Trustmark - Q3 2024
October 23, 2024
Transcript
Operator (participant)
Good morning, ladies and gentlemen, and welcome to Trustmark Corporation's third quarter earnings conference call. At this time, all participants are in a listen-only mode. Following their presentation, there will be a question-and-answer session. To ask a question, you may press star and then one on your touchtone phone, and to withdraw your question, please press star, then two. As a reminder, this call is being recorded. It is now my pleasure to introduce Mr. Joey Rein, Director of Corporate Strategy at Trustmark. Please go ahead, sir.
Joey Rein (Director of Corporate Strategy)
Thank you. Good morning. I'd like to remind everyone that our third quarter earnings release and the slide presentation that will be discussed on our call this morning are available on the investor relations section of our website at trustmark.com. During our call, management may make forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, and we'd like to caution you that these forward-looking statements may differ materially from actual results due to a number of risks and uncertainties which are outlined in our earnings release, as well as our other filings with the Securities and Exchange Commission. At this time, I'll turn the call over to Duane Dewey, President and CEO of Trustmark.
Duane Dewey (President and CEO)
Thank you, Joey, and good morning, everyone. Thank you for joining us this morning. With me are Tom Owens, our Chief Financial Officer, Barry Harvey, our Chief Credit and Operations Officer, and Tom Chambers, our Chief Accounting Officer. The third quarter was a very active and productive quarter for Trustmark. Our third quarter results reflect significant progress across the organization. Net income totaled $51.3 million, representing diluted earnings per share of $0.84. Profitability meaningfully increased, as evidenced by 26.7% growth in net income from adjusted continuing operations and a 282 basis point improvement in the efficiency ratio. The restructuring of the investment securities portfolio was a major contributor to the 9.5% increase in net interest income in the third quarter. These accomplishments are the result of focused efforts to enhance Trustmark's long-term performance.
Now, let's turn to slide three for a recap of the strong fundamental accomplishments during the quarter. Loans held for investment were relatively flat, decreasing $55 million linked quarter and increasing $290 million year-over-year. Deposits declined $222 million linked quarter, excluding targeted reductions in public and brokered deposits of approximately $530 million. Deposits increased over $300 million linked quarter. A significant contributor to our performance in the quarter was the growth in net interest income, which increased $13.7 million or 9.5% linked quarter to $158 million. The net interest margin expanded 31 basis points during the quarter to 3.69%. Tom Owens will provide some additional color on his, in his remarks here in a minute.
Non-interest income from adjusted continuing operations in the third quarter totaled $37.6 million, a decrease of $0.7 million linked quarter and an increase of $0.6 million year-over-year. From an expense perspective, non-interest expense increased to $4.9 million during the quarter. There are three primary drivers of this increase. First, our annual salary merit increases were effective July 1. Second, annual incentive accruals and commissions increased due to strong operating performance. And third, we had an increase in ORE expense related to the establishment of a reserve for a single property that is under contract to sell and scheduled to close in the fourth quarter. Year-over-year expenses from adjusted continuing operations actually declined $500,000. Diligent expense management continues to be a focus of the organization here moving forward.
Trustmark's capital ratios expanded meaningfully during the quarter as tangible equity to tangible assets increased 55 basis points to 9.07%, while the CET1 ratio expanded 38 basis points to 11.3%, and the total risk-based capital ratio expanded 42 basis points to 13.71%. Tangible book value per share was $26.88 at September 30th, 2024, an increase of 6.5% from the prior quarter and 32.9% from the prior year. The board declared a $0.23 dividend payable on December 15 to shareholders of record on December 1st. From a credit quality perspective, net charge-offs totaled $4.7 million during the quarter, representing 0.14% of average loans.
The allowance for credit losses represented 1.21% of loans held for investment and nearly 500% of non-accrual loans, excluding individually analyzed loans. At this time, Barry Harvey will provide an overview of our loan portfolio and credit quality.
Barry Harvey (Chief Credit and Operations Officer)
I'll be glad to, Duane. Thank you. Turning to slide four, loans held for investment totaled $13.1 billion as of September 30th,
which as Duane indicated, is relatively flat for the third quarter. Increases in the third quarter came from existing multifamily loans, our equipment finance line of business, and one to four family mortgages. They were all set by declines in C&I, state and political loans, and other CRE. We continue to expect loan growth of low single digits for 2024. As you can see, our loan portfolio remains well diversified and by both product types as well as geography. Looking on the slide five, Trustmark's CRE portfolio is 95% vertical, with 70% in the existing category and 30% in construction land development. Our construction land development portfolio is 82% construction. Trustmark's office portfolio, as you can see, is very modest at $262 million outstanding, which represents only 2% of the overall loan book.
The portfolio is comprised of credits with high-quality tenants, as well as low lease turnover, strong occupancy levels, and low leverage. Turning to slide six, the bank's commercial loan portfolio is well diversified, as you can see, across numerous industries, with no single category exceeding 14%. Looking to slide seven, our provision for credit losses for loans held for investment was $7.9 million during the third quarter, which was driven by specific reserves for individually analyzed credits and net adjustments to our qualitative factors. The provision for credit losses for all balance sheet credit exposure was a negative $1.4 million, which resulted primarily from a decline in unfunded commitments. At September the 30th, the allowance for credit losses for loans held for investment was $158 million. Turning to slide eight, we continue to post solid credit quality metrics.
The allowance for credit losses increased to 1.21% of loans held for investment, representing 497% of nonaccruals, excluding those loans that are individually analyzed. In the third quarter, net charge-offs totaled $4.7 million, as Duane mentioned earlier. Both nonaccruals and nonperforming assets increased during the quarter, primarily as a result of two commercial credits. However, they materially declined year-over-year due to continued efforts to effectively manage and resolve problem assets in a timely manner. Duane?
Duane Dewey (President and CEO)
Great. Thank you, Barry. Now, Tom Owens will cover deposits, net interest margin, and non-interest income.
Thomas Owens (CFO)
Thanks, Duane, and good morning, everyone. Turning to deposits on slide nine. We had another good quarter, which continued to show the strength of our deposit base. Deposits totaled $15.2 billion at September 30th. That was a linked quarter decrease of $222 million or 1.4%, and a year-over-year increase of $139 million or 0.9%. However, as Duane indicated, significant driver of that decline was targeted, intentional, runoff of deposits. Specifically, the linked quarter decrease was driven by a $200 million decline in brokered CDs, which we allowed to run off at maturity rather than replace.
And we had $330 million in public fund balances, which are really targeted decline related to large accounts that tend to be somewhat volatile quarter to quarter. Looking beyond that, we had a solid quarter of deposit growth, with growth of $155 million in personal balances and about $152 million in commercial balances, representing linked quarter growth of about 1.9% and 3.5%, respectively. Non-interest-bearing DDA balances remained resilient, declining by $11 million linked quarter and remaining above 20% of our deposit base. Time deposits increased by $124 million linked quarter, excluding the decline of $200 million in brokered CDs.
As of September 30th, our promotional and exception price time deposit book totaled $1.4 billion, with a weighted average rate paid of 4.97% and a weighted average remaining term of about five months. Our brokered time deposit book totaled $400 million, had a weighted average, all-in rate paid of 5.41% and a weighted average remaining term of about two months as of September 30th. Our cost of interest-bearing deposits increased by six basis points from the prior quarter to 2.81%. Turning to Slide 10, Trustmark continues to maintain a stable, granular, and low exposure deposit base.
During the third quarter, we had an average of about 460,000 personal and non-personal deposit accounts, excluding collateralized public fund accounts, with an average balance per account of about $28,000. As of September 30th, 65% of our deposits were insured and 12% were collateralized, meaning that our mix of deposits that are uninsured and uncollateralized was relatively unchanged linked quarter of 23%. We maintain substantial secured borrowing capacity, which stood at $6.2 billion at September 30th, representing 176% coverage of uninsured and uncollateralized deposits. Our third quarter total deposit cost increased four basis points linked quarter at 2.22%. The favorable variance to prior guidance reflects proactive strategic pricing actions that we took during the quarter in anticipation of the Fed's September rate cut.
Based on those cuts, as well as the cuts that we're currently contemplating in anticipation of a possible cut by the Fed on November 7th, we're currently projecting a linked quarter decline in deposit cost for the fourth quarter of about 13 basis points to 2.09%. And as a frame of reference for that guidance, we're on track for deposit costs of approximately 2.11% month to date here in October. Turning our attention to revenue on slide 11, net interest income FTE increased $13.7 million linked quarter, totaling $158 million, which resulted in a net interest margin of 3.69%. Our net interest margin increased by 31 basis points linked quarter, as Duane said, driven by securities portfolio restructuring, as well as ongoing accretion from loan rate and volume.
The deposit pricing actions taken in the third quarter, as well as the actions that we'll likely be taking in the fourth quarter to offset the anticipated Fed rate cut on November 7th, should enable us to achieve a minimum of 365-370 for the H2 of 2024. Turning to slide 12, our interest rate risk profile remained essentially unchanged as of September 30th, with loan portfolio mix of 52% variable rate coupon. The cash flow hedge portfolio, which is structured to mitigate asset sensitivity, had an active notional of $875 million and a weighted average maturity of 3.5 years, including the effect of $390 million in forward settle swaps and $125 million in forward settle floors.
The weighted average received fixed rate on the $850 million active notional of swaps is 3.12%, and the weighted average SOFR rates on the $25 million of active notional floors is 4%. Turning to slide 13, non-interest income from adjusted continuing operations totaled $37.6 million in the third quarter, a linked quarter decrease of approximately $700,000, and a year-over-year increase of about $600,000. The linked quarter decrease was driven primarily by seasonal and one-time items that had increased during the second quarter, rather than fundamental recurring drivers that decreased third quarter revenue. Mortgage banking net hedge ineffectiveness normalized somewhat linked quarter to -$2.5 million, but remained unfavorable year-over-year by $1.5 million.
Excluding net hedge ineffectiveness, non-interest income increased by $2.1 million or 5.6% year-over-year, which is consistent with our full-year's guidance, and now I'll ask Tom Chambers to cover non-interest expense and capital management.
Tom Chambers (Chief Accounting Officer)
Thanks, Tom. Turning to slide 14, we'll see a detail of our total non-interest expense. During the third quarter, non-interest expense totaled $123.3 million, or a linked quarter increase of $4.9 million or 4.2%. The increase was mainly driven by an increase in salary and benefits of $1.9 million, resulting from an increase in annual performance incentive accruals of $1.2 million, and salary expense of $523,000 due to annual merit increases beginning July 1st. If you look, services and fees increased $981,000, mainly as a result of increased third-party professional fees during the quarter. Other Real Estate expense net increased $2.1 million, driven by establishing a reserve related to one property during the quarter.
When you remove other real estate net for each period, and the litigation settlement expense incurred during the third quarter of 2023, there was a decline in adjusted non-interest expense when comparing the third quarter year-over-year of approximately 2.4%. Turning to slide 15, Trustmark remains well positioned from a capital perspective. As Duane previously mentioned, our capital ratios remain solid. At the end of the quarter, Common Equity Tier 1 ratio was 11.30%, a linked quarter increase of 38 basis points. Total risk-based capital was 13.71%, a linked quarter increase of 42 basis points. Although we currently have a $50 million share repurchase program in place, our priority for capital deployment continues to be focused on organic lending.
As Duane indicated, we will continue to evaluate the share repurchase program as the market and capital levels dictate. Back to you, Duane.
Duane Dewey (President and CEO)
Great. Thank you, Tom. Now turning to slide 16, we expect loans held for investment to be up low single digits for the full-year 2024, and deposits, excluding the broker deposits, to remain relatively stable for the full-year 2024. Securities balances are expected to remain stable as we reinvest cash flows. We anticipate net interest income to increase in the mid-single digits in 2024, reflecting continuing earning asset growth, stabilizing deposit costs, and accretion from balance sheet repositioning, resulting in full-year 2024 net interest margin of approximately 3.50% based on market implied forward interest rates. We expect the net interest margin to be in the range of 3.65%-3.70% in the H2 of 2024.
From a credit perspective, the provision for credit losses, including unfunded commitments, is dependent upon credit quality trends, current macroeconomic forecast, and current and future loan growth. Net charge-offs from continuing operations are expected to remain below the industry average based on the current economic outlook. Non-interest income from adjusted continuing operations for full-year 2024 is expected to increase low to mid-single digits, while non-interest expense from adjusted continuing operations full-year 2024 is expected to be approximately unchanged, reflecting heightened cost containment initiatives. We will continue our disciplined approach to capital deployment with a preference for organic loan growth, potential market expansion, M&A, or other general corporate purposes, depending on market conditions. We will also continue to assess the board of directors approved 2024 share repurchase program as the market and balance sheets dictate.
That concludes our prepared comments this morning, and we now open the floor to questions.
Operator (participant)
We will 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. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Will Jones with KBW. Please go ahead.
Will Jones (Associate VP of Equity Research)
Yeah. Hey, thanks. Good morning, everyone.
Thomas Owens (CFO)
Good morning, Will.[inaudible]
Will Jones (Associate VP of Equity Research)
So I wanted to start with the margin. I mean, the returns were obviously really impressive in the quarter. As you know, we saw the first kind of full quarter impact with the securities restructuring. The margin perhaps came even a little bit better than expected. Tom, you alluded multiple times to, you know, some of the deposit pricing actions that you guys were able to take. Could you just walk us through, you know, a little bit of what you were able to do there towards the end of the quarter? And you know whether or not you saw any pushback from clients or just any general commentary about what you're able to achieve on the deposit front?
Thomas Owens (CFO)
Yeah, Will. So thank you for the question. You know, the cuts that we made to deposits in the third quarter, we made with the intention of substantially mitigating the pressure from the 50 basis point reduction on our floating rate loan coupons. We feel really good about the monitoring and reporting we have. We look at it on a daily basis in terms of account activity and deposit flows, and we are very encouraged at this point. We feel really good about our ability to maintain our deposit base. You know, the challenge, Will, obviously now is, you know, we're potentially looking at another 25 here coming up real soon, November 7th, and then who knows, maybe one in December.
And so, you know, when you start to get into sort of a, you know, relatively rapid fire sequence of Fed cuts, you're, you know, tactically, you're always in that position of, you know, there's what you want to do, but at the same time, you know, and the want to do is obviously to maintain our net interest margin and offset the adverse impact on our floating rate loan portfolio. But at the same time, we're on a daily basis, as I said, monitoring deposit activity. We feel good right now, and the guidance that we're putting out there right now reflects what we anticipate at this point. Might there be the opportunity to do a bit better? There might be,
You know, the last couple of quarters, we've been managed to come in favorable relative to guidance, and so it's just going to get trickier here, I think, tactically. But that's going to continue to be our intent, is to maintain our net interest margin going forward.
Will Jones (Associate VP of Equity Research)
Yeah, that's great. I appreciate that comprehensive answer. It feels like, you know, maybe we have a pretty good understanding of what deposits and deposit costs will do next quarter. But, is there any way to kind of quantify, you know, what the impact you expect to see, you know, maybe on the loan yield side, just understanding you have a little bit higher, you know, exposure to variable rates and, you know, but there's also a little bit of hedging involved as well.
Thomas Owens (CFO)
So again, about half the portfolio is floating rate. You know, so Will, and it gets a little trickier here again, with the Fed cutting rates. In the background, you know, half the portfolio, the loan portfolio is floating rate, half of it's fixed in very round numbers, right? And so, you know, you've got the repricing characteristics of each. In the background, absent Fed rate cuts in the background, as I've said on prior calls, we continue to have that effect of whether you think of it as a couple basis points a month or, you know, five or six basis points per quarter of lift to loan yield absent-
[inaudible] [actions], right? And so it's also interesting here that we've seen post-Fed rate cut. We've actually seen some steepening of the yield curve. You know, if you look at a three-year swap rate or a five-year Treasury, you know, the belly of the curve there, where most of our fixed rate pricing would be off of, it's interesting that those rates are now going up, even as you know it's anticipated that the Fed will likely cut in November. So that is helpful, right? That's helpful that you still have some lift in the background.
Will Jones (Associate VP of Equity Research)
Okay, so that's, that's great. Really appreciate that. And just as a point of clarification on the fee and expense guidance, well, do you guys happen to have just handy the, you know, the adjusted, you know, continuing ops, you know, fees and expenses from 2023, just so we're all kind of comparing off the same base?
Thomas Owens (CFO)
We do, Will, and I'm going to ask Tom Chambers to address that.
Tom Chambers (Chief Accounting Officer)
Yep. So, Will, this is Tom Chambers. How you get there is if you look at our 2023 10-K as filed, if you look at non-interest income off the income statement and back out the insurance segment revenue in the insurance in the segment revenue footnote in the back, that's the base we're looking at for non-interest income. In the non-interest expense base, you do the same thing, but you also take out the significant non-recurring items that we incurred during the year last year, which would be litigation settlement expense of $6.5 million and reduction in force expense we incurred in the fourth quarter last year of $1.4 million. So if you do that exercise, you'll get to the base we're looking at.
Non-interest income, to back up on that, it's going to be approximately $148 million. Non-interest expense, if you do that exercise, is going to be about $488 million.
You might note also, Will, in the deck, we put in the addendum, where we had at the front of the deck last quarter, we have in the back of the deck the adjusted continuing operations calculations, and that may help some as well to get the baseline numbers.
Will Jones (Associate VP of Equity Research)
Yes, yes. All right. That makes a lot of sense. That's very helpful. If you kind of look at the expense guide and, you know, you just kind of see what that implies for the fourth quarter of this year, you know, it feels like we may see a little bit of an uptick in expenses in the fourth quarter. Are there any puts or takes that we should be considering as, you know, we kind of think about the run rate in the next quarter and, you know, what that potentially implicates for 2025?
Tom Chambers (Chief Accounting Officer)
No, I think your... This is Tom. I think your logic is accurate. We're looking at, you know, a little bit of an uptick in the fourth quarter if you do that math. 2025, I believe we have—you know, we're going to continue to challenge our expense initiative reduction initiatives and, you know, battle that front as hard as we have in 2024. But at this point, I don't believe we're ready to give guidance on 2025.
Thomas Owens (CFO)
No, but we will reiterate that we feel really good, you know, on a year-over-year basis, excluding the sort of unusual-ish items. We're down, what, 2.5% year-over-year in non-interest expense and from adjusted continuing operations?
Tom Chambers (Chief Accounting Officer)
Yes.
Thomas Owens (CFO)
Third quarter of 2024, third quarter of 2023. Well, we feel good about that accomplishment, you know, particularly in the inflationary environment in which we've been operating.
Will Jones (Associate VP of Equity Research)
Yeah, I mean, no doubt. That's been the profitability for this quarter. So, but that's it for me, everybody. Thank you.
Thomas Owens (CFO)
Thank you, Will.
Operator (participant)
The next question will come from Tim Mitchell with Raymond James. Please go ahead.
Tim Mitchell (Equity Research Associate)
Hey, good morning, everyone. This is Tim Mitchell.
Barry Harvey (Chief Credit and Operations Officer)
Good morning.
Tim Mitchell (Equity Research Associate)
I just want to start out on loans. We've heard a lot of your peers talk about maybe some elevated payoff activity in the third quarter. You know, you saw some declines in C&I. Was just hoping you could discuss kind of what you saw that drove the modest decline, kind of flash balances in the third quarter. Then based on the guide, it would seem you maybe expect some modest growth here in the fourth quarter.
Barry Harvey (Chief Credit and Operations Officer)
Yeah, Tim, this is Barry. Let me just reiterate, you know, our guidance for the year hasn't changed. We're low single digits. During the third quarter, we did have, obviously, slight loan shrinkage to $55 million. That's probably a result of some pay downs on some corporate and commercial lines during the latter part of the quarter. To that point, even our average loan balances are actually up for the quarter because those payoffs did come late. Based on our analysis, we fully believe these pay downs are just the normal ebb and flow of line utilization. Our historical line utilization has averaged around 37%. During the quarter, our utilization decreased from 37% to 35%, but we fully expect these lines to draw back up in the near term.
We do, when we look at our corporate, commercial, and CRE pipelines, they remain very strong. Our production activity is doing quite well. We are like all other banks that
have a real estate exposure. There is a certain amount of payoffs that are in front of us that we'll need to deal with in terms of, runoff that we'll need to cover all. But we're very pleased with the way our pipelines look today.
Tim Mitchell (Equity Research Associate)
Great, appreciate the color, and then maybe more strategically, you talked about market expansion a little bit. We've seen some M&A activity pick up in the past few months. Just hoping you could discuss maybe your approach to building out new markets, whether it be via M&A or some team lift outs, and maybe any markets that are particularly attractive to you right now.
Duane Dewey (President and CEO)
Well, all the above are definitely attractive to us. We're actively building, I guess, we'd say we're building a pipeline of M&A opportunity here as we move forward. We feel good about the overall performance of the company. Our capital situation and everything now is lining up very, very nicely for potential opportunities. We are seeing a definite increase in pipeline and conversation and interested, I guess, interested parties in the marketplace, so I think that's a possibility. In terms of the organic side, we are very definitely focused on expanding business lines and then expanding in markets where we have a current presence. That would include markets like Houston, Birmingham, Atlanta, maybe South Alabama, and so on.
So we have opportunities to expand in those markets where we have knowledge and a presence and good visibility to attractive teams, so we're actively working on that front. Additionally, we've had good success on the equipment finance side. We've got a year, almost two years now under our belt in that business. We've gotten familiar with underwriting standards, etc, and feel there are definite expansion opportunities in our production staff in those businesses, and then finally, you know, the mortgage market is coming back to life, and we had strategically reduced mortgage production over time, and we feel there's opportunities again, starting to surface in the mortgage business, where we have potential to add production teams across the franchise.
So, we see a lot of opportunity organically, on that front, but are also very interested in, your comment and your question on M&A. That's a very, defined focus for us.
Tim Mitchell (Equity Research Associate)
Great. Appreciate the color. Thanks. Thanks for taking my questions.
Duane Dewey (President and CEO)
Thank you.
Operator (participant)
Again, if you have a question, please press star, then one. Our next question will come from Gary Tenner with D.A. Davidson. Please go ahead.
Gary Tenner (Managing Director and Senior Research Analyst)
Thanks. Good morning.
Duane Dewey (President and CEO)
Morning.
Gary Tenner (Managing Director and Senior Research Analyst)
I wanted to ask about the loan yields here in the third quarter relative to the commentary about the fourth quarter NIM outlook. It looks like loan yields were up one basis point. I'm wondering if there was any impact either way regarding loan fees or anything, just as I'm trying to think of the kind of upward repricing portion of the loan portfolio from a, you know, fixed or hybrid perspective.
Thomas Owens (CFO)
So, Gary, this is Tom Owens. No, I don't think there was really anything particularly unusual about loan fees in the third quarter relative to where we've been running on average. I'd say very probably for the last six or eight quarters. Right? I mean, it's been pretty much steady state.
Gary Tenner (Managing Director and Senior Research Analyst)
Okay.
Thank you. And then just.Sorry, go ahead.
Duane Dewey (President and CEO)
No, go ahead.
Gary Tenner (Managing Director and Senior Research Analyst)
Just as it relates to the increase in NPAs, can you just kind of give any color around kind of the credits, you know, the type of credit, location, et cetera?
Barry Harvey (Chief Credit and Operations Officer)
You said, say the first part about it again?
Duane Dewey (President and CEO)
NPAs.
Barry Harvey (Chief Credit and Operations Officer)
As far as, what was the question?
Gary Tenner (Managing Director and Senior Research Analyst)
Give any color on the NPAs?
Barry Harvey (Chief Credit and Operations Officer)
Sorry, the
Third quarter increase.
Third quarter increase. Okay, I'm sorry. I wasn't sure if you were referring to the year-over-year or the third quarter. Yeah, yeah, we just, we had two credits that I mentioned earlier that are both corporate customers, that one of them had been non-accrual several years back and had turned the company around. They began to struggle again, and we've moved that credit back into the non-accrual status. We did go ahead and reserve as part of our individually analyzed process and reserved it appropriately based on the current appraisal we have, even going in and scrutinizing the appraisal a little bit and maybe making what we felt like were appropriate haircuts to the appraisal to make sure we've got an appropriate reserve.
And then the other credit was in a different industry, but nonetheless, it was a credit that had been troubled for a quarter or two, and then there began to be the need for making certain concessions, at which point we determined it was not only substandard, it was also nonaccrual, and we moved it to nonaccrual. I do feel like that second credit is smaller in nature, but I do feel like the ultimate result there is going to be a liquidation, and they have begun marketing the assets, and we do have a really good sense of what they should bring, and we were able to establish a reserve on that individually analyzed credit based upon those LLIs that we've already received. So we feel good that we've got that accounted for properly.
Gary Tenner (Managing Director and Senior Research Analyst)
Thanks for the call.
Operator (participant)
The next question will come from Christopher Marinac with Janney. Please go ahead.
Christopher Marinac (Director of Research)
Thanks. Good morning. I just want to continue on Gary's questions. And if you looked at the interest rate move in September, does that help at all on upgrading credits in future quarters, or is it too early to kind of use that as a catalyst?
Barry Harvey (Chief Credit and Operations Officer)
Gary, this is Barry. I think it's a little bit too early. It definitely, 50 basis points really makes things look better. I think, you know, most people would look, having seen a 550 basis point run up, I think most banks would like to see 100 basis points or even 125 basis points. I think that makes pretty much all the CRE projects that have been struggling, carrying that additional cost of carrying, perform much better, even if they're in an early stage of construction or maybe they're stabilizing but haven't stabilized yet. I, I do think when you look at the pro forma and you look at 100 basis points down or even 125 basis points, I think that makes everything work, that it maybe didn't quite clear the bar previously.
So the 50 makes a big step in that direction. We'd like to see the other 225 that were alluded to for the rest of this year, and then next year is a little bit unknown, but if we can get a little bit of help next year, I think the good news in that is, from a risk rating standpoint, from a reserving standpoint, that is very beneficial. I do also think as you move into a lower interest rate environment, the results will be some credits moving away from you as a result of being able to achieve a better cap rate on the sale or possibly better financing in the permanent market. We're already seeing a little bit of that, and I think we'll continue to see better pricing in the permanent market.
The downside could be some migration of some of your portfolio that is at a point where it is stabilized, might begin to move out, maybe even ahead of maturity. That would be the downside.
Christopher Marinac (Director of Research)
Got it. Thank you for sharing all that. And then is there anything from just your normal tax return work and client interaction on the commercial book, so thinking C&I, that would, you know, lead to more inflows there?
Barry Harvey (Chief Credit and Operations Officer)
There's not.
Christopher Marinac (Director of Research)
Great. Thanks again for taking the questions.
Barry Harvey (Chief Credit and Operations Officer)
Thank you.
Operator (participant)
This concludes our question and answer session. I would like to turn the conference back over to Mr. Duane Dewey for any closing remarks. Please go ahead, sir.
Duane Dewey (President and CEO)
Thank you again for joining us for this quarter's report. We're very excited where the company's positioned and look forward to a great fourth quarter and look forward to getting back on our call at the January timeline. Y'all have a great rest of the week.
Operator (participant)
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.