The I'll start then crap can jump in. You[inaudible] Oliver. So it's really a function of your public funds that are driving the modest but more margin pressure in the back half of the year more so than your retail and kind of core customer base. That would that be a fair comment? That's right, exactly. Okay. All right, very helpful. Thank you.

Make sure I'm thinking about this correctly so.

We're gonna have.

You know a positive tailwind for the margin from the securities transaction, but this is being out we'd.

In the fourth quarter by the public funds right being a drag on in terms of being higher cost in coming in and we.

We still continue to see a deposit mix shift right, but.

All right.

You know that.

So the velocity or the pace of departure.

Rate increases is debating it seems like you are saying so if we look you know I appreciate that margin range, but.

Apart from the effect of.

The public funds are we at a point where.

Yeah.

Sure.

Margin is gonna.

<unk> here in the next quarter or two and then position maybe in the first half of 'twenty four to start expanding I know I know, that's a big preamble I'm just trying to.

Make sure I'm catching all the better.

I appreciate the preamble.

Because those are those are all the things we talk about yeah, I think I mean.

I think he got it I think you nailed it in it with one thing I would say there was something.

You said.

That the public funds should.

Outweigh the stripes.

Stripes Securities trade and it will certainly.

Those two will work against each other.

Well it totally outweigh it yeah, because it's a kind of a rate volume yes.

<unk> drive is the.

The volume of the public funds, we expect to come on four or five extra security strike yeah.

And into the.

But the rest of that Kevin is as it is what's going on and you called it a preamble, but you know it's those and other factors, which were which are all filter into the model to help us forecast, where it's headed.

And that's why we use a range.

And we've described it as kind of range bound over the next couple of quarters, but again I think you said and then after that we'd expect it to begin to increase and that would be the case and getting into 'twenty for let's say the mix ship. Yeah. If you think about from noninterest bearing to interest bearing it has moderated as well and we've been in this.

22% range for a couple of quarters now.

So it says the velocity of deposit.

The velocity of rate increases has slowed we've seen that moderate as well yeah, I always point back to get a pre pandemic.

As we talked about the the combination with Franklin, we expected that number to be around 20%. So I would say this range feels about right for migration from NIF b to interest bearing we do see some move between products.

Interest checking to money market more so little bit in <unk>, but we're trying to keep those fairly short.

Brett Rabatin: The next question comes from Brett Rabatin from Hubby Group. Please go ahead. Hey guys, good morning. Morning, Brett. Wanted to start off, it's college football season and I know you guys followed quite a bit and I know there's been some desire to get to FBK back in the college playoffs, so to speak. And so I wanted to ask, you've obviously taken some actions here in 3K, what offense and defense with the security risk portfolio and the expenses?

Yeah, but competition there as I mentioned earlier, some community banks, and then treasuries, but not not seeing as much outflow anymore to treasuries.

Got it got it thanks.

Brett Rabatin: Wanted to see what else you might be considering doing to get caught back in the playoffs in 24 or if you feel like what you've done is kind of what what you're able to do and if maybe you end up in the playoffs in 25 instead. Yeah. Hey, Brett, Chris, you're right. It is college football season. We are fans and we do have the Monday morning ribbing of everybody that's only losing in, so it's no fun on Monday morning here out here when you lose.

One follow up I wanted to ask about M&A.

Chris in the past you've kind of.

Described it is you guys have certain.

Our gifts in mind over a long term time horizon, and it's a matter of when.

The right time for them to be willing to sell and but yet you sound.

You sound much more confident there will be opportunities coming and so is that a matter of.

You guys are getting a sense some of these trucking properties.

Getting ready or having starting to have conversations or or an door.

Right.

Just given the environment.

And the position you're in you're kind of expanding that.

Spectrum of potential opportunities.

It's the former it's it's nothing we're really.

We still have the same.

Brett Rabatin: And it's no fun day in and day out when you lose in banking relative to how we how we perform. And so if you go back and look at our historical performance, it doesn't just go back actually two or three years to go back to when we when we start to call, we talk about where our compound annual growth rate of our of our book bag of the tangible book value of our stock is since we've become a public company, we go back and we actually look further back than that.

Things that we look for in when we're so that means that there's going to be a limited.

A number of institutions that have the parameters that they were looking for so that list really hasn't hasn't changed.

It's just that with when we look out into 'twenty four.

No.

And we talk to too.

Everybody in the industry.

And conclude for ourselves, what we think's going to happen.

Just think that that some of those.

Our.

Likely to decide hey, it's time to seek of sika.

Brett Rabatin: And we've always been a premier performer and we that's a one of our key foundational tenants here. We're going to be an elite performer. We we did over the last. I'll say four quarters or so four or five quarters said, Hey, there are some things that we need to do to make sure that we have the scalability of the company and the foundations of the company where they need to be. So we spent some money, which we knew would would hurt our performance.

Seek out my options and so it's really the latter it's not that we're expanding NGO okay.

Expanding our or <unk>.

Parameters, either from a geographic perspective or from what we're looking forward.

Yeah, Okay got it. Thank you and one last thing you mentioned a couple of times that.

Yeah.

These deliberate moves to strengthen the balance sheet for difficult times, but you feel now that.

These things won't likely get that difficult is that.

Brett Rabatin: And we have taken and we say we took our foot off the accelerator, we've done some things and but we feel hopefully you're beginning to hear when we talk about our confidence moving forward and we talk about some momentum moving forward. We are we'll be back in the playoffs and competing for the championship. And so that's that's that's game on from our standpoint. Just keeping with your your metaphor there. It's game on from our standpoint.

It's been more of an ongoing thought or is that something based on recent observations that you're feeling like alright.

We're glad we prepared but it's probably not going to be as bad as what.

What we what we might have thought a couple of quarters ago.

And then I'm going to alter that just a little bit to say, yeah. We're prepared for things to get difficult, but we don't think they'll get is difficult, but we're prepared for it.

And so because we're prepared if things get.

Brett Rabatin: You see you saw improvement last quarter that was meaningful. You see improvement some improvement. This quarter that was meaningful. You see the steps that are already going to improve next quarter in 24. And so we have we continue to generate levers when we talk about our strength and our balance sheet. What we're doing is general is is creating levers that we can pull as we go through 24 to improve our profitability and make sure our returns are where we wanted to be.

If you know.

If we find ourselves stuck back in 2008 net kind of environment.

Think knock on wood, we think we'd be prepared for that at this point.

Yeah going back to what happened in March of this year again, we feel like we're well prepared for whatever comes at us.

And our point is we don't think those things are going to happen, we actually do see things like slow get slower from here. Okay. So we do think that things will get slower.

Brett Rabatin: You know we're shareholders and those returns are they they have our bar is higher than any of the investors out there our internal bar is higher than any of the investors. And so again we appreciate the metaphor and we are playoff caliber at this point and competing for the championship. Richard. That's, that's good to hear. So I like you're, you're expecting 24 to be a lot improved. So that's good to hear.

We just don't think we're saying if it gets really slow really difficult we're prepared for that okay, but we don't really anticipate it getting us.

As bad as we're prepared.

So that doesn't mean I don't think it gets slower okay.

Got it got it understood. Okay. Thanks for that clarification. Thank you guys.

Thanks, Kevin.

The next question comes from Matt Olney from Stephens. Please go ahead.

Brett Rabatin: One to ask back on credit, you know, you've got the slide in the deck about the office portfolio, but I'm actually curious. It's, it's slightly smaller, but wanted to ask actually about hotels and just, you know, if we have any kind of consumer consumer driven weakness, you know, in the next year, 18 months would seem like. Hotels might actually be somewhat somewhat at risk. And so I was curious if you guys have done any work on on rep or occupancy cushions for the hotel portfolio.

Hey, great. Thanks, Good morning, guys just wanted to follow.

A follow up on the capital discussion, we've talked about potential for additional securities transactions and.

M&A conversations heating up.

Can we assume that as far as a any kind of share repurchase program that in the near term that that's going to be a less likely or how would you characterize the the appetite of the buybacks.

Yeah, I'd say less.

Likely.

With that and Thats really related again to <unk>.

Brett Rabatin: Maybe how you think about that book. Yeah, so, so we do have a hotel book again. That one also is not outsized for us in terms of where it sits kind of on a comparative basis. I don't have those specific stats. And we, we don't have a key credit offer with us today. But we, we have been watching hotel and we, we frankly, haven't been doing much new there over the last couple of years for all the things that you, you just mentioned, we do have a few, but when we, we're pretty much restricted to really strong flags in, in nice and good, in good areas.

Just not being able to predict the future.

And we are.

We don't want them.

I think if somebody goes out if anybody if we went out and did what did you started buying back now in credit got really difficult for the whole world.

You wouldn't look to smart if we had to raise capital after that and so we want to make sure that.

So.

We're gonna be conservative there.

Sure.

On how we how we use this capital until we we we think that the industry is.

Yeah.

Brighter from a credit perspective and.

And to get interest rates, we feel like interest rates are or have hit their peak.

Okay. That's helpful. Chris and then I guess also circling back on the deposit discussion I think you gave us lots of good details around the public funds and that's kind of where the focus is now what about on the customer time deposits I think theres, a $1.4 billion balance that average cost in the third cornerstone.

Brett Rabatin: We've got some suburban stuff. We don't, we do have a little bit of central business district hotel stuff, but in Travis, I'm thinking the ones I can think of, we've got a hampton in in a central business district. And, but it's that, it's that type of flag if we've got, if we've got that. So, yeah, morning, good morning, Brett. This is Travis, but one other thing I would add is it wasn't too long ago.

Feels quite a bit below most of your peers can you just kind of walk through the repricing dynamics there with maturing more near term and then what are the current rates that you're seeing for your customers.

Brett Rabatin: It was the pandemic where hotels were on everybody's mind. And we did a thorough analysis during that time frame to make sure that our borrowers were able to withstand that pandemic. And what we found was we have very strong borrowers in this half the class did everything that they said they were going to do. We continue to monitor that portfolio. We're not seeing any, any struggles to date on rep or we, we are mindful as the consumer spending goes down in 24, that's something we need to definitely keep our own, but, but no alarms at this time.

Yeah.

Good morning, this is Michael.

Yeah. If you remember we did a fairly decent sized deposit campaign last year, and we had some <unk> some CD specials that.

It was September October last year. It was kind of 13 18 months 24 months papers. So the weighted average term on that was about 18 months.

And.

Yeah. The cost was right at the time market, we havent moved off those rates a whole lot.

And we're still saying renewals and historic got our renewal rates.

Brett Rabatin: Yeah, Michael, we have done in the last, say, your 18 months, one, again, I guess I can say it's a helping and it's a with just fantastic parameters around it that has, we had extremely high expectations for it and it's crashed the room. And so it's, again, that's the only one we've done in the here very recently.

And so I kind of mentioned this earlier, we have certainly raised some CD rates, but it's just been shorter in term so we.

If customers come in and want a shorter term C. D at slightly higher rate you actually see it looks like the yield curve a little bit inverted.

And so.

If you stay in those terms that you ran last year, you're getting a very similar rate.

And of course, our our model is.

Brett Rabatin: So, okay, if I could sneak in one last one just around M&A and Chris, it sounds like you're more interested in expansion. If it makes sense strategically. And so I think everyone in the environment realizes that's kind of the top thing is that the marks on the balance sheet.

As customer focus.

So the field can take care of customers as they need to in competitive situations and we stick by that.

So that we're doing right by the customer right by the company.

There is some flexibility there.

And then Michael just to follow up on that as you look at some of the renewal timeline is there is it spread evenly in the next few quarters or is it in any quarter or two where you see more more volumes are set to reprice.

Brett Rabatin: Can you guys talk about, or maybe Chris, just how you think about dilution to tangible book or, you know, what kind of parameters would be acceptable to you relative to an opportunity? Yeah, Brett. Certainly, there's a lot, you know, there's conversations that seem to be picking up and seem to be a lot of that going on. And I think folks are thinking, I think, you know, I think 24 is going to force a lot of that.

It's spread pretty evenly fourth and first are yeah.

A little bit of a lump in the second quarter of next year.

Yeah.

But it's our already higher priced stuff.

And then what's renewing in in the fourth and first quarter.

Brett Rabatin: And I know it is forcing a lot of that. And I think folks are having to think strategically. And the landscape continues to change. And I think you have to think more strategically as we think about it. And I made this comment, we only think about it strategically. So we don't we're not thinking about just assets eyes unless it makes really good strategic sense for us. We don't engage in a deep way.

Okay. That's that's helpful. And then I guess I guess sticking on the deposit pricing pressure theme, you're your footprints are good kind of mix of.

Brett Rabatin: And so, and then when we think about so when we think about it, it's going to be strategic. And usually those aren't going to be, you know, are called intangible book value type deals because they're going to be valuable properties.

More metro markets and.

Also some some real communities just any.

Commentary for us as we think about Oh deposit repricing pressure.

And some of your general markets, where the pressure is greater today than where its maybe not as great as it once was.

Hey, Matt Good morning Travis.

It's really it's really interesting.

Initially we saw the most pressure from the smaller communities to the kind of the rural markets. We're now seeing some some larger regional banks, putting out some specials in the fives.

Brett Rabatin: And so we've always thought about it as a three year burn back is kind of the where we draw the line. I will tell you one of the most frustrating things that I deal with is because we say this on the, we say that on this call. And, and therefore investment bankers hear that. And so they just automatically go out and calculate what a three year tangible book value is and then they go out and tell everybody here, this is what they, here's what they can afford to pay for you. And generate conversations around that. And then my, the line I use often is because that's what we can afford to pay doesn't mean that's what you're worth. And so we have that conversation sometimes.

So it's really across the board either urban or rural there, we're seeing deposit pressures and they're all generally in that five and a quarter to $5 seven five range on the specials.

Okay. That's helpful. That's it from me thanks, guys.

Thanks, Matt.

Okay.

The next question comes from Steve Moss from Raymond James. Please go ahead.

Good morning.

Good morning.

So most of my questions have been asked and answered here just do want to just one thing on the office here just curious if you could give any color as to why.

When the rents in that portfolio and start to come up for renewal.

And any color around that dynamic there.

Uh huh.

Brett Rabatin: And again, I draw the analogy of selling your house. You know, if you on musk is interested in your house, he can afford to pay a lot that doesn't necessarily mean your house is worth more than, and then, then, you know, the comps around your house. And so we get into that. And so that's a, when we think about it, we think about that as kind of a parameter. But we're thinking about, hey, what does this mean to us?

Steve.

Alright.

Our chief Credit Officer here.

I will say just generally on renewal.

Michael went through kind of where we were on our fixed rate portfolio.

Not off the specific.

And so when we did look at office.

I'm thinking about rent renewals I was thinking about the loan renewals and so I'd have to I'd have to get a little more detail information and get back to you.

Brett Rabatin: And it could, you know, in some cases, I suppose it could take us over that and never ask. But we, we, we think about it quite strategically in our parameters is really, you know, we want, obviously, we want to see. EPS accretion. And, and we want that to be, you know, again, a reasonable size institution. You'd like for that to get up in the double digit EPS accretion. And then a smaller institution, it might not reach that because it doesn't have the impact.

Does that Travis.

Travis you.

Is that fair that's fair okay great.

Okay No that's.

Pretty much my last question.

I would call it here today.

Alright, alright, Steve Thanks for being with Us.

The next question comes from <unk> Strickland from Janney Montgomery Scott. Please go ahead.

Hey, good morning, gentlemen.

Brett Rabatin: But then we, we really focus on what happens to our tangible capital level. And, and one other point there that is what you're part of what you're alluding to is that that's a harder computation that it used to be because of AOCI and what that does, it can create more tangible value delusion, but that also tends to come back much more quickly in the count, you know, the way that that comes back to you on your, on your earnings and gap, gap accounting.

Good morning, everybody how are you.

I'm good I'm good.

Wanted to start off soft borrowings and brokered Cds declined during the quarter, which I'm sure health on the funding cost side.

Brett Rabatin: Okay, that's really helpful. Thanks for all the comments.

Did those just mature and you didn't renew them and could we see more of that rolling off in future quarters, just given you've got loans to deposits at around 87%.

Yeah, that's right.

Some of them rolled off and we have some more where they are.

Coming due in November .

If you remember last quarter, we increased some of that.

Just because it was cheaper than retail deposits quite frankly, I think Chris mentioned this in his and we keep our powder dry.

Alex Lau: The next question comes from Alex Lau, from JP Morgan, please go ahead. Hi, good morning, everyone. What are the key areas of the bank where you're seeing the expense reductions coming from? Can you give some color as to how much of this retirement or cuts are coming from front office, back office? And also, what are the types of projects or investments that you're putting on the back burner for now? Thanks. Hey, Alex, Michael, good morning.

Yeah, the sources of liquidity.

We can leverage it when we want to need to.

And so sometimes when we say brokered market is cheaper.

Or <unk> findings cheaper.

Well, we will do that.

And so that that levers out there, but we do have I believe it's $100 million rolling off in November .

Whether we renew it or not it's TBD certainly don't need it to your point, we freed up a lot of liquidity from collateral standpoint, as well during the quarter. Good work by the team there.

Alex Lau: Yeah, I mean, it's broad base across across the company, front end back offices. Early retirement was probably more management driven activity, but again, it's front end back office, some leadership, type stuff and change. Yeah, positions, as you look across, obviously, we've had slower loan growth, so we've seen some reduction in relationship managers, but not very much. And some of that's just a product of the environment. You know, I've mentioned the branches, that's a piece of it.

To further further great sources of liquidity.

Understood that's helpful and switching gears a little bit here.

We look at these expense reductions coupled with.

So the securities portfolio restructuring and some of the other trends we talked about in the market and everything else going on do you think efficiency at the core bank ex mortgage can get into the mid <unk> range by the end of 2024 from the peg at around 60% today.

Yes, yes is the answer.

We do we think on the core just core bank.

Yes.

We think we can get below the mid fifties either.

Got it and one last question for me.

Alex Lau: And then, you know, just some other back office stuff. But I think if you think about projects, Chris mentioned the investments we've made. I mean, we're still positioning ourselves for, you know, becoming a larger, more scalable institution. So, we've invested a lot in risk management, a lot in data, a lot in audit functions, and so those continue. We're just in a really sustainable, scalable place at this point, operationally. And so we're looking to capitalize on that.

It sounds like we should expect to see the unfunded loan commitments in the CD space continue to come down.

As a consequence do you think we will see the unfunded commitment reserve continue to decline as well.

Yeah.

That's right. If you look at the ICL side Youll see we actually increased our reserve on the construction bucket, but we released from the unfunded strictly due to volume and so you'll see that continue to decrease and then well.

Probably land in that.

Alex Lau: But yeah, it's just making sure that that we're well positioned for next year and the years after. Hey, Alex, if I could just add just a couple of comments. Some of the, some of the, the expense reduction comes from it. Remember this, remember we over, you know, since we did our IPO in like 2016, we have quadrupled inside. We have made four acquisitions. The last one being 40% our size. And so, and then we, and then that went through a pandemic right after that.

You know, 80% 85% range.

Tier one plus ICL so.

It would normalize from there.

Understood. That's helpful. Thanks for taking my questions Scott.

Thanks Patty.

The next question is a follow up from Stephen Scouten from Piper Sandler. Please go ahead.

Hey, guys. Thanks for letting me hop back and I'm not sure. If you have this number but I just wanted to follow up you referenced U S. C&I credit had some exposure to the snick loan in the industry. They weren't bad but do you guys have numbers on your total SNCC exposure and if so like kind of how much of that you you lead of the knick exposure that you.

Alex Lau: And so, when you do all that, you put a lot together. And so the, the, the, the expense reductions, which we have been very thoughtful about. Notice we didn't, we haven't built up and tried to, tried to build a lot of anticipation around this because we've been very thoughtful about that now over a number of months. And it's something that comes. And frankly, it's been the execution has been over, over time as well.

You may have.

Yes, good morning against Steven's Travis.

We have roughly $175 million.

Next we lead approximately 80 of that.

As for round numbers.

And so.

And.

Shortly there we don't do any snags.

Without some compelling we won't do snacks for growth, we only enter a snick because we've got some clients that are or some relationship that.

Alex Lau: And so, and so they, they come across the board. Both geographically as well as operationally in terms of how those. And then I want to mention just a couple of investments that we that we won't put on the back burner. You said that you do. And frankly, I can't think of ones that we're looking around and say we're going, we can't think of ones that we have, but we have made substantial investments, particularly in data, the data side of the business and making sure that we have actionable data to manage the business.

It gets us into the snake and so so and I'll give you I'll give you a couple of examples to specific examples without using names.

One.

Significant client here in our footprint.

We have a we know the the owners.

No.

<unk> as a company we know the officers of the company and they said, we really want you in or we really won't get our credit and so we got we're in the credit because it's a it's a major name that everybody would know in our geography second one.

Alex Lau: And I talked in my comments about, you know, when we, we were talking about liquidity and we talked about, I said, some of the models have been tweaked and some have been overhauled. That's, that's what we did. So we've done a lot of overhauling of models, again, making sure we have the right and actionable data, the risk management side of our business. We've made really substantial investment over the last, last two-plus years.

A company that we banked from the.

The startup of the company until they became a publicly traded company we still have a.

The.

Bulk of their either deposits.

<unk> their operating accounts, but they're Atlantic credit now has over $1 billion, we don't need it we still we just paid we.

Alex Lau: And just third-line, third-line defense investments have been substantial as, you know, as the company gets larger, and as you plan to scale the company from here, those foundations are what we've spent. The other, one of the other ones, Michael, I'm not sure if you mentioned was professional services. You know, one of the big reductions is we spent a lot in professional services. You can see that actually, again, if you look at that expense line or a supplement, you'll see the decrease there.

We have part of the snake.

Those would be two examples and so.

We.

It's only those kinds of that we get into we don't we don't just put snack zone.

We generally are SNCC adverse is the way I would put it when we do it it's because we have some compelling reason that says we need to do this.

Alex Lau: And that's, that was intentional spend from some of the best international consultants out there on things that we, we wanted to make sure we got right. And so, and so when it comes to backburner, frankly, I can't think of what we would put on the backburner. We hadn't done a lot of expansion would be one thing. That's about the only thing I can think of. Thanks so much for that color.

Yeah, well I think that's the right mindset. Thanks for the color. There that's helpful to know kind of the logic behind it so I appreciate that.

Alright, very good thanks, Dave.

This concludes our question and answer session I would like to turn the conference back over to Chris Holmes for any closing remarks.

Okay.

Thanks, everybody, we really appreciate again your interest in the company. We appreciate everybody's questions and answers today and if we have things that need clarification, we're glad to get on the phone with anybody that they there.

Alex Lau: And I had a question on security sale. Can you update us on the parameters that you look for in terms of an acceptable earnback period? And then separately, as bond yields were rising in the quarter, when in the quarter did you sell these securities? And what is the appetite for more sales at the current yield curve? Thank you. Yeah, it's really, the parameters haven't, haven't changed that much. You know, you want to, we want to be around a couple of years.

We need to so don't hesitate to reach out alright, everybody have a great rest of your day and you get you analysts have a great rest of your earning season.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

[noise].

Alex Lau: We didn't kind of move a little bit off that just because, as I mentioned earlier, the securities we sold were so low yielding that it really didn't matter the rate environment, the duration was the duration. And so we saw some opportunity. But I think as we look forward, you know, it's going to be in that couple of year range on on earnback. We sold, it's kind of probably middle September. And it was before the 10 year and everything shot up at the end.

Alex Lau: And so we really paused re-investing. We put about 90 million to work in mid September. And we paused that last couple of weeks. Now it's absolutely that the 10 years come back down, you know, 25, 30 basis points. So we're comfortable in this range, but it's about finding the right investments. Our portfolio's gotten smaller. It's about 10.8% of total assets. That's fine. It depends on what other options are. And so we're not, we're not growing the book to 20%. You know, we're not shrinking to five. And it'll stay on this range. Thank you.

Alex Lau: And then just to follow up on the public funds, if you look at last year's fourth quarter, that grew in the $400 million range, is that a fair amount to assume for this year or is there something different going on in the fourth quarter? Yeah, that's fair. We expect 400 to 500 million or so. And yeah, we're managing that with profitability and liquidity and competitive environment, so it's a daily grind, I'll say, but yeah, that's what kind of forecasts out that's what we'd expect and we're kind of managing through all the moving pieces there.

Alex Lau: Yeah, I just say, yeah, I'd say you're right on our assumption. Yeah, Alex, I mean, it's going to be right in that range. Well, that's what we anticipate it will be. Great, thank you for taking my questions.

Kevin Simmons: All right, sir, you just talked to us.

Kevin Simmons: The next question comes from Kevin Simmons from DA Davidson, please go ahead. Hey guys, good morning. Good morning. I just want to so I know we've had a few questions on this, but I just want to make sure I'm thinking about this correctly. So we're going to have, you know, a positive tailwind for the margin from the securities transaction, but this is being outweighed in fourth quarter by the public funds, right?

Kevin Simmons: Being a drag on in terms of being higher cost and coming in and we still continue to see a deposit mixtures, right? But however, you know, the velocity or the pace of deposit rate increases is debating, it seems like you're saying so if we look, you know, I appreciate that margin range, but apart from the effect of the public funds, are we out of point where, you know, we're margin is going to drop here in the next quarter or two and then position maybe in the first half of 24 to start expanding.

Kevin Simmons: I know I know that's a big preamble. I'm just trying to make sure I'm catching all the variables. Thanks. I appreciate the preamble, because those are all the things we talk about. I think I think you got it. I think you nailed it. And it would one thing I would say there was something you said that the public funds should outweigh the securities trade. And it will certainly those two will work against each other.

Kevin Simmons: Michael was totally outweighed. Yeah, because it's kind of a right volume. Yeah. Challenge right as the volume of the public funds we expect to come on for five x the securities trade. Yeah. And so the, but the rest of that Kevin is what's going on and you've called it a preamble, but you know, it's those and other factors, which we're, which are filter into the model to help us, you know, forecast what we're excited.

Kevin Simmons: And that's why we use a range and we've described it as kind of range found over the next couple quarters, but again, I think you said. And then after that, we'd expect it to begin to increase and that would be the case at getting into 24. So let's say the the mix ship. Yeah, if you think about from non-interest bearing to experience has moderated as well. Yeah, we've been in this 22% range for a couple quarters now.

Kevin Simmons: So the velocity of deposit or the velocity of rate increases is slow. We've seen that moderate as well. Yeah, I always point back to kind of pre pandemic. You know, as we talked about the combination with Franklin, we expected that number to be around 20%. So I would say this range feels about right for migration from NIB to the interest bearing we do see some move between products, you know, interesting to the money market, more so a little bit in in CDs, but we're trying to keep those fairly short, you know, but competition there's, as I mentioned earlier, some community banks and then treasuries, but not not as much outflow anymore treasuries. Got it, got it, thanks.

Kevin Simmons: And one follow up, I wanted to ask about M&A, Chris, in the past, you've kind of described it as you guys have certain targets in mind over a long term time horizon, and it's a matter of when the right time for them to be willing to sell. But yet you've sounds, you sound much more confident there will be opportunities coming. And so is that a matter of you guys are getting a sense, some of these attractive properties are getting ready or having certain conversations or or indoor that just given the environment in the position you're in, you're kind of expanding that spectrum of potential opportunities.

Kevin Simmons: You know, so it's the former it's it's it's not that we're really we still have that same things that we look for and when we're so that means what that there's going to be a limited number of institutions that have the parameters that we're that we're looking for. So that list really hasn't hasn't hasn't changed. It's just that with when we look out into 24 and we talk to everybody in the industry and and and conclude for ourselves what we think's going to happen, we we just think that that some of those are likely to decide, hey, it's time to seek a seek a seek out my options.

Kevin Simmons: And so it's it's really the ladder. It's not that we're expanding and going, okay, we're not expanding our our parameters either from a geographic perspective or from what we're looking for. Yeah, okay, got it. Thank you.

Kevin Simmons: And one last thing you mentioned a couple times that you you made these deliberate move to strengthen the balance sheet for difficult times, but you feel now that things won't likely get that difficult is that. Been more of an ongoing thought was that something based on recent observations that you're feeling like all right, we're we're glad we prepared, but it's probably not going to be as bad as what we what we might have thought a couple quarters ago.

Kevin Simmons: If you know, if we if we find ourselves stuck back in 2008 and that kind of environment, we think we're not going to would we think we'd we'd be prepared for that at this point. You know, going back to what happened in March of this year, you know, we feel like we're well prepared for whatever comes at us, and our point is, we don't think those things are going to happen. We actually do think things would slow get slower from here.

Kevin Simmons: Okay, so we do think that things will get slower. We don't think we're saying if it gets really slow and really difficult, we're prepared for that. Okay, but we don't really anticipate it getting as bad as we're prepared for. So that doesn't mean that we think it gets slower. Okay. Got it. Understood. Okay. Thanks for that clarification. Thank you guys. Thanks, Kevin.

Matt Olney: The next question comes from Matt Olney from Stevens. Please go ahead. Hey, great. Thanks. Good morning guys. Just want to follow up on the capital discussion. We've talked about potential for additional security transactions and M&A conversations heating up.

Matt Olney: So can we assume that as far as any kind of shared repurchase program that in the near term, that's going to be less likely, or how would you characterize the appetite of the buybacks? That's a less likely, and that's really related, again, to just not being able to predict the future. And we don't want to, you know, I think if somebody goes out, if anybody, if we went out and did started buying back now and credit, got really difficult for the whole world, we wouldn't look too smart if we had to raise capital after that.

Matt Olney: And so we want to make sure that so we're going to be conservative there on how we how we use this capital until we think that the industry is feel brighter from a credit perspective. And again, interest rates, we feel like interest rates have hit their peak.

Matt Olney: Okay. That's helpful, Chris.

Matt Olney: And then I guess also circling on back on the deposit discussion. I think you gave us lots of good details around the public funds, and that's kind of where the focus is now. What about on the customer time deposits? I think there's a $1.4 billion balance that average cost in the third quarter still feels quite a bit below most of your peers. Can you just kind of walk through the repricing dynamics there with ensuring more near term and then where the current rates that you're seeing for your customers?

Matt Olney: Yeah, Matt, good morning, Michael. If you remember, we did a fairly decent sized deposit campaign last year, and we had some CD, some CD specials that if September October last year, it was kind of 13, 18 months, 24 month papers. The weighted average term on that was about 18 months. And the cost was at the time market. We haven't moved off those rates a whole lot. And we're still seeing renewals in historic kind of renewal rates.

Matt Olney: And so I kind of missed in this earlier, we've certainly raised some CD rates, but this has been shorter in terms. So we, you know, If customers come in and want a shorter term, CD, it's slightly higher, right? You actually see it looks like the yield curve is a little bit inverted. And so if you stay in those terms that you were in last year, you're getting a very similar rate. And of course our model is as customer focused and said, so the field can take care of customers as they need to in competitive situations and we stick by that. So that we're doing right by the customer right by the company. So there's some flexibility there.

Matt Olney: And then Michael just follow up on that. As you look at some of the renewal timelines, is there is spread evenly the next few quarters or is there any quarter to where you see more, more volumes set to reprise? Yes, it's spread pretty evenly fourth and first there's a little bit of a lot in the second quarter of next year. But it's already higher priced stuff than what's renewing in the fourth and first quarter. Okay, that's that's helpful.

Matt Olney: And then I guess I guess thinking on the deposit pricing pressure theme your footprints a good kind of mix of more metro markets and also some some rural communities, just any general commentary for us as we think about deposit repricing pressure. And it's some of your general markets where the pressure is greater today and where it's maybe not as great as it once was. Hey, Megan Morton's Travis. It's really it's really interesting.

Matt Olney: Initially we saw the most pressure from the smaller communities that the kind of the rural markets were now seeing some some larger regional banks putting out some specials in the five. So it's really across the board, either urban or rural, that we're seeing deposit pressures and they're all generally in that five and a quarter to five seven five ranges on the specials. Okay, that's helpful.

Matt Olney: That's it for me. Thanks, guys. Thanks, man.

Steve Moss: The next question comes from Steve Moss from Raymond James. Please go ahead.

Steve Moss: Good morning. So most of my questions have been asked and answered here, just do want to fall just one thing on office here. Just curious if you could give any color as to when the rents in that portfolio start to come up for renewal in any color around that dynamic there. And Steve, I'm sorry. When it's a cheap cred officer nut here, I will say just generally on renewal. Michael went through kind of where we were on our fixed rate portfolio, nothing is not office specific.

Steve Moss: And so when we did look at office, you know, I'm thinking about rent renewals, I was thinking about the long renewals. And so I'd have to I'd have to get a little more detail information and get back to it. Is that okay? Okay, right. Okay, no, that's pretty much my last question, so appreciate all the color here today. All right, all right Steve, thanks for being with us.

Feddie Strickland: The next question comes from Feddie Strickland from Janie Montgomery Scots, please go ahead. Hey, good morning gentlemen. How are you Feddie? How are you? I'm good. I wanted to start off. I saw borrowings and burger CDs declined during the quarter, which I'm sure helped on the funding cost side. If those just mature and you didn't renew them and could we see more of that rolling off in future quarters, just given you've got loans to deposit, so around 87%.

Feddie Strickland: Yeah, that's right, Feddie. Some of them rolled off and we have some more or come and do in November. If you remember last quarter, we we increased some of that just because it was cheaper than retail deposits. But frankly, it's a crisp mention this and it is that we keep our powder dry on your sources of liquidity so that we can leverage it when we want to need to. And so sometimes when we see broker market is cheaper or FHLB funding cheaper, we'll do that.

Feddie Strickland: And so that that lever is out there, but we do have, I was believe it's a hundred million rolling off in November, whether we were new or not as TBD, certainly don't need it. We've freed up a lot of liquidity from collateral standpoint as well during the quarter. Good work by the team there to further further create sources of liquidity.

Feddie Strickland: Understand, let's help pull in switching gears a little bit here. You know, as we look at these expense reductions coupled with so the security is quite fairly restructuring and some of the other trends we talked about in the market and everything else going on. Do you think efficiency is the core bank X mortgage can get into the mid 50s range by the end of 2024 from the navigate packet around 60% today?

Feddie Strickland: Yep, yes, we think on the core just core bank. Yes, we think we can get below the mid 50s. Got it. One last question for me, it sounds like we should expect to see the unfunded loan commitments in the CD space continue to come down. As a consequence, do you think we'll see the unfunded commitment reserve continue to define as well? Yeah, that's right. If you look at the ACO slide, you'll see we actually increased our reserve on the construction bucket, but we released from the unfunded strictly due to volume.

Feddie Strickland: So you'll see that continue to decrease and then we'll, you know, we'll probably land in that, you know, 80 85% range. Here one plus the ACL said and it would normalize from there. Understood. That's helpful. Thanks for taking my questions, guys. Thanks, Betty.

Stephen Scouten: The next question is a follow up from Steven Scouton from Piper Sandler. Please go ahead. Hey, guys, thanks for letting me hop back in. I'm not sure if you have this number, but I just wanted to follow up as you record. Conference. You had seen I credit had some exposure to the this snake loan in the industry that went mad, but do you guys have numbers on your total snake exposure? And if so, like kind of how much of that you lead of the the snake exposure that you may have?

Stephen Scouten: Yes, good morning against Davis Travis. We have roughly 175 million in snakes. We lead approximately 80 of that is for our numbers. And so importantly there we don't do any snakes without some compelling, we don't do snakes for growth. We only enter a snake because we've got some client that or some relationship that gets us into the snake. And so too, and I'll give you I'll give you a couple of examples, two specific examples.

Stephen Scouten: Without using names, one significant client here in our footprint, we have a we know the owners of we know the owners of company, we know the officers of the company and they said, we really want you in our, we really want you in our credit. And so we we got we're in the credit because it's a it's a major name that everybody would know it in our geography. Second one, a company that we banked from the startup of the company until they became a publicly traded company, we still have the bulk of their either deposits, including their operating account.

Stephen Scouten: But they're they're line of credit now is over a billion dollars. We don't lead it. We still we participate. We, you know, we, we have part of the snake. Those would be two examples. And so we, it's only those kinds of that we get into. We don't, you know, we don't just put snakes on. We generally are snake adverse is the way I would put it when we do it, it's because we have some compelling reason that says we need to do this. Yeah, well, I think at the right mind that thanks for the color that that's helpful to know kind of the logic behind it, so appreciate that. All right, very good. Thanks Dave.

Unknown Executive: This concludes our question and answer session.

Christopher Holmes: I'd like to turn the conference back over to Chris Holmes for any closing remarks. Okay, thanks everybody. We really appreciate again your interest in the company. We appreciate everybody's questions and answers today.

Unknown Executive: If we have things that need clarification, we're glad to get on the phone with anybody that we that we need to so don't hesitate to reach out. All right, everybody have a great rest of your day. And you, you analysts have a great rest of your earnings season.

Unknown Executive: The conference has now concluded. Thank you for attending today's presentation. You may now disconnects.