Smartfinancial Inc. Q2 FY2023 Earnings Call

Hello, everybody. And welcome to today’s conference call regarding SmartFinancial's Second Quarter 2023 Earnings Release. My name is Ellen, and I will be coordinating the call. I will now hand over to our host Nate Strall, Director of Corporate Strategy, to begin. Nate, please proceed whenever you are ready.

Thanks, Ellen. Good morning, everyone and thank you for joining us for SmartFinancial’s second quarter 2023 earnings conference 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, our Chief Financial Officer; and Rhett Jordan, our 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 may 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 July 24, 2023, with the SEC. And now, I will turn it over to Chairman, Miller Welborn to open our call.

Thanks, Nate, and good morning to everyone, and thanks for joining us today. The second quarter of this year was a challenging quarter for the entire banking industry. There's been a tremendous amount of turmoil and, quite frankly, a lot of negative press about the stability of our banking industries. I'm very proud of how our team has remained steadfast to our mission and our objectives for the company. We have made a strong effort to be in our communities and share our thoughts and updates about not only SmartBank but also the Southeastern region and the industry as a whole. SmartBank has been very focused on our clients, and we've held multiple town hall gatherings in many of our markets. These conversations have allowed us to tell our SmartBank story and also to share with others about the strength and the importance of the community banking system in the Southeast. We're very proud of what we were able to accomplish for the quarter. I'm proud of the entire team for the focus and continued improvements we've made this quarter. With that, I'm going to turn it over to Billy.

Thanks, Miller, and good morning, everyone. Our second quarter was a good one for the company. But like many others, we had to battle a few headwinds. I think our industry is seeing some stabilization because it looks like the pace of rate increases appears to be slowing. We're going to walk through the state of our company today. And as I believe you will see, SMBK is positioned well to navigate the environment looking forward. I'll open with some comments and in a moment, Rhett and Ron will dive into details on credit, balance sheet, and earnings. First, it was a solid quarter for us. You can refer to Page 3 of the deck for some of those highlights. We reported $8.8 million in operating earnings, equating to $0.52 per share and maintained our double-digit return on tangible common equity coming in at 10.6%. We also continue to move our tangible book value higher, now at $21.84, excluding the impact of AOCI and $19.78, including it. Our income numbers were within our forecasted range, although slightly lower on revenue, driven primarily by increased funding costs and seasonal cash balance declines. We did make up some of that headwind with expense controls. I was also a little surprised with some irrational pricing in our markets over the last few months. So we battled through that and ended up having to push rates higher than anticipated on some core client balances, which compressed the NIM a bit. That's temporary though. At the end of the day, we kept the deposits we wanted and have not been out trying to aggressively gather funds while the market seems to have been unreasonable. That said, we held balances with only a slight contraction for the quarter and most importantly, maintained our mix, including 24% in noninterest-bearing accounts. We had a number of great net new clients this quarter, and we continue our focus on the sales side on lower-cost checking and treasury clients. Loan growth continued at a pace we expected coming in at 7% annualized for the quarter. Yields on new production are continuing to move up. So with that and our loan repricing on maturities, we do feel the margin should be bottoming out. Ron will discuss this a little bit more shortly, along with the huge opportunity we have with cash flows coming off large bond maturities in early 2024. We also felt extremely good about finishing the quarter with no borrowings or hardly any brokered funding. The fruit use of these funding vehicles is fine, but to go through another quarter like this with much higher rates and for us to continue to fund with our core base shows the strength we've built in the balance sheet over the last several years. Our credit quality remained outstanding, with NPAs maintaining at 12 basis points, and even a net recovery position related to charge-offs. There continues to be a lot of talk around CRE and office exposure, but we continue to feel very good about our CRE book. Rhett will dive into this shortly. As I wrap my opening comments, a couple of notes on great growth opportunities for our bank. This quarter, we opened our Tallahassee, Florida full-service office, and we're really excited to be in the state capital of one of the country's fastest-growing states. We also officially added a great group of wealth professionals to SmartBank Investment Services in our Dothan, Alabama market. Dothan has been a great market for us from a commercial and private banking standpoint, and this investment team is a great addition. Our wealth program now has over $1 billion in assets under management. So all in all, a good quarter where I think holding serve for a couple of periods is okay, while the balance sheet recalibrates. I'll close with some additional comments in a moment, but let me hand it over to Rhett and then over to Ron to dive into some greater details. Rhett?

Thank you, Billy. As Billy pointed out, the bank's loan portfolio is growing steadily while maintaining strong credit performance metrics. In the second quarter, we observed a loan portfolio increase to $3.3 billion, reflecting a 7% quarter-over-quarter annualized organic loan growth, distributed across different geographies and segments, primarily in commercial and industrial lending. The loan portfolio also recorded a 19 basis point rise in average yield, bringing that metric to 5.39% for the period. Overall, the portfolio composition remained stable over the last several quarters. Our construction portfolio experienced a slight increase of approximately $8 million in outstanding balances while staying steady at 12% of total loans and 89% of total capital. Most of this funding supported existing construction projects nearing completion, with the percentage disbursed in this segment increasing from 60% to just under 65% quarter-over-quarter. Our total CRE portfolio remained stable at $883 million outstanding, resulting in a decrease from 27% to 26% of total loans and from 288% to 286% of total capital from the previous period. Excluding owner-occupied construction financing, our non-owner-occupied construction portfolio declined to about 66% of total capital, with total non-owner-occupied CRE down to approximately 263% of capital. Our office exposure is minimal at 14% of our total non-owner-occupied CRE portfolio, with an average loan-to-value ratio of 56% and an average debt coverage ratio of 1.75 in this segment. The office portfolio largely consists of smaller project office buildings averaging a loan size of $1.3 million, with about 35% allocated to medical office space. Overall, our CRE ratios have gradually trended downward since the end of 2022. Our credit performance metrics remained stable, with non-performing assets, delinquency, and classified asset ratios largely unchanged, while the bank recorded a slight improvement in the portfolio loss ratio for the quarter. Our clients have been reporting stable trends and a positive outlook for their operations despite the challenges posed by rising interest rates. Our markets are experiencing strong housing activity, maintaining a favorable balance of supply and demand, as evidenced by continued robust average home prices and strong market absorption times. Although some market trends may be slightly down compared to certain key statistics from this time last year, even a modest decline today still represents a very favorable outcome in relation to historical averages for the area. This situation is intensifying shortages in existing home availability across our geography, as the influx of new residents competes with a lack of existing home listings, given that current homeowners are apprehensive about losing their favorable mortgage rates when considering financing a new home purchase. Coupled with an ongoing expectation of lot shortages in many of our key metropolitan statistical areas over the next few years, we anticipate continued healthy price performance and solid demand levels in our housing sector for the coming year. The balance of previously mentioned steady loan growth, paired with persistent strong credit quality performance and a quarter-over-quarter reduction in unfunded commitments in the loan portfolio, kept our allowance stable at 0.98% of total loans and leases in the second quarter. Overall, loan demand continues to align with forecasts while the loan portfolio maintains top-of-class credit metrics and performance, with a positive outlook. Now, I'll turn the call over to Ron to discuss deposit composition, liquidity, and other key financial aspects.

Thanks, Rhett and good morning, everyone. Let's start on slide nine. Despite continued industry volatility and aggressive market competition, our deposit portfolio remained stable, declining $30 million from the prior quarter, primarily as a result of seasonality. Additionally, we were extremely pleased to see our non-interest-bearing deposits increased by almost 6% linked quarter annualized to represent 24% of total deposits. Our focus on relationship banking continues to drive positive mix shift and a healthy liquidity position with minimizing the need to utilize wholesale funding. As a result, we ended the quarter with a loan-to-deposit ratio of 79%. For the quarter, our total deposit costs increased 33 basis points to 1.89% and was 2.01% for the month of June. As we move into the second half of 2023, we intend to be cautious in our approach to growing and defending deposits where rate is the only factor. That said, we do anticipate upward pricing pressure to continue, albeit at a more moderate pace throughout the remainder of the year. However, as previously mentioned, and as shown on slides 10 and 11, our deposit granularity and access to liquidity gives us confidence in our ability to navigate funding headwinds in a cost-effective manner. On slides 12 and 13, we highlight our securities and liquidity management detail. During the quarter, we deployed some liquidity, primarily to fund new loan production. Our overall liquidity position, which includes cash and securities, remained strong at 22% of total assets. Included in the securities portfolio is over $250 million in US treasuries with a weighted average yield of approximately 1.8% that will mature in Q1 and early Q2 of 2024. These maturities will provide significant cash on hand for redeployment and represent a potential increase of over $8 million to interest income when redeployed at today's rate. Our net interest margin for the quarter was 2.93%, representing a 38 basis point contraction. Adjusting for the $1.4 million loan fee included in our Q1 margin, our margin contraction was 25 basis points. Our loan production base yield, which excludes loan fees and accretion, was 5.39%, a 19 basis point increase from the prior quarter, and the June portfolio spot-based yield was 5.43%. Yields on our new commercial loan originations are currently in the 7.5% to 8% range, depending on various business aspects and revenue opportunities associated with the project. Our interest-bearing deposit costs increased 41 basis points to 2.46% for the quarter and were at 2.60% for the month of June. The weighted average cost of new deposit production during June was 3.39%. Our cumulative deposit beta during the cycle to date is approximately 32%. Looking ahead, we are modeling the third quarter cumulative beta of 36% and a year-end cumulative beta of 38% to 40%. While market compression has been challenging, we anticipate margin stabilization through the remainder of 2023, with funding cost increases being offset by new and renewing loan production. That said, we are modeling third-quarter net interest margin in the range of 2.9% to 2.95%. Lastly, with yet another challenging quarter behind us, our forecast indicates we should have reached the bottom for our operating revenue. Looking ahead at the next few quarters, we expect to maintain operating revenue in the range of $39 million before returning to our previous $42 million plus run rate by midyear 2024. We have details of our noninterest income and expense on slides 15 and 16. Operating noninterest income was $7.1 million in line with our previous guidance. We are pleased to see our ongoing efforts to generate stable recurring income. Looking ahead, we anticipate noninterest income in the low to mid $7 million range for the next several quarters. On the expense side, we managed costs coming in at $27.4 million, better than our previous quarterly guidance. While our efficiency ratio increased to 71%, it was a result of revenue pressure rather than expense increases. We did offset increases in our FDIC insurance, occupancy, and other expenses by reductions in professional fees and loan-related expenses. Additionally, we had a reduction in salary expenses from revisions made to our company-wide incentive plans, as well as being diligent around replacing employees lost through attrition. Moving forward, we project noninterest expenses in the $27.5 million range and salary and benefit expenses of $16.2 million. Lastly, on slide 17, we continue to build our capital ratios with this quarter seeing the company come close to or surpass the 8%, 10%, and 12% thresholds on our leverage CET1 and total risk-based capital ratios. In line with our strategic plan, we are pleased to see our capital ratios move to and pass these milestones and feel we are poised to deliver strong ROEs and tangible book value growth. With that said, I'll turn it back over to Billy.

Thanks, Ron. As you can see with our trends, we're in a solid position and actively pursuing opportunities. Our established markets provide a strong foundation, and as we gain clarity on economic rates, our emerging markets are set to drive even more growth in new client relationships. Revenue growth is crucial, and I remain confident in our execution capabilities. As Ron noted, we are maintaining our focus on efficiency and managing expenses. Aside from some minor occupancy costs in our new markets, expense growth should remain well-managed. We plan to limit hiring unless there's a significant revenue growth opportunity. I still have a positive outlook on loans. We are lending and believe we can sustain a mid-single-digit growth rate, possibly better. To support that, we need deposits to grow at a similar pace, and we think we can achieve that internally as well. As Miller mentioned, we've spent considerable time on the road recently, engaging in market roundtables and meeting with clients and prospects across our entire footprint. The momentum in our markets is impressive and is gaining strength. As rates stabilize, our loan balances grow and adjust, along with our ability to capitalize on substantial investment cash flows expected early next year, our company is in a great position. Lastly, I want to acknowledge our more than 600 outstanding associates who have recently received their sixth consecutive Regional Top Workplace Award. We continue to cultivate an exceptional culture at SmartFinancial and SmartBank. I'll stop there and open it up for questions.

Thank you. We'll now begin our Q&A session. Our first question comes from Brett Rabatin from Hovde Group. Brett, your line is open, please go ahead.

Hey guys. Good morning.

Good morning, Brett.

Thank you for the questions. I appreciate hearing that you believe the margin will stabilize from this point onward. Can you discuss how much of the loan portfolio will reprice in the third and fourth quarters? Additionally, I'm interested to know if you believe the competitive environment has shifted somewhat since one regional competitor has finished their campaign.

Ron, do you have the information on the repricing?

Yes. In Q3, we expect to see around $30 million, and for Q4 of 2023, about $50 million. As we move into 2024, we anticipate repricing $180 million throughout the year. This will cover both variable and fixed-rate loans.

Brett, I will address the other question regarding market pricing. I believe it is significant. I think we are all somewhat surprised by the aggressiveness of some pricing we observed in the market. However, I want to emphasize that much of this is temporary, and we just need to work through it. It appears to have stabilized somewhat across all our markets, but there are still some competitors pricing aggressively. Therefore, we are still facing some challenges in that regard. However, I do believe it has settled as we communicate with our regional presidents throughout our area.

Okay. And then just thinking about mix shift change, you're in a little better position than some peers with the balance sheet in terms of the loan-to-deposit ratio, and you talked about kind of mid-single-digit growth, maybe better. Does the balance sheet itself stay relatively flat from here as you maybe mix shift change a little bit of the asset base, or do you continue to grow it?

We want to ensure we're making the right decisions regarding rates. In terms of structure, I believe we have the potential for growth, though we'll likely remain relatively stable. Looking at the next quarter, I expect it to be mostly flat again, potentially with some growth. I think we will see improvement on the loan side while keeping deposits steady. However, I anticipate that we will see balance sheet growth picking up as we look a few quarters ahead.

Okay. Great. And then maybe just one last quick one. You've got that nice slide, slide 5 that shows the market area. Are you seeing more of the opportunities in the expanding markets or in the legacy markets in terms of growth from here?

Yes, it's a mix of both, but I believe the expansion markets and the lift-out markets we've developed over the past year and a half to two years are showing significant growth. These markets present great opportunities for building relationships. While we are seeing some progress in our legacy markets, the pace of growth in the lift-out markets is faster. We seem to be adding more new clients in those areas, and the teams there are performing exceptionally well. I'm very pleased with the progress we're witnessing in those regions. As Miller mentioned in his opening comments, we've been actively engaging with clients and prospects, and there's tremendous energy within our company at the moment. We are facing a couple of temporary challenges, but as Ron indicated, we believe our numbers will improve from here. Our revenue figures are approaching the levels we aim for, and our momentum is strong. There are many positive developments happening across all our markets.

And that's the clients as well as the bankers are really positive from the industry side.

Okay. That’s great. Appreciate all the color. Thanks, Brent.

Yes. Thanks, Brett.

Thank you. Our next question comes from Catherine Mealor from KBW. Catherine, your line is now open. Please go ahead.

Thanks. Good morning.

Good morning, Catherine.

Good morning.

Good morning.

I just wanted to follow up on loan yields. I appreciate the commentary about how much is repricing. How about where new loan yields are coming in today relative to where your portfolio yield is?

We're indicating a range of approximately mid-7% to 8%. If you have something with a tighter spread on a float, it might be slightly lower around 7.5%, but I believe we are in a solid position, around mid-7s with new productions.

Okay, so regarding your margin guidance of about $2.90 for next quarter and possibly stabilizing for the latter half of the year, how do you anticipate loan yields fitting into that guidance? Do you expect them to exceed 6% as we approach the end of 2023?

I'm looking at Ron…

I’m not certain we will exceed 6%, but I believe we will come closer to 5.75% or 5.80%. We will experience incremental growth on a month-to-month basis, but we probably won't reach that 6% figure at this time. By year-end, yes, sorry.

Okay. Got it. And then on the deposit side, we've heard commentary from a lot of your peers in your markets just we're all talking about First Horizon's deposit campaign and what that did to the market. But I feel like there's been commentary that, that's stabilized a little bit as the quarter has continued on, and maybe June was a little bit less competitive or crazy as it was earlier in the quarter. I'm just curious if you're seeing that same dynamic in your markets and maybe what the deposit conversations are like today versus a month ago?

We have seen some stabilization. Rates are higher, and we are still having many of the same discussions. However, I don't think we're facing as many external pressures, such as promotional signs or direct mail advertisements inundating people's mailboxes. This has helped ease the situation somewhat. Overall, I think in the past few weeks we've noticed a reduction in those pressures.

And FHN, I mean, I think that was the biggest pricing pressure. They look like their specials ended at the end of June. So I think the market has, as Billy indicated, has slowed down a little bit.

Okay. Great. And then maybe just one last one on just non-interest-bearing remix. I know it's a shot in the dark. But as you just look forward, what's your gut on where that bottoms as non-interest-bearing deposits as a percentage of deposits? Is there just an inherent kind of bottom as you think about maybe transaction accounts, or just kind of core customers that you are less likely to move their deposits into an interest-bearing account to where that stabilizes?

It's a tough situation. We believe we can maintain our position within this range. We’ve discussed the possibility of it drifting into the low 20s, but we don’t expect it to drop much below that. It might decrease by a few basis points, but I still feel confident that our focus on operating accounts in our expansion markets is yielding success in attracting new full relationship clients. So, overall, I'm quite optimistic about staying in this range. If I had to provide a specific number, it might edge down to around 22%.

But it's certainly a bank-wide focus.

Absolutely, yes.

Catherine, I've really enjoyed witnessing the transformation in our company over the past few years. Our approach to selling has evolved significantly, particularly in expansion markets. A few years back, we were more focused on lending, but now we're seeing a comprehensive relationship-driven strategy that is evident across all our markets. I'm genuinely excited about our current sales approach and the direction we're heading. Although we may be facing a temporary funding squeeze and some seasonal fluctuations this quarter, I feel confident about our ability to sustain core relationship balances going forward.

Great. Thank you for the commentary.

Thanks, Catherine.

Thanks, Catherine.

Thank you. Our next question comes from Kevin Fitzsimmons from D.A. Davidson. Kevin, your line is now open. Please proceed with your question.

Hey, good morning, everyone.

Hi, Kevin.

Hi, Kevin.

I wanted to follow up on Catherine's question. You mentioned that you maintained non-interest-bearing accounts, and actually saw growth this quarter, which is something I haven't noticed in this earnings season. Was there anything notable or unusual that contributed to this increase in non-interest-bearing accounts? I'm assuming there's a consistent transition from non-interest-bearing to interest-bearing accounts, but was there any significant relationship gain or unusual factor that influenced this growth? Thank you.

I mean, Ron, I think nothing has jumped. As far as a relation…

One-time.

Yes, I think it's pretty detailed, Kevin. It goes back to my comments about the focus shift we've experienced in the company over the last year or two. We are seeing that we're becoming a strong deposit sales company, which contributes to the optimism in our commentary today. There's some exciting development happening, and we believe we can continue to grow in that area. As I mentioned, if we can maintain and expand the mix, I tend to be a bit conservative with the outlook, but I truly believe we have good momentum.

Yes, I think it's three words: focus, effort, and attention.

Got it. Great. Thank you. And on the bond portfolio, so Ron, I was trying to keep up; my pen wasn't keeping up with your commentary, but if you can just reiterate what those cash flows you expect are? And then if that's pretty significant, I would assume you're not contemplating like a larger one-time bond restructuring where you would take a loss upfront to get those at higher rates faster? But is that a good assumption or not?

Yes, we are constantly considering various strategies. On Page 12 of the slide deck, we outline our returning principal on a quarterly basis. Specifically for our treasuries, we aim to receive $250 million in the first and second quarters of 2024. We are still strategizing on the deployment of those funds, as it will depend on our liquidity situation at that time. We have numerous options available, which will provide a significant income boost once we implement them. Currently, we are evaluating the best approach, whether to act now or wait for the maturities to take place.

Okay. Great. And one last one for me on the loan-to-deposit ratio. I see here on the slide you point out that you guys are below the peer average. So still a nice liquid position. It sounds like, Billy, if I heard you right, it sounds like mid-single-digit loan growth have maybe even a little higher, holding deposit balances flat to maybe growing some. So we should expect that loan-to-deposit ratio to drift higher into the '80s. Does that seem reasonable?

Yes, I think low rates will likely help. As I mentioned, we can continue to support our growth internally through new deposit relationships and deposit growth. However, we will be cautious about pursuing higher-yield opportunities, so that may mean a slight upward drift for us. I believe that's a reasonable expectation.

It is.

Okay. Thanks very much, guys.

Thanks, Kevin.

Thanks, Kevin.

Thank you. Our next question comes from Graham Dick from Piper Sandler. Graham, your line is now open. Please go ahead.

Hey, good morning, guys.

Hey, Graham.

I just wanted to touch on something, I guess, a little bit further out into 2024. I know you said that you think operating revenue probably returns back to the $42 million number at some point, maybe mid-year. How are you guys thinking about the efficiency ratio at that point in time? Are there any targets you guys have in mind that you'd like to get under, or is it sort of still too far out to project, I guess?

Yes, Graham, it's not too far in the future. Reflecting on what we mentioned several quarters ago, we need to get back down to about 60%. Ideally, I would like to see it below 60%. Our aim is to reduce it into that lower 60 range, as we have done before, and we definitely have a plan to bring it back down to the lower 60s by the end of next year.

That's very helpful. I noticed that the yield on the other earning assets dropped by 75 basis points this quarter. I'm curious about what caused that decrease, if there are any one-time factors involved, and whether you anticipate it will increase again in the third quarter. I'm trying to understand how NIM has remained flat despite rising deposit costs, and I think this is a significant factor contributing to the decrease this quarter.

The decline in liquidity from lower earnings was one factor. We made an adjustment that reduced the yield for the second quarter, but we anticipate it will recover in the third quarter. This reclassification also contributed to some pressure on margins, though it wasn't significant. It involved a reclassification of $300,000. Moving forward, we expect to return to the yield rate we had in the first quarter.

Thank you, Ron, that was very helpful. I feel the need to ask about credit. It seems like everything remains strong in your markets, continuing to defy expectations. I’d like to hear your thoughts on how your clients perceive the economy now compared to our last discussion in the first quarter, as well as your outlook for credit based on the conversations you’re having with them and how that may impact the provision line moving forward.

Rhett, do you want to get and take that first?

Sure. Yes. I mean, as you can see, I mean, the metrics continue to hold extremely steady. And I think as Mill and Billy both mentioned, this meeting we have with clients, town halls we've done talking to our customer relationships. Obviously, none of them like the fact that most of their interest expense line items on our income statements are going up for their borrowings. But overall, they're still optimistic about the business activities of top-line revenues. They're being able to hold their margins to profitability. And so the feedback we're getting from them. Graham, this was good. I mean we're still very optimistic about being able to hold metrics where they are. Hopefully, interest rate increases will begin to taper all and we'll kind of hit that ceiling, so to speak. And then I think that will make borrowers feel a whole lot better as they forecasted in the next year.

Yes, as I mentioned, we've been closely monitoring what's happening in these markets. Overall, there isn't much negativity. While some businesses may face slight impacts for various reasons, we have confidence in our credit portfolio and our conservative underwriting practices. Even during the early calls as we navigated the pandemic, we weren't concerned about our clients. That's part of why we might accept a lower loan yield; we prioritize higher quality credit. Overall, we feel positive about the situation and believe it will maintain its strength.

And I think to expand a little bit on these town hall meetings, we are going to each of the markets. We are inviting 10 to 30 different businessmen and women in those communities, various industries, clients and non-clients and just really a town hall asking as many questions and getting their feedback and it is literally across the footprint, very positive about where the economy is today, their outlook over the next year, even if it slows down a little bit in the Southeast, it's still extremely busy. They are very optimistic as we are.

Okay. That’s helpful. I appreciate it guys. Thank you.

Thank you.

Thank you. Our next question comes from Feddie Strickland from Janney Montgomery Scott. Feddie, your line is now open. Please go ahead.

Hey, good morning.

Good morning, Feddie.

Good morning, Feddie.

I wanted to revisit the growth of the balance sheet. Thank you for your insights, Billy. Should we anticipate a decrease in earning asset growth specifically in the first quarter of 2024, considering the volume of maturing securities during that period?

I don't think so, Ron.

No. We didn't adjust our growth for that, because we're just converting it to cash or whatever we put it to.

I don't think we're planning to deleverage at this point. Instead, our forecast indicates we're focused on reallocating those investments into other earning assets. While we can explore other strategies, our main goal is to maintain our total earning asset level at or above its current position.

Understood. That's helpful. And then another clarifying piece. Ron, I think you talked about this a little bit earlier, too. But in your opening remarks, I think you said there was roughly an $8 million potential increase in interest income from the securities portfolio maturing being redeployed. What was the time horizon for that? Was that the next four quarters, or I didn't quite catch over what period that $8 million would come in?

The $8 million, again, back to that Slide 12, we will have that $8 million at today's rates are coming in at really the end of Q1, beginning of Q2. That's where our $250 million in treasuries will mature. And then actuality, over the next 12 months, we have about $300 million coming through with agencies and it’s a pay downs, but that big burst of principal will be Q1, Q2 time frame.

Feddie, I think Ron, I think we were just kind of looking at it hypothetically, if that was to reset today.

You got to reset today.

I think we were saying if that resets today, you're looking at an $8 million delta. So…

We might as well get.

Got it. And one last one for me. Along that same line of questioning. If we get two more rate hikes this year, then the Fed stops, given everything we talked about with the loan repricing and securities maturity schedule, could we see the margin come back up in 2024 over 3% if the Fed just holds rates flat?

Yes, we are anticipating that. We are currently modeling for it. We expect to receive the 25% probably around 125 in November. Additionally, we are projecting to surpass the 3% margin range in 2024.

All right. Thanks for the color. That's all I had.

Thanks, Feddie.

Thank you. Our last question today comes from Steve Moss from Raymond James. Steve, your line is now open. Please proceed with your question.

Good morning.

Good morning, Steve.

I wanted to follow up on the margin. With the expectation for 2024 being above 3%, are you considering the deposit beta reaching a cumulative total of 38% to 40%? I'm just curious about your thoughts on this.

At this point, that's our anticipation. We looked at it in Q4, but it will likely continue into Q1 of 2024 and then conclude. I think the beta will reach around 40%, which will bring us back to where we historically were. Our historical figures weren't that far off, so that's our current outlook.

Okay, that's helpful. I apologize for joining a bit late. Billy, you sounded optimistic about loan growth. You've experienced strong commercial and industrial growth for several quarters, including this quarter. As you look ahead, how much of the growth do you expect to come from commercial and industrial compared to commercial real estate?

Yeah. I’ll let Rhett add to that, Steve. I believe our pipelines are currently somewhat more focused on C&I.

Yeah, we’re definitely.

Can you give maybe a little color on kind of what you're seeing next couple of quarters?

We are observing a similar trend in our pipeline, with a noticeable emphasis on commercial and industrial. We expect to see increased success in new production in that area over the next few quarters.

Okay, great. I appreciate that. Lastly, you've been predominantly focused on organic growth, but you have made acquisitions before. I'm curious if there have been any recent discussions about mergers and acquisitions in the past month or two, especially with the market showing some stability, and what your thoughts are on that compared to organic expansion?

I'm happy to address that. We're pleased to see the deal finalized this morning, which was a positive development from the Atlantic Coast. This is a hopeful sign for the industry. Bill and I engage frequently and invest a lot of time in the markets, both upstream and downstream, building relationships. We believe that discussions are ongoing today, and the future outlook appears promising.

Yes, I believe valuation is a key factor for us. We have had significant success with mergers and acquisitions and would be eager to identify potential opportunities. While these may be limited, we are always open to exploring strategic options. If something suitable arises, we will consider it. I expect to see more announcements like the one from this morning, and we will remain vigilant to determine how we can engage in such opportunities.

All right. Great. Thank you very much. Nice quarter.

Thank you. Our last question today comes from Jordan Ghent from Stephens. Jordan, your line is now open. Please go ahead.

Good morning, everyone. Thank you for taking my question. I have a quick question regarding the loan yields. Back in April, you were anticipating loan yields to be around 560, but it seems they have decreased a bit for this quarter. Could you provide some insight into what occurred?

The loan yields have been gradually increasing each month and quarter. Last quarter, we experienced unusually high loan fees that did not carry over into this quarter. We mentioned ranges between $1 million to $1.4 million, along with other loan fees that we incurred. However, moving forward, we expect to build up our loan fees incrementally. I apologize for the confusion.

Perfect. That was my one question. Appreciate it.

Great. Thank you.

Thanks, Jordan.

Thank you. We have no further questions. So, I'll now hand back to Miller Welborn for any closing comments.

Thanks Ellen, and thanks again 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 you each have a great week. Thanks.

Bye.

That concludes today's conference call, everybody. Thank you all for joining. You may now disconnect your lines. Have a lovely rest of your day.