SmartFinancial, Inc. (NASDAQ:SMBK) Q3 2023 Earnings Call Transcript October 24, 2023
Operator: Hello, everyone and welcome to the SmartFinancial Third Quarter 2023 Earnings Release and Conference Call. My name is Seb and I will be the operator for your call today. [Operator Instructions] I will now hand the floor over to Nate Strall to begin. Please go ahead.
Nate Strall: Thanks, Seb. Good morning, everyone, and thank you for joining us for SmartFinancial’s third quarter 2023 earnings call. During today’s call, we will reference the slides and press release that are available within the Investor Relations section on our website, smartbank.com. Chairman, Miller Welborn will begin the call followed by Billy Carroll, our President and Chief Executive Officer; Ron Gorczynski, Chief Financial Officer; and Rhett Jordan, Chief Credit Officer will also provide commentary. We will be available to answer your questions at the end of our call. Our comments include forward-looking statements. These statements are subject to risks and uncertainties and the actual results could vary materially.
We list the factors that might cause results to differ materially in our press release and in our SEC filings, which are available on our website. We do not assume any obligation to update any forward-looking statements because of new information, early developments or otherwise, except as may be required by law. During the call, we will reference non-GAAP financial measures related to the company’s performance. You may see the reconciliation of these measures in the appendices of the earnings release and investor presentation filed on October 23, 2023, with the SEC. And now, I will turn it over to Chairman, Miller Welborn to open our call.
Miller Welborn: Thanks, Nate. The third quarter of this year has been another quarter of incredibly busy activity for SmartBank. I’m very proud of how our team has remained steadfast to our mission and our objectives for the company. It’s not a secret that our industry has been challenged this year, but we see the challenges as positive opportunities. We’ve made a strong effort to improve every line of business that we operate, and I do sincerely believe we’re poised for a bright future. Our markets remain very strong, and we’re fortunate to be located in the southeastern United States where the economy remains robust. We are very proud of what we were able to accomplish for the quarter. Our entire SMBK team is focused, determined, and very clear of our goals. With that, I’m going to turn it over to Billy.
Billy Carroll: Thanks, Miller. And good morning, everyone. Great to be with you today. I’m going to jump right in this morning and discuss our third quarter highlights. You’ll see most of these on Page 3 of our deck. All in all, a steady quarter for our company. I’ll be discussing primarily non-GAAP operating metrics today. As Ron will provide some details shortly on a bond trade we did in September that had some impact on our GAAP numbers. We came in at $0.43 on operating EPS or $7.2 million in net income. We continue to grow both sides of the balance sheet with both loans and deposits increasing right at 5% annualized. Our loan-to-deposit ratio is staying healthy, right around 80%, giving us nice flexibility on growth. Credit is strong with an NPA ratio of only 12 basis points, the same as prior quarter, with charge-offs continuing at a negligible number.
Our credit quality continues to feel very solid. And a key number we focus on here, a tangible book value moved higher even with the bond trade, now at $21.95 excluding AOCI and $19.94 including it. As I stated, we did execute a well-timed transaction late in the quarter to reposition close to $160 million in available for sell securities. The loss taken on the trade will be earned back in a year, but accelerates our ability to reallocate assets. We like the timing and what the trade did for our forward-looking balance sheet. This, along with the large cash flows coming in early 2024, puts us in a very favorable spot related to cash positioning. Our operating income and margin were slightly below our forecast, driven primarily by heavier funding costs and some movement with balances from non-interest bearing to interest bearing.
I do feel we’ve stabilized and while we’ll continue to see some grind higher on deposits, I feel that delta will be covered by growth and asset yield resets. I believe the net interest income number has floored and we look forward to seeing that line move up from here. All in all, a good quarter where we helped serve, continued adding some outstanding new clients and positioned the company to move metrics north. I’ll close with additional comments in a moment, but let me hand it over to Rhett to discuss the loan portfolio and credit and then to Ron to dive deeper into the numbers. Rhett?
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A small business owner in front of a terminal, making a deposit to her company’s bank account via the company’s services. Editorial photo for a financial news article. 8k. –ar 16:9
Rhett Jordan: Thank you, Billy. SmartBank’s loan portfolio continues to grow at a moderate pace, while maintaining a stable and diversified profile with continued strong credit performance. In third quarter, we saw 5% quarter-over-quarter annualized organic long growth spread evenly across the bank’s geographies and across the different segments of the portfolio. The composition of the portfolio was effectively unchanged through this growth cycle, while recognizing a 13 basis point increase in average portfolio yield, which moved up to 5.52%. Our construction portfolio saw a slight decline in outstanding balances, down about $23 million quarter-over-quarter and representing 11% of total loans and 84% of total capital, a little below those same metrics for second quarter.
This was an expected swing as we’ve had several projects under construction moving to the completed stage, while new commercial construction starts were slower in the early part of the 2020 per year than in the same period prior year. Our non-owner occupied non-construction CRE portfolio grew slightly in outstanding balances for the quarter, but held steady at 26% of total loans and the total CRE ratio came in at 285% of total capital, also right in line with the last period. Again, steady performance with diversified production results. Also holding steady were our overall credit performance metrics with NPAs, delinquency and classified asset ratios seeing very little change quarter-to-quarter. While we have a slight increase in total delinquent and non-accrual loan balances since year end 2022.
The dollar amount has moved in conjunction with our overall capital growth and portfolio growth, and thus, our ratio to total loans and leases has held steady. Approximately 21% of those total outstandings are carried in our equipment finance subsidiary due to some slower activity in some of its smaller trucking clientele. Credit losses for the period were 0.04% with the year-to-date total being 0.06% through third quarter. Loss risk within our classified and delinquency portfolio is expected to be very manageable in future periods, and our allowance is more than adequately positioned to address any realized loss as these assets are navigated through. Our markets continue to report solid housing metrics, continued population growth, and overall stable economic conditions that support small business stability, and we expect solid credit quality results to continue in upcoming periods.
Our allowance did reflect a slight increase from 0.98% to 1% of total loans. But this minimal increase was due to how our CECL model monetized certain impacts of various input factors that occurred during the period. The recommended provision resulted from changes to certain components in the model, such as continued portfolio balance group, movement in unfunded commitments, quarterly net charge-offs, lower unemployment rates, and changes in key management positions. The culmination of the adjustments in each of these factors resulted in the recommended provision that was realized for the period. Overall, loan demand continues to be good, while the loan portfolio continues to maintain stable, solid credit metrics and performance. Now I’ll turn the call over to Ron to discuss deposit composition, liquidity, and other key financial measures.
Ron?
Ron Gorczynski: Thanks, Rhett, and good morning, everyone. On Slide 9, we continue to see our overall deposit levels remain stable as we build our presence and gain new clients in our expansion market areas. We ended the quarter with a loan to deposit ratio of 80%, driven by deposit growth of $47 million, which exceeded our quarterly funding needs and further bolstering our liquidity position. However, we did experienced some upward pricing pressure and mix shift, particularly during the first two months of the quarter, as clients reacted to the Fed rate hike and competitor solicitation. Our total deposit costs increased 31 basis points to 2.20% and were 2.28% for the month of September. Despite upward pricing pressure, our strategy of lagging market rate increases and adjusting rates only as needed for competitive purposes has afforded us some buffer relative to peers.
Looking ahead, we do expect some additional cost migration as clients right size operating accounts and look to maximize returns on idle cash. However, we believe this will occur at a much more muted pace as most of our price sensitive clients have been addressed. On Slide 10, you’ll see that we have updated our principal cash flow schedule to reflect the sale of almost $160 million securities at the end of September. The security sale was comprised primarily of U.S. Treasuries, approximately $100 million of which had maturities in Q1 of 2024 and the remainder of which had a weighted average maturity of 2.6 years. The total weighted average yield of these securities sold was 1.37%. Reinvested at current cash yields, the sale proceeds provide an additional $6.4 million of annual interest income which equates to an earn back just over one year.
Aside from the enhanced liquidity benefits, the securities repositioning provides additional earnings momentum as we move into Q4. Further, our current yield on cash affords us the ability to be patient in our redeployment of the sale proceeds, whether it be methodically reinvesting in securities or preferably funding higher-yielding loan production, both of which would accelerate the earn back on this trade. As you’ll see on Slide 11, even with the securities repositioned during the quarter, we still have approximately $208 million of securities, primarily comprised of held to maturity treasuries, maturing by year-end 2024. Combined with fixed rate and adjustable rate loans, we have over $460 million in assets maturing or repricing by year-end 2024 with a weighted average yield of 4.08%.
While the interest rate environment remains challenging, we are optimistic on future profitability knowing this significant earnings catalyst is on the horizon. Our overall liquidity position on Slide 13, which includes cash and securities, remained unchanged at 22% of total assets. Net interest margin was 2.81%, representing a 12 basis point contraction for the quarter. As discussed earlier, our margin was negatively impacted by increased deposit pricing pressures and mix shift experienced during the quarter. However, we are starting to experience a slowdown in the velocity of money movement and deposit repricing as we move into Q4. In addition, Q3 saw a weighted average cost of new deposit production of 3.59% and new commercial loan originations in the 7.5% to 8% range.
These factors, combined with the enhanced yield on repositioned security proceeds, we are projecting margin stabilization into Q4. Lastly, looking ahead at the next few quarters, we expect operating revenue to remain stable in a range of $38 million to $39 million before returning to our previous $42 million plus run rate in the second half of 2024. We have details of our noninterest income and expenses on Slides 15 and 16. Operating noninterest income was in line with Q3 guidance at $7.5 million, primarily driven by ongoing focus to identify and capitalize on those income opportunities as they present themselves. Looking ahead, we anticipate non-interest income to continue to be in the mid $7 million range. Total operating expenses were $28.4 million.
The slight escalation was primarily to salary benefit expenses increases for incentives and commissions resulting from better than anticipated production and additional costs relating to the new self-insured health insurance program. While our efficiency ratio was at 74%, which is above our internal target, we recognized that it’s primarily a function of the pressures of an abnormal rate environment rather than lack of expense control. Despite this, we continue to be extremely diligent on all expenditures while identifying opportunities to cut or delay expenses. Looking ahead to the fourth quarter, we project noninterest expenses in the 25 — excuse me, $28.5 million to $29 million range and salary and benefit expenses in the range of $16.5 million to $17 million.
And finishing off on Slide 17. We had minimal change to our capital ratios from the prior quarter, even with the loss associated with the securities repositioning. We remain in a strong, well-capitalized position and, most importantly, continue to execute on our primary mission to grow and defend tangible book value. With that said, I’ll turn it back over to Billy.
Billy Carroll: Thanks, Ron. As you can see with our trends, we are positioned well in playing offense. With the stabilization we’ve discussed and more clarity on the rate forecast, we are diligently focusing on building the revenue number back after absorbing these rate increases. I remain confident in our ability to execute on that front. My outlook on loans is still fairly bullish as we are continuing to see nice pipelines. We are lending and feel that we can continue this same mid-single digit pace. With that, deposits need to be growing at the same pace, and I feel we can fund that growth internally as well. As Ron discussed, we are continuing our internal focus on efficiency and expense control, and I do believe expense growth should be fairly well contained.
We are looking to add revenue producers within existing markets. In due field, we can make some of those additions in the coming quarters, but any expense growth there should be offset by increased revenues. Miller and I spent several days on the road again this quarter, continuing our market roundtables and meeting with clients and prospects throughout our footprint. The bank’s momentum in these markets is outstanding and continues to gain steam. I see tremendous opportunity for our company as there are a number of changes happening in our industry. We’ve chosen a path to continue to do what we’ve done successfully in the past, investing with an eye on long-term revenue and EPS growth. Again, overall, I felt a good quarter where we helped serve, held credit, grew loans and deposits, grew tangible book value, and set us up as we look forward.
As these rates settle, our loan balances grow and reprice, plus our ability to utilize the outsized cash flows coming in early next year, our company is positioned very well. I’ll close with a huge shout out to our 600 plus outstanding associates that we have in this company. These team members continue to build a phenomenal culture and it’s greatly appreciated. I’m going to stop there and open it up for questions.
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Q&A Session
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Operator: Thank you. [Operator Instructions] Our first question today comes from Thomas Wendler at Stephens Inc. Please go ahead.
Thomas Wendler: Hey, good morning, everyone. Just thinking about the $106 million security sale and then the $184 million of securities maturing by 2Q 2024. With these increased cash balance that you guys are likely to see, could we see loan growth maybe over that mid-single digit range?
Ron Gorczynski: Thomas, it’s really — it’s possible. I think we’re positioned to grow loans at whatever pace we can find them. I think it’s just a function to find the right ones in this sort of an environment. But we’ve had a lot of success doing that. So we’ve got the capacity to do it. We’ll just continue to — we’re going to continue to get out there and grind and dig and find good credits to add to the books, but it’s possible. But I still like kind of giving the environment that mid-single digit forecast for us going forward.
Thomas Wendler: Okay. No, I appreciate that color. And then just kind of staying on that with all of these earning assets kind of repricing coming up through 2Q 2024. NII stay in kind of — had floored from here. How are you thinking about NIM moving forward?
Ron Gorczynski: Yes, at this point, Thomas, our margin has been difficult to forecast, as many others. This quarter, we did experience higher betas and modeled. It increased to 39% from 32% from the prior linked quarter. We were projecting 36%. As we move forward, we do expect some compression, but some of our repricing will minimize that effect. We’re just going to say our NIM is stabilized and we’re projecting like results for Q4. We do see our NIM getting better throughout 2024 as we get to the second half. But right now, we’re just going to say we’re going to be stable for a while.
Thomas Wendler: All right. I appreciate all the color. Thanks for answering my questions, guys.
Billy Carroll: Thanks, Thomas.
Operator: The next question comes from Stephen Scouten at Piper Sandler. Please go ahead.
Stephen Scouten: Yes, good morning, everyone. Thanks. I guess one question just on the securities repositioning — Good morning. The securities repositioning trade, I’m just kind of curious on the dynamic. It sounded like a chunk of that was maybe already set to mature in the first quarter. So kind of what drove that, given the short duration there, or was more of the actual loss content, I guess, related to some of the longer dated portion of that trade?
Billy Carroll: You may start — Ron, you want to go ahead.
Ron Gorczynski: Well, I’ll start now. I think we wanted the ability to re-price as many assets as we can earlier. So that really facilitated the thought of the trade. We were on course to let these mature naturally, but given the modeling and the earn back and we thought it was a pretty good move on our part to go ahead and just recognize this loss and to get their earnings are the key to keep our name stabilized.
Billy Carroll: Yes, and the one I’ll add, Stephen is, when we — as we timed this right around when the — I guess right around the last Fed move. And so kind of given where the market was, we just felt like rates were going to continue to stay elevated. So we felt like timing was good. In hindsight, it was. And so it just seemed like a good time to do it. Yes. The bulk of that was going to mature going into early next year anyway. So it really wasn’t too big of a risk for us anyway.
Stephen Scouten: Okay. Got it. That makes sense. And then obviously, I know you kind of spoke to the fact that it’s more interest rate driven, the efficiency ratio, than it is really expense driven. But I’m sure you’re not really content with, I think, 60 basis point ROA this quarter. So what are the clearest levers you feel like you can pull to kind of move earnings back to a level you might start to be more comfortable with in the maybe near to medium term?
Billy Carroll: Yes, again, it goes back to revenue growth, as Ron had said, and there’s always opportunities to refine the expense side. We’re constantly doing that. We’ve been able to absorb some attrition on the salary side. We’re always looking to try to renegotiate contracts, whatever that may be. But I think ours is more revenue growth. I think when you look at our numbers, go back and look historically, I mean, it’s net interest income. We were a little heavier dependent on margin and the squeeze that we’ve had in the net interest income line over the last little bit, really what’s impacted those metrics that are away. As we’ve discussed, I think the biggest thing for us is just growing that line back. And that just comes with — we’ve got some great sales teams out there.
Growth has been solid, we continue to think that’s going to be in the cards for us. So, I think with resets on the asset yields plus growth, I think you’ll see that net interest income number continue to drive back up and we’ll get that ROA back to where it was just a few quarters ago.
Stephen Scouten: Got it. Makes sense. And then maybe along that growth front, I guess it’s been maybe right about two years since you guys brought on a number of teams back in 2021. And I’m just kind of wondering as you look back on those teams now, maybe some of those regions, Gulf Coast maybe in particular, how are you seeing them continue to contribute to the overall growth of the franchise?
Billy Carroll: I’ll tell you, they have been great contributors to the growth of the franchise. Really when you look at all those teams that we added to the bank just a couple of years ago, and I think, again, kind of going back to a little bit of our inefficiency today, I think that’s a piece of it too. When you — we added — that was a big bite for us. And so to add basically six new markets in the course of a six month period, we were able to get all those folks ramped up, all those markets are incrementally profitable now. But some of that growth was delayed with a little bit higher rate move. We couldn’t move as many balances, but we’ve been able to organically grow some great balances really in all of those markets. All of those teams have been just outstanding contributors to our company as well as a lot of our legacy markets.
So as I said in my comments, I love war position. We’ve got some great salespeople. We’re out grinding every day and continuing to grow this thing. So it’s been good. The rate increase has delayed a little bit of that profitability that we had expected, but it’s there. And we’ve got it in sight.
Stephen Scouten: Got it. Yes, that’s really helpful color, Billy. Thank you so much, guys. Appreciate the time.
Billy Carroll: Thanks, Stephen.
Operator: Our next question is from Will Jones at KBW. Please go ahead.
Will Jones: Hey, great. Good morning, guys.
Billy Carroll: Good morning, Will.
Will Jones: So I was a little surprised to hear that, the revenue outlook is really kind of unchanged in that $38 million to $39 million range over the next few quarters. It just feels like we’ve talked a lot about the asset repricing opportunity you have coming up, the NIM is looking to — at least maybe hold stable here and maybe steadily grind higher through 2024. I’m just curious, that would have made me react and think that revenues might gain some positive momentum going into next year. I’m just curious if you can help me connect the dots and maybe what’s driving that more muted revenue forecast.
Ron Gorczynski: Yeah I’ll take this first and Rhett could chime in. This is Ron. For the most part the mutinous is coming from our deposit betas. We’ve modeled not to be as fast to move upward, but from what we’re experiencing, like I said, we’re 3 basis — 3% higher on our beta is what we’re looking at. So I think it’s truly a function of our deposit costs escalating.
Rhett Jordan: Yes. And that [Technical Difficulty] Will, and I don’t know how. You say — I guess your comment about a few quarters. I don’t think. I think we’re just dealing with a couple of quarters here where we think this thing kind of stay, we kind of grind here a little bit because you think about, going to have a little more deposit pressure probably this quarter. We can offset that as we talked about with the asset yield reset with some growth. So it will stabilize. First quarter is always going to be typically a little bit softer just with fewer days. So I think the first couple — these next couple of quarters is where we see kind of that grind. It picks back up pretty, we see it picking back up pretty nicely from there.
Will Jones: Okay, that’s super helpful. I know last quarter we kind of talked about maybe deposit beta’s peaking in the 38% to 40% range, but if we just forecast the 3% higher that we’re talking about here maybe deposit beta’s end in the 45% realm. Is that the right way to think about it?
Billy Carroll: I think we’re looking at — yes, I would say low to mid-40s, probably max mid-40s at this point. But we’ve been probably wrong on our deposit betas in the past, but I know they’ll escalate slightly, but our asset repricing will minimize or mute some of those effects going forward. This quarter is our first quarter that we’re looking at for Q4 where our growth in interest income is projected to outpace the growth in deposit expense. That’s the first time we’ve seen that quarter-over-quarter. And it’s all predicated on what the Fed does going forward.
Will Jones: Yeah, I understood. That’s very helpful. Thank you for that. And then just switching over to credit, I mean, it still remains just remarkably clean. The provision really has been fairly low here for the past handful of quarters, and you guys feel pretty comfortable with the reserve at the 1% level. Is the messaging on the provision that it’ll just be kind of steady as she goes until maybe credit turns or loan growth picks up or is — what would be the messaging on the go-forward provision?
Rhett Jordan: Yes, I think that’s probably the best outlook at this point. It’s kind of a — you use the term steady as she goes. I think that’s a pretty good depiction. I mean, as we said, with the seasonal model, the different factors that impact it can move it slightly from period to period. But as Billy said, that single-digit long-growth profile, we don’t really see any considerable credit weakness in the near term. So I think that’s a good outlook.
Will Jones: Yes. Okay, great. And then lastly for me, there was a bit of excitement earlier in this year on bank M&A, and we’re still hearing chatter that conversations are fairly active and we might just be right on the cusp of seeing any kind of real deal activity materialized, but could you just give us a refresher on where you stand on M&A, maybe from the perspective of both upstream and downstream partners?
Miller Welborn: Will, The only color we can give is probably the same as we’ve done the last couple of quarters. Yes, there seem to be a lot of conversations out there, and you see a couple of deals getting announced along the way, a couple of smaller deals and maybe one or two bigger MOEs. But I don’t know until you see — until we get some clarity on credit and what that looks like and a little bit of Fed clarity. I don’t know that you’ll get any real escalation. But yes, we’re continuing conversations upstream and downstream. We love those relationships. And Billy and I and the rest of the team enjoy those meetings. So that’s really about all I can say.
Billy Carroll: Yes. And I’ll add, Miller, just that M&A, as Miller alluded to, with valuations kind of with the industry kind of suppressed, it makes it a little more challenging on the acquisition front. But I think to your point, I think a lot of banks are sitting down and looking at it strategically, what are their options and where do they want to go? I feel very good about us and our environment in a standalone, but also obviously we’re going to look advantageously at opportunities. And so, if we see something that fits, we’ll continue to explore it. But really like kind of where we’re positioned and kind of what our optionality is sitting on today.
Miller Welborn: We love letting Nate run these models. He’s a model geek. Yeah, it’s really, it’s really, Will, just getting back to shareholder focus. And I think we are totally focused on the shareholder and what makes the most sense for them and love focusing on that.
Will Jones: Yes. That makes sense. That’s helpful. Thanks for the questions, guys.
Billy Carroll: Thank you.
Operator: Our next question comes from Kevin Fitzsimmons at D.A. Davidson. Please go ahead.
Kevin Fitzsimmons: Hey, good morning, guys. Just wanted to follow-up on the margin. So at a high level, it sounds like what you’re saying is, it’s kind of going to — to use your words, it’s going to continue to be a bit of a grind next few quarters, but stabilizing in the course of stabilizing. And the head — the main headwinds had been the cost of deposits going higher and the DDA remix. And I believe Ron, you might’ve said at the beginning of your comments some — you alluded to those slowing and you gave some number for September. Can you kind of go back to like what gives you confidence those headwinds are slowing and anything you can give us like coming out of the quarter on that front. Thanks.
Ron Gorczynski: Yeah, I think we saw, as I said, escalated Q3. September, we’re starting to see pretty much conversationally and balance-wise a lot less repricing going on. And we’re modeling where our deposit beta has slowed down as we go. We’re seeing less of a — we had a pretty good non-interest bearing mix shift happen. We think that stabilized. I think Q2 had excessive funds in there, so that assisted with it. I think going forward, we think we can maintain our non-interest bearing balances. I think we’ll see it creep a little bit, but again, this trade in our investments would offset some of the noise and just a lot less chatter on the deposit side at this point of time. I mean, really it’s as simple as that of what we’re seeing and hearing in our numbers for the beginning of October.
Kevin Fitzsimmons: Got it. And Billy, just — you say you continue to be bullish on loan growth. Maybe just if you can give us a flavor for how the customers and your local economies are hanging in and what that sentiment is like. I mean, some banks are talking about really limiting loan growth and just focus on fortress balance sheet and only dealing with existing customers, not looking for new customers until we get more clarity on the economy. And I know the Southeast has definitely got tailwinds, other parts of the country don’t. But I’m just curious where, how you’re looking at that, whether you’re feeling incrementally better or more of the same just over the last three months. Thanks.
Billy Carroll: Kevin, I mean, I still feel pretty good. And I still think, again, as I said, a fairly bullish outlook on both the economy and loan growth. Obviously, there are headwinds out there. The rate increases have — will continue to have some impacts. But for us, when we look at — when we look to onboard new clients, a lot of these, again, a lot of these go back to the ones where we talked about a lot of these newer team members that we’ve added over the course of the last couple of years. So we’re onboarding clients that are not new to business. They’ve been around for years. Our team members have banked them in some instances for decades. And so, yes, I think that the long tenure track record that we have that our team members have a lot of these clients give us some confidence to go in and continue to add.
I think that’s kind of where the kind of the cautiously optimistic terms. Obviously, it is. It’s a challenging environment, but I like where we’re positioned. The clients that we’re continuing to add, we feel really good about. So we want to keep our foot on the gas pedal to that extent. It’s not on the floorboard, but it’s halfway down. And we feel pretty good about our ability to keep doing that.
Kevin Fitzsimmons: Okay, great. And one last question. I know maybe this quarter with the securities loss it might not have been priority number one to do, but like with your current capital levels and with your outlook you’ve outlined and the stock trading where it is, would you guys entertain stepping into buybacks or do you want to get those capital ratios higher before you would do that? Thanks.
Billy Carroll: Yeah, it’s definitely an option depending on share price, but as you alluded to in the prior comment, Kevin, we’re going to continue to watch the markets, make sure that the balance sheet stays where we expect it to stay. We’ve got some powder, not a ton, in those capital numbers. So I think we’ll watch that. Obviously, we can if we feel like we need to. If stock price gets to a point that we feel like that’s the right move, we’ll do it. But I think it’s more of a balance today, kind of watching growth aspects and what’s going on with the economy in conjunction with that.
Kevin Fitzsimmons: Okay. Great. Thank you.
Billy Carroll: Thanks Kevin.
Operator: Our next question comes from Steve Moss at Raymond James. Please go ahead.
Steve Moss: Good morning guys. Maybe just on deposit costs here, just — I apologize if I missed it, but do you guys have what it was for the month of September.
Ron Gorczynski: Yes. New deposit production was in the 360 range. New deposit production. Is that what you are looking for. Are you looking for what the deposit cost were…
Steve Moss: Yes. Deposit cost were for the month of September.
Ron Gorczynski: Our total deposit cost for the month of September was 2.28% for the portfolio.
Steve Moss: Great. And then in terms of just on the — Billy following up on the loan pipeline here, just kind of curious, is the mix starting to shift towards more C&I and less CRE here going forward, just given the absolute moving rates? And just wondering also maybe does the construction portfolio continue to go lower here, just given where we are with rates.
Billy Carroll: Yes. And I’m going to let Rhett take that first, Steve, then I’ll add some anecdotal color.
Rhett Jordan: Yeah, Steve, I would say that is indeed the case. We’re certainly seeing a bigger pool in our pipeline in the C&I segment to your point. Construction has begun to, I guess, sneak back in here and there with specific projects, mostly owner-occupied related. But we are beginning to see some borrowers begin to go ahead and pull the trigger on projects that they may have delayed a little while. But C&I has certainly become a much larger component of our pipeline. And I would also say that correlates back to what we talked about a few times with regard to our newer market expansion teams having come from a much broader C&I portfolio. That’s their client base. That’s who they’re calling on. So that’s what’s driving a lot of that…
Steve Moss: That was a focus even before rates move, maybe more C&I.
Billy Carroll: But Rhett hit it Steve. And I think it is — we will see that. We’ll continue to look at [indiscernible] opportunities, we we’re seeing a few that we like, that we feel really good about the sponsors and guarantor positions. So we’ll continue to look at those. But yes, the focus is definitely a little bit more C&I based.
Steve Moss: Yes, and maybe just the other thing in terms of just the moving rates here, especially the last 70 bps in the last month or so. Just curious, as loans are coming up for renewal, are you seeing increasing borrower stress or kind of how are those debt service coverage ratios looking now that rates are moving even higher?
Billy Carroll: Yes. I don’t — I’m going to let Rhett jump in. I don’t think we’ve not seen a lot of stress. You want to dive into that one.
Rhett Jordan: We’ve been looking at that really the entire year and just kind of forward looking at upcoming maturities and current information we have on projects and borrowers. And certainly in some instances, with rates moving at the pace they did, the coverages are down from where they were perhaps at the time that it was originated, but nothing to the point that it’s causing significant challenges for the borrower in being able to generate adequate cash flow to the projects to service the expected repricing. We still feel very good about our portfolio’s ability to absorb these rate increases when the repricings occur. We have seen some market moves in the revenue side for some of those projects that’s allowing that as well. So we still feel pretty optimistic about the ability for the CRE portfolio to absorb that.
Steve Moss: Okay, great. Thanks. I appreciate all the color here.
Billy Carroll: Thanks, Steve.
Operator: The next question comes from Feddie Strickland from Janney Montgomery Scott. Please go ahead.
Feddie Strickland: Hey, good morning, guys.
Billy Carroll: Good morning, Feddie.
Feddie Strickland: Just wanted to go back to the expense guide. Ron, I think you said it was $28.5 million to $29 million of the fourth quarter. Correct me if I’m wrong there. But as we think into 2024, is there anything that would cause a significant change from that level or is it just sort of a steady, modest growth rate given some of Billy’s comment on the cost of new hires being more or less offset over time?
Ron Gorczynski: Exactly that, Feddie. It’s for the most part, it’s going to be the normal wage increase cycle. We do have small issues along the way, but we’re probably looking at normal 5% to 7% increase in that for 2024. Again, we’re not done with our 2024 modeling, but that’s probably what would be expected. Majority of that’s going to be in salaries.
Feddie Strickland: Got it. That makes sense. And then my other question was, what should we expect in terms of the trajectory of overall earning asset growth and earning asset growth — just asset growth in general, just with all these upcoming maturities, both in terms of loans and securities. What I’m trying to get a sense for is, whether all these maturities are put back into new loans and securities or do you potentially continue to pay down some of the borrowings that are still there on the liability side.
Ron Gorczynski: Yeah, Feddie. Again, depending on our loan growth, we expect it to put it to our loan production. Fortunately, we don’t have any borrowings to pay down. So, if we wind up in an excessive cash mode we would either invest it in securities which is — the rates are getting more favorable as we go along or be more prudent in our deposit pricing as we go forward. We will have some options to go to do that.
Feddie Strickland: Understood. Thanks for taking my questions, guys.
Billy Carroll: Thank you.
Operator: [Operator Instructions] We have no further questions on the call, so I will turn back to Miller Welborn for closing remarks.
Miller Welborn: Thanks Seb. And thanks again to each of you for joining us today. As always, please feel free to reach out to any of us directly if you have any additional questions. And I hope each of you have a great week. Thanks. Goodbye.
Operator: This concludes today’s conference call. Thank you all very much for joining. You may now disconnect your lines.