Cadence Bank
NYSE:CADE
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Cadence Bank
Earnings Call Analysis
Q3-2023 Analysis
Cadence Bank
The company projected its noninterest-bearing deposits to be just shy of 20% by the end of next year, a gradual change reflecting ongoing deposit pressure within the industry and macro environmental factors. Additionally, they anticipate some declines in interest rates during the latter half of the year, according to forward curves employed in their financial modeling.
In efforts to manage costs effectively, the company has set a goal to keep its adjusted expenses flat through 2024, but this excludes the insurance segment of their business. This illustrates a disciplined approach to cost control amid fluctuating market conditions.
While the company acknowledged some pressure in the franchise finance lending sector, they reported no material change to the reserves for that segment of their loan book. This indicates a stable risk assessment despite the challenges in that area.
Credits that had been previously identified have been charged off and removed from the books, contributing to lower balances in the C&I sector. However, the company boasts robust capacity and a strong team focused on maintaining and building existing relationships, ensuring current activities continue to provide opportunities. Although growth in new credits may be selective, it is managed with a view towards sustainability and profitability. The company also indicated an appetite for extending credit in the energy sector, particularly in upstream energy, with better terms and pricing, suggesting strategic growth opportunities in these areas.
The company concluded by emphasizing its commitment to shareholder value, demonstrated by its premier bank-owned insurance agency's robust valuation. Selling this segment has allowed the company to enhance its capital position, earnings, and efficiency, pointing to a strategic move intending to yield benefits for shareholders, employees, clients, and the communities they operate in.
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Good day, and welcome to the Cadence Bank Third Quarter 2023 Webcast and Conference Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Will Fisackerly, Director of Finance. Please go ahead.
Good morning, and thank you for joining the Cadence Bank Third Quarter 2023 Earnings Conference Call. We have members from our Executive Management team here with us this morning, Dan Rollins; Chris Bagley, Valerie Toalson, Hank Holmes and Billy Bradd. Our speakers will be referring to prepared slides during the discussion. You can find the slides by going to our Investor Relations page at ir.cadencebank.com, where you'll find them on the link to our webcast or you can view them at the exhibit to the 8-K that we filed yesterday afternoon. These slides are also in the Presentations section of our Investor Relations website. I would remind you that the presentation, along with our earnings release contain our customary disclosures around forward-looking statements and any non-GAAP metrics that may be discussed. The disclosures regarding these forward-looking statements contained in those documents apply to our presentation today. And now I'll turn it to Dan for his opening comments.
Good morning, everyone. Thank you for joining us. We would like to take some time this morning during our third quarter 2023 earnings conference call to also discuss the announcement of our agreement to sell Cadence Insurance to Arthur J. Gallagher & Company. Following our prepared remarks, our executive management team will be available for questions. The first several slides in our deck today provide some detail regarding the sale of our insurance agency. The total deal value of nearly $1 billion represents a multiple of 5.4x the last 12 months revenue. The achievement of this multiple is a tremendous testament to the growth and accomplishments of Cadence Insurance under the leadership of Markham McKnight, Chris Boone, Aimee Kilpatrick and their entire executive team. While we've repeatedly said, we like the insurance business, the opportunity to monetize this business at historically high valuation levels is a huge win for our shareholders. It's also a tremendous win for our insurance teammates and clients with access to additional resources and product offerings of an agency with the size and scale of Gallagher. We value the relationships we've built with these teammates, and we look forward to continuing to work with them in their new roles as Gallagher will be the preferred insurance partner of Cadence Bank. From a shareholder perspective, we are able to significantly enhance our capital metrics and tangible book value per share while focusing our efforts on supporting and growing our core banking business. Valerie will provide some more color on the pro forma impact of the transaction as well as planned uses of the proceeds in just a moment. As we move to financial results for the quarter, we reported quarterly net income available to common shareholders of $90.2 million or $0.49 per diluted share and adjusted net income available to common shareholders of $103.9 million or $0.56 per diluted common share, with the primary difference being nonroutine expenses largely associated with our efficiency initiatives that we've discussed on our second quarter call. Our balance sheet was relatively stable for the quarter. Loans were essentially flat for the quarter at $32.5 billion, while reported deposits declined $357 million. The deposit decline included our intentional reduction in brokered CD balances as well as a seasonal decline in public funds. Before the impact of those, total core customer deposits actually increased just over $500 million or 5% annualized. This growth reflected success in both our Corporate and Community Banking segments, particularly given the ongoing competitive environment for deposits. Deposit trends also reflected a slower pace of deposit mix shift compared to the most recent quarters as noninterest-bearing deposits represented 25.2% of total deposits at the end of the third quarter compared to 26.4% 3 months ago. These balance sheet trends contributed to stability in our net interest margin, which was 2.98% for the third quarter. The third quarter increase in deposit costs slowed considerably, representing roughly half of the increase we experienced during each of the first 2 quarters this year. We anticipate this margin stability to continue in the fourth quarter as well. rom a credit quality standpoint, net charge-offs were elevated as a result of the charge-off of 2 C&I credits that were previously identified as impaired. These 2 credits have been on our radar and reflected in our credit metrics for several quarters now. Otherwise, both of our non-performing as well as our criticized and classified asset totals were stable compared to the second quarter of 2023. We reported a provision for credit losses of $17 million for the quarter, driven by slower loan repayment expectations and credit outlook. Overall, despite the volatility in the macro environment, our risk identification process is working well and credit quality expectations remain stable. Finally, we continue to make progress on our efficiency initiatives. This progress is evidenced in our head count decline. Total FTEs have declined over 300 during the third quarter and over 400 since the end of last year. We expect a decline of additional 80 head count prior to the end of this year. We expect the fruits of these efforts to be more visible in our numbers during the fourth quarter and the first part of 2024. Before factoring in the insurance sale impact, we are working hard toward holding our 2024 expenses flat through these and other efforts.I'll now turn the call over to Valerie for her comments. Valerie?
Thank you, Dan. I would like to start by making a few brief comments on the pro forma financial impact and expected uses of proceeds on the Cadence Insurance transaction, which is highlighted on Slides 5 through 7. The financial metrics of this transaction are extremely attractive. We estimate that the transaction will result in additional capital of approximately $620 million, including a net book gain of approximately $520 million, which represents approximately 160 basis points of additional CET1 and 24% tangible book value accretion. Further, we estimate the transaction to be net neutral to earnings by simply applying the cash proceeds towards the paydown of wholesale funds before any use of the generated capital. Referencing Slide 7, upon completion of the sale, in addition to the paydown of borrowings, we anticipate executing on a securities repositioning of at least $1.5 billion of the securities portfolio, whereby we would use a portion of the generated capital to sell securities yielding under 1.2% and use the proceeds to reinvest in earning assets at market value rates likely with higher building securities. The pro forma earnings and margin impact of these actions are impressive. Using consensus estimates for 2024, we estimate EPS accretion of 11% and incremental net interest margin pickup of over 20 basis points and an improvement in the efficiency ratio of 530 basis points. After factoring in an estimate of the related loss associated with the sold securities, the pro forma net impact to our CET1 is still nearly 120 basis points. We also anticipate both the gain from the insurance transaction and a subsequent loss from the securities sales to occur in the same reporting period in support of efficient tax management. On the remaining generated capital, we ultimately aim to maintain capital strength and flexibility, whether it be in additional securities, portfolio restructuring, share buyback or various other forms of future growth. If I sound excited, I am. This is a unique opportunity that we believe has meaningful shareholder value. Moving on to our financial results for the quarter. Looking at our balance sheet and margin highlights beginning on Slide 18. We reported net interest income of $329 million for the third quarter, a decline of $4.5 million compared to the second quarter of 2023. Our net interest margin was 2.98% for the third quarter, down 5 basis points from our second quarter margin of 3.3%. Our total cost of deposits increased to 2.14%, up 27 basis points from the second quarter, which is roughly half of the increase we experienced in each of the first 2 quarters of the year. While it's clearly still very competitive, pressure on deposit balances and pricing seems to have moderated over the last several months. We also saw a reduction in the pace of migration from noninterest-bearing products to interest-bearing products. Noninterest-bearing balances represented 25.2% of total deposits at the end of the third quarter compared to 26.4% at the end of the second quarter. Our yield on net loans, excluding accretion, was 6.31% for the third quarter, up 13 basis points from the prior quarter as slowing in new originations contributed to a reduction in the pace of loan yield increases compared to prior quarters. Noninterest revenue highlighted on Slide 21 was $119 million on a reported basis. Excluding $6.7 million in facility and signage write-downs associated with the branch closures during the third quarter, which is reflected in the other income line item. Total adjusted noninterest revenue was $125.6 million, a $6.6 million decline in the prior quarter. About half of this decline was driven by mortgage banking income, with the remainder being driven by a combination of other revenue sources, including credit-related fees and brokerage income. Mortgage banking production and servicing declined by $1 million, primarily as a result of slowed purchase activity. Additionally, the MSR asset adjustment was a negative $0.2 million for the third quarter compared with a positive $1.6 million for the second quarter. Moving on to expenses, which are highlighted on Slides 22 and 23. Total adjusted noninterest expense was $301 million for the quarter, reflecting stability across most of the major expense categories. Salaries and employee benefits increased $1.3 million compared to the second quarter as the headcount declines that Dan mentioned earlier, allowed us to stay relatively flat on compensation expense despite the July 1st effective date for annual merit increases. We reported a $2.7 million increase in deposit insurance assessment expense, which was driven by an increase in uninsured deposits, higher second quarter loan balances and changes in certain of the credit quality metrics that impact the assessment. Dan spoke to the progress on our efficiency initiatives, but to briefly recap, we expect our total FTE to be down by over 480 since the end of last year or an 8% reduction excluding insurance. We also closed 35 branches in the third quarter, reducing our total branch count by 12% since merger. And of course, all of this is before factoring in the impact of the pending sale of the insurance company. We believe the combination of these and other efforts will provide a meaningful positive impact on our performance and efficiency. Finally, speaking to credit quality on Slide 16. Dan addressed most of this provision for the quarter was $17 million, up slightly from the $15 million provision in the second quarter of this year. Net charge-offs increased to $34.2 million in the third quarter or 0.42% of average loans on an annualized basis, primarily due to 2 credits that were identified as impaired and reserved for in prior quarters, as Dan mentioned. Our nonperforming loans and nonperforming asset totals were stable linked quarter at 0.49% of loans and 0.33% of assets, respectively. Our criticized loan totals were also stable compared to the second quarter, while our classified loans increased slightly to 2.10% of total loans. We saw some migration from special mention to substandard, primarily the result of higher interest rates and inflationary pressures on loan rates. We continue to monitor credit quality very closely while higher rates and other macro factors have clearly impacted certain borrowers, our near-term outlook on credit remains stable. Our allowance coverage is solid at 1.37%, and we continue to appreciate the diversification of our loan book, both in type and geography. In closing, I can't help but use the word excited again because we simply are. It has been nice to see the stabilization in our balance sheet and margin this quarter, highlighting the value of our core deposit franchise and our efficiency initiatives are progressing as planned. Finally, and importantly, the pending insurance sale transaction is a transformative step in our efforts to improve our performance and enhance shareholder value. Operator, we would now like to open the call to questions.
We will now being the question-and-answer session. [Operator Instructions] The first question today comes from Manan Gosalia with Morgan Stanley.
I was wondering can you talk through the rationale for the insurance sale? Why now? Was it a function of rates rising further and reaching a breakeven point for you? Or are the economics of the deal much better than you would have originally got, say, at the start of the year? Maybe help us think through that?
Sure. I think we've talked about it on this call for the last couple of quarters that we like the insurance business. We've always liked the insurance business. We knew we had what we thought was the premier bank-owned agency as we continue to talk to potential partners that were out there. The valuation just continued to be a big number. And when we look at the multiples that we received, I think it proves the process out that we did have the premier bank-owned insurance agency out there and the numbers that we're publishing out here can show that. The value of the agency represents about 25% of our total market cap and the agency produced 5%, give or take, of our net income. So the disconnect there was just too big and the benefit that it brings to our shareholders, we work for our shareholders. We've got to be shareholder focused. As we look at our performance, we know we've got to continue to improve our performance. We're not pleased with where we are, and this is an opportunity for us to benefit our shareholders.
And in terms of the capital benefits, you're generating a pretty meaningful 160 basis points of capital through the deal. You're using about a quarter of that, and I think you're suggesting that there's some upside to that as you use more of that gap freed up over time. But can you help us think to any constraints that you might have there? So for instance, if there is a high level of CET1 that you want to hold over time? Or is there a certain level of liquidity you want to hold, how you're thinking about the asset sensitivity and doing more of the securities yield resets, et cetera. So maybe help us think through that as well.
Yes. We've got some examples in the deck that we published this morning, and I think that the securities repositioning is something that we're going to do. That gives us lots of options. I think today, we don't have a number that we need to hit. We don't have a capital number that we're worried about. This is a tremendous benefit to us, and it puts all the options in front of us.
But are there any constraints like why not do is it more?
We certainly can. As far as I know, there are no constraints. We want to make sure that we take all the information that we have before that make good decisions.
The next question comes from Michael Rose with Raymond James.
Maybe, Valerie, I just haven't had a chance to run through all the numbers yet, but what were the expenses, the annual expenses associated or expected for the insurance business? Next year obviously, we forecast the revenues, but maybe not explicitly break out in. I just wanted to get a sense for what that is. And then just separately, if you could discuss the appetite for potentially using some of the proceeds for a buyback? Or is it just a better use to maybe look at investing in lenders or the franchise in other ways?
I'll take the second half of that one, and then Valerie can give you some numbers on the expenses side. I think we want to have all the tools in our toolkit. And so we would not want to say that we're not interested in doing buybacks. I think we want to make sure that we've got that option in front of us, but we want to make smart decisions. So I think where we have not been in the buyback game, I think this gives us the opportunity, should the market move against us to be able to execute on a buyback if we wanted to. Valerie, you want to talk about expenses?
Yes, sure. So Mike, I want to make sure, too, that you saw the updated deck that we sent out has the updated slides that include not only our earnings release side, but also the 3 different insurance slides at the beginning of that. And on Page 6 of that deck at the core headquarter, there's some discussion there on the adjusted revenue and adjusted net income for the last 12 months. So if you look back at the last 12 months, the total expenses were about $140 million.
Sorry, I missed that. Thanks for pointing that out. Maybe just separately, if you could just give a little more detail on the securities restructuring, maybe how you came up with that amount, just the process there. I certainly appreciate the benefit that the transaction provides you.
Well, I think this is our estimate today. We haven't closed the transaction. It's going to take some time to get the transaction closed. We certainly want to make sure that we take advantage of the opportunity in front of us to offset this tax loss in the same quarter. And so depending upon when we close, which we currently expect that we can do this quarter, then we would want to make sure that we can execute in this quarter, and the market can move between now and then. So you've got a whole bunch of what ifs built into this. And as the last question from Manan was there's no right size here. This is just an example that we're committed to do a securities repositioning. What we've shown in here was the lowest yielding quickest payback that we could do, and then we can look and see what else we could do.
Helpful. I'll step back. Thanks for taking my question.
Yes, the new deck was posted out this morning if you didn't pick it up.
The next question comes from Kevin Fitzsimmons with D.A. Davidson.
Maybe shifting gears, looking at the funding side. So you guys highlighted that proactive reduction in brokered deposits. I'm just curious if that you got it down to a level you'll probably keep or could there be further proactive reductions there?
I'm not a fan of brokered CDs in any form or fashion. I think the team here knows that well. I'm really proud of what we did in the last quarter in growing deposits. The corporate bank, the community bank, the whole team is focused on deposits. You heard in my comments, if you pull back the loss of brokered CDs and the seasonal decline in public funds, core customer deposits was up $500 million in the quarter. We're really proud of that. I think we've got the ability to continue to play in a highly competitive deposit gain. And I would like to see our team continue to win those customer deposits in, and I'd like to see us move those brokered deposits further down. That clearly is dependent upon what we can do on the loan desk, and you saw loans were flat this quarter. We clearly intend to continue to grow loans. We're seeing opportunities out there, but it's much slower than it was before. But on the funding side, I'm really proud of what the team is doing. Chris or Hank, do you want to jump in on deposits?
Nothing to add on the deposit side, man. I think you explained it well. I think on the loan side, I think rates have definitely clearly moderated some of the opportunities that we're still seeing opportunities, but we're also focused on deposits as part of those opportunities. And we're assessing the economic impacts that are out there right now. And we still have good year-to-date loan growth. So I think we've got the engine. I think it's just been a bit of a -- we're picking and choosing right now. Hank?
I just build on that a little bit. I would say, certainly, loan activity is down, I would call it moderate activity. But really the focus and the drive on the deposit side and when you look at the pipeline, especially on both corporate and community bank, they're very active in gathering the deposits. So I'm optimistic. And obviously, we had a good quarter in loan or deposit growth as well.
I would just add that of the cash proceeds from the insurance sale, we do intend on bringing down our borrowings. And that would include brokered CDs.
Right. That's in that base case, Valerie?
Yes, exactly. We've got about $830 million of brokered CDs that mature in the fourth quarter in January.
One quick follow-up just with that one lumpy credit issue, which helped a number of banks. I'm just curious what your shared national credit exposure is now, if you can have it handy in dollars or a percentage of loans or both, hopefully.
Billy, do you want to jump in on that? Valerie?
Well, I'll give you the numbers and then Billycan jump in with a little more color. We've got $4.3 billion in our shared national credit portfolio at 13%. That's pretty consistent with where we've been running. Can you add any color to that?
Yes. The one color I would add is, usually, the follow-on is how active are we? And shared national credits is just one piece of our multibank exposure. The bulk of our multibank exposure is actually smaller clubby deals that aren't shared national credit. And within those, we're almost 30% of those we lead. So we have a controlling basis in a lot of our multibank deals that fall outside of that shared national credit exposure.
Next question comes from Catherine Mealor with KBW.
One question on expenses. Appreciate the comments here to keep flat expenses year-over-year. Just as we think about the fourth quarter, I think we're going to see more, I assume, of the range closures and the cost of the initiatives that you've put through. So any near-term guidance where you think the fourth quarter expenses should land within the range?
With the noise that we're going to create in the insurance world, it's going to be a noisy quarter, I can assure you. So let's just talk through the things that you've already seen. So the headcount reduction that you saw with the lower headcount at the end of the third quarter, we're seeing benefit of that this quarter. Salaries and benefits should be off. We've still got more headcount reduction that will take place in this quarter outside of the insurance change. So as we get to 1Q, we'll see the full benefit of the people piece of that puzzle. On the branch side, those branches all closed on July 31, I think. And so that's fully baked into the fourth quarter run rate altogether. So there's no more to do there. So you've got some down pressure there. Valerie, do you want to talk numbers?
No. I think you're exactly right. And those will drive the core expenses down in the fourth quarter. To Dan's point, it is going to be a noisy quarter. So just bear with us, and we expect the first quarter at 24%. That's some that the insurance transaction does close in the fourth quarter as we anticipate that first quarter should really be much, much cleaner.
And then one classification on the capital gain from the insurance sales, that $620 million capital impact, does that include taking out the $91 million of goodwill associated with insurance hub?
I think that includes that number.
And then just to circle back on the capital, is there a capital ratio that you target, via CET1 or TCE that you just -- I mean this is a great capital accretive event. And so now that we've got our capital ratios back up to levels that I think we all feel better about, is there just a bottom in either of those ratios that you really don't want to get below as you think about bond restructuring and buybacks into next year?
No. I think we want to make good decisions. And I don't think we want to be trapped by 1 basis point or 2 basis points on some ratio. We want to make good intelligent smart decisions at the time.
The next question comes from Brody Preston with UBS.
I wanted to ask Valerie, just maybe if you could talk a little bit about the moving parts on NII. I was wondering where the spot rate on interest-bearing deposits were at quarter end? And also, could you talk about the loan repricing that you expect going forward? We had previously spoken about a 50% loan beta cycle to date, but I think you're running closer to 44% now. So any commentary you can give around those 2 items, I'd appreciate.
Yes, sure. So we did see our noninterest-bearing mix moderate pretty meaningfully during the quarter, where noninterest-bearing really only came down a little over 26% in the second quarter, a little over 25% in the third quarter. And so that obviously is a positive impact. And as we also mentioned, the cost of deposits went up 27 basis points at was half of what it had done in the prior couple of quarters. So all of that is meaningful. If you take a look at Slide 20, that shows the standard repricing that we've talked about and where things are in the floating category and then where things are in the next 3 to 12 months, and that obviously flows into our margin and helps improve that loan yield. One of the things that we saw this quarter was because we didn't have net loan growth, the pace of that loan yield increase was down from -- or with moderated anyway, that impact was moderated because of the lack of new loans. And so that is bringing down our beta assumptions as we go forward. The loans, excluding accretion, direct for the third quarter was flat. The beta was flat at 44% compared to the second quarter. As we look towards year-end, it's probably going to inch up a little bit. And again, some of that depends on the volume of loan growth. But probably, it will be sub-50, I think, at this point from what we saw this quarter, but it will be up a couple of percent probably, 2, 3 along that line. On the deposit beta side, again, that slowed it was 35% on a cumulative basis in the second quarter, 38% now. Similarly, I think it will probably move a little bit between now and year-end. But 2, 3 basis points kind of thing or percentage points.
You got that, Brody?
Yes, that's helpful. And then, Dan, I wanted to ask just how do you think about -- we talked about buybacks, we talked about securities, restructure. We haven't talked about whole bank M&A at all. I think that we saw at least one other bank use proceeds of an insurance sale to buy another bank up in the Northeast. At BXS, you'd been a prolific buyer of smaller banks and then you did the MOE. So any thoughts around using some of the proceeds or a bigger inorganic transaction? And then secondly, I did want to get your thoughts about how you think about overall levels of profitability and where you'd like to drive those 2 at some point over the medium term. I think the ROE target when you did the deal, the MOE was like a 1.3% ROA. I think with this transaction, it gets you back to 1. So just trying to think about longer term how do you get back to that kind of trajectory that you had laid out before.
Yes. I think we'll take that one first. We clearly have room to improve, and we need to continue to focus on that. That's why we're working through the initiatives that we've been working through to eliminate expenses to consolidate branches, to take advantage of opportunities there in front of us, and we still need to continue to improve. There's no question about that. I think when we look at where we want to be, again, you use the word target. We've never had any targets. We had some pro forma numbers that we put out at the time of the merger. Those were not targets. Those were based upon what we saw at the time based upon the economic environment at the time. Obviously, things have changed a little since then. But when you look at us and you compare us to what's going on in the market, we're not where we want to be. Nobody is willing to hide from that. We've got to improve. And I think this transaction gives us some tools in our toolkit to allow us to improve. And I think when we look at what we've got going in the future, I think we can continue to make headway on that. When you talk about M&A activity that's out there, there's no cost activity out there. There's nobody knocking our door down and we're certainly not out chasing anything at this point. I think we think we need to take care of our business right here at home. And we think that's probably the best use of what we've got in front of us today.
That's very helpful. I appreciate that. And if I could squeeze just one more in. I just wanted to just ask around the SNC portfolio. What percent of that are you guys the lead agent on? And then has any of that been reviewed by regulators lately, there's been some discussion around the industry this morning about SNC reviews taking place.
We're like every other bank that has those. Absolutely. The regulators are in and looking at them all the time. I don't know that we have a number on what we're leading. Billy was given some of that information a few minutes ago. But I think when you look at our overall loan portfolio, we're no different than anybody else that's out there. It's getting looked at every day.
The next question comes from Brandon King with Truist Securities.
So I wanted to get some commentary on what you're seeing as far as deposit trends within the corporate versus community bank, just to get a sense of how those flows have behaved. Recently, I know last call, you mentioned how you wish things were more rational. So I just wanted to get a sense of how things are shaping up between the 2 sides.
Well, I think as I said a minute ago, the fact that we grew core customer deposits from $0.5 billion in the quarter, and that came both in the Community Bank and in the Corporate Bank. I think the depositors are calming down. Chris, Hank, I'm happy for you guys to jump in here.
Yes. On the corporate side, we've definitely seen a reversal. We're able to get many of those deposits back that left earlier in the year. We're continuing to really focus on the deposit growth and it's certainly rates, we have attractive rates for our borrowers. But there's a stabilized and improving is the way I would categorize it in the corporate set.
Stabilized and improving. That's good.
I think I would agree with that across the whole bank. I mean the difference in what we consider our secret sauce is the relationship bankers in the field. So we've got great bankers across our complete footprint, and they're in those communities. They know the clients that have opportunities to go deposits and they're out there calling on them and everybody is focused on deposits 100%.
Yes. That's executive management all the way down. Some of our executive management team is not asking for deposits from customers all the time. So it works all the way up and down the line.
And just given the success you've seen this quarter, how does that inform your expectations for the deposit mix next year, particularly when we talk about noninterest-bearing deposits?
Well, I think we've been pretty open on our forward look on noninterest-bearing deposits dollar. You've got numbers we've been talking about for some time as we model out where we're going.
Yes. So given the slowed pace that we saw this quarter, we are projecting that to probably be just a little south of 20% by the end of next year. That's just what's in our modeling. That's based on an assumption that there continues to be significant deposit pressure in the industry based on some of the macro environmental factors. But that's what we're modeling out today on a gradual pace.
And is that assuming rates stay stable next year at points?
We are projecting some declines in the latter half of next year based on the forward curves. We primarily rely on the forward curves for use in our modeling.
The next question comes from Stephen Scouten with Piper Sandler.
So I just wanted to, I guess, some clarity on the expenses, flat expenses sounded like a goal or a target, but I don't want to misconstrue that. And then is the best way to think about that, just stripping the $140 million out from the insurance business and thinking about that basis is flat year-over-year?
I think that's a good way to do that. Yes, the expense drive to hold expenses flat is excluding insurance. So yes, I think that's a good way to look at that. Valerie, do you want to tag in?
Yes. I think you said it well. Looking at our adjusted expenses for 2023. We'll be working hard to keep those flat 2024. And again, excluding insurance and all that.
And then my only other question is around franchise finance lending. Another bank that I consider somewhat of a peer had maybe a little bit of a weakness or took up reserves around that business. I'm just curious if you're seeing any degradation in your book or anything that gives you pause around that segment of the business?
Hank?
Well, typically, when you have that industry, it's a little higher leverage. And certainly, with interest rates moving where they were, we have seen some pressure. I think they've worked through most of their issues as far as expense and are able to also increase some pricing. But yes, we have seen some pressure in that area of the bank.
Any major changes in the reserves related to those loans, I guess, accordingly?
No material change in those reserves. Just going through our process that we indicated earlier, we're active in looking at them and where we need to increase reserves we're doing that throughout the bank.
[Operator Instructions] The next question comes from Jon Arfstrom with RBC Capital Markets.
Dan, you don't have to talk about how the insurance business impacts your efficiency ratio going forward. I think I've heard that about 20 times.
The numbers are in the deck for you this morning, John.
Yes, I appreciate that. Just had a couple of follow-up questions. One on C&I. I understand the big loan that you identified last quarter that moved out, but the balances are still down a little bit. What's going on in C&I? Is it the market? Is it you just...
There were 2 credits that we've talked about for the last couple of years that both got charged off and moved out. And then actually, Hank, talk about where we are production-wise.
Yes, John. I appreciate the question. And I would say, as I mentioned earlier, we have an active portfolio, but it's moderately active. We are managing the growth there, obviously, based on the funding outlook that we have. And so there are deals out there, it's very competitive. We are obviously working through the deposit side as well. So any new credit or anything we're looking at is going to have a liability associated with it as well. And we're managing our growth. But I mean, the activity is there, but I would say it's down from the peak clearly. So let me just add to that a little bit. We do have plenty of capacity, too, with the relationship managers that we have, and they continue to focus on the existing relationships to build on that. So going out and meeting new additional teams, we obviously, at this point, don't see that as something that we would be active in, but unless it presents itself in an area that we could grow in.
So other than it's probably a little better outlook in that category, C&I.
Yes, I would want to brag on the team. We've got a great team. They're producing business every day. The market certainly has pulled back and slowed down and people are asking more questions, which is all healthy and good. But the markets that we serve are going to continue to give us opportunities. We had a great quarter for production down from where we've been, and that's why you didn't see growth in the quarter. But I think the team is out there making it up every day.
And we're able to get into some credits where the pricing may be better than it has been historically in terms are certainly that way as well.
Good to hear. Stephen asked a commercial segment question. So I'll ask on energy as well. I mean it's 5% of the company, but it seems like it's a pretty dynamic environment right now. What's your appetite like there? And what are terms and pricing like in energy?
Terms and pricing are better.
Yes, really, I would say they are. If you're willing to extend credit, you can get these terms in credit piece of terms and decent pricing. We're active in alternatives and not as much energy service but in upstream. And certainly, we have an existing client base that we're going to continue to build on. So I think there are opportunities there.
Last one. Any changes in your economic assumptions or overlays in your reserve this quarter? Or is it just largely the same as last quarter?
Valerie, I think it's the same as the past.
I mean there's always a little bit of movement, but I would say there's nothing notable to call out on that.
This concludes our question-and-answer session. I would like to turn the conference back over to management for any closing remarks.
All right. Thank you all again for joining us today. We manage our company for our shareholders. And as I've said for some time, we know we had the premier bank-owned insurance agency, and this obviously proved true with the valuation multiple that we were able to achieve. The ability to improve our capital position, improve our earnings position and improve our efficiency was just too good to pass up. This unique opportunity where everyone is a winner. Our shareholders win, our insurance teammates win, our insurance clients win, the communities we serve win. As we look forward, we're committed to improving our performance. Our planned bond restructuring will obviously be a benefit to us as the options this transaction provides will allow us to fast-forward some of our improvement plans and reward our shareholders. Thanks again for joining today. We look forward to visiting with you all soon.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.