SmartFinancial - Q2 2023
July 25, 2023
Transcript
Operator (participant)
Hello, everybody, and welcome to today's conference call titled: SmartFinancial Q2 2023 Earnings Release and Conference Call. My name is Ellen and I'll be coordinating the call for today. During the presentation, if you would like to ask a question, please press star followed by one on your telephone keypad to join the question queue. I'll now hand over to our host, Nate Strall, Director of Corporate Strategy, to begin. Nate, please proceed whenever you're ready.
Nate Strall (Director of Strategy and Corporate Development)
Thanks, Ellen. Good morning, everyone, and thank you for joining us for SmartFinancial's Q2 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 look to 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. Now I'll turn it over to Chairman Miller Welborn to open our call.
Miller Welborn (Chairman)
Thanks, Nate, and good morning, everyone, and thanks for joining us today. The Q2 of this year was a challenging quarter for the entire banking industry. There's been a tremendous amount of turmoil and quite frankly, a ton of bad press about the stability of our banking industry. 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 had 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.
Billy Carroll (President and CEO)
Thanks, Miller. Good morning, everyone. Our Q2 was a good one for the company. Like many others, we had to battle a few headwinds. I think our industry is seeing some stabilization as 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, SNBK 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, held our double-digit return on tangible common equity, coming in at 10.6%. We also continued 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, 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've kept the deposits we wanted and have not been out trying to aggressively gather funds while the market seems a bit unreasonable. That said, we held balances with only a slight contraction for the quarter, and most importantly, maintained our mix, including 24% in non-interest-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 had anticipated, coming in at 7% annualized for the quarter. Yields on new production are continuing to move up. With that and our loan pricing on maturities, we do feel the margin should be bottomed 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. I also felt extremely good about finishing the quarter with no borrowings or hardly any brokered funding. Prudent 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 remains 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 deep dive into this in just a minute. 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. 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?
Rhett Jordan (Executive VP and Chief Credit Officer)
Thank you, Billy. As Billy mentioned, the bank's loan portfolio continues to grow at a moderate pace while maintaining very solid credit performance metrics. In the Q2, we saw the loan portfolio grow to $3.3 billion, measuring a 7% quarter-over-quarter annualized organic loan growth spread across the bank's geographies and across different segments of the portfolio, led by commercial and industrial lending. The loan portfolio also saw a 19 basis point increase in the average portfolio yield, moving that metric up to 5.39% for the period. The portfolio composition maintained what has been a very stable mix for the last several quarters. Our construction portfolio saw a slight increase in outstanding balances, being up approximately $8 million, but holding steady at 12% of total loans and 89% of total capital.
The majority of this funding was existing construction projects continuing to move toward completion, as our percent dispersed in the segment moved up from 60% to just under 65% quarter-over-quarter. Our total CRE portfolio held steady at $883 million outstanding, resulting in the portfolio moving down from 27% to 26% of total loans, and from 288% to 286% of total capital, period-over-period. If the owner-occupied construction financing is removed from those results, our non-owner occupied construction portfolio moves down to approximately 66% of total capital, and total non-owner occupied CRE down to approximately 263% of capital.
Office exposure is minimal for our bank at 14% of our total non-owner occupied CRE portfolio, with average LTV of 56% and 1.75 times average debt coverage ratio in the segment. Our office portfolio is predominantly made up of smaller project office buildings with an average loan size of $1.3 million, and about 35% of that being medical office space and purpose. Overall, our CRE ratios have continued to gradually trend down since year-end 2022. Overall, our credit performance metrics held steady, with NPAs, delinquency, and classified asset ratios being relatively unchanged period to period, while the bank recorded a slight recovery in the portfolio loss ratio for the quarter. Our client base has been reporting stable trends and an optimistic outlook for their operations, despite historical interest rate increases, increased hurdles in their capital costs.
Our markets continue to report strong housing activity, with supply and demand maintaining a sound balance, evidenced by continued strong average home prices, as well as strong market absorption times. While some market trends may be down slightly when directly compared to certain key statistics this time last year, even a slightly down metric today still reflects extremely good outcomes compared to historical averages for the period. This is causing existing home availability shortages to be intensified across our geography, as the inflow of new residents battles against the lack of existing home listings, as current homeowners are reluctant to lose their existing mortgage rate when looking at the cost of financing a new home purchase.
That dynamic, coupled with a continued outlook for lot shortages across many of our key MSAs over the next couple of years, leads us to feel we will see continually healthy price performance and solid demand levels in our housing segment for the next quarter. The balance of previously mentioned steady loan growth being offset by continued strong credit quality performance and a quarter-over-quarter reduction in unfunded commitments within the loan portfolio, held our allowance steady at 0.98% of total loans and leases in the Q2. Overall, loan demand continues to hold its course as forecasted, while the loan portfolio continues to maintain strong, top-of-class credit metrics and performance with a positive outlook. Now I'll turn the call over to Ron to talk about deposit composition, liquidity, and other key financial measures.
Ron Gorczynski (Executive VP and CFO)
Thanks, Rhett, and good morning, everyone. Let's start on slide 9. 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 increase 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. 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, remains 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 interest income when redeployed at today's rates. 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 base yield was 5.43%.
Yields on new commercial loan originations are currently in the about 7.5%-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 a third quarter cumulative beta of 36% and a year-end cumulative beta of 38%-40%. While margin 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.
We are modeling third quarter net interest margin in the range of 2.9%-2.95%. 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+ run rate by midyear 2024. We have details of our non-interest income and expense on slides 15 and 16. Operating non-interest 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 non-interest income in the low to mid $7 million range for the next several quarters.
On the expense side, we did a great job managing 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 non-interest expenses in the $27.5 million range and salary benefit expenses of $16.29 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%, 12% threshold 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.
Billy Carroll (President and CEO)
Thanks, Ron. As you can see with our trends, we're positioned well and still playing offense. Our legacy markets provide a great foundation. As we gain more clarity on rates and the economy, our expansion markets are poised to provide even greater growth and new client relationships. Revenue growth is a key focus. I remain confident in our ability to execute on that front. As Ron mentioned, we're continuing our control and internal focus on efficiency and expenses. Outside of a little occupancy expense with facilities in our lift-out markets, expense growth should be fairly well contained. We're planning very limited hiring unless there's a good revenue growth opportunity associated with it. My outlook on loans is still fairly bullish. We are lending. We feel we can continue the same mid-single digit pace, maybe better.
With that, deposits need to be growing at the same pace, and we feel like we can grow internally there. As Noah mentioned, we've spent several days on the road over the last few months doing market roundtables and meeting with clients and prospects throughout our entire footprint. The momentum in our markets is outstanding and continues to gain steam. As these rates settle, our loan balances grow and reprice, plus our ability to utilize the outsized investment cash flows coming early next year, our company is very well positioned. I'll close with a shout-out to our 600+ outstanding associates we have in this company. These team members recently received their 6th consecutive Regional Top Workplace award, and we continue to build phenomenal culture here at SmartFinancial and SmartBank. I'll stop there and open it up for questions.
Operator (participant)
Thank you. We'll now enter our Q&A session. If you'd like to ask a question, please press star followed by one on your telephone keypad. When preparing to ask your question, please ensure that your device is on muted locally. We'll take our first question from Brett Rabatin from Hovde Group. Brett, your line is now open. Please go ahead.
Brett Rabatin (Managing Director, Head of Research)
Hey, guys, good morning.
Billy Carroll (President and CEO)
Hey, Brett.
Brett Rabatin (Managing Director, Head of Research)
Thanks for the thanks for the questions. Wanted to first ask, you know, It's good to hear that you think the margin is basically going to stabilize from here. Can you talk maybe about how much of a loan portfolio reprices in three and four Q? Was just curious to hear if you think the competitive landscape has ebbed a bit with one regional competitor having completed their campaign.
Billy Carroll (President and CEO)
Ron, do you have the information on the repricing?
Ron Gorczynski (Executive VP and CFO)
Yeah, well, what we think on Q3, we're probably looking around at this point, about $30 million and then $50 million for Q4, 2023. As we go into 2024, we have $180 million that will reprice pretty much ratably throughout next year. That includes both variable and fixed rate loans, and these variable rate loans are the ones that have a little bit longer than 3 months maturities on them, or reset marks.
Billy Carroll (President and CEO)
Brett, I'll take the other question related to market pricing. Yeah, I think it is. You know, I think we're all a little, as I've commented, I think we were all a little surprised with the aggressiveness of some pricing that we saw in the market. You know, again, I go back, a lot of this is temporary, you know, and so, you know, you just kind of battle through it. It seems to have settled maybe a little bit throughout really all of our markets. There, you know, obviously there's still folks out there, they're pricing up, so we're still having to battle a little bit from that standpoint, but I do think it has, I would say, settled.
Brett Rabatin (Managing Director, Head of Research)
Right
Billy Carroll (President and CEO)
to our regional presidents, too, and our footprint.
Brett Rabatin (Managing Director, Head of Research)
Okay. Then just thinking about, you know, 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. You talked about, you know, kind of mid-single digit growth, maybe better. Does the balance sheet itself, you know, 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?
Billy Carroll (President and CEO)
you know, we, I would say we're gonna look to grow it. you know, we've just kind of taken the last few months trying to watch the markets, stay flat, see what's kind of, you know, just kind of gauge what's going on in the economy. I, you know, I'm feeling, you know, I think most of our markets have really stayed bullish. I've continued to feel very bullish. you know, as Rhett and I, and Greg and I talk about, you know, where we want to take the company from a growth standpoint, the opportunities are there. you know, we just want to make sure that we're doing the right thing from a rate standpoint, from a, you know, from a structure standpoint. I think we can grow it.
We'll probably stay relatively flat. I would imagine, just kind of looking at next quarter, probably flat, ish again, maybe with some growth. I think we get the growth on the loan side and just kind of hold deposits steady. I do think you'll see I think we get the balance sheet growth ticking back up as we look ahead, you know, a few quarters out.
Brett Rabatin (Managing Director, Head of Research)
Okay. great. Maybe just one last quick one. You've got that nice 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?
Billy Carroll (President and CEO)
Yeah, a little of both. I think the expansion markets, the lift-out markets, that we've added over the course of the last 1.5 years, 2 years, are really showing some nice growth. I mean, those folks have got great opportunities to pull relationships. We're pulling them in our legacy markets, too. The pace in our lift-out markets is greater. I think we're adding more net new in those markets, and those folks are continuing to execute extremely well. I couldn't be more pleased with what we're seeing in those zones.
As Miller alluded to in his opening comments, we've been out a lot over the course of the last a couple of months and really getting into our markets, doing a lot of roundtables, meeting clients, prospects, and Miller really is. We've got such a phenomenal energy right now in our company. I think that what we're doing, a couple of temporary headwinds, and as Ron alluded to, we think that's, you know, we think that this number grows from here, the revenue numbers and back to our revenue run rates where we want them to be here real soon. It's just, our momentum's great. We got a lot of really positive things going on in all the markets.
Ron Gorczynski (Executive VP and CFO)
That's the clients as well as the bankers.
Billy Carroll (President and CEO)
Oh, absolutely.
Ron Gorczynski (Executive VP and CFO)
They're really positive from the industry side.
Brett Rabatin (Managing Director, Head of Research)
Okay, that's great. Appreciate all the color.
Billy Carroll (President and CEO)
Yep. Thanks, Brett.
Operator (participant)
Thank you. Our next question comes from Catherine Mealor from KBW. Catherine, your line is now open. Please go ahead.
Catherine Mealor (Managing Director of Equity Research)
Thanks. Good morning.
Billy Carroll (President and CEO)
Good morning, Catherine.
Ron Gorczynski (Executive VP and CFO)
Good morning.
Catherine Mealor (Managing Director of Equity Research)
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 on today relative to where your portfolio yield is?
Billy Carroll (President and CEO)
Yeah, we're seeing that kind of, and I think Ron said it, kind of mid 7s, 8 range. If you've got something that might have a little bit tighter spread on a float, might be a little lower than that 7.5. I think we're in a pretty good spot. Call it mid 7s with new productions.
Catherine Mealor (Managing Director of Equity Research)
Okay. All right, great. As you think about the margin guidance that you gave, you know, around 2.90% for next quarter, and then you stabilize there for the back half of the year, how are you thinking about where loan yields end up within that guidance? Do you get above 6%, kind of as you exit 2023?
Billy Carroll (President and CEO)
I'm looking at Ron, Catherine.
Ron Gorczynski (Executive VP and CFO)
Yeah, I'm looking at him.
Billy Carroll (President and CEO)
He's right there up in the bottom.
Ron Gorczynski (Executive VP and CFO)
We get up above 6, but let me. I think we get closer to the 575, 580. We'll have incremental growth month-over-month, but we probably won't hit that 6 amount at this point in time.
Catherine Mealor (Managing Director of Equity Research)
Okay. Okay.
Ron Gorczynski (Executive VP and CFO)
By year-end, yes. Sorry.
Catherine Mealor (Managing Director of Equity Research)
Okay, got it. 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. 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?
Billy Carroll (President and CEO)
We are. It has, as I'm speaking with the previous caller. Yeah, it really has settled some. I mean, obviously rates are higher. We're still having a lot of those same conversations, but I don't think we're getting, I call it the external pressures, as much with, you know, promotional banners hanging out in front of buildings or direct mail cards in everyone's mailbox. That... I think that has at least settled it a little bit. Yeah, I think the last few weeks, we've seen that abate some.
Ron Gorczynski (Executive VP and CFO)
And FHN, I mean, I think, you know, 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.
Catherine Mealor (Managing Director of Equity Research)
Okay, great. I think 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 % of deposits? Is there just an inherent kind of bottom as you think about maybe transaction accounts or, you know, just kind of core customers that are less likely to kind of move their deposits into an interest-bearing account to where that stabilizes?
Billy Carroll (President and CEO)
Yeah, it is. It's a tough call. Yeah, we think we can hold in this range. I think, you know, we've talked about could it drift into the low 20s, possibly. You know, we just don't see it going much lower than the, that low 20s. Could it tick down a couple of basis points from here? Sure. I still think we're in a spot where, you know, our sales focus is on these operating accounts. A lot of these expansion markets that we have, we're having a lot of success bringing in these net new full relationship clients. Yeah, I'm pretty optimistic that we can hold kind of in this range. It could edge down a little bit, possibly, maybe a couple of basis points, maybe a 22%.
Ron, if you're asking for a number, that's probably a fair number, wouldn't it be, Ron?
Miller Welborn (Chairman)
It's certainly a bank-wide focus.
Billy Carroll (President and CEO)
Absolutely.
Miller Welborn (Chairman)
Billy is on top of that, and so are our markets.
Ron Gorczynski (Executive VP and CFO)
We're really modeling, you know, we kind of changed our outlook. We're probably modeling 23% for the most part, so not much different than where we're at today. I know we're a little tick higher, but trying to stable going forward.
Billy Carroll (President and CEO)
I'll tell you, Catherine, you know, one of the things that I've really, you know, I've enjoyed watching. You know, you've seen the transformation in our company over the course of the last couple of years. A lot of these expansion markets, the, just kind of the way we are selling as a company now, I think, you know. You know, a few years ago, a little more of a lending focused efforts. Now you're just seeing that full relationship effort that is kind of permeating through all of our markets. Just, it's really I'm very excited about the way we're selling now in this company and the way that we're moving forward.
Like I said, I think we got a little bit of a temporary squeeze, with just kind of some of the funding and as Ron said, a little bit of the, just some seasonality this quarter, but really feel good about us being able to maintain those, you know, those core relationship balances moving forward.
Catherine Mealor (Managing Director of Equity Research)
Great. Thank you for the commentary.
Miller Welborn (Chairman)
Thanks, Catherine.
Billy Carroll (President and CEO)
Thanks, Catherine.
Operator (participant)
Thank you. Our next question comes from Kevin Fitzsimmons, from D.A. Davidson. Kevin, your line is now open. Please proceed with your question.
Kevin Fitzsimmons (Senior Research Analyst)
Hey, good morning, everyone.
Miller Welborn (Chairman)
Hello, Kevin.
Billy Carroll (President and CEO)
Kevin.
Kevin Fitzsimmons (Senior Research Analyst)
Just following up on Catherine's question there. I mean, you know, non-interest bearing, you know, you're talking about maintaining it. You guys actually grew it this quarter, which I don't think I've seen yet this earnings season. Was there anything unusual, or, you know, in terms of, you know, like, there's I would assume on the one hand, there's a steady remix going on in terms of non-interest bearing flowing out and going into interest bearing? Was there any, like, big relationship win or unusual item that might have drove that increase in non-interest bearing? Thanks.
Billy Carroll (President and CEO)
I mean, Ron, nothing is jumping as far as a relationship.
Ron Gorczynski (Executive VP and CFO)
One time.
Billy Carroll (President and CEO)
One time. Yeah, I think it's pretty granular, Kevin. It goes back to my comments. I mean, the focus shift that we've had in this company over the last, you know, year to two years has really been. I think we're seeing it. You know, we're turning into a pretty good deposit sales company. I think that's one of the things. I think it's one of the reasons you hear kind of the optimism in our commentary today. There's some great stuff going on, and we feel like we can continue to grow that.
Like I said, if we can hold the mix, grow the mix, you know, I, you know, I've always tried to be a little more conservative on the outlook, but I do think we've got a minimum there.
Miller Welborn (Chairman)
Yeah, I think it's three words: focus, effort, [equity].
Kevin Fitzsimmons (Senior Research Analyst)
Got it. Great. Thank you. On the bond portfolio, 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. Is that a good assumption or not?
Ron Gorczynski (Executive VP and CFO)
Yeah, we're always contemplating looking at different strategies. You know, Kevin, on our page 12 of the slide deck, we kind of have it spelled out quarter to quarter on what our returning principle is. What I said was on, you know, specifically for our treasuries, we're looking to get, you know, $250 million in over the next two, you know, Q1 and Q2 of 2024. Deployment of those, we're still, you know, kind of strategizing. It all depends on where we're at on our liquidity side at that point in time. We do have a lot of options to us, and, you know, it will give us a nice income pop once we execute those options.
We are strategizing now on what is the best way to handle it, either today or wait for the maturities to occur.
Kevin Fitzsimmons (Senior Research Analyst)
Okay, great. 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, still in a nice liquid position. It sounds like, you know, Billy, if I heard you right, it sounds like mid-single-digit loan growth and maybe even a little higher, holding deposit balances flat to maybe growing some. We should expect that loan-to-deposit ratio to drift higher, into the 80s. Does that seem reasonable?
Billy Carroll (President and CEO)
Yeah. That, I think that's probably lower 80s. You know, we, like I said, I think we think we can continue to fund the growth internally, just with new deposit relationships and deposit growth. But again, we're gonna be prudent on chasing the higher yield stuff. You know, for us, that might mean we drift up a little bit. I think that's a fairly safe assumption it is.
Kevin Fitzsimmons (Senior Research Analyst)
Okay. Thanks very much, guys.
Ron Gorczynski (Executive VP and CFO)
Thanks, Kevin.
Billy Carroll (President and CEO)
Thanks, Kevin.
Operator (participant)
Thank you. Our next question comes from Graham Dick from Piper Sandler. Graham, your line is now open. Please go ahead.
Graham Dick (VP)
Hey, good morning, guys.
Ron Gorczynski (Executive VP and CFO)
Good morning, Graham.
Billy Carroll (President and CEO)
Graham.
Graham Dick (VP)
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. Ho w, 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? Is it sort of still too far out to project, I guess?
Billy Carroll (President and CEO)
Yeah, it's probably not too far out, Graham. I think, you know, I go back to what we said several quarters ago. You know, you kind of rewind. I mean, we need to be down there, we need to be back down there in the, around 60. You know, I'd love to, I'd love to be sub 60. I think our goal is, you know, we had gotten it down into that, kind of, that lower 60 range, before we, before we had a little bit of this rate bump. We definitely have a path to get it back down into the lower 60s by the end of next year.
Graham Dick (VP)
All right. That's very helpful. I guess just one quick thing on the NIM. I noticed that the other earning assets line, the yield dropped by 75 basis points this quarter. I'm just wondering what drove that. If there's anything like one time in there, and if you expect it to snap higher again in 3Q, just as we try and reconcile, you know, NIM staying flat essentially with, you know, higher deposit costs at the same time. I think I feel like this is a bigger piece of what drove the downside this quarter.
Ron Gorczynski (Executive VP and CFO)
You know, well, one, the downside on the, you know, lower earning liquidity was one of them. We did have a rice, we did have an adjustment through there that dropped the yield for Q2, but we do expect it to bounce back into Q3. Again, that's part of our, that reclass additionally also drove some of the margin pressure downward. Not much, but some. It was a $300,000 reclass that we did. We'll pick it back up to probably Q1's rate as we go forward.
Graham Dick (VP)
Okay. That's really helpful, Ron. Thank you. I guess the last thing from me just be on credit. I feel like I got to ask about it, but it sounds like everything is, I mean, just as good as it's ever been in y'all's markets, and it continues to buck the trend, that people expect to occur. I just wanted to hear a little bit from you guys on your clients and how they feel about the economy now versus, I guess, the last time we talked at one Q. Your outlook for credit and as a result of the conversations you guys are having with them, and what that might mean for the provision line going forward.
Billy Carroll (President and CEO)
Rhett, do you want to jump in and take that first?
Rhett Jordan (Executive VP and Chief Credit Officer)
Sure, yeah. You know, as you can see, I mean, the metrics continue to hold extremely steady. I think as Bill and Billy both mentioned, just the meetings we've had with clients, town halls we've done talking to our customer relationships. You know, obviously, none of them like the fact that most of their interest expense line items on their income statement are going up for their borrowings. Overall, they are, they're still optimistic about the business activity.
margins, being able to hold the margins, up to profitability. The feedback we're getting, from them, Brett, is good. I mean, they were still very optimistic about being able to hold metrics where they are, you know. Hopefully, interest rates increases will begin to taper off, and we'll kind of hit that ceiling, so to speak. I think that will make borrowers feel a whole lot better as they forecast into next year.
Billy Carroll (President and CEO)
Yeah, no, and just. [crosstalk]
Ron Gorczynski (Executive VP and CFO)
Yeah. Brent, live. [crosstalk]
Billy Carroll (President and CEO)
Yeah. We, like I said, we've been, Brent, we've been, you know, Noah and I have been out a lot, and Rhett has, too. I mean, we're, you know, we're keeping our thumb on the pulse of what's happening in these markets. Really, there's just not a lot of negativity. I mean, you might have some businesses that have got a little bit of an impact for one reason or another, man, we feel really good about our current credit book. You know, our underwriting, you know, we've always been conservative underwriters. I think going back to even when you looked at, I remember when we had some of those early calls coming through the pandemic, we just didn't have any concern about clients during that time.
For us, you know, I think for us, it's one of the reasons, you know, we take a little bit less loan yield because I think we really focus on, you know, a higher quality credit. I, you know, I think overall, we feel good about it and think it'll continue to hold.
Ron Gorczynski (Executive VP and CFO)
Yeah, 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, so just really a town hall asking as many questions and getting their feedback. It is literally across the footprint, very positive about where the economy is today, their outlook over the next year. You know, even if it slows down a little bit in the Southeast, it's still extremely busy. They are very optimistic, as we are.
Kevin Fitzsimmons (Senior Research Analyst)
Okay, that's helpful. I appreciate it, guys. Thank you.
Ron Gorczynski (Executive VP and CFO)
Thanks you. [crosstalk]
Operator (participant)
Thank you. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. Our next question comes from Feddie Strickland from Janney Montgomery Scott. Freddie, your line is now open. Please go ahead.
Feddie Strickland (VP of Equity Research)
Hey, good morning.
Ron Gorczynski (Executive VP and CFO)
Good morning, Feddie.
Billy Carroll (President and CEO)
Good morning.
Ron Gorczynski (Executive VP and CFO)
Hey, Freddie.
Feddie Strickland (VP of Equity Research)
Wanted to go back to the balance sheet growth. Appreciate your color there, Billy, should we expect lower earning asset growth in the first quarter of 2024 in particular, just given the magnitude of the maturing securities that quarter?
Billy Carroll (President and CEO)
I don't, Ron, I don't think so.
Ron Gorczynski (Executive VP and CFO)
No, we didn't adjust our growth for that because we're just converting it, you know, to cash or whatever we put it to, right?
Billy Carroll (President and CEO)
I think our thought and our forecast, Feddie and Ron, correct me if I'm wrong, I think we're looking today, our forecast is basically rolling back those investments into another earning asset vehicle, you know, rather than deleveraging at this point. I mean, obviously, it's something, you know, we could take a look at other strategies, but at the end of the day, I think our thought is just to continue to roll that into some other earning asset, keeping that total earning asset number at or above where it is today.
Feddie Strickland (VP of Equity Research)
Understood. That's helpful. Another clarifying piece, Ron, I think you talked about this a little bit earlier, too. In your opening remarks, I think you said there was roughly $8 million potentially increase in interest income from the securities portfolio maturing and 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?
Ron Gorczynski (Executive VP and CFO)
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 US Treasuries will mature. You know, in all actuality over the next 12 months, we have about $300 million coming through with agencies and some in, and some pay downs. That big burst of principal will be Q1, Q2 timeframe.
Billy Carroll (President and CEO)
Feddie, I think, Ron, I think we were just kind of looking hypothetically, if that were to reset today.
Ron Gorczynski (Executive VP and CFO)
Probably reset today.
Billy Carroll (President and CEO)
I think we're saying if that resets today, you're looking at an $8 million delta. you know,
Ron Gorczynski (Executive VP and CFO)
Which we'll get.
Billy Carroll (President and CEO)
We don't know what rates are going to be at that time, but if they hold, then we're looking at about an $8 million delta.
Ron Gorczynski (Executive VP and CFO)
Yeah.
Feddie Strickland (VP of Equity Research)
Got it. One last one for me along that same line of questioning is, if we get 2 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?
Ron Gorczynski (Executive VP and CFO)
Yes, we do. That's kind of what we're modeling at this point. We are, you know, we know we have the 25% coming in, probably 1.25 in November timeframe. Yeah, we are modeling to get over that 3% margin range in 2024.
Feddie Strickland (VP of Equity Research)
All right. Thanks for the color. That's all I have.
Miller Welborn (Chairman)
Thanks, Freddie.
Operator (participant)
Thank you. Our next question comes from Steve Moss from Raymond James. Steve, your line is now open. Please proceed with your question.
Steve Moss (Managing Director)
Good morning. Just following up on the margin here, you know, with that expectation to 2024 above 3%, are you guys thinking of the cumulative deposit beta, you know, maxing out at a total of 38%-40% cumulative beta? Just kind of curious on how you're thinking there.
Ron Gorczynski (Executive VP and CFO)
At this point, that's our anticipation. You know, probably, we kind of looked at it in Q4, but probably dribbling into, you know, Q1 of 2024, and then it's over. Yeah, I think 40% and pretty much getting back to where we started, what our historical was, because historical, wasn't that far off. That's what we're looking at now.
Steve Moss (Managing Director)
Okay. That's, that's helpful. I apologize that I hopped on a bit late, just, you know, Billy, you sounded optimistic on loan growth here. You've had good C&I growth for a number of quarters now, including this quarter. Just kind of curious, as you look forward here, how much of the drivers going forward do you think will be, you know, C&I driven, you know, versus maybe CRE?
Ron Gorczynski (Executive VP and CFO)
Yeah, I'll let Rhett chime in on that, Steve. I think we're still, when you look at our pipelines today, Rick, I believe we're a little more heavily C&I-wise.
Miller Welborn (Chairman)
Yeah, we're definitely.
Ron Gorczynski (Executive VP and CFO)
Can you give maybe a little color on kind of what you're seeing?
Miller Welborn (Chairman)
Yeah. It's.
Ron Gorczynski (Executive VP and CFO)
Yeah.
Miller Welborn (Chairman)
You know, you look at our pipeline, we're definitely seeing that same trend, as far as the split, a much definitely heavier C&I. That is the area that we would anticipate seeing more of the of the new production, success in the next couple quarters.
Steve Moss (Managing Director)
Okay, great. Appreciate that. Then, lastly for me, just on, you know, you've been very much organically focused, but you've done acquisitions in the past. Just curious, you know, have discussions on the M&A front picked up here in the last month or two? Have you seen some stability in the market or just, you know, any thoughts around that versus organic expansion?
Miller Welborn (Chairman)
Yeah, Steve, I'll jump in on that one. You know, we're glad to see the deal get done this morning. That was a good announcement up on the Atlantic Coast. That's optimistic for the industry. You know, Billy and I talk often. We spend a lot of time in the markets, upstream, downstream, generating relationships, and we think there are continued discussions today, and I think the outlook is optimistic for that in the future.
Ron Gorczynski (Executive VP and CFO)
Yeah, and I, yeah, I think for us, obviously, valuation plays into that. You know, for us, you know, we've been very successful doing M&A. Would we look? Absolutely, love to find some opportunities. I think those probably are limited. We're always open to look at strategic alternatives, and if there's something that pops up that makes sense, we'll look at it. I do think you'll see more of that, as Miller said, nice to see an announcement this morning. I think you'll see more of those types of things occurring, we're going to keep our eye on it and figure out how we might be able to participate.
Steve Moss (Managing Director)
All right. Great. Thank you very much. Nice quarter.
Operator (participant)
Thank you.
Our last question, sorry, our last question today comes from Jordan Ghent from Stephens. Jordan, your line is now open. Please go ahead.
Jordan Ghent (Senior Research Associate)
Hey, good morning, guys. Thanks for taking my question. I just had one quick question, actually, on the loan yield. Back in April, looks like you guys were expecting, loan yield to be 5, in the 5-6 yield range. Looks like they came down a little bit off that for this quarter. Can you kind of give some color on what happened?
Ron Gorczynski (Executive VP and CFO)
The loan yields themselves have been incrementally increasing month-over-month, quarter-over-quarter. I think the contraction was, you know, last quarter, we did have really excessive loan fees that didn't repeat itself for this quarter. We had, you know, $1 million-$1.4 million, which we talked about, and additionally, we had other loan fees that hit. Going forward, you know, we should, you know, we will incrementally build our, you know, the loan fees, you know, again, going forward. Apologize for that.
Jordan Ghent (Senior Research Associate)
Perfect. That was my only question. Appreciate it.
Ron Gorczynski (Executive VP and CFO)
Great. Thank you, Jordan.
Operator (participant)
Thank you. We have no further questions. I'll now hand back to Miller Welborn for any closing comments.
Miller Welborn (Chairman)
Thanks, Ellen. Thanks again to each of you for joining us today. As always, please feel free to reach out to any of us directly if you have any additional questions. I hope you each have a great week. Thanks. Bye.
Operator (participant)
That concludes today's conference call, everybody. Thank you all for joining. You may now disconnect your line. Have a lovely rest of your day.