SmartFinancial Inc
NYSE:SMBK
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SmartFinancial Inc
Earnings Call Analysis
Summary
Q3-2023
SmartBank's third quarter was highlighted by a 5% annualized growth in both loans and deposits, stable credit quality, and a beneficial securities transaction expected to pay back within a year. Net interest income has reached a floor with promises of improvement in the future. The bank maintains a healthy loan-to-deposit ratio of around 80% and a net interest margin of 2.81%, despite a slight contraction due to increased deposit pricing pressures. Operating revenue is expected to remain stable at $38 million to $39 million, returning to a $42 million plus run rate in the second half of 2024. The net interest margin is projected to stabilize into Q4 and improve throughout 2024.
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Hello everyone and welcome to the SmartFinancial Third Quarter 2023 Earnings Release and Conference Call. My name is Seb and I will be the operator for your call today. [Operator Instructions] I will now hand the floor over to Nate Strall to begin, please go ahead.
Thanks, Seb. Good morning, everyone. And thank you for joining us for SmartFinancial's third quarter 2023 earnings 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, Chief Financial Officer; and Rhett Jordan, Chief Credit Officer will also provide commentary. We will be available to answer your questions at the end of our call. Our comments include forward-looking statements. These statements are subject to risks and uncertainties, and the actual results could vary materially. We list the factors that might 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 October 23, 2023 with the SEC. And now I'll turn it over to the Chairman Miller Welborn to open our call.
Thanks, Nate. The third quarter of this year has been another quarter of incredibly busy activity for SmartBank. I'm very proud of how our team has remained steadfast to our mission and our objectives for the company. It's not a secret that our industry has been challenged this year, but we see the challenges as positive opportunities. We've made a strong effort to improve every line of business that we operate, and I do sincerely believe we are poised for a bright future. Our markets remain very strong, and we are fortunate to be located in the Southeastern United States, where the economy remains robust. We are very proud of what we were able to accomplish for the quarter. Our entire SMBK team is focused, determined and very clear of our goals. With that, I'm going to turn it over to Billy.
Thanks, Miller, and good morning, everyone. Great to be with you today. I'm going to jump right in this morning and discuss our third quarter highlights. You'll see most of these on Page 3 of our deck. All in all, a steady quarter for our company. I'll be discussing primarily non-GAAP operating metrics today. As Ron will provide some details shortly on a bond rate we did in September that had some impact on our GAAP numbers. We came in at $0.43 on operating EPS or $7.2 million in net income. We continue to grow both sides of the balance sheet with both loans and deposits increasing right at 5% annualized. Our loan-to-deposit ratio was staying healthy, right around 80%, giving us nice flexibility on growth. Credit is strong with an NPA ratio of only 12 basis points, the same as prior quarter with charge-offs continuing in a negligible number. Our credit quality continues to feel very solid. And a key number we focus on here our tangible book value moved higher even with the bond trade now at $21.95, excluding AOCI and $19.94 including it.As I stated, we did execute a well-timed transaction late in the quarter to reposition close to $160 million in available for sale securities. The loss taken on the trade will be earned back in a year, but accelerates our ability to reallocate assets. We like the timing and what the trade did for our forward-looking balance sheet. This, along with the large cash flows coming in early 2024, puts us in a very favorable spot related to cash positioning.Our operating income and margin were slightly below our forecast, driven primarily by heavier funding costs and some movement with balances from noninterest-bearing to interest-bearing. I do feel we've stabilized. And while we'll continue to see some grind higher on deposits, I feel that delta will be covered by growth in asset yield resets. I believe the net interest income number has floored, and we look forward to seeing that line move up from here. All in all, a good quarter where we help serve continued adding some outstanding new clients and position the company to move metrics north. I'll close with additional comments in a moment, but let me hand it over to Rhett to discuss the loan portfolio and credit and then to Ron to dive deeper into the numbers. Rhett?
Thank you, Billy. SmartBank's loan portfolio continues to grow at a moderate pace, while maintaining a stable and diversified profile of continued strong credit performance. In the third quarter, we saw 5% quarter-over-quarter annualized organic loan growth spread evenly across the bank's geographies and across the different segments of the portfolio. The composition of the portfolio was effectively unchanged through this growth cycle, while recognizing a 13 basis point increase in average portfolio yield, which moved up to 5.52%. Our construction portfolio saw a slight decline in outstanding balances, down about $23 million quarter-over-quarter and representing 11% of total loans and 84% of total capital, a little below those same metrics for second quarter. This was an expected swing as we've had several projects under construction moving to the completed stage while new commercial construction starts was lower in the early part of the 2023 year than in the same period prior year.Our nonowner-occupied nonconstruction CRE portfolio grew slightly in outstanding balances for the quarter but held steady at 26% of total loans, and the total CRE ratio came in at 285% of total capital, also right in line with the last period. Again, steady performance with diversified production results.Also holding steady were our overall credit performance metrics with NPAs delinquency and classified asset ratios seeing very little change quarter-to-quarter. While we have a slight increase in total delinquent and nonrural loan balances since year end 2022. The dollar amount has moved in conjunction with our overall capital growth and portfolio growth and thus, our ratio to total loans and leases has held steady. Approximately 21% of those total outstandings are carried in our equipment finance subsidiary due to some slower activity in some of the smaller trucking clientele.Credit losses for the period were 0.04% with year-to-date total being 0.06% through third quarter. Loss risk within our classified and delinquency portfolio is expected to be very manageable in future periods, and our allowance is more than adequately positioned to address any realized loss as these assets are navigated through.Our markets continue to report solid housing metrics, continued population growth and overall stable economic conditions that support small business stability, and we expect solid credit quality results to continue in upcoming periods. Our allowance did reflect a slight increase from 0.98% to 1% of total loans, but this minimal increase was due to how our CECL model monetized certain impacts of various input factors that occurred during the period. The recommended provision resulted from changes in certain components in the model, such as continued portfolio balance growth, movement in unfunded commitments, quarterly net charge-offs, lower unemployment rates and changes in key [indiscernible] positions. The culmination of the adjustments in each of these factors resulted in the recommended provision that was realized for the period.Overall, loan demand continues to be good, while the loan portfolio continues to maintain stable, solid credit metrics and performance.Now I'll turn the call over to Ron to discuss deposit composition, liquidity and other key financial measures. Ron?
Thanks, Rhett, and good morning, everyone. On Slide 9, we continue to see our overall deposit levels remain stable as we build our presence and gain new clients in our expansion market areas. We ended the quarter with a loan-to-deposit ratio of 80%, driven by deposit growth of $47 million, which exceeded our quarterly funding needs and further bolstering our liquidity position. However, we did experience some upward pricing pressure and mix shift, particularly during the first 2 months of the quarter as clients reacted to the Fed rate hike and competitive solicitation. Our total deposit costs increased 31 basis points to 2.20% and were 2.28% for the month of September. Despite upward pricing pressure, our strategy of lagging market rate increases and adjusting rates only as needed for competitive purposes has afforded us some buffer relative to peers. Looking ahead, we do expect some additional cost migration as clients rightsize operating accounts and look to maximize returns on idle cash. However, we believe this will occur at a much more muted pace as most of our price-sensitive clients have been addressed. On Slide 10, you'll see that we have updated our principal cash flow schedule to reflect the sale of almost $160 million securities at the end of September. The security sale was comprised primarily of U.S. treasuries, approximately $100 million, which had maturities in Q1 of '24 and the remainder of which had a weighted average maturity of 2.6 years. The total weighted average yield of these securities sold was 1.37%. Reinvested at current cash yields the sale proceeds provide an additional $6.4 million of annual interest income, which equates to an earn back just over 1 year. Aside from the enhanced liquidity benefits, the securities repositioning provides additional earnings momentum as we move into Q4. Further, our current yield on cash affords us the ability to be patient in our redeployment of the sale proceeds, whether it be methodically reinvesting in securities or preferably funding higher-yielding loan production, both of which would accelerate the earn back on this trade.As you'll see on Slide 11, even with the securities we positioned during the quarter, we still have approximately $208 million of securities, primarily comprised of held-to-maturity treasuries maturing by year-end 2024. Combined with fixed rate and adjustable rate loans, we have over $460 million in assets maturing or repricing by year-end 2024 with a weighted average yield of 4.08%. While the interest rate environment remains challenging, we are optimistic on future profitability, knowing the significant earnings catalyst is on the horizon.Our overall liquidity position on Slide 13, which includes cash and securities, remained unchanged at 22% of total assets. Net interest margin was 2.81%, representing a 12 basis point contraction for the quarter. As discussed earlier, our margin was negatively impacted by increased deposit pricing pressures and mix shift experienced during the quarter. However, we are starting to experience a slowdown in the velocity of money movement and deposit repricing as we move into Q4. In addition, Q3 saw weighted average cost of new deposit production of 3.59% and new commercial loan originations in the 7.5% to 8% range. These factors, combined with the enhanced yield on repositioning security proceeds, we are projecting margin stabilization into Q4.Lastly, looking ahead at the next few quarters, we expect operating revenue to remain stable in the range of $38 million to $39 million before returning to our previous $42 million plus run rate in the second half of 2024.We have details of our noninterest income and expenses on Slides 15 and 16. Operating noninterest income was in line with Q3 guidance at $7.5 million, primarily driven by ongoing focus to identify and capitalize on those income opportunities as they present themselves. Looking ahead, we anticipate noninterest income to continue to be in the mid-$7 million range. Total operating expenses were $28.4 million. The slight escalation was primarily to salary and benefit expense increases for incentives and commissions resulting from better than anticipated production and additional costs related to the new self-insured health insurance program.While our efficiency ratio was at 74%, which is above our internal target, we recognize that it's primarily a function of the pressures of an abnormal rate environment rather than lack of expense control. Despite this, we continue to be extremely diligent on all expenditures while identifying opportunities to cut or delay expenses. Looking ahead to the fourth quarter, we project noninterest expenses in the 25 -- excuse me, $28.5 million to $29 million range and salary and benefit expenses in the range of $16.5 million to $17 million.And finishing off on Slide 17, we had minimal change to our capital ratios from the prior quarter even with the loss associated with the securities repositioning. We remain in a strong, well-capitalized position and most importantly, continue to execute on our primary mission to grow and defend tangible book value.With that said, I'll turn it back over to Billy.
Thanks, Ron. As you can see with our trends, we are positioned well employing offense. With the stabilization we discussed and more clarity on the rate forecast, we are diligently focusing on building the revenue number back after absorbing these rate increases. I remain confident in our ability to execute on that front. My outlook on loans is still fairly bullish as we are continuing to see nice pipelines. We are living and feel that we continue the same mid-single-digit pace. With that, deposits need to be growing at the same pace, and I feel we can fund that growth internally as well. As Ron discussed, we are continuing our internal focus on efficiency and expense control, and I do believe expense growth should be fairly well contained. We are looking to add revenue producers within existing markets and do feel we can make some of those additions in the coming quarters, but any expense growth there should be offset by increased revenues.Miller and I spent several days on the road again this quarter, continuing our market roundtables and meeting with clients and prospects throughout our footprint. The bank's momentum in these markets is outstanding and continues to gain steam. I see tremendous opportunity for our company as these -- as there are a number of changes happening in our industry. We've chosen a path to continue to do what we've done successfully in the past, investing with an eye on long-term revenue and EPS growth. Again, overall, I felt a good quarter where we helped serve down credit, grew loans and deposits, grew tangible book value and set us up as we look forward. As these rates settle, our loan balances grow and reprice plus our ability to utilize the outsized cash flows coming in early next year, our company is positioned very well.I'll close with a huge shout out to our 600-plus outstanding associates that we have in this company. These team members continue to build a phenomenal culture and it's greatly appreciated. I'm going to stop there and open it up for questions.
[Operator Instructions] Our first question today comes from Thomas Wendler of Stephens Inc.
Just thinking about the $106 million securities sale and the $184 million of securities maturing by 2Q '24. With these increased cash balance you guys are likely to see, could we see loan growth maybe over that mid-single-digit range?
Thomas, it's really -- it's possible. I think we're positioned to grow loans at whatever pace we can find them. I think it's just a function to find the right ones in this sort of an environment. But we've had a lot of success doing that. So we've got the capacity to do it. We'll just continue to -- we're going to continue to get out there and grind and dig and find good credits to add to the books, but it's possible. But I still like, kind of, given the environment that mid-single-digit forecast for us going forward.
And then just kind of staying on that with all of these earning assets kind of repricings coming up through 2Q '24, NII staying kind of a floor from here. How are you thinking about NIM moving forward?
Yes. At this point, Thomas, our margin has been difficult to forecast as many others. This quarter, we did experience higher betas we modeled. Increased to 39% from 32% from the prior linked quarter. We were projecting 36%. As we move forward, we do expect some compression, but some of our repricing will minimize that effect. At this point, we're just going to say our NIM is stabilized, and we're projecting like results for Q4. We do see our NIM getting better throughout 2024 as we get to the second half. But right now, we're just going to say we're going to be stable for a while.
The next question comes from Stephen Scouten of Piper Sandler.
I guess, one question just on the stated securities repositioning the securities repositioning trade. I'm just kind of curious on the dynamic. It sounded like a chunk of that was maybe already set to mature in the first quarter. So kind of what drove that given the short duration there? Or was more of the actual loss content, I guess, related to some of the longer-dated portion of that trade.
Ron you want to -- go ahead.
I think we wanted the ability to reprice as many assets as we can earlier. So that really facilitated the thought of the trade. We were on course to let these mature naturally. But given the modeling and the earn back and we thought it was a pretty good move on our part to go ahead and just recognize this loss and to get their earnings under key to keep our NIM stabilized.
Yes. And the only thing I'll add, Stephen, is when we were -- as we timed this right around when the -- I guess, right around the last fed move. And so kind of given where the market was, we just felt like rates were going to continue to stay elevated. So we felt like timing was good; in hindsight, it was. And so it just seemed like a good time to do it. Yes, the bulk of that was going to mature going into early next year anyway. So it really wasn't too big -- wasn't too big of a risk for us anyway.
And then obviously, I know you kind of spoke to the fact that it's more interest rate driven, the efficiency ratio, than it's really expense-driven, but I'm sure you're not really content with, I think, 60 basis point ROA this quarter. So what's the -- what are the clearest levers you feel like you can pull to kind of move earnings back to a level you might start to be more comfortable with in the maybe near- to medium-term?
Yes. Again, it comes back to revenue growth. As Ron had said, and there's always opportunities to refine the expense side. And we're constantly doing that. We've been able to absorb some attrition on the salary side, we're always looking to try to renegotiate contracts, whatever that may be. But I think ours is more revenue growth. I think when you look at our numbers, go back and look historically. I mean it's net interest income. I mean we were a little heavier on the -- dependent on margin and the squeeze that we've had in the net interest income line over the last little bit. It's really what's impacted those metrics, not ROA. As we've discussed, I think the biggest thing for us is just growing that line back. And that just comes -- we've got some great sales teams out there. Growth has been solid. We continue to think that's going to be in the cards for us. So I think with the resets on the asset yield plus growth, I think you'll see that, that net interest income number continue to drive back up, and we'll get that on our way back to where it was just a few quarters ago.
And then maybe along that growth front, I guess it depends maybe right about 2 years since you guys brought on a number of teams back in '21. And I'm just kind of wondering, as you look back on those teams now, maybe some of those regions, Gulf Coast, maybe in particular, how are you seeing them continue to contribute to the overall growth of the franchise?
I'll tell you. They've been great contributors to the growth of the franchise. Really, when you look at all these teams that we added to the bank just a couple of years ago. And I think that's, I think, again, kind of going back to a little bit of our inefficiency today. I think that's a piece of it, too. When you -- we added -- that was a big bite for us. And so to add basically 6 new markets in the course of a 6-month period, we were able to get all those folks ramped up, all those markets are incrementally profitable now, but some of that growth was delayed with a little bit higher rate. We couldn't move as many balances, but we've been able to organically grow some great balances really in all of those markets. And they've -- all of those teams have been just outstanding contributors to our company as well as a lot of our legacy markets. So as I said in my comments, I love where we're positioned. We've got some great salespeople. We are out grinding every day and continuing to grow this thing. So it's been good. The rate increase has delayed a little bit of that profitability that we had expected, but it's -- and we've got it in sight.
Our next question is from Will Jones at KBW.
So I was a little surprised to hear that the revenue outlook is really kind of unchanged, staying in that $38 million to $39 million range over the next few quarters. It just feels like we talked a lot about the asset repricing opportunity you have coming up that the NIM you're looking to at least maybe hold stable here and maybe steadily grind higher through 2024. I'm just curious, that would have maybe reacted and think that revenues might gain some positive momentum going into next year. Just curious if you can help me connect the dots and maybe what's driving that more muted revenue forecast.
Yes. I'll take this first, and Rhett could chime in. This is Ron. For the most part, the neediness is coming from our deposit base. We've modeled not to be as fast to move upward. But from what we're experiencing, like I said, we're 3 basis, 3% higher on our beta as what we're looking at. So I think it's truly a function of our deposit cost escalating.
Yes. And that Will and, I don't know how -- you had a, I guess your comment about a few quarters. I don't think -- I think we're just dealing with a couple of quarters here where we think this thing kind of stay -- we kind of grind here a little bit because you think about going to have a little more deposit pressure probably this quarter, we can offset that as we talked about with the asset yield reset with some growth. So it will stabilize. First quarter is always going to be typically a little bit softer just with fewer days. So I think the first couple -- these next couple of quarters is where we see kind of that grind. -- it picks back up pretty -- we see it picking back up pretty nicely from there.
I know last quarter, we kind of talked about maybe deposit betas peaking in the 38% to 40% range. But if we just forecast the 3% higher that we were talking about here, maybe deposit betas end in the 45% realm. Is that the right way to think about it?
I think we're looking at -- yes, I would say low to mid-40s, probably maximum at 40s at this point, but we've been probably wrong on a deposit betas in the past. But I know it'll escalate slightly, but our asset repricing will minimize or mute some of those effects going forward. This quarter is our first quarter that we're looking at for Q4, where our growth in interest income well is projected to outpace the growth in deposit expense. That's the first time we've seen that quarter-over-quarter. And it's all predicated on what the Fed does going forward.
And then just switching over to credit, I mean, it still remains just remarkably clean. The provision really has been fairly low year for the past handful of quarters. And you guys feel pretty comfortable with the reserve at 1% level. Is the messaging on provision that it will just be kind of steady as she goes until maybe credit turns or loan growth picks up? Or what would be the messaging on the go-forward provision?
Yes, I think that's probably the best outlook at this point is kind of -- you used the term say as she goes. I think that's a pretty good depiction. And as we said with the season model of the different factors that impacted can move it slightly from [indiscernible]. But we -- as Billy said, that single-digit loan growth profile, we don't really see any considerable credit weakness in the near term. So I think that's a good outlook.
And then lastly for me, there was a bit of excitement earlier in this year on bank M&A, and we're still hearing chatter that -- conversations are fairly active, and we might just be right on the cusp of seeing any kind of real deal activity materialize. But could you just give us a refresher on where you stand on M&A maybe from the perspective of both the upstream and downstream partners.
Will, the only color we can give is probably the same as we've done in the last couple of quarters that yes, there seem to be a lot of conversations out there and you see a couple of deals getting announced along the way, a couple of smaller deals and maybe 1 or 2 bigger MOEs. But I don't know until you see, until you get some clarity on credit and what that looks like and a little bit of Fed clarity. I don't know that you'll get any real escalation. But yes, we're continuing conversations upstream and downstream. We love those relationships and Bill and I and the rest of the team enjoy those meetings. So that's really about all I --
** Yes. And I'll add, Miller. Just that M&A, as Miller alluded to, with valuations kind of what the industry kind of suppressed it makes it a little more challenging on the acquisition front. But I think to your point, I know a lot of banks are sitting down and looking at kind of strategically what are their options and where do they want to go? And I feel very good about us and our environment in a stand-alone, but also, obviously, we're going to look advantageously at opportunities. And so if we see something in principle we'll continue to explore it, but really like kind of where we're positioned and kind of what our optionality is sitting on the day.
We love letting Nate run these models. He's a model [indiscernible]. Yes, it's really well just getting back to shareholder focus. And I think we are totally focused on the shareholder and what makes the most sense for them and love focusing on that.
Our next question comes from Kevin Fitzsimmons at D.A. Davidson.
Just wanted to follow up on the margin. So at a high level, it sounds like what you're saying is it's kind of going to -- to use your words, it's going to continue to be a bit of a grind next few quarters but stabilizing -- in the course of stabilizing. And the main headwinds had been the cost of deposits going higher and the DDA remix. And I believe, Ron, you might have said at the beginning of your comments, so you alluded to those slowing, and you gave some number for September. Can you kind of go back to what gives you confidence those headwinds are slowing? And anything you can give us like coming out of the quarter on that front?
Yes. I think we saw, as I said, escalated Q3, September, we're starting to see pretty much conversationally and balance wise, a lot less repricing going on. And we're modeling our deposit beta has slowed down as we go. We're seeing less of a -- we had a pretty good noninterest-bearing mix shift happen. We think that stabilized. I think Q2 had excessive funds in there. So that assisted with it. I think going forward, we think we can maintain our noninterest-bearing balances. I think we'll see it creep a little bit. But again, this trade in our investments would offset some of the noise and just a lot less chatter on the deposit side at this point of time. I mean, really, it's as simple as that of what we're seeing and hearing in our numbers for the beginning of October.
And Bill, we just -- you say you continue to be bullish on loan growth. Maybe just if you can give us a flavor for how the customers and your local economies are hanging in and what that sentiment is like? I mean some banks are talking about really limiting loan growth and just focus on fortress balance sheet and only dealing with existing customers, not looking for new customers until we get more clarity on the economy. I know the Southeast has definitely got tailwinds, other parts of the country don't. But I'm just curious where how you're looking at that, whether you're feeling incrementally better or more of the same just over the last 3 months?
Yes. Kevin, I mean I still feel pretty good, and I still think, again, as I said, a fairly bullish outlook on both the economy and loan growth. Obviously, there are headwinds out there. The rate increases have -- will continue to have some impacts. But for us, when we look to onboard new clients, a lot of these, again, a lot of these go back to the ones where we talk about a lot of these newer team numbers that we've added over the course of the last couple of years. So we're onboarding clients that are not new to business. They've been around for years. Our team members have banked them in some instances for decades. And so yes, I think the long tenure track record that we have, that our team members have with a lot of these clients give us some confidence to go in and continue to add. I think that's kind of where the -- kind of the cautiously optimistic terms. Obviously, it is. It's a challenging environment, but I like where we're positioned. The clients that we're continuing to add, we feel really good about. So we want to keep our foot on the gas pedal to that extent. It's not on the floor board, but it's half way down. And we feel pretty good about our ability to keep doing that.
And one last question. I know maybe this quarter with the securities loss that might not have been priority #1 to do. But like with your current capital levels and with your outlook, you've outlined and the stock trading where it is, would you guys entertain stepping into buybacks? Or do you want to get those capital ratios higher before you would do that?
Yes. It's definitely an option depending on share price. But as you alluded to in the prior comment, Kevin, we're going to continue to watch the markets, make sure that the balance sheet stays where we expect it to stay. We don't -- we've got some powder, not a ton in those capital numbers. So I think we'll watch that. Obviously, we can if we feel like we need to, if the stock price gets to a point that we feel like that's the right move, we'll do it. But I think it's more of a balance today, kind of watching growth aspects and what's going on with the economy in conjunction with that.
Our next question comes from Steve Moss of Raymond James.
Maybe just on deposit costs here. Just -- I apologize if I missed it, but do you guys have what it was for the month of September?
Yes, new deposit production was in the 3.60% range. New deposit production is that what you're looking for? Are you looking for what the deposit costs were?
Yes. Deposit costs for the month of September.
Our total deposit costs for the month of September was 2.28% for the portfolio.
And then in terms of just on the following up on the loan pipeline here. Just kind of curious, is the mix starting to shift towards more C&I and less here going forward, given the absolute move-in rates? And just wondering also maybe does the construction portfolio continue to go lower here just given where we are with rates.
Yes. And let me -- I'm going to let Rhett take that first, Stephen, and then I'll add some anecdotes, a couple.
Stephen I would say that is indeed the case. We're certainly seeing a bigger pool in our pipeline in the C&I segment, to your point. Construction has begun to, I guess, sneak back in here and there with specific projects, mostly owner occupied re-lease, but we are beginning to see some borrowers begin to go ahead and pull the trigger on projects that they may have delayed a little while. But C&I has certainly become a much larger component of our pipeline. And I would also say that correlates back to what we've talked about a few times with regard to our newer market expansion teams, having come from a much broader C&I portfolio. That's the client base. That's what they're calling on. So that's what's driving a lot of that [indiscernible] and that was the focus even before rates moved, moved more C&I.
But yes, Rhett hit it, Stephen. I think it is, we'll see that. We'll continue to look at CRE opportunities. We're seeing a few that we like, that we feel really good about the sponsors and guaranteed positions. And so we'll continue to look at those. But yes, the focus is definitely a little bit more C&I based.
And maybe just the other thing in terms of just the move in rates here, especially the last 70 bps in the last month or so. Just curious, as loans are coming up for renewal, are you seeing a increase in borrower stress? Or kind of how are those debt service projections looking now that rates have moved even higher?
Yes. I don't -- I'm going to let Rhett jump in. I don't think -- we've not seen a lot of stress. But you want to dive into that one?
We've been looking at that really the entire year and just kind of forward-looking at upcoming maturities and our current information we have on projects and borrowers. And certainly, in some instances, with rates moving at the pace they did the coverages are down from where they were perhaps at the time that it was originated, but nothing to the point that it's causing significant challenges for the borrower and being able to generate adequate cash flow projects to service the expected repricing. We still feel very good about our portfolio's ability to absorb these rate increases when the repricings occur. We have seen some market moves in the revenue side for some of those projects that's allowing that as well. So it is -- we still feel pretty optimistic about the ability for the CRE portfolio to absorb that.
The next question comes from Feddie Strickland from Janney Montgomery Scott.
Just wanted to go back to the expense guide. Ron, I think you said it was 28.5% to 29% for the fourth quarter. Correct me if I'm wrong there. But as we think into 2024, is there anything that would cause a significant change from that level? Or is it just sort of a steady modest growth rate, given some of Bill's comments on the cost of new hires being more or less, offset over time?
Exactly that, Feddie. It's -- for the most part, it's going to be a normal wage increase cycle. We do have small initiatives along the way. But we're probably looking at normal 5% to 7% increase in that for 2024. Again, we're not done with our 2024 modeling, but that's probably what would be expected. The majority of that's going to be in salaries.
And then my other question was, what should we expect in terms of the trajectory of overall earning asset growth and earning asset -- just asset growth in general, just with all these upcoming maturities, both in terms of loans and securities. What I'm trying to get a sense for is whether all these maturities are put back into new loans and securities? Or do you potentially continue to pay down some of the borrowings that are still there on the liability side?
Yes, Feddie, again, depending on our loan growth, we expected to put it to our loan production. Fortunately, we don't have any borrowings to pay down. So if we wind up in an excessive cash mode, we would either invest it in securities, which is -- the rates are getting more favorable as we go along or be more prudent in our deposit pricing as we go forward. We'll have some options to go to do that.
[Operator Instructions] We have no further questions on the call. So I will turn back to Miller Welborn for closing remarks.
Thanks, Seb, and 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. And I hope each of you have a great week.
Thanks.
Goodbye.
This concludes today's conference call. Thank you very much for joining. You may now disconnect your lines.