FB Financial Corporation (NYSE:FBK) Q3 2023 Earnings Call Transcript

FB Financial Corporation (NYSE:FBK) Q3 2023 Earnings Call Transcript October 17, 2023

Operator: Good morning and welcome to the FB Financial Corporation’s Third Quarter 2023 Earnings Conference Call. Hosting the call today from FB Financial are Chris Holmes, President and Chief Executive Officer; and Michael Mettee, Chief Financial Officer. Also joining the call for the question-and-answer section is Travis Edmondson, Chief Banking Officer. Please note FB Financial’s earnings release, supplemental financial information and this morning’s presentation are available on the Investor Relations page of the Company’s website at www.firstbankonline.com and on the Securities and Exchange Commission’s website at www.sec.gov. Today’s call is being recorded and will be available for replay on FB Financial’s website approximately an hour after the conclusion of the call.

At this time, all participants have been placed in a listen-only mode. The call will be open for questions after the presentation. During this presentation, FB Financial may make comments, which constitute forward-looking statements under the federal securities laws. Forward-looking statements are based on management’s current expectations and assumptions and are subject to risks, uncertainties and other factors that may cause actual results and performance 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 SEC, including FB Financial’s most recent Form 10-K. Except as required by law, FB Financial disclaims any obligation to update or revise any forward-looking statements contained in this presentation, whether as a result of new information, future events or otherwise. In addition, these remarks may include certain non-GAAP financial measures as defined by SEC Regulation G. A presentation of the most directly comparable GAAP financial measures and a reconciliation of the non-GAAP measures to comparable GAAP measures is available in FB Financial’s earnings release, supplemental financial information and this morning’s presentation, which are available on the Investor Relations page of the Company’s website at www.firstbankonline.com and on the SEC’s website at www.sec.gov.

I would now like to turn the presentation over to Chris Holmes, FB Financial’s President and CEO.

Chris Holmes: 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. For the quarter, we reported EPS of $0.41 per share and an adjusted EPS of $0.71. We’ve grown our tangible book value per share excluding the impact of AOCI at a compound annual growth rate of 14% since our IPO. In recent quarterly calls, I’ve discussed priorities of maintaining the strength of the balance sheet and improving internal processes and procedures with the goals of efficiency and scalability. We’ve made significant progress on both of those priorities. First, let me talk about the balance sheet. Our capital positions are strong across the board, including a CET1 ratio of 11.8%, and a tangible common equity to tangible assets ratio of 9.2%.

And in doing that, we haven’t reclassified any of our available for sale securities as held-to-maturity. Our capital and reserve levels are prepared for difficult times, but we don’t expect economic conditions to become as severe as our preparation allows for. Our liquidity position, which is detailed on page 11 of the financial supplement that we provide each quarter, continues to be strong. We keep our securities portfolio plus our loans as a percent of deposits near or under 100% to keep from 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. When you consider that our deposit base is quite granular and we make very little use of brokered and internet deposits, this keeps us in a strong liquidity position.

Our credit portfolio continues to perform well, although we did move one C&I loan to non-accrual in the quarter. Outside of that credit, we haven’t seen significant changes quarter to quarter. Again, we’re positioned very well with an ACL of 1.57% of our HFI loan portfolio. We also reduced our CRE and construction exposure over the last five quarters. CREs within our long-term tolerance level and construction will be there by the end of the year. And so, as we enter the fourth quarter, the balance sheet feels well positioned. We built some momentum there and we’re excited about the growth opportunities that lie ahead of us. From an operational perspective, we feel as strong as we ever have and we’re focused on improving profitability and returns.

In the late third and early fourth quarters, we executed on pieces of two broader initiatives to both increase revenue and reduce expenses. While actions were taken in the third quarter, the majority of the benefit will be felt in the fourth quarter and beyond. On the revenue side, as you’ve seen in the earnings release, we executed a securities trade that will lead to improvement in net interest income in Q4 and in 2024. Trade also resulted in a pre-tax loss of $14.2 million in the third quarter. 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 several quarters, not only for ourselves, but for others as well based on the discussions we’ve had with our peers.

The margin’s becoming somewhat less volatile because the velocity of change in the variables has slowed. Models have been tweaked and in some cases overhauled and confidence in the forecast is increasing. Funding costs will continue to increase as long as we remain in this rate environment, but the rate of increase on our deposits has slowed materially, and we expect the NIM to remain in the same relative band that we experienced in the last two quarters for the next couple of quarters. Again, Michael is going to provide some deeper analysis in his commentary. On expenses, and significantly we reduced our run rate on core banking non-interest expenses by $15 million. The realization of most of those expense savings begins in late October, so we expect a couple of months of benefit in Q4.

By mid-January, we anticipate achieving an additional $5 million in annualized expense reduction, so $20 million annualized in total. We currently expect core banking non-interest expenses of $255 million to $260 million in 2024, which compares to third quarter core banking expenses of $66.2 million or $265 million annualized. M&A conversations seem to be picking up across the industry, and we’re increasingly receiving inbound calls, asking to engage in those discussions. As we’ve said before, we don’t believe in acquiring for the sake of growing our asset size, but there are some banks across our geography that we respect and believe would be great cultural and strategic fits. Following our internal efficiency and scalability initiatives of the last couple of years, we’re very confident in our ability to effectively execute on M&A, should the right opportunities arise.

So, to summarize before handing the call over to Michael, we spent time and resources focused on internal improvements and enhancing our balance sheet. We made ourselves a better place to bank for our customers, a better place to work for our associates and in that process we’ve improved our operational efficiency. At the same time, we built our capital, maintained strong reserves and put ourselves in a great liquidity position. Increasing profitability and returns are in focus for us, and we’re ready to execute on attractive opportunities that may come our way. Now, I’m going to let Michael go into our financial results in a little more detail.

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 will take a minute to walk through this quarter’s core earnings. We reported net interest income of $100.9 million, reported non-interest income was $8 million. Adjusting for the $4.2 million loss on sale of securities, $115,000 gain on a sale of OREO, we had core non-interest income of $22.1 million. Of that $22.1 million, $10.1 million 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. Of that $78.2 million, $66.2 million came from banking.

So we delivered consolidated core pre-tax, pre-provision earnings of $45 million and banking core pre-tax, pre-provision earnings of $44.8 million. Going into more detail on net interest income and our margin, I’ll touch first on our securities trade. We sold $77 million of securities at a $14.2 million pretax loss at the end of September. Given the timing, we do not see any real benefits in 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 are 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, if the trade met our parameters on earn-back, expected duration, earnings accretion and capital dilution.

We wouldn’t do a trade that would not meet our parameters, as there will be many options to deploy capital over the next couple of quarters. Next, our contractual yield on loans increased by 16 basis points during the quarter to 6.32%. For the month of September, our contractual yield on loans held was 6.35%. Yield on new commitments for the month of September were coming in a little over 8%. Remember, 48% of our loan portfolio remains floating rate, which leaves $4.9 billion in fixed rate loans. Of that $4.9 billion of fixed rate loans, we have about $200 million maturing in the fourth quarter at a yield of about 6.7%, $300 million maturing in the first half of 2024 with a yield of 6.05%, and about $175 million maturing in the second half ‘24 with a yield of 5.65%, so about $680 million maturing through year-end 2024, at a weighted average yield of about 6.13%.

Cost of deposits continued to rise. But as Chris mentioned, we have seen that rate of increase moderate recently. For the quarter, our cost of interest-bearing deposits increased by 27 basis points to 3.33%. For the 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%. Those gives and takes 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 being in the 3.30% to 3.40% range for the next couple of quarters. Moving to non-interest income. Non-mortgage, non-interest income continues to perform in the $10 million to $11 million range and we expect that to remain in the band plus or minus the next few quarters. Our non-interest expense also needs more explanation 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 also acted on an additional $5 million in annual expense reduction that will be realized by the end of January. These reductions have come through a combination of a voluntary early retirement program and some position eliminations, reduction of redundant processes, limiting utilization of professional services and contract renegotiations and cancellations.

Most of the expense reductions still to be realized will come from a closure of seven branches, which we have communicated internally and to customers. For the fourth quarter, we expect banking non-interest expense to be in the $64 million to $66 million range and for 2024, we anticipate annual banking non-interest expenses of $255 million to $260 million. To achieve this reduction, we took a $4.8 million in charges in the third quarter in connection with the early retirement program and related severance costs. We also took $1.4 million in charges related to this project in the second quarter. So we’re at about $6.2 million so far. We anticipate an additional $5 million to $7 million in charges through the fourth and first quarters as we continue our focus on efficiency and profitability.

On the ACL and credit quality, our ACL on loans held for investment increased by 6 basis points for the quarter, or a $5.5 million increase in the allowance. 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 held for investment this quarter. Excluding this credit, our ACL to loans held for investment would have remained roughly flat as economic indicators remained in line with the prior quarter. I’ll close by speaking to the progress that we’ve made in the past year on our recent priorities of balance sheet strength through liquidity and capital management. In the past 12 months, we’ve increased our TCE to tangible assets by 60 basis points and total risk-based capital by 110 basis points.

Our loan to deposits have declined from 91% to 87%. Our construction and development 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 we have grown our available sources of liquidity from $6.2 billion in the third quarter of 2022 to $6.8 billion today. As Chris said, we feel very well prepared for any economic downturn. And our current view is that any downturn we experience will be milder than what we have prepared for. I’ll now turn the call back over to Chris.

Chris Holmes: Thanks Michael for that color. And to summarize before going into questions, our balance sheet’s situated in the position of strength, we’re focused on improving profitability and returns. We’re excited about the future and from a financial perspective, we feel very prepared to execute on any opportunities that may come our way, so both financially and operationally. So that concludes our prepared remarks. Again, thank you for your interest. And operator, we’ll open up the line for questions.

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Q&A Session

Operator: We’ll now begin the question-and-answer session. [Operator Instructions] Our first question comes from Stephen Scouten from Piper Sandler.

Stephen Scouten: 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 of things, what sort of securities did you reinvest in it that 6.43% yield? And maybe what did you sell that kind of precipitated that longer earn-back where — was it a longer duration portion of your securities book. That would be helpful.

Michael Mettee: Yes, it was a little bit longer. It’s a little over a three-year earn-back. As we went through the process, we thought about even if rates move down 300 basis points, these securities we sold which are mostly mortgages and some CMOs would be with us in any rate environment. So that has extended out so far that it just made sense to kind of get rid of the dogs, as I’m calling them internally. Reinvestment of some government agency stuff, FHLB type paper and so that’s where the yield came from, although we are seeing current market securities all in that range. It’s all well within our guidelines and duration, not any extra credit risk there.

Stephen Scouten: Okay. That’s helpful. And then maybe thinking about just that one C&I credit that you noted that kind of encapsulates a lot of the move into credit metrics. Any additional information you can give us there, kind of what sector that is and if there’s any lingering issues along the same lines and then the other similar sectors?

Chris Holmes: Sure, Stephen. It’s Chris. And Travis Edmondson, our Chief Banking Officer is in here with us as well. So let me just make a comment. It’s a C&I credit you’re familiar with — there was a bankruptcy that reportedly was Mountain Express. We are not involved in that credit, as you guys, I think know. We were not involved in that at all. We do have a client of which that bankruptcy, they — was a vendor to that client. And so that was the one C&I credit, roughly a $10 million credit for us. And it is actually pretty well secured and has guarantors on it as just about all of our credits of that type do. But once it goes into bankruptcy, we’re fairly conservative, and this is not, but there’s a major vendor that is, in bankruptcy. And so, we are fairly conservative with how we handle those. And so, we went ahead and just put it on nonaccrual and took some extra reserve on it, even though we are pretty optimistic on it.

Stephen Scouten: Got it. Okay. And I know — I think Michael said no real changes in your ACL kind of mindset and underlying economic scenarios, but obviously, you took the reserve up, even in light of only 2 basis points of charge-offs. So, it feels like most of that is really just conservatism on your end. And you never know what you don’t know is coming down the pipe. Is that the right way to think about it, or would we expect additional reserve build moving forward?

Michael Mettee: Yes.

Chris Holmes: Go ahead, Mike.

Michael Mettee: Well, I think we’re well positioned, Stephen. And I think this range, it didn’t move up because of the credit we’re talking about individually evaluated loan. But I think you’ll sort of stay in this range. We feel comfortable with where we are. And like I said, we haven’t seen deterioration in the portfolio. And so, right now, that $155 million range where we’ve been is likely where we’ll stay.

Chris Holmes: Stephen, I would just add, and Michael and I both alluded to this in comments, both our capital levels and reserve, we’re prepared for difficulties moving forward. We don’t really actually expect things to get that difficult. But our preparation allows for things to get more difficult than we anticipate they will.

Operator: The next question comes from Catherine Mealor from KBW. Please go ahead.

Catherine Mealor: I just wanted to ask about your outlook for balance sheet growth. You’ve been really conservative on your outlook for loan growth over the past couple of quarters. And you saw loans pull back again this quarter. Just curious how many more quarters your gut would be that we’ll see a decline in loan balances before we kind of hit that inflection and start to see growth again?

Chris Holmes: 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, not overleveraging 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. 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, I’ll come on C&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 thrown out recession. So, Travis, is that — do you have anything to add to that?

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

Catherine Mealor: Are you seeing opportunities on the C&I side? It seems like your — you talked about construction and CRE that you’re really not lending in right now. Can you just kind of talk generally about what the landscape is in C&I lending today?

Travis Edmondson: Yes. 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. 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 in that space, and we’re seeing some positive momentum.

Catherine Mealor: Okay, great. And then on the deposit side, your NIM guide was really helpful and seems like we’re stabilizing, which is great. Can you just talk about just the incremental cost of deposits and just kind of what you’re seeing within the behavior of your clients, maybe one, where you’re seeing the most — maybe the most stress in terms of higher deposit costs versus where things are really starting to ease, maybe in product or kind of deposit type.

Michael Mettee: Hey Catherine, it’s Michael. I’ll start and then Travis can jump in. I mentioned public funds, most of our deposit outflows in the third quarter were down $230 million, but $300 million outflows in public funds, so that all of it centered around that. As those come back on, I mentioned 5% range, those are mostly expected to be Fed funds minus a little bit. So highly competitive, expecting full market rates, their large customers, commercial, corporate are expecting 5-plus-percent on deposits, you’re getting large balances. The challenge we face, and I know we’ve talked about this before, as you look across our footprint, tackets of banks, whether they’re community banks or smaller or some of the larger institutions, the community banks have CDs priced at 5.75% for six months, right?

And so that’s impacting our retail. And then you get the money market and stuff that’s still over 5%. What we’ve seen is because the velocity of rate increases has slowed that the constant request for repricing has moderated. And so that’s been a benefit. And as long as there’s stability, I think you continue to see that. But new deposits, new customers, they expect market rates.

Travis Edmondson: Correct. Just one quick thing to add. A lot of the people this time last year were chasing yields where they could get much higher yield, right? We’re talking from 1% to 4%. It’s been somewhat stabilized over the last few quarters, where you might go from 5.25% to 5.75%, and there’s not as many people chasing that incremental yield in the footprint. So that’s helped us a little bit.

Catherine Mealor: That’s great. Go ahead, Chris.

Chris Holmes: Yes, I want to make one — so 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’d say, is public funds and that the flow in and out of public funds sometimes we see — not sometimes all the time. We see a flow out of in the second quarter, that’s a combination of the way the funds come into most of our public entities as well as some folks making a market share play for reporting purposes and then they come back in 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 we’re going to manage through that in the third and fourth quarter.

Catherine Mealor: So it’s really a function of your public funds that are driving some modest but more margin pressure in the back half of the year more so than your retail and kind of core customer base? Would that be a fair comment?

Chris Holmes: That’s right. Exactly.

Operator: The next question comes from Brett Rabatin from Hovde Group. Please go ahead.

Brett Rabatin: I wanted to start off, it’s college football season. And I know you guys followed that quite a bit. And I know there’s been some desire to get FBK back in the college playoffs, so to speak. And so I wanted to ask, you’ve obviously taken some actions here in 3Q on offense and defense with the securities portfolio and the expenses. I wanted to see what else you might be considering doing to get, quote, back in the playoffs in ‘24, or if you feel like what you’ve done is kind of what you’re able to do, and if maybe up in the playoffs in ‘25 instead.

Chris Holmes: Yes. Hey Brett, this is Chris. You’re right. It is college football season, we are fans and we do have the Monday morning ribbing of everybody that’s on the losing end. So it’s no fun on Monday morning out here when you lose and it’s no fun day in and day out when you lose in banking relative to how we perform. And so, if you go back and look at our historical performance, it doesn’t just go back actually two or three years, if you go back to when we start the call, we talk about where our compound annual growth rate of 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 and we’ve always been a premier performer. And we — that’s one of our key foundational tenets here is we’re going to be in a lead performer.

We did over the last I’ll say, four quarters or so, four, five quarters, said, hey, there are some things that we need to do to make sure that we have the scalability of the company and the foundations of the company where they need to be. So we spent some money, which we knew would hurt our performance. And we have taken — as we say, we took our foot off the accelerator, we’ve done some things. But we feel, hopefully, you’re beginning to hear when we talk about our confidence moving forward and when 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 game-on from our standpoint. Just keeping with your metaphor there, it’s game-on from our standpoint.

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 leverage. When we talk about strengthening on our balance sheet, what we’re doing is creating levers that we can pull as we go through ‘24 to improve our profitability and make sure our returns are where we want them to be. We’re shareholders and those returns are — they have — our bar is higher than any of the investors out there. Our internal bar’s 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.

Brett Rabatin: That’s good to hear. It sounds like you’re expecting ‘24 to be a lot improved, so that’s good to hear. I wanted to ask back on credit. You’ve got the slide in the deck about the office portfolio. But I’m actually curious — it’s slightly smaller, but wanted to ask actually about hotels. And just if we have any kind of consumer-driven weakness in the next year, 18 months would seem like hotels might actually be somewhat at risk. And so, I was curious if you guys have done any work on RevPAR or occupancy, cushions for the hotel portfolio and maybe how you think about that book?

Chris Holmes: Yes. So, we do have a hotel book. Again, that one also is not outsized for us in terms of where it sits kind of on a comparative basis. I don’t have those specific stats, and we don’t have our Chief Credit Officer with us today. But we have been watching hotel and we frankly haven’t been doing much new there over the last couple of years for all the things that you just mentioned. We do have a few, but when — we’re pretty much restricted to really strong flags in nice and good areas. We’ve got some suburban stuff. We don’t — we do have a little bit of central business district, hotel stuff, but I’m thinking the ones I can think of, we’ve got a Hampton Inn in the central business district. But it’s that type of flag if we’ve got that.

Travis Edmondson: One other thing I would add is, it wasn’t too long ago, it was the pandemic where hotels were on everybody’s mind. And we did a thorough analysis during that time frame to make sure that our borrowers were able to withstand that pandemic. And what we found was we have very strong borrowers in this asset class that did everything that they said they were going to do. We continue to monitor that portfolio. We’re not seeing any struggles to date on RevPAR. We are mindful as the consumer spending goes down in ‘24, that’s something we need to definitely keep our eye on. But no alarms at this time.

Chris Holmes: We have done in the last, say, a year, 18 months, one, again, I guess I can say it’s a Hilton and it’s — with just fantastic parameters around it. That has — we had extremely high expectations for it, and it’s crashed the room. And so it’s — again, that’s the only one we’ve done here very recently.

Brett Rabatin: 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 tough thing is 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 kind of parameters would be acceptable to you relative to an opportunity?

Chris Holmes: Yes. Brett, certainly, there’s a lot — there’s conversations that seem to be picking up and seem to be — a lot of that going on. I think folks are thinking. I think ‘24 is going to force a lot of that. And I know it is forcing a lot of that. And I think folks are having to think strategically. And the landscape continues to change, and I think you have to think more and more strategically. As we think about it, and I made this comment, we only think about it strategically. So we don’t — we’re not thinking about just asset size, unless it makes really good strategic sense for us, we don’t engage in a deep way. And so — and then when we think — so when we think about it, it’s going to be strategic.

And usually, those aren’t going to be I’ll call them tangible book value type deals because they’re going to be valuable properties. And so we’ve always thought about it as a three-year earn 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 that on this call 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. Here’s what they can afford to pay for you and generate conversations around that. And then 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.

And again, I’ll draw the analogy of selling your house. If Elon Musk is interested in your house, he can afford to pay a lot, but that doesn’t necessarily mean your house is worth more than the comps around your house. And so, we get into that. And so that’s — when we think about it, we think about that as kind of a parameter, but we’re thinking about, hey, what does this mean to us? And it could — in some cases, I suppose it could take us over that. It never has. But we think about it quite strategically in our parameters as really we — obviously, we want to see EPS accretion and we want that to be, again, on a reasonable size institution, you’d like for that to get up into double-digit EPS accretion. And then on a smaller institution that might not reach that because it just doesn’t have the impact.

But then we really focus on what happens to our tangible capital level. And one other point there that is what you’re — part of what you’re alluding to is that’s a harder computation than it used to be because of AOCI and what that does. It can create more tangible book value dilution, but that also tends to come back much more quickly in the way that that comes back to you on your earnings and GAAP accounting, so.

Operator: The next question comes from Alex Lau from JP Morgan.

Alex Lau: What are the key areas of the bank where you’re seeing the expense reduction coming from? Can you give some color as to how much of this retirement or cuts are coming from front office, back office? And also, what are the types of projects or investments that you’re putting on the back burner for now?

Michael Mettee: Yes. I mean, it’s broad-based across the Company, front end, back office. Early retirement was probably more management-driven activity. But again, it’s front end, back office, some leadership type stuff and change. 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 is just a product of the environment. I’ve mentioned the branches. That’s a piece of it. And then 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 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. But yes, it’s just making sure that we’re well positioned for next year and the years after.

Chris Holmes: Hey Alex, if I could just add just a couple of comments. Some of the — some of the expense reduction comes from — remember this — remember, we — since we did our IPO in late 2016, we have quadrupled in size. We have made four acquisitions, the last one being 40% our size. And so — and then that — we went through a pandemic right after that. And so when you do all that, you put a lot together. And so the expense reductions which we have been very thoughtful about, notice we did — we haven’t built up and try 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 have been — the execution has been over time as well.

And so, they come across the board, both geographically as well as operationally in terms of how those… And then I want to mention just a couple of investments that we won’t put on the back burner. You said ones that you do. And frankly, I can’t think of ones that — we’re looking around the things, we can’t think of ones that we have, but we have made substantial investments, particularly in data — the data side of the business and making sure that we have actionable data to manage the business. And I talked in my comments about — when 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 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, defense investments have been substantial as the company gets larger and as you plan to scale the company from here, those foundations or what we’ve spent — the other — one of the other ones, Michael, I’m not sure if you mentioned was professional services, one of the big reductions as we’ve spent a lot in professional services. You can see that actually — again, if you look at that expense line in our supplement, you’ll see the decrease there. And that was intentional spend from some of the best of international consultants out there on things that we wanted to make sure we got right. And so, when it comes to back burner, frankly, I can’t think of what we would put on the back burner.

We hadn’t done a lot of branch expansion would be one thing. That’s about the only thing I can think of.

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 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.

Michael Mettee: Yes. Really, the parameters haven’t changed that much. We want to be around a couple of years. We did kind of move a little bit off that just because, as I mentioned earlier, the securities we sold were so low yielding that it really didn’t matter the rate environment, the duration was the duration. And so, we saw some opportunity. But I think as we look forward, it’s going to be in that couple of year range on earn-back. We sold — it’s kind of probably in middle September, and it was before the 10-year and everything shot up at the end. And so we really paused reinvesting. We put about $90 million to work in mid-September, and we paused that last couple of weeks. Now subsequently, the 10 years come back down 25, 30 basis points.

So, we’re comfortable in this range, but it’s about finding the right investments. Our portfolio has 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 growing the book to 20%. We’re not shrinking to 5%, and it will stay in this range.

Alex Lau: And then just a 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?

Michael Mettee: Yes. That’s fair. We expect $400 million to $500 million or so. And yes, we’re managing that with profitability and liquidity and competitive environment. So, it’s a daily grind, I’ll say. But yes, that’s — as we kind of forecast out, that’s what we’d expect, and we’re kind of managing through all the moving pieces there.

Chris Holmes: Yes. I’d just say, yes, I’d say you’re right on our assumption. Yes, Alex, I mean it’s going to be right in that range. Well, that’s what we anticipate it will be.

Operator: The next question comes from Kevin Fitzsimmons from D.A. Davidson. Please go ahead.

Kevin Fitzsimmons: Just want to — so I know we’ve got a few questions on this, but I just want to think — make sure I’m thinking about this correctly. So, we’re going to have a positive tailwind for the margin from the securities transaction, but this is being outweighed in fourth quarter by the public funds, right, being a drag on — in terms of being higher cost and coming in. And we still continue to see a deposit mix shift, right? However, the velocity or the pace of deposit rate increases is abating, it seems like you’re saying. So if we look — I appreciate that margin range, but apart from the effect of the public funds, are we at a point where margin is going to trough here in the next quarter or two and then position maybe in the first half of ‘24 to start expanding. I know that’s a big preamble. I’m just trying to make sure I’m catching all the variables. Thanks.

Chris Holmes: I appreciate the preamble. Because those are all the things we talk about. I think you got it. I think you nailed it. And with 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, Michael, totally outweigh it.

Michael Mettee: Yes, because it’s kind of a rate volume challenge, right, is the volume of the public funds we expect to come on 4x, 5x with securities trade.

Chris Holmes: Yes. That’s true. And so the — but the rest of that, Kevin, is what’s going on. And you called it a preamble, but it’s those and other factors, which 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 getting into ‘24.

Michael Mettee: I will say, the mix shift, if you think about from noninterest-bearing to interest-bearing has moderated as well. We’ve been in this 22% range for a couple of quarters now. So, the velocity of deposit or the velocity of rate increases has slowed. We’ve seen that moderate as well. I always point back to kind of pre-pandemic as we talked about the combination with Franklin, we expected that number to be around 20%. So I would say this range feels about right for migration from NIB to interest-bearing. We do see some move between products, interest checking to money market more so, a little bit in CDs, but we’re trying to keep those fairly short. But competition there, as I mentioned earlier, some community banks and then treasury, but not too as much outflow anymore to treasuries.

Kevin Fitzsimmons: 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 sound much more confident there will be opportunities coming. And so, is that a matter of you guys are getting a sense some of these attractive properties are getting ready or having — starting to have conversations or — and/or that just given the environment and the position you’re in, you’re kind of expanding that spectrum of potential opportunities?

Chris Holmes: It’s the former — it’s not that we’re really — we still have the same things that we look for. And when we’re — so that means that there’s going to be a limited number of institutions that have the parameters that we’re looking for. So that list really hasn’t changed. It’s just that with — when we look out into ‘24 and we talk to everybody in the industry and conclude for ourselves what we think is going to happen, we just think that some of those are likely to decide, hey, it’s time to seek out my options. And so, it’s really the latter. It’s not that we’re expanding and going, okay, we’re not expanding our parameters either from a geographic perspective or from what we’re looking for.

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

Chris Holmes: Yes. And I’m going to alter that just a little bit to say we’re prepared for things to get difficult. We don’t think they’ll get as difficult as we’re prepared for. And so because we’re prepared if things get — if we find ourselves stuck back in 2008 and 2009, that kind of environment, knock on wood, we think we’d be prepared for that at this point. 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 think things would get slower from here, okay? So we do think that things will get slower. We don’t think — we’re saying if it gets really slow or really difficult, we’re prepared for that, okay? But we don’t really anticipate it getting as bad as we’re prepared for. So that doesn’t mean — we don’t think it’s going to get slower. Okay.

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

Matt Olney: I just want to follow up on the capital discussion. We’ve talked about potential for additional securities transactions and M&A conversations heating up. So can we assume that as far as any kind of share repurchase program that in the near term, that’s going to be less likely, or how would you characterize the appetite of the buybacks?

Chris Holmes: 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 I think if somebody goes out, if anybody, if we went out and did start 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. And so, we want to make sure that — so we’re going to be conservative there on how we use this capital until we think that the industry is — feels brighter from a credit perspective. And again, interest rates, we feel like interest rates are — have hit their peak.

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

Michael Mettee: If you remember, we did a fairly decent sized deposit campaign last year, and we had some CDs, some CD specials that in September, October last year, it was kind of 13, 18-month, 24-month paper. So the weighted average term now is about 18 months. And the cost was — and 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. And so I kind of mentioned this earlier, we’ve certainly raised some CD rates, but it’s just been shorter in term. So, we — if customers come in and want a shorter-term CD at a slightly higher rate, 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 that very similar rate.

And of course, our model is customer focus, so they feel 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. And so there’s some flexibility there.

Matt Olney: And then, Michael, just to follow up on that. As you look at some of the renewal time lines, is there — is it spread evenly in the next few quarters, or is there any quarter or two where you see more volumes set rate price?

Michael Mettee: It’s spread pretty evenly fourth and first. There’s a little bit of a lump in the second quarter of next year. Yes. But it’s already higher-priced stuff than what’s renewing in the fourth and first quarter.

Matt Olney: Okay. That’s helpful. And then, I guess, sticking on the deposit pricing pressure theme, your footprint is a good kind of mix of more metro markets and also some rural communities. Just any general commentary for us as we think about deposit repricing pressure in some of your general markets, where the pressure is greater today and where it’s maybe not as great as it once was?

Travis Edmondson: It’s really interesting. Initially, we saw the most pressure from the smaller communities, the kind of the rural markets. We’re now seeing some larger regional banks putting out some specials in the 5s. So, it’s really across the board, either urban or rural that we’re seeing deposit pressures. And they’re all generally in that 5.25% to 5.75% range on the specials.

Operator: The next question comes from Steve Moss from Raymond James.

Steve Moss: So most of my questions have been asked and answered here. Just one thing on office here. Just curious if you could give any color as to when the rents in that portfolio start to come up for renewal, and any color around that dynamic there?

Chris Holmes: Steve, sorry, our Chief Credit Officer is not here. I will say just generally on renewal, Michael went through kind of where we were on our fixed rate portfolio is not office specific. And 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 get a little more detailed information and get back to you. Does that — Travis, is that fair?

Travis Edmondson: That’s fair.

Steve Moss: Okay. That’s pretty much my last question. I appreciate all the color here today.

Operator: The next question comes from Feddie Strickland from Janney Montgomery Scott. Please go ahead.

Feddie Strickland: I wanted to start off, I saw borrowings and brokered CDs declined during the quarter, which I’m sure helped on the funding cost side. Did those just mature and you didn’t renew them? And could we see more of that rolling off in future quarters, just given you’ve got loans to deposits, so around 87%.

Chris Holmes: Yes. That’s right, Feddie. Some of them rolled off and we have some more coming due in November. If you remember last quarter, we increased some of that, just because it was cheaper than retail deposits, quite frankly. And so, Chris mentioned this. And we keep our powder dry on sources of liquidity, so that we can leverage it when we want to, need to. So sometimes when we see brokered market is cheaper or FHLB funding is cheaper, we’ll do that. And so, that lever is out there. But we do have, I believe, it’s $100 million rolling off in November. Whether we renew it or not, that’s TBD, certainly don’t need it, to your point. We freed up a lot of liquidity from a collateral standpoint as well during the quarter, good work by the team there to further create sources of liquidity.

Feddie Strickland: Understood. That’s helpful. And switching gears a little bit here. As we look at these expense reductions, coupled with — so the securities portfolio restructuring and some of the other trends that we talked about in the margin and everything else going on, do you think efficiency as the core bank ex mortgage can get into the mid-50s range by the end of 2024 from the, I think, a peg at around 60% today?

Chris Holmes: Yes is the answer. We do, we think on the core, just core bank? Yes. We think we can get below the mid-50s, even.

Feddie Strickland: Got it. And 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 decline as well?

Chris Holmes: Yes. That’s right. If you look at the ACL slide, you’ll see we actually increased our reserve on the construction bucket, but we released from the unfunded strictly due to the volume. And so, you’ll see that continue to decrease, and then we’ll probably land in that 80%, 85% range Tier 1 plus ACL and it would normalize from there.

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

Stephen Scouten: I’m not sure if you have this number, but I just wanted to follow up, as you referenced, you had C&I credit, had some exposure to the SNC loan in the industry that went bad. But, do you guys have numbers on your total SNC exposure? And if so, like kind of how much of that you lead of the SNC exposure that you may have?

Travis Edmondson: We have roughly $175 million in SNCs. We lead approximately $80 million of that is for round numbers.

Chris Holmes: And importantly there, we don’t do any SNCs without some compelling — we don’t do SNCs for growth. We only enter a SNC because we’ve got some clients that — or some relationship that gets us into the SNC. And so — and I’ll give you a couple of examples, two specific examples without using names. One, significant client here in our footprint, we have — we know the owners of the company. We know the officers of the company. And they said, we really want you in our credit. And so we got — we’re in the credit because it’s a major name that everybody would know in our geography. Second one, a company that we banked from the start-up of the company until they became a publicly traded company. We still have the bulk of their deposits, including their operating account, but their line of credit now is over $1 billion.

We don’t lead it. We still — we have part of the SNC. Those would be two examples. And so, we — it’s only those kinds of — that we get into. We don’t just put SNCs on for — we generally are SNC 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.

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

Chris Holmes: Okay. Thanks, everybody. We really appreciate, again, your interest in the company. We appreciate everybody’s questions and answers today. And if we have things that need clarification, we’re glad to get on the phone with anybody that we need to. So, don’t hesitate to reach out. Everybody, have a great rest of your day, and you analysts have a great rest of your earnings season.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.