FB Financial - Q3 2023
October 17, 2023
Transcript
Operator (participant)
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 session is Travis Edmondson, Chief Banking Officer. Please note, FB Financial's earnings release, supplemental financial information and this morning's presentation are available on the investor relations page of the company's website at www.firstbankonline.com, and on the Securities and Exchange Commission's website at www.sec.gov. Today's call is being recorded and will be available for a replay on FB Financial's website approximately an hour after the conclusion of the call. 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 of 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 in 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 (President and CEO)
Well, 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 over-leveraging our deposit base.
If you use that metric to compare banks, you'll find that we have one of the lowest levels of leverage, often the lowest, on our deposit base among our peers. When 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 nonaccrual 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. CRE is 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 quarter, we executed on pieces of two broader initiatives to both increase revenue and reduce expenses. While actions were taken in the third quarter, the majority of the benefit will be felt in the fourth quarter and beyond. On the revenue side, as you see 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.
We'll let Michael discuss our, our strategy there in more detail, but we continue to look for ways to continue to enhance our profitability. The margin, net interest margin, has been difficult to forecast over the last several quarters, not only for ourselves, but for others, as well, based on the discussions we've had with our peers. The 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, 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-$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 (CFO)
Thank you, Chris, and good morning, everyone. It's a bit of a noisy quarter due to our securities trade and the charges related to our efficiency initiatives. So I'll take a minute to walk through this quarter's core earnings. We reported net interest income of $100.9 million. Reported non-interest income was $8 million. Adjusting for the $4.2 million loss on sale of securities and $115,000 gain on a sale of, uh, 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 pre-tax loss at the end of September. So given the timing, we did not see any real benefit to net interest income in the third quarter from that transaction. The trade should deliver approximately $4 million in additional net interest income annually. At this point, we're continually examining how we can increase our yield on our liquidity. We would be comfortable with another loss in the $10 million-$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 in fixed-rate loans, we have about $200 million maturing in the fourth quarter at a yield of about 6.7%, $300 million maturing in the first half of 2024 with a yield of 6.05%, and about $175 million maturing in the second half of 2024 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 continue to rise, but as Chris mentioned, we've seen that rate of increase moderate recently.
For the quarter, our cost of interest-bearing deposits increased by 27 basis points to 3.33%....For the months 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 onto the balance sheet at around 3.6%. As a reminder, we'll have public funds accounts beginning to build in the fourth quarter. We would expect $400 million-$500 million to come back onto 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 for the second quarter.
With all the moving pieces that I laid out above, we anticipate margin being in the 3.30-3.40 range for the next couple quarters. Moving to non-interest income. Non-mortgage non-interest income continues to perform in the $10-$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 than is typical of 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 7 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-$66 million range, and for 2024, we anticipate annual banking non-interest expenses of $255 million-$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-$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 to 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 a 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 to bank-level Tier 1 capital plus allowance has declined from 124% to 104%, and will continue to move lower and closer to our long-term operating target for that ratio of 85%-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. All right. Thanks, Michael, for that color. And to summarize, before going into questions, our balance sheet's situated in a position of strength. We're focused on improving profitability and returns. We're excited about the future, and from a financial perspective, we feel very prepared to execute on any opportunities that may come our way, so both, 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.
Operator (participant)
Thank you. We'll now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Steven Scouten from Piper Sandler. Please go ahead.
Stephen Scouten (Managing Director, Senior Research Analyst)
Hey, good morning, guys. Appreciate the time this morning. I wanted to get some more information on the security sale. I think last quarter you had said kind of bands you were looking at was 9-27 months on the earn back. It looks like this is a little higher than that. Kind of curious, a couple things: What sort of securities did you reinvest in at that 6.43 yield? And maybe what did you sell that kind of precipitated that longer earn back? Were these—you know, was it a longer duration portion of your securities book? That'd be helpful. Thanks.
Michael Mettee (CFO)
Yeah, Steven, good morning. Yeah, it was a little bit longer, so about a little over a 3-year earn back.
As we went through the process, we thought about, even if rates moved down, we had 300 basis points, these, these securities we sold, which are mostly mortgages and some CMOs, would be with us in any rate environment. So they, they'd have 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 agency, government agency stuff, FHLB-type paper, and so that, that's where the yield came from. Although, we are seeing kind of, current market securities all in that range, and so all well within, you know, our, our guidelines and, and duration, not any extra credit risk there.
Stephen Scouten (Managing Director, Senior Research Analyst)
Okay, that's helpful. And then maybe thinking about just that one C&I credit that you noted that kind of encapsulated a lot of the move in the credit metrics. Any additional information you can give us there, kind of what sector that is, and if there's any kind of lingering issues along those same lines in any other similar sectors?
Chris Holmes (President and CEO)
Sure, sure, Steven, it's Chris, good morning. 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, it, that was the one C&I credit.
It's 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're 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 (Managing Director, Senior Research Analyst)
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 two basis points of charge-off. So it feels like a lot—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 (CFO)
Yeah. Go ahead, Mike. Well, I think we're well positioned, Steven, and I think this, this range, it did move up, because of the, the credit we're talking about, individually evaluated loan. But I think you'll sort of stay in this range. We, we feel comfortable with, with where we are, and like I said, we haven't seen, deterioration in the portfolio. And so, so right now, that 150-155 range, where we've been is, is likely where we'll stay.
Chris Holmes (President and CEO)
Yeah, Steven, I would just add, and Michael and I both alluded to this in comments, both our, you know, 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.
Stephen Scouten (Managing Director, Senior Research Analyst)
Yeah, that's great. Perfect. All right, guys. Thanks a lot. I appreciate all the color.
Michael Mettee (CFO)
Thanks, Steven. We appreciate it.
Operator (participant)
The next question comes from Catherine Mealor from KBW. Please go ahead.
Catherine Mealor (Managing Director, Equity Research)
Thanks. Good morning, everyone.
Michael Mettee (CFO)
Morning, Catherine.
Chris Holmes (President and CEO)
Morning.
Catherine Mealor (Managing Director, Equity Research)
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, you know, how much you know, 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 (President and CEO)
Yeah, 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 over-leveraging our deposit base, and so that's a real governor for us. And so we have been conservative on that side. We still see opportunities, and we still see some growth. But remember, we're also taking balances down, particularly in our construction portfolio, and we're not growing our overall CRE portfolio. And so when you put those dynamics in there, it's gonna probably be muted for another quarter, maybe two. But we do expect some growth in 2024.
And so, again, that'll come on C&I, and we'll be in a little different position. Also, you know, 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 drawn-out recession. So Travis, do you have anything to add to that?
Travis Edmondson (Chief Banking Officer)
First off, good morning, Catherine. Nice to talk to you.
Catherine Mealor (Managing Director, Equity Research)
Good morning.
Travis Edmondson (Chief Banking Officer)
Nothing much, nothing much to add to that. I think you're spot on. We still have a lot of opportunities in our markets. We're in a lot of growth markets, Birmingham, Huntsville, Memphis, Knoxville, and the list goes on and on. It's more of a self-imposed governor at this point. And when we decide that the economy looks better for us, where we can see more clearly into the future, we will turn on some more growth initiatives internally.
Catherine Mealor (Managing Director, Equity Research)
Are you seeing opportunities on the C&I side? It seems like, you know, 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 (Chief Banking Officer)
Yeah, we're seeing a lot of opportunity. Of course, there's a lot of competition in that space today. A lot of other institutions are de-risking their balance sheets 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 (Managing Director, Equity Research)
Great. 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? You know, maybe where you're seeing 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 (CFO)
Yeah. Hey, Catherine, it's Michael. Good morning. The-
Catherine Mealor (Managing Director, Equity Research)
Good morning.
Michael Mettee (CFO)
I'll start, then Chris can jump in. You know, 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. Yeah, as those come back on, I mentioned 5% range, but those are mostly expected to be Fed funds minus a little bit. So highly competitive, expecting full market rates. They're large customers, commercial, corporate, are expecting 5%+ 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, pockets 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 have 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 (Chief Banking Officer)
Correct. Uh-
Catherine Mealor (Managing Director, Equity Research)
Great.
Travis Edmondson (Chief Banking Officer)
Just one quick thing to add. A lot of the people this time last year were chasing yield, where they could get a 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 (Managing Director, Equity Research)
That's great. All right-
Chris Holmes (President and CEO)
Yeah.
Catherine Mealor (Managing Director, Equity Research)
Thank you for all the coloring. Oh, go ahead. Go ahead, Chris.
Chris Holmes (President and CEO)
Yeah, I'm going to make one other. 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 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 in the third and fourth quarter.
And those tend to be when they come back in, they're 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 (Managing Director, Equity Research)
So it's really a function of your public funds that are driving the modest but more margin pressure in the back half of the year, more so than your retail and kind of core customer base. Would that be a fair comment?
Chris Holmes (President and CEO)
That's, that's right. Exactly.
Catherine Mealor (Managing Director, Equity Research)
Okay. Okay, great. All right. Very helpful. Thank you.
Operator (participant)
The next question comes from Brett Rabatin from Hovde Group. Please go ahead.
Brett Rabatin (Analyst)
Hey, guys. Good morning.
Travis Edmondson (Chief Banking Officer)
Morning, Brett.
Brett Rabatin (Analyst)
Wanted to start off, it's college football season, and I know you guys follow 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. Wanted to see what else you might be considering doing to get, "back in the playoffs in 2024," or if you feel like what you've done is kind of what you're able to do, and if maybe you end up in the playoffs in 2025 instead.
Chris Holmes (President and CEO)
Yeah. 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 here, around 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 our book value of the tangible book value of our stock is since we become a public company, we go back and we actually look further back than that, and we've always been a premier performer. That's one of our key foundational tenets here, is we're gonna be an elite performer.
We did over the last, I'll say, four quarters or so, four or five quarters, said, "Hey, there are some things that we need to do to make sure that we have the scalability of the company and the foundations of the company where they need to be." So we spent some money, which we knew would 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, your, metaphor there. It's, it's game on from our standpoint. You see, you saw improvement last quarter, that was, meaningful. You see improvement—some improvement this quarter that was meaningful. You see the steps that are already gonna improve next quarter in 2024. And so, we continue to generate leverage. When we talk about, strengthening our balance sheet, what we're doing is creating levers that we can pull as we go through 2024 to improve our profitability and make sure our returns are where we want them to be. You know, we're shareholders, and those returns are, are, they, they have... Our, our bar is higher than any of the investors out there. Our, our internal bar is higher than any of the investors.
And so, again, we appreciate the metaphor, and we are playoff caliber at this point and competing for the championship.
Brett Rabatin (Analyst)
That's good to hear. Sounds like you're expecting 2024 to be a lot improved, so that's good to hear. Wanted to ask back on credit, you know, you've got the slide in the deck about the office portfolio, but I'm actually curious. It's slightly smaller, but wanted to ask actually about hotels and just, you know, if we have any kind of consumer-driven weakness, you know, 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 (President and CEO)
Yeah. 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 are—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 we're pretty much restricted to really strong flags in nice and good—in good areas. We've got some suburban stuff.
We do have a little bit of central business district hotel stuff, but, and, Travis, I'm thinking, the ones I can think of, we've got a Hampton Inn in a central business district.
Travis Edmondson (Chief Banking Officer)
Correct.
Chris Holmes (President and CEO)
But it's that type of flag if we've got that, so.
Travis Edmondson (Chief Banking Officer)
Yeah. Morning-
Brett Rabatin (Analyst)
Okay.
Travis Edmondson (Chief Banking Officer)
Good morning, Brad, this is Travis. One other thing I would add is, it wasn't too long ago, it was the pandemic, where hotels were on everybody's mind. And we did a thorough analysis during that timeframe to make sure that our borrowers were able to withstand that pandemic. And what we found was, we have very strong borrowers in this asset class that did everything that they said they were gonna 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 2024, that that's something we need to definitely keep our eye on, but no alarms at this time.
Chris Holmes (President and CEO)
Yeah. And Michael just reminded me, we have done in the last, say, 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 through them. And so it's... Again, that's the only one we've done in the here very recently, so.
Brett Rabatin (Analyst)
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, if it makes sense strategically. And so I think everyone in the environment realizes that's kind of the, the, the tough thing, is the, the marks on the balance sheet. Can you guys talk about, or maybe, Chris, just how you think about, dilution to tangible book or, you know, what, what kind of parameters would be acceptable to you relative to an opportunity?
Chris Holmes (President and CEO)
Yeah, Brett, certainly there's a lot—you know, there, 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, you know, I think 2024 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, when we think about it, it's going to be strategic and usually those aren't going to be, you know, I'll call them tangible book value type deals because they're going to be valuable properties. So we've always thought about it as a three-year earn back is kind of 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, this is 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 draw the analogy of selling your house.
You know, 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, you know, 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, you know, in some cases, I suppose it could take us over that. It never has.
But we think about it quite strategically, and then our parameters is really, you know, we want—obviously, we want to see EPS accretion, and we want that to be, you know, 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, it 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.
One other point there that is what you're part of what you're alluding to is that 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, you know, the way that that comes back to you on your earnings in GAAP accounting, so.
Brett Rabatin (Analyst)
Okay. That's really helpful. Thanks for all the, thanks for all the comments.
Chris Holmes (President and CEO)
Sure.
Operator (participant)
The next question comes from Alex Lau, from J.P. Morgan. Please go ahead.
Alex Lau (Analyst)
Hi, good morning, everyone.
Chris Holmes (President and CEO)
Hey, Alex. Good morning.
Brett Rabatin (Analyst)
Good morning.
Alex Lau (Analyst)
What are the key areas of the bank where you're seeing the expense reductions coming from? Can you give some color as to how much of this retirement or cuts are coming from front office, back office? And also, what are the types of projects or investments that you're putting on the back burner for now? Thanks.
Michael Mettee (CFO)
Hey, Alex, Michael, good morning. Yeah, I mean, it's broad-based across the company, front and back offices. Early retirement was probably more management-driven activity. But again, it's front and back offices, some leadership type stuff and change. Yeah, positions, as you look across, obviously, we've had slower loan growth, so we've seen some reduction in relationship managers, but not very much. And some of that's just a product of the environment. You know, I've mentioned the branches. That's a piece of it. And then, you know, just some other back office stuff. But I think if you think about projects, yeah, Chris mentioned the investments we've made.
I mean, we're still positioning ourselves for becoming a larger, more scalable institution. So we've invested a lot in risk management, a lot 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 yeah, it's just making sure that we're well positioned for next year and the years after.
Chris Holmes (President and CEO)
Hey, Alex, if I could just add just a couple of comments. Some of the expense reduction comes from—remember this, so remember we, over you know, 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 haven't built up and tried to build a lot of anticipation around this because we've been very thoughtful about that now over a number of months, and it's something that comes...
And frankly, 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... We're looking around the table going, "We can't think of ones that we have," but we have made substantial investments, particularly in data, the data side of the business, and making sure that we have actionable data to manage the business.
I talked in my comments about, you know, 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've—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 two-plus years. Just third line defense investments have been substantial. As you know, as the company gets larger and as you plan to scale the company from here, those foundations are what we've spent. The other—one of the other ones, Michael, I'm not sure if you mentioned, was professional services.
You know, one of the big reductions is we've spent a lot in professional services. You can see that actually, again, if you look at that expense line or supplement, you'll see the decrease there. And that's- 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, 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 (Analyst)
Thanks so much for that color. 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 (CFO)
Yeah. It really, the parameters haven't changed that much. You know, you wanna—we wanna be around a couple years. We did kinda 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 if as we look forward, you know, it's gonna be in that couple year range on earn back. We sold, it's kind of probably mid-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, you know, in mid-September, and we paused that last couple of weeks.
Now, subsequently, you know, the 10-year comes back down, you know, 25-30 basis points. So we're comfortable in this range, but it's about finding, you know, the right investments. You know, our portfolio has gotten smaller. It's about 10.8% of total assets. You know, that's fine. It depends on what other options are. And so, we're not growing the book to 20%, you know, we're not shrinking to 5%, and it'll stay in this range.
Alex Lau (Analyst)
Thank you. And then just to follow up on the public funds. If you look at last year's fourth quarter, that grew in the $400 million range. Is that a fair amount to assume for this year, or is there something different going on in the fourth quarter?
Michael Mettee (CFO)
Yeah, that's fair. We expect $400 million-$500 million or so. And yeah, we're managing that with profitability and liquidity and, you know, competitive environment. So, it's, it's a daily grind, I'll say. But, but yeah, that's... Yeah, as we kind of forecast out, that's what we'd expect, and we're kind of managing through, all, all the moving pieces there.
Chris Holmes (President and CEO)
Yeah, I'd just say, yeah, I'd say you're right on our assumption. Yeah, Alex, I mean, it's gonna be right in that range. Well, that's what we anticipate it will be.
Alex Lau (Analyst)
Great. Thank you for taking my questions.
Chris Holmes (President and CEO)
All right.
Michael Mettee (CFO)
Sure.
Chris Holmes (President and CEO)
Good to talk to you, Alex.
Operator (participant)
The next question comes from Kevin Fitzsimmons, from D.A. Davidson. Please go ahead.
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
Hey, guys. Good morning.
Michael Mettee (CFO)
Good morning.
Chris Holmes (President and CEO)
Good morning, Kevin.
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
Just want to. So, I know we've had a few questions on this, but I just want to make sure I'm thinking about this correctly. So we're gonna have, you know, a positive tailwind for the margin from the securities transaction, but this is being outweighed in fourth quarter by the public funds, right? Being a drag in terms of being higher cost and coming in. And we still continue to see a deposit mix shift, right? But however, you know, the velocity or the pace of deposit rate increases is abating, it seems like you're saying.
So if we look, you know, you—I appreciate that margin range, but apart from the effect of the public funds, are we at a point where, you know, where, where, where margin is going to trough here in the next quarter or two, and then position maybe in the first half of 2024 to start expanding? I know, I know that's a big preamble. I'm just trying to make sure I'm catching all the variables. Thanks.
Michael Mettee (CFO)
I appreciate the preamble. Because those are all the things we talk about.
Chris Holmes (President and CEO)
Yeah. 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-
Michael Mettee (CFO)
Security trade.
Chris Holmes (President and CEO)
securities trade, and it will certainly, those two will work against each other. Michael, will it totally outweigh it? You know-
Michael Mettee (CFO)
Yeah, because it's a kind of a rate volume-
Chris Holmes (President and CEO)
Yeah
Michael Mettee (CFO)
challenge, right? As you—the volume of the public funds, we expect to come on 4 or 5x the securities trade.
Chris Holmes (President and CEO)
Yeah. Yeah, that's true.
Michael Mettee (CFO)
So.
Chris Holmes (President and CEO)
And so, but the rest of that, Kevin, is what's going on, and you called it a preamble, but, you know, it's those and other factors which are all filtered into the model to help us, you know, forecast where it's headed. And that's why we use a range, and then 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 at getting into 2024.
Michael Mettee (CFO)
I will say the mix shift, yeah, if you think about it from non-interest bearing to interest bearing, has moderated as well. And we've been in this 22% range for a couple quarters now. So the velocity of deposit or the velocity of rate increases has slowed. We've seen that moderate as well. Yeah, I always point back to kind of pre-pandemic, you know, as we talked about the combination with Franklin, we expected that number to be around 20%. So I would say this range feels about right for migration from NIB to interest bearing. We do see some move between products, you know, interest checking to money market, more so. A little bit in CDs, but we're trying to keep those fairly short.
Yeah, but competition there is, as I mentioned earlier, some community banks, and then, yeah, treasuries, but not, not seeing as much outflow anymore to treasuries.
Kevin Fitzsimmons (Managing Director and Senior Research Analyst)
Got it. Got it. Thanks. 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 starting to have conversations, or that just given the environment and the position you're in, you're kind of expanding that spectrum of potential opportunities?
Chris Holmes (President and CEO)
You know, so 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 what—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 when we look out into 2024 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 a, 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 (Managing Director and Senior Research Analyst)
Yeah, okay. Got it. Thank you. And one last thing. You mentioned a couple 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, it's, we're glad we prepared, but it's probably not going to be as bad as what we might have thought a couple quarters ago?
Chris Holmes (President and CEO)
... Yeah, and I'm going to alter that just a little bit to say, you know, 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, you know, if we find ourselves stuck back in 2008 and 2009, that kind of environment, we think we're, knock on wood, we think we'd be prepared for that at this point. You know, going back to what happened in March of this year, you know, 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 will get slower from here, okay?
So we do think that things will get slower. We just don't think we're saying if it gets really slow and really difficult, we're prepared for that, okay? But we don't really anticipate it getting as bad as we're prepared for. So that doesn't mean-
Michael Mettee (CFO)
Got it.
Chris Holmes (President and CEO)
We don't think it's going to get slower. Okay?
Michael Mettee (CFO)
Got it. Got it. Understood. Okay, thanks for that clarification. Thank you, guys.
Chris Holmes (President and CEO)
Thanks, Kevin.
Operator (participant)
The next question comes from Matt Olney from Stephens. Please go ahead.
Matt Olney (Analyst)
Hey, great. Thanks. Good morning, guys. 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 (President and CEO)
I'd say less likely. But that-- and that's really related, again, to just not being able to predict the future. And we don't want to... You know, I think if somebody goes out, if anybody-- if we went out and did a lot-- 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 feel brighter from a credit perspective. And again, interest rates, we feel like interest rates are have hit their peak.
Matt Olney (Analyst)
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, and then what are the current rates that you're seeing for, for your customers?
Michael Mettee (CFO)
Yeah. Matt, good morning, this is Michael. We—if you remember, we did a fairly decent-sized deposit campaign last year, and we had some CDs, some CD specials that it was September, October last year. It was kind of 13, 18-month, 24-month papers. So the weighted average term on that was about 18 months. And, yeah, the cost was, at the time, market. We haven't moved off those rates a whole lot, and we're still seeing renewals in historic kind of renewal rates. And so I kind of mentioned this earlier, we've certainly raised some CD rates, but it's just been shorter in terms. So we, you know, if customers come in and want a shorter-term CD at slightly higher rate, you actually see it looks like the yield curve. It's a little bit inverted.
And so if you stay in those terms that you were in last year, you're getting a very similar rate. And of course, our model is customer-focused and so the field can take care of customers as they need to in competitive situations, and we stick by that, so that we're doing right by the customer, right by the company, and so there's some flexibility there.
Matt Olney (Analyst)
And then, Michael, just to follow up on that, as you look at some of the renewal timelines, is it spread evenly the next few quarters, or is there any quarter or two where you see more volumes set to reprice?
Michael Mettee (CFO)
It's spread pretty evenly, fourth and first. There's, you know, a little bit of a lump in the second quarter of next year. Yeah, and so it's, but it's already higher priced stuff than what's renewing in the fourth and first quarter.
Matt Olney (Analyst)
Okay. That's helpful. And then I guess sticking on the deposit pricing pressure theme, your footprint's 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 and 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 (Chief Banking Officer)
Hey, Matt, good morning. This is Travis. It's really interesting. Initially, we saw the most pressure from the smaller communities, the kind of 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%-5.75% range on the specials.
Stephen Scouten (Managing Director, Senior Research Analyst)
Okay, that's helpful. That's it for me. Thanks, guys.
Feddie Strickland (VP, Equity Research)
Thanks, Matt.
Chris Holmes (President and CEO)
Thanks, Matt.
Operator (participant)
The next question comes from Steve Moss from Raymond James. Please go ahead.
Stephen Moss (Managing Director, Equity Research)
Good morning.
Chris Holmes (President and CEO)
Morning.
Feddie Strickland (VP, Equity Research)
Hey.
Stephen Moss (Managing Director, Equity Research)
So, most of my questions have been asked and answered here. Just do want to just one thing on office here. Just curious if you could give any color as to, you know, when the rents in that portfolio start to come up for renewal, and any color around that dynamic there?
Chris Holmes (President and CEO)
and Steve, I'm 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. Not, it's not office specific. and so—and when we did look at office, you know, I'm not 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 (Chief Banking Officer)
That's fair.
Chris Holmes (President and CEO)
Okay, great.
Stephen Moss (Managing Director, Equity Research)
Okay. No, that's pretty much my last question, so appreciate all the color here today.
Chris Holmes (President and CEO)
All right. All right, Steve, thanks for being with us.
Operator (participant)
The next question comes from Feddie Strickland from Janney Montgomery Scott. Please go ahead.
Feddie Strickland (VP, Equity Research)
Hey, good morning, gentlemen.
Chris Holmes (President and CEO)
Morning, Feddie.
Feddie Strickland (VP, Equity Research)
How are you? I'm good, I'm good. 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 at around 87%?
Chris Holmes (President and CEO)
Yeah, that's right, Feddie. Some of them rolled off, and we have some more or coming due in November. If you remember last quarter, we increased some of that just because it was cheaper than retail deposits, quite frankly. So Chris mentioned this, and it is that we keep our powder dry on, you know, sources of liquidity, so that we can, you know, leverage it when we want to, need to. And so sometimes when we see brokered market is cheaper or FHLB funding is cheaper, we'll do that. And so that lever's out there. But we do have, I believe, it's $100 million rolling off in November. Whether we renew it or not, it's TBD. Certainly don't need it.
To your point, we've 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 (VP, Equity Research)
Understood. That's helpful. And switching gears a little bit here, you know, as we look at these expense reductions coupled with some of the securities portfolio restructuring and some of the other trends we talked about on the margin, everything else going on, do you think efficiency at the core bank X mortgage can get into the mid-fifties range by the end of 2024 from the, I think, I peg it around 60% today?
Chris Holmes (President and CEO)
Yep. Yes is the answer. We do. We think on the core, just core bank, yes, we think we can get below the mid-fifties even.
Feddie Strickland (VP, Equity Research)
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 (President and CEO)
Yeah, that's right. If you look at the ACL side, you'll see we actually increased our reserve on the construction bucket, but we released from the unfunded strictly due to volume. And so you'll see that continue to decrease, and then we'll, you know, we'll probably land in that, you know, 80-85% range, Tier 1 + ACL, so... And it would normalize from there.
Feddie Strickland (VP, Equity Research)
Understood. That's helpful. Thanks for taking my questions, guys.
Chris Holmes (President and CEO)
Thanks, Fetty.
Operator (participant)
The next question is a follow-up from Stephen Scouten from Piper Sandler. Please go ahead.
Stephen Scouten (Managing Director, Senior Research Analyst)
Hey, guys. Thanks for letting me hop back in. I'm not sure if you have this number, but I just wanted to follow up. As you referenced, that 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 (Chief Banking Officer)
Yes, good morning again, Steven. It's Travis. We have roughly $175 million in SNCs. We lead approximately $80 million of that, is for round numbers.
Chris Holmes (President and CEO)
And so, 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 client that or some relationship that gets us into the SNC. And so, I'll give you, I'll give you a couple of examples, two specific examples without using names. One, significant client here in our footprint, 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'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 startup 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 participate, you know, we have part of the SNC. Those would be two examples. And so, it's only those kinds of that we get into. We don't, again, 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.
Stephen Scouten (Managing Director, Senior Research Analyst)
Yeah. Well, I think that's the right mindset. Thanks for the color there. That's, that's helpful to know kind of the logic behind it, so appreciate that.
Chris Holmes (President and CEO)
All right. Very good. Thanks, Stephen.
Operator (participant)
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 (President and CEO)
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. All right, everybody, have a great rest of your day, and you analysts have a great rest of your earnings season.
Operator (participant)
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.