First Horizon (NYSE:FHN) delivered strong results for the first quarter of 2024, with a noticeable increase in adjusted earnings per share (EPS) and revenue growth driven by margin expansion and countercyclical businesses. Celebrating 160 years in business, the company also highlighted its community engagement through the Grants for Good Campaign and a confident capital deployment strategy. Despite some challenges in the loan portfolio, First Horizon's overall credit performance remained stable, and the company is poised for continued success throughout the year.
Key Takeaways
- Adjusted EPS rose to $0.35, up 9% from the previous quarter.
- Revenue growth was driven by margin expansion and countercyclical business improvement.
- First Horizon celebrated its 160th anniversary with a $1.6 million Grants for Good Campaign.
- The company repurchased over $150 million of stock and remains strong with a CET1 ratio of 11.3%.
- Loan demand is expected to improve over the year, despite modest beginnings.
- Non-performing loans increased, primarily due to two specific credits.
- Executives remain confident in the loan portfolio's performance and the company's approach to future regulatory requirements.
Company Outlook
- Expectation of non-interest income growth between 6% to 10%.
- Expense outlook remains unchanged, indicating operational efficiency.
- Anticipated improvement in loan demand through the year.
- Plans to reprice loans and securities to increase spread in preparation for regulatory thresholds.
Bearish Highlights
- Non-performing loans rose due to two credits in senior living and consumer finance.
- Criticized balances increased, with most on watch status.
- Commercial real estate loans faced revaluation, with an average property value decline of about 20%.
Bullish Highlights
- Strong credit performance and capital levels maintained.
- Significant stock repurchase signals confidence in the company's valuation.
- Executives expressed confidence in managing balance sheet structure amid regulatory changes.
Misses
- Challenges in forecasting net interest income (NII) due to the volatile environment.
- Higher interest rates have led to increased loan criticism and the necessity for loan modifications.
Q&A Highlights
- Loan modifications and debt service coverage ratios discussed, with a focus on working with borrowers for mutual benefit.
- Importance of long-term client relationships emphasized in C&I loan growth.
- Company's disciplined underwriting and strong loan-to-value ratios in commercial real estate loans highlighted.
First Horizon's earnings call showcased the company's strategic focus and adaptability in a changing financial landscape. With a strong start to the year and a clear vision for the future, First Horizon is set on maximizing shareholder value and fostering community relationships as it navigates through 2024.
InvestingPro Insights
First Horizon (FHN) stands out with a track record of resilience and shareholder commitment, as evidenced by its 14-year streak of maintained dividend payments—an important consideration for income-focused investors. The company's dedication to returning value to shareholders aligns with its robust capital deployment strategy and stock repurchase program, reinforcing the bullish sentiment noted in the article.
Despite challenges, analysts remain optimistic about First Horizon's profitability for the current year, a sentiment that is backed by the company's performance over the last twelve months. The InvestingPro Tips highlight this profitability, which is crucial for investors gauging the company's financial health and future prospects.
InvestingPro Data further complements the article with key financial metrics. First Horizon's market capitalization stands at $7.84 billion, and the P/E ratio, a measure of the company's current share price relative to its per-share earnings, is 8.93, which is relatively low, indicating potential value for investors. The company's revenue for the last twelve months as of Q4 2023 was $2.982 billion, despite a slight decline in revenue growth during the same period.
For those looking to delve deeper into First Horizon's financials and future outlook, there are additional InvestingPro Tips available. Use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, and unlock access to more than 5 exclusive InvestingPro Tips that provide a comprehensive analysis of First Horizon's financial health and stock performance.
Full transcript - First Horizon Ntl (FHN) Q1 2024:
Operator: Welcome to the First Horizon First Quarter 2024 Earnings Conference Call. My name is Carla and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Natalie Flanders, Head of Investor Relations to begin. Natalie, please go ahead.
Natalie Flanders: Thank you, Carla. Good morning. Welcome to our first quarter 2024 results conference call. Thank you for joining us. Today, our Chairman, President and CEO, Bryan Jordan; and Chief Financial Officer, Hope Dmuchowski, will provide prepared remarks, and then we'll be happy to take your questions. We're also pleased to have our Chief Credit Officer, Susan Springfield, here to assist with questions as well. Our remarks today will reference our earnings presentation, which is available on our website at ir.firsthorizon.com. As always, I need to remind you that we will make forward-looking statements that are subject to risks and uncertainties, and therefore, we ask you to review the factors that may cause our results to differ from our expectations on Page 2 of our presentation and in our SEC filings. Additionally, please be aware that our comments will refer to adjusted results which exclude the impact of notable items. These are non-GAAP measures, so it's important for you to review the GAAP information in our earnings release and on Page 3 of our presentation. And last but not least, our comments reflect our current views and you should understand that we are not obligated to update them. And with that, I'll turn things over to Bryan.
Bryan Jordan: Thank you, Natalie. Good morning, everyone, and thank you for joining our call. The first quarter of 2024 was another strong quarter for First Horizon, demonstrating our ability to produce consistent returns for our shareholders. We grew revenue both through expanding our margin and improvement in our countercyclical businesses, while simultaneously reducing expenses and maintaining strong credit performance. In March, we celebrated our 160th year in business and took the opportunity to celebrate the strength and resiliency of our company, which has been driven by a dedicated and talented associate base. In honor of our 160th anniversary, we recently announced our Grants for Good Campaign, which will award $1.6 million in grants to non-profit organizations within our 12-state footprint. We believe that the communities where we do business are the foundation of First Horizon's long record of success and we are proud to continue to support the clients and communities in our markets. On Slide 5, we have shared some of the financial highlights for the quarter. We delivered adjusted EPS of $0.35 per share, up 9% from the prior quarter with pre-provisioned net revenue up $25 million. Adjusted return on tangible common equity improved to 11.6%, driven by positive operating leverage, as well as the benefit of returning excess capital to shareholders. Our improved returns resulted from our ability to drive higher revenue in both our core banking franchise and our countercyclical businesses. We grew the net interest margin 10 basis points from the fourth quarter from improved pricing on both loans and deposits, driving a $7 million increase in net interest income. FHN Financial had a stronger quarter as well with a $15 million increase in fixed-income fees. In January, our Board approved a $650 million share repurchase authorization. We began to return capital to shareholders this quarter, repurchasing over $150 million of stock, ending the quarter with a common equity Tier 1 ratio of 11.3%. We will continue to opportunistically deploy capital above our 11% near-term target. As I look forward to the rest of 2024, I remain incredibly optimistic that First Horizon will continue to deliver strong results quarter-after-quarter, while serving our customers and communities just as we have over the past 160 years. We have an attractive footprint, a competitive product set, and a strong credit culture that will allow us to profitably navigate the ever-changing economic outlook of the upcoming year. With that, I'll hand the call over to Hope to run through our financial results in more detail. Hope?
Hope Dmuchowski: Thank you, Bryan. Good morning. On Slide 6, you will find our adjusted financials and key performance metrics for the quarter. We generated pre-provision net revenue of $323 million, up $25 million from the prior quarter. Net interest income increased $7 million from fourth quarter, driven by improvements in both deposit and loan pricing, which expanded the margin by 10 basis points. Fees excluding deferred comp were up $13 million from last quarter, driven by higher revenues from our fixed-income business which saw a 58% increase in ADR. Expenses excluding deferred comp were down $4 million linked quarter, driven by a significant reduction to outside services, which as previously mentioned were elevated in the fourth quarter. That reduction was partially offset by personnel increases for annual merit, seasonal benefits, and revenue-driven incentives within our fixed-income business. Expenses remain a lever that we are able to pull to drive increased profitability. We continue to identify and implement operational efficiencies across our bank that will help us offset the increase of our strategic investments to drive enhanced shareholder returns. Provision expense was $50 million this quarter, resulting in a stable ACL coverage ratio of 1.4%. Our strong performance improved return on tangible common equity by 60 basis points. On Slide 7, we outline a couple of notable items in the quarter, which reduced results by $0.02 per share. First quarter notable items include; incremental expense of $10 million for the FDIC, a Special Assessment which stemmed from revised estimates of the FDIC provided in February. We also had $5 million of restructuring expenses associated with personnel initiatives as we remain focused on finding operational efficiencies. We also noted an upcoming event in second quarter. On April 1st, First Horizon provided notice that it would redeem all outstanding shares of the Series D preferred stock on May 1st. The Series D shares were acquired during the Iberia merger of Equals and do not qualify for capital treatment as the first call date was in a five-year window. The interest rate was set to convert from a fixed coupon to a three-month SOFR plus 4.12% in May. Second quarter will include an approximately $7 million non-cash charge associated with retirement of this instrument. On Slide 8, you will see that margin expanded 10 basis points from the prior quarter to 3.37%, improving NII by $7 million. First quarter benefited from a full quarter of repricing on the promotional deposits gathered in 2023, with interest-bearing deposit costs declining 9 basis points from prior quarter. Loan yields also expanded 9 basis points from the benefit of wider spreads on new and renewing loans, as well as the ability to redeploy lower-yielding fixed-rate cash flows. The path for deposit costs over the rest of the year will depend on when the Fed decides to cut rates, as well as the level of competition we see in our markets. Meanwhile, loan yields still have room to modestly expand as fixed cash flows continue to reprice. As you can see on Slide 9, we've successfully maintained deposit balances while reducing our deposit costs. Period-end deposits are flat quarter-to-quarter with a 5 basis point reduction to the total deposit rate and a 9 basis point reduction to the interest-bearing rate paid. We continue to see strong retention on the promotional deposits repriced last quarter with about 90% retention on both the number of clients and the balances. We had a modest increase in brokered balances as contracts initiated in 2023 funded up ahead of approximately $800 million of brokered CDs maturing in the second quarter. Though, we continue to see some rotation out of non-interest bearing in January, balances were relatively flat since February. We have an overview of our diversified loan portfolio on Slide 10. Period-end loans were up 1% from the prior quarter. Loans to mortgage companies were up 17% or $343 million at period end, though average balances were down slightly due to typical seasonality in the business. CRE loans are up $210 million, driven by fund ups, primarily in multifamily. We added some additional CRE detail in the appendix this quarter, including a geographical breakdown that illustrates the granularity and attractive footprint of the portfolio. Loan yields are up 9 basis points, continuing to benefit from wider spreads on new and renewing loans, as well as continued repricing of fixed-rate cash flows. Spreads on new loans increased 46 basis points year-over-year. Fixed-rate cash flows should continue to be a tailwind as we have $4 billion of cash flows coming back over the next year with a roll-off yield of approximately 4.4%. On Slide 11, you can see that our countercyclical businesses had a relatively strong quarter. Average daily revenue in our fixed-income business increased $268,000 from fourth quarter, contributing an additional $15 million of fee income. The rebound this quarter was driven by improving liquidity conditions in the banking sector and the market's expectation that short-term rates have peaked and were likely headed lower. Though the recent inflation numbers have reduced the prospect of rate cuts, we expect business will remain solid, though not as strong as first quarter levels. Mortgage revenue also increased by $4 million, primarily due to higher volumes. Service charges and fees decreased $2 million due to seasonality and overdraft fees. Card and digital banking fees rebounded $3 million as fourth quarter included a non-recurring impact from an accounting methodology adjustment on interchange rebates. Lastly, our non-interest income declined $6 million, mostly due to lower FHLB dividends, as well as a modest reduction in letter of credit and swap fees. Slide 12, we show that excluding deferred compensation, adjusted expenses are down $4 million. Personnel excluding deferred comp was up $17 million from last quarter with a couple of drivers. First, salaries and benefits are up $9 million due to our annual merit increase, which were effective January 1, and seasonality in certain benefits lines such as 401(k) match and unemployment compensation. Second, incentives and commissions increased $7 million, driven by incentives on the fixed income revenue growth. Offsetting these personnel increases is a significant decrease to outside services. As a reminder, our fourth-quarter marketing expense was elevated for deposit and brand campaigns, as well as third-party services engaged on our strategic investments. As 2024 progresses, we expect technology investment expenses to moderately increase over the year, but those costs will be offset by lower retention expenses and continuing to identify and implement operational efficiencies. I'll cover asset quality reserves on Slide 13. Loan loss provision was $50 million this quarter, flat to prior quarter. Net charge-offs were $40 million or 27 basis points. Our largest charge-off this quarter was a $9 million C&I loan to a consumer goods company for which we were already fully reserved. We also had $12 million of partial charge-downs on three commercial real estate loans based on updated appraisal values. The ACL coverage ratio remains stable at 1.40%. We provide additional detail in the appendix that gives some insight into the diversification and granularity of our loan portfolio. We have remained disciplined in underwriting and our approach to client selection. While we have seen some additional negative grade migration in the first quarter, overall, we continue to see stable credit performance across markets and industries. On Slide 14, you can see that we have maintained strong capital levels while successfully deploying capital to shareholders through the repurchase of almost 11 million shares, utilizing approximately $150 million of our $650 million of share repurchase authority. Share repurchases drove a 9 basis point reduction in capital this quarter, while CET1 remains very strong at 11.3%. Adjusting for the marks on our securities portfolio and loan book, our pro forma CET1 ratio would be 8.8%, which is well above the regulatory threshold. We will continue to opportunistically deploy capital above our 11% near-term target. First quarter tangible book value per share increased to $12.16, benefiting by $0.35 of net income offset by $0.15 of dividends, $0.15 from higher mark to market impact, and $0.04 of share buybacks. On Slide 15, we've updated our 2024 outlook slightly to reflect better-than-expected performance in our countercyclical businesses. We continue to expect our full-year NII growth to fall within the 1% to 4% range that we originally outlined. We have updated our assumptions for interest rates to reflect the forward curve for March, which includes cuts in June, September, and November. Though the market's expectations have continued to evolve over the last few weeks, we do not believe that it will have a material impact to our outlook. We saw a strong performance from our countercyclical businesses in the first quarter, with fixed income fees up $15 million and mortgages up $4 million from prior quarter. We expect these businesses to continue to perform well, which has improved our outlook for non-interest income growth from a range of 4.6% previously to an updated 6% to 10%. The expense outlook remains unchanged despite increases to revenue-driven incentives in our countercyclical businesses due to the benefit of the operational efficiencies we have implemented. I will wrap up on Slide 16, which is a slide that you have all seen a few times now, but it really drives home that we are focused on a company in order to maximize shareholder value. First quarter was a great start to 2024 and I believe this is the beginning to a strong year for First Horizon. We expect to deliver better revenue performance than we laid out in our original guidance, while finding operational efficiencies to maintain our expense guidance. We are making tremendous progress on the strategic investments we have been talking about for almost a year now and these initiatives will allow us to offer our clients and associates better products, better service, and improved efficiencies. First Horizon has a diversified business model that can provide top-quartile results throughout any cycle. We are well-positioned to capitalize on our 160-year legacy with our passionate and dedicated bankers, clients, and communities. We will continue to demonstrate our commitment, strength and resiliency, while increasing shareholder returns. Now, I'll give it back to Bryan.
Bryan Jordan: Thank you, Hope. Our first quarter results reflect the strength of our franchise and the ability to improve profitability in an extremely competitive industry. As Hope mentioned, our teams have made great progress over the last year on our strategic investments, which will allow our associates to serve our clients more quickly and efficiently. I continue to remain confident that this company has the people, the clients, and the enthusiasm to build an unparalleled banking franchise in the South. My expectation is that the next few months for the economy will look similar to the first quarter, which gives me tremendous confidence in our ability to generate strong returns for our shareholders throughout the rest of the year. Finally, I want to touch on the announcement we made Monday that our Chief Credit Officer, Susan Springfield, has decided to retire later this year. We have named Tom Hung as her successor. Tom currently runs our franchise finance business and brings a wealth of credit and client experience to the role. We have already started the transition process with Tom serving as Deputy Chief Credit Officer as he prepares to officially step into the role on October 1. Susan will remain with the company until the end of the year to help ensure a seamless transition. Susan's decision to retire is bittersweet and she will be greatly missed. She has been with the company for nearly 30 years, having served as Chief Credit Officer for 11 of those years. She led us adeptly through a number of credit cycles, maintaining strong credit quality under her leadership. She has been a vital member of our Executive Management Committee, as well as a mentor and role model to countless young professionals throughout her distinguished career. We are incredibly grateful for her steadfast leadership and her unwavering devotion to our team and our clients. Thank you, Susan. Carla, we can now open it up for questions.
Operator: [Operator Instructions] Our first question comes from Ebrahim Poonawala from Bank of America. Your line is open.
Ebrahim Poonawala: Hi, good morning.
Bryan Jordan: Good morning, Ebrahim.
Ebrahim Poonawala: Hi, Bryan. How are you? I guess, maybe just first question for Hope around NII outlook. In the past, Hope you provided spot rates and deposit costs. Just give us, if you don't mind, if you can drill down into what the spot rate was at the end of 1Q and how we should think about that drifting higher, I'm assuming if we don't get much in terms of rate cuts for the rest of the year.
Hope Dmuchowski: Thanks, Ebrahim. Good to hear from you this morning. Our spot rate at the end of the quarter was slightly up on interest-bearing and total deposits, but on average kind of flat. Well, some of it is mixed, some of its timing. So I really want to focus on what was our overall deposit costs for the quarter. Our betas went from a peak of 63 down to 60. We continue to have momentum in retaining the balances and repricing them. We're probably at the bottom of being able to reprice those promotional deposits and we are seeing increased competition. As you mentioned, the longer it takes us to get that first-rate cut, the harder I think it's going to be to continue to drive deposit costs down meaningfully. We could be a couple basis points here or there within a month or a spot rate within a quarter, but I think we're probably close to where the deposit cost will be for the rest of the year with -- within 1% maybe on the beta on either side. It is really hard to predict. The market is just changing so quick and competition will slow one month and then pick up the next week. And so, it's going to be kind of a month-by-month look for the industry, I think. Bryan, do you want to add anything to that?
Ebrahim Poonawala: Go ahead.
Bryan Jordan: No. Go ahead, Ebrahim.
Ebrahim Poonawala: Yes, no, and I guess just taking a step back when we look at that 1% to 4% NII guide, is it -- is the delta going to be around what gets you to 4%? Is it going to be just loan growth or whether or not we get any rate cuts? Like what's more impactful?
Hope Dmuchowski: Yes. Ebrahim, if you get to the higher end of that guidance, we would definitely have to see less rate cuts. We have an asset-sensitive balance sheet, and so less rate cuts put us -- puts us at the higher end, more rate cuts put to the lower end. The thing that I can't handicap right now within 1% to 2% on the full year is what are the deposit costs going to do for the rest of the year. We had originally given guidance, assuming we see a rate cut at some point early half the year and we start to see competition for deposit costs be going down as an industry. And if we don't see any rate cuts, we don't see rate cuts until late in the year. That's where it gets a little harder for me to predict. But think about it as we'll be on the lower end with the current curve and less rate cuts is more positive for us to get to the higher end of that guidance.
Bryan Jordan: You'll remember when we laid out that guidance in the fourth quarter, we laid it out based on four rate cuts in 2024. And the over and under betting seems to be we're going to -- the market has two today and there are questions about whether we get two or not. So that will dictate it. So deposit and loan pricing will both be affected by how many cuts we actually do get. As Hope pointed out, the most important aspect of managing the margin is, we're not playing solitaire. We're doing this in a competitive marketplace. And we've seen pricing competition increase fairly significantly. And I think you're seeing that show up in some of the earnings releases that are out there. And so, we'll continue to protect our deposit base, we'll continue to protect our customer base, and we'll continue to compete on a long-term basis of growing the franchise. I would say, we're every bit as focused on managing both sides of the balance sheet. You saw improvement on loan spread and you've seen improvement on deposit pricing and we think that will continue. We just think it's sort of stabilized at this point given what's going on competitively.
Ebrahim Poonawala: Got it. Thanks for taking my questions.
Bryan Jordan: Thank you.
Operator: Our next question comes from Michael Rose from Raymond James.
Michael Rose: Hi, good morning, everyone. Thanks for taking my questions. I think, in the prepared remarks, you mentioned that loan yields have the potential to move higher just as cash flows continue to mature. Can you just give us a sense for what the magnitude of that could be? And Bryan, if you can just generally comment on loan demand in some of your markets at this point, obviously, I think some areas of commercial real estate a little bit weaker, but you are seeing some fund ups from existing commitments and just what you're seeing generally on the C&I side. Thanks.
Hope Dmuchowski: Thanks, Michael. As I mentioned in my prepared comments, yes, we do have a fair amount of cash flow coming in that we will be able to redeploy. From a loan growth perspective, we're forecasting kind of flat to maybe slightly up. As we look at where to redeploy that mortgage warehouse is one of those that is a seasonal product for us and tends to fund up in Q2 and Q3. And it's our highest-yielding asset that we have. We're -- so when we look at kind of how will the year project, you do need to look at the seasonality of that business. We continue to see on renewing business and new business, expanding margins anywhere from 150 basis points spread all the way up to 300 and some above 300 in our top businesses. And so, when you think about our specialty businesses, they have a higher spread. When you think about regional businesses, they are slightly on the lower end of that. But feel confident that we will be able to, even with slowing loan demand, that we'll be able to put this into our portfolio on the client side and be able to be there for our existing clients and bring new clients into the First Horizon franchise with an expanding loan margin.
Bryan Jordan: Michael, I'll pick up on loan demand. Loan demand is okay. It's not great. It really is in pockets that you see real strength. You have some aspects of the Carolinas where loan demand has been very good and you see other pockets where it is probably a bit softer. As you mentioned, we do have the benefit of some fund up on some existing relationships, and you started to see the tick-up in seasonality in our mortgage warehouse lending business. And that's usually stronger in the second and third quarters of the year as the moving season kicks in. But overall, we're still seeing good opportunities. We're still being very selective about how and where we participate, particularly on price and structure. But we're looking for long-term growth and really those generational opportunities to move business. But I expect that the loan demand is likely to remain somewhat more modest, broadly speaking, in the economy, simply because we're in that space between rates not going up anymore and rates not coming down. And I think people are still a little bit cautious and it's going to take a little bit more certainty about when the Fed is going to move and I think people will start to lean in. The economy is still very good in our view, relative to all that's going on in the world and how much rates have been moving up. And as you know, we benefit from being in a sector of the U.S., the South that has a very strong general economic dynamic. So we think loan demand will be fairly soft, but improve over the course of the year.
Michael Rose: That's great color. And maybe just as my follow-up, maybe one for Susan, and congratulations on your upcoming retirement. Well deserved. Can you just describe or what drove kind of the increase in non-performers? And then if you have an update to the criticized balances at quarter end, I think they were a little over $2 billion at the end of the fourth quarter. Thanks.
Susan Springfield: Sure. Thanks. And thanks, Michael, for the nice comments. As it relates to new non-performing, we saw non-performing go up about $43 million. And that's there were a few new non-performing loans. That increase was largely driven by two credits. One was a senior living facility, a senior living, assisted living memory care facility, and the other was a consumer finance company. Again, so when we're seeing some slight movement in NPLs, we're still seeing it kind of not any specific industry or sector. And as it relates to criticized, we have had a continued focus on conservative grading. And as we somewhat seasonal getting in year-end financials on borrowers, we did see criticized balances go up about 20%. But most -- much of that was in -- on special mentions, kind of a watch status. So those are not defined weaknesses at this point there. They're more potential weaknesses where we're just taking a more frequent look working with borrowers. The other thing I'm really pleased to see, and this is in commercial real estate, as well as C&I is borrowers really coming to the table wanting to work with us. We're wanting to work with them. We've seen good opportunities to bring in additional equity reserves, et cetera, as we have loans that may be temporarily challenged due to interest rate environments. And then classified loans were up less than 10% quarter-over-quarter.
Michael Rose: Perfect. Thanks for taking my questions. Appreciate it.
Susan Springfield: Thanks, Michael.
Operator: Our next question comes from Jon Arfstrom from RBC.
Jon Arfstrom: That's close. John Armstrong. Good morning, everyone.
Bryan Jordan: Hi, John. How are you?
Jon Arfstrom: It's like trying to pronounce Hope's last name. It's just as challenging. Just, Susan, for you, just to follow up on Michael's question, anything new or surprising that you're seeing on credit? And what should -- what do you think we should expect on non-performing trends for 2024? Can you just set the expectation there?
Susan Springfield: Yes, I don't really see anything that surprises me. Again, we're still -- each one kind of has a story as we're talking borrower by borrower. We've had a number of deep dives in portfolio reviews across lines of business in different regions. Great conversations with our bankers about what's going on. Our bankers are having great conversations with clients. As I mentioned earlier to Michael's question, I'm still really pleased to see how we're able to be at the table, talk about rightsizing alone or what do we need to do? What do you think is going to happen? Getting updated projections from clients, so we still feel good about the ultimate performance of the portfolio. I think depending on what happens with interest rates, John, that's probably going to affect. If -- obviously, if we start seeing rates start to go down, I think you'll see non-performing loans start to slow in terms of any increases. The good news about not having any increased rates right now, though, you're seeing a lot of borrowers who have adapted to this new interest rate environment, whether it's able to pass along costs in their businesses or just learning how to do things differently, being more efficient, learning how to operate in a higher interest rate environment. So with this, we're still being cautious. Bryan mentioned we're always selective with discipline in how we underwrite, discipline in client selection. And so, that's serving us well, but we're keeping an eye on the portfolio.
Bryan Jordan: John, I would add to that, I'm not really surprised at all by anything I see in terms of credit performance. You're getting what you would expect with higher inflation and higher interest rates and a lot of movement in a fairly short period of time. And across the entire economy, you're going to have borrowers who are a little more stressed by that and it's going to show up in terms of their performance. I would say, Susan and her credit teams, as well as our relationship teams, our RMs and PMs have been very proactive in doing deep dives through our portfolio, understanding at a transaction level borrowers' financial position. As Susan said, being very proactive in working with borrowers. And as Susan also said, we've had tremendous success with borrowers who want to work with us and stepped up with right-sizing loans, et cetera. So I'm not surprised. And in fact, I'm very pleased with the performance that I see, given the nature of what's going on in the underlying economy and the way we structured this loan portfolio, I'm very comfortable that we're in a pretty good position.
Jon Arfstrom: Okay, good. Fair enough. And then Hope for you on Slide 8, the bottom of Slide 8, you're highlighting $5 billion in loans and securities that are rolling off. Can you talk about what the repricing uplift is from that? And I think the message here is that you expect the margin to grind higher because of some of this repricing. The deposit repricing opportunities are probably done. So it's more about this asset repricing that's going to grind the margin higher over time. Is that the right message?
Hope Dmuchowski: That's the right message, John. I think, deposit as I think could go a couple basis points lower or a couple basis points higher in quarter to quarter. That may change until we see that first-rate cut. But, we have $4 billion rolling off at 2.25% yield and yes, you're seeing 6% and 7% yields pretty steadily in the market and some 8% in our specialty businesses. And so, absolutely putting that to work on the client side of the balance sheet versus parking and securities or something else is our intention with that money to be able to increase our spread.
Jon Arfstrom: Okay. All right. Thank you very much.
Bryan Jordan: Thank you.
Operator: Our next question comes from Casey Haire from Jefferies.
Casey Haire: Great, thanks. Good morning, everyone. Hope, a question for you on the NII outlook. The DDA attrition a little bit lower as you guys kind of highlighted in January. Just wondering, what does this guide presume for DDA mix going forward?
Hope Dmuchowski: Yes. The guide is a range -- a 4 basis point range there. So it is -- assuming today, we're assuming kind of flat balances with non-interest bearing, if we were to see a larger pickup in that. Again, that could help us get to the higher end of the range. But I don't see any risk to that taking us below the range if we saw immaterial runoff. We think we're at the bottom, right? We saw some January outflows. February and March are really stabilized. First quarter does tend to be a little bit more seasonally low and then come back through the year.
Casey Haire: Okay, very good. And then just big picture question on getting ready for the $100 billion and CAT4. When I compare you guys versus the CAT4 group, you guys are in pretty good shape. If there is a weak link, it's on the liquidity side. And just wondering when do you guys start to -- I know you have time, but when do you start address that and build out the securities book and/or drive down that loan-to-deposit ratio?
Bryan Jordan: Yes. The -- there's a lot of work going in all around the industry to understand the impact on potential category for banks. As you know, Casey, we've done a lot of work around it. And I think we are in pretty good shape. we have continued to run stress testing. We have some of the infrastructure in place, not all, and we will build that infrastructure out on the compliance side. The balance sheet structure issues really fall into two major categories. One you highlighted, which is liquidity. The other is the potential for TLAC. And we don't have a lot of total loss-absorbing capital or long-term debt on our balance sheet either. And in some sense, those two can be mutually solving in the sense that if we raise debt, we can use that to fund high-quality liquid assets. So, as you said, we have time. We don't feel any particular urgency to start moving the shape of the balance sheet today. We're mindful of those two balance sheet hurdles that we would have to get over. And as we get greater clarity from the Basel 3 in game, the FDIC's proposals around TLAC, we'll have a better sense of the steps that we need to take over the next two years or three years to get prepared for crossing that threshold.
Casey Haire: Great. Thank you. Just last question for Susan. You mentioned or Hope mentioned, a handful of losses within the CRE bucket on updated appraisals. Just wondering if you could provide some color as to what the price decline was on those underlying properties.
Susan Springfield: Yes. I mean, on those specific ones, I'd say, on average, we saw probably about a 20% decline. I did talk to -- I've kept in close contact with our Chief Appraiser just on a larger perspective, Casey, just on what we're seeing in terms of reappraisals, both on non-performing properties, but also just office in general. And it really varies a good bit by market. And in strong markets like Florida, you're seeing small turns of 3% to 5%. 3% to 5%, not 3%. And in some markets or certain office properties that may have had a major tenant that they haven't yet replaced, you can see it in the 25% range. So it is kind of on an individual basis. As it relates to the credits where we took a partial charge related to new updated appraisals this quarter, it was in three different markets, and one was actually more of a mixed-use facility, just that office had the most space, and so we classify that as office. All three were in our footprint.
Casey Haire: Okay. So there -- it sounds like most were office. One was a mixed-use, or are these varied by underlying property type?
Susan Springfield: Of the $12 million that we took in charge offs in commercial real estate, two were pure office, and then one was a mixed-use that had some office, which was the predominant space, but it also had some retail and multifamily.
Casey Haire: Got you. Thank you.
Bryan Jordan: Thanks, Casey.
Operator: Our next question comes from Jared Shaw from Barclays.
Jared Shaw: Hi, good morning.
Bryan Jordan: Good morning, Jared.
Jared Shaw: Maybe sticking with the -- with Casey's question on the CRE, what drove the revaluation? Is that because you saw individual credit migration, or is this part of a broader revaluation of all CRE? And I guess, if it's not broader, what happens to drive a revaluation?
Susan Springfield: Yes, there are a number of things, Jared, that, first of all, whenever we downgrade loans to non-pass, we have a policy where we do updated appraisals on commercial real estate loans that get downgraded to non-passed within several months of a downgrade. And then as we -- if we start to see further deterioration and in this case, these were non-performing loans, then we'll -- in all --in these three cases, these were we reappraised six months later. Just having to look at what may be going on. The other thing that can trigger it is if there's something in an individual loan, it could be the loss of the tenant that was -- maybe it was being renegotiated, thought it was going to come up, or maybe it was renegotiated at a lower rate that could cause the need for an appraisal. So we believe in being conservative, and if we need to reappraise, like in this case, within six months of the last one, then we'll do that to make sure we've got the valuations correct.
Jared Shaw: Okay. So those three loans you talked about, they were previously non-performers, and they hit the six month. So you did an additional reappraisal. I guess, what happened with that first reappraisal? So if these are down, call it, 20%, what was that first reappraisal step down from maybe peak to current?
Susan Springfield: How long that? That's on one of them, I mean.
Jared Shaw: Well, I guess on those three loans that were previously non-performer, I guess what -- you talked about a 20% markdown now, from what I'm assuming is the six-month prior reappraisal. What's the magnitude of sort of origination to current markdown?
Susan Springfield: Right. So in terms of -- I have to look back at that. But again, on average, what we're seeing, and I hate to do averages, because it really does vary by property. So in one case, it was down. 20%, 25% from an original appraisal. But then our charge was not nearly that much because we've got significant equity that we've gotten these properties when we underwrite them. In other cases, we're seeing appraisal changes of 10%. So there's a different number for each building.
Jared Shaw: Okay. All right. That's good color. Thanks. And then maybe shifting to the fixed-income business, really good trends in ADRs this quarter. I guess, in a stable rate environment, what's driving the expectation for lower ADRs going forward? Was that just, you saw some, maybe a spurt of activity early on, and then it tapered off or how should we be thinking about the pace of that for the rest of the year?
Hope Dmuchowski: Yes. Jared, I'll start that. The first is, there was a pent-up demand, right? There had not been a lot of balance sheet repositioning. There had not been a lot of liquidity put to use. So we started to see it happen in December. We had a really good December, which we talked about in our last earnings call. And that just carried through to Q1. And so we think some of that is behind us and it was more of just kind of a catch-up. Additionally, the current week has given us a little bit of pause in that we are talking about not if we'll see rate cuts, but could we see a rate increase this year. What will it look like? And that has stall, we will stall that business for a period of time. And if you run the current guidance? I know you all do after this call, it assumes kind of a 500k-ish ADR for the rest of the year, which is still significantly stronger than we saw last year in every quarter except for Q4.
Jared Shaw: Okay. Okay, thanks. And then finally, just for me, on the buyback, strong activity this quarter. Should we be thinking that you continue being pretty aggressive on that $650 million authorization, or was there anything unique in first quarter that may have accelerated some of that?
Bryan Jordan: No, we'll continue to be very opportunistic, but we still believe that the stock is and has been on sale, and we'll look for opportunities to manage our excess capital relative to that 11% near-term target. And the buyback is a great vehicle for doing that in the absence of a significant pickup in balance sheet growth, i.e. loan growth.
Jared Shaw: Great. Thanks a lot.
Bryan Jordan: Sure, thanks. Thank you, Jared.
Operator: Our next question comes from Chris McGratty from KBW.
Chris McGratty: Great. Thanks. Good morning. Just wanted to follow up on Jared's question on the buyback. Bryan, you mentioned 11% as a near-term. I guess, what would lead you to change that directionally, either up or down? And maybe is there something you could consider this year?
Bryan Jordan: Well, right now, I don't think about changing 11% near term. I think there's still enough uncertainty in the economy and the interest rate environment that we want to see a few more cards. If anything changed, it would -- it'd have to be a significant pickup in the economic environment and inflation abating significantly. And I don't anticipate either one of those at this point. So we'll manage to the 11% near term. We'll have greater clarity, probably by the end of this year about what Basel 3 is likely to, Basel 3 in game is likely to look like and we can manage from there. So we're comfortable with that target. And as we pointed out earlier, we start with a 11.3% ratio in CET1. And so, we have a little bit of gap there and we're going to have some earnings. So we think we've got the capacity with the authorization that we can make a significant dent in that authorization over the next three quarters.
Chris McGratty: Okay, great. And just maybe one more on the fee income business. A lot of talk about the fixed income. The mortgage banking is a smaller line item, but directionally had a decent jump linked quarter. Maybe what's in your assumptions in your guide, Hope, for the mortgage, just the gain on sale business.
Hope Dmuchowski: Yes. It's not materially up from here. Q1 was coming off a pretty record low last year for mortgage originations and Q4 was somewhat anemic in that space. And so, we're not expecting a big upturn, but just a continued originations coming in.
Chris McGratty: Okay, thank you.
Operator: Our next question comes from Steven Alexopoulos from JPMorgan.
Steven Alexopoulos: Hi, good morning, everyone.
Bryan Jordan: Good morning, Steven.
Steven Alexopoulos: Bryan, I wanted to go back to your answer to Casey's question across $100 billion. And I'm curious, given how this New York community situation played out, has that impacted how you think about crossing the threshold? Previously you said that you thought a transaction was a preferred method. Curious if you still feel that way.
Bryan Jordan: Could you say the last part? Again, it broke up a little bit. I still feel what way about what?
Steven Alexopoulos: Well, in the past -- yes, in the past, you indicated that you didn't want to fall over $100 billion. You wanted to more or less leap over it via transaction. I'm just curious if you still feel that way, just so your community played out.
Bryan Jordan: Well, yes, that's a -- yes, I guess, you have to couple a couple of thoughts. One, if you put M&A in a separate bucket, I still have significant reservations about, one, what can get approved and two, how long it takes to get it approved. And so, that's not something without greater clarity that looks like a good idea independently. And then you couple it with crossing the $100 billion threshold and in particular, how much readiness do you have to have? Is there really a three-year phase in if you cross in the context of an M&A transaction? I would tell you, while I don't have any inside information, my gut would tell me that what happened recently is likely to make it more difficult to cross. And I think you'll have to show a significant great -- a significantly greater degree of preparedness to be a category for a bank or a very near term path for achieving that. So I think it makes it -- and said another way, it makes it more likely that if you cross the $100 billion threshold in the near term, it's likely to be in an organic fashion. And then you sort of deal with is M&A, a -- the right strategy, and does it make sense from a shareholder in a capital deployment perspective, independent of trying to cross that threshold?
Steven Alexopoulos: Okay. That's helpful. That makes sense. And if I could shift gears and talk about C&I loan growth, when I look at balances, they're pretty flat versus the prior quarter, up a bit versus last year and it's funny. When I look at your markets, whether it's what's going on in Nashville or Texas or Florida, they're on fire. GDP is probably 4% in your markets. Why are you not seeing stronger commercial loan growth here?
Susan Springfield: Hi. I'll take part of that, Steven. In terms of C&I loan growth, first of all, we have been focused on making sure that we're taking care of existing clients first. We're also very focused on full relationship businesses. And as Bryan said earlier, we continue to remain selective in terms of new underwriting and bringing on new clients. That being said, we are open for business and we are seeing some good opportunities and have brought in both new to bank, as well as some increased opportunities with existing clients. And we are hearing when we -- when we have pipeline calls, we are hearing some additional opportunities for us to again lend existing customers, but also bring in some generational opportunities in our communities, as well as in our specialty lines of business. So I think that you will continue to see some opportunities for loan growth across our markets in our business.
Bryan Jordan: As I pointed out earlier, Steve, they're pockets that are stronger than others and some that are a little softer. And Susan is exactly right. If you step back, we are looking to build relationships and do relationship banking. And we really want to move bank relationships, doing the transaction, lending money, getting it out the door is the easy part of the business. It's really how you build relationships in long-term nature of the banking business. And I think our teams are doing an outstanding job of working for a relationship, and we've taken some opportunities where there is not the opportunity for a long-term relationship to step away from some transactions. So we're trying to manage our balance sheet in a way that manages the balance between profitability and growth.
Steven Alexopoulos: Okay. That's fair. And maybe, Susan, if I could squeeze one more in for you on commercial real estate. I see the maturity schedule here on the slide. Can you tell us what was the balance of commercial real estate loans that team do here in the first quarter, and how did those work out in terms of refinance extensions, things like that? Thanks.
Susan Springfield: In terms of things that came up through, we've had -- in terms of things that have come up, we've been, again, as I said earlier, we've had good, really good outcomes in terms of working with borrowers on the appropriate way to refinance when there is a maturity. It could be -- if things are clicking along like they should, then we look at just kind of a traditional renewal, looking at rates and structure. Sometimes we do talk with borrowers about bringing money to the table, either in terms of a paydown or some reserves. So we're -- again, we're having, I think, really good success. One of the things that I do want to emphasize and is that we can -- I mentioned this earlier, we've been very disciplined in our underwriting, really through all the cycles. And if you look at things like our office portfolio, and this is with updated appraisals in them, our stabilized loan to value on office is about 60%. So there's a lot of cushion that we have in our commercial real estate book of business, and that allows us, one, to continue to have good outcomes, but also the ability to work with borrowers. And when borrowers have that kind of equity in front of our debt, there's even more of an incentive to work with us. The last thing I would add is that we've also seen in certain cases where we have been able to -- as Bryan talked about exiting things that aren't relationships. But I would tell you, I've also still will occasionally see us get refinanced out of something that might not hurt our feelings that we're being refinanced out of either because of a credit grade or potentially a borrower that didn't come to the table with quite the right approach. That worked for us. So it's good to see that there are still some opportunities out there, too, when it doesn't set our risk profile going forward, that there are opportunities for them to refinance. So all in all, I feel good about things that have come up for maturity, our ability to work with them, and the options that we have.
Steven Alexopoulos: Thanks for the color. And Susan, congratulations on the upcoming retirement.
Susan Springfield: Thank you. I really appreciate it.
Operator: Our next question comes from Timur Braziler from Wells Fargo.
Timur Braziler: Hi. Good morning.
Bryan Jordan: Good morning.
Timur Braziler: One more for you, Susan, on commercial real estate. Just looking at the allowance build over the last couple of quarters, compared to the coverage ratio on the CRE book, the coverage ratio looks like it's 115% today. That's been tracking lower. I guess, how should we be thinking about the coverage ratio here? And if we don't get any kind of improvement in rates and we see some broader kind of degradation in that space. Are you modeling it to a coverage ratio? Are you modeling it to an allowance ratio? Maybe just give us the puts and takes of those two.
Susan Springfield: As it relates to the allowance process, I would tell you, we don't really -- we don't shoot for a specific number. We go through a process -- a disciplined process each and every quarter and look at various scenarios such as different economic outlooks, things that are base case, things that are ultra-stressed cases. We don't put a lot of emphasis on upside cases, but there are those out there as well. And then we have qualitative overlays related to certain segments that we may decide either that may need more than what just an economic outlook would look like. As you know, with CECL, CECL is considered a lifetime loss approach. So based on what we know today and what we're -- what external economists and our own internal experts are saying, we believe this is the right reserve coverage based on several different outcomes that could emerge. But as I mentioned earlier, each quarter we're reevaluating that. And as you know, as we all know, things like interest rate outlooks can change pretty dramatically quarter-to-quarter. All that being said, I do think the economy - Bryan talked about this. I think the economy remains strong. We're still seeing borrowers being able to adapt to higher inflation, higher interest rates. But this is something that we take a look at each and every quarter.
Timur Braziler: Great, thanks. And then my follow-up, looking at Slide 22 on the C&I loan buckets, the 12% of C&I, that's to finance and insurance companies. Can you just give us a reminder what that composition is and maybe more specifically, what component of that balance is to borrowers that are then using those funds as leverage for commercial loans?
Susan Springfield: Yes, so the finance and insurance bucket has a number of different things in it. And the -- probably one of the things, our asset-based lending business, we lend to companies that lend to others. A good part of that is consumer finance companies, and we've been in that business for many, many years. We've got very sophisticated borrowers. I would tell you just as a sidebar, we've also seen them adapt nicely to higher interest rate environments as it relates to how they deploy. I don't have the exact number with me on how much of it is to then further commercial funds. It's not a big number for us. We do have some of that, kind of a business-to-business like lending arrangements, but it's not a significant portion of that finance and insurance bucket. So those are the ones I would highlight in that bucket.
Timur Braziler: Okay, thanks. Thank you for the question.
Bryan Jordan: Thank you.
Operator: Our next question comes from Ben Gerlinger from Citi.
Ben Gerlinger: Good morning, everyone.
Bryan Jordan: Morning, Ben.
Ben Gerlinger: I was curious, I know we've belabored quite a bit here on guidance change, and it seems like the uptick in fees, one, that's the big positive. So I think going from four to six, now six to 10, should we kind of assume the expenses are closer to that six range, given you've cited the fixed income and mortgage, which are typically higher percentage ratio businesses, or can you also see fees at the high end and expenses on the lower end? Just kind of think about the cadence of the two throughout the year.
Susan Springfield: Ben, thanks for the question. I would not say that the expenses will be on the high end, but that's a foregone conclusion. As we mentioned, we are continuing to look at operational efficiencies. We are looking at what is the right way to run the organization in a lower loan growth environment. We have spent a significant amount on technology that's going to go into place this year that creates additional efficiency. We're looking at every contract that's coming up and looking at what we're doing for it. And so our goal would not to be on the high end of that, but things can change. But no, I would not make that assumption. If I thought we were in the high end of that, honestly, I probably would have just increased guidance at the same time I told you to increase revenue and de-risk it.
Ben Gerlinger: Okay, that's great. It kind of leads to my next question, actually, because I know you're apprehensive that you took out a cut in your guidance. To me, it kind of implies you're close to a higher end. Like if we get to the middle of the year, would it even be worth going from plus one to four to something like two to five? Or is that too nuanced to think about?
Susan Springfield: Ben, I wish I could. If you saw the number of models we run every single month, and as soon as we get to ALCO every month, somebody has said something, Powell's released something, there's new CPI data, which puts it out. So I just don't think we're in an environment where we could be that specific. If we thought it was going to be kind of like our fee income, we knew that the high end of the guidance was probably the low side, so we immediately let you guys know that we don't expect to - we don't expect to come in, we could have said we expect to be on the high side, instead we said previous high side and our low side. Forecasting NII in this environment is very, very hard, even within a 3% range, with as much moving parts as we have.
Ben Gerlinger: Got it. Okay, I appreciate it. For what it's worth, I run a one model, and we'll come up with similar numbers, so appreciate how you guys are doing on your end.
Bryan Jordan: Thanks, Ben.
Operator: Our next question comes from Christopher Marinac from Janney Montgomery Scott.
Christopher Marinac: Hi, guys, good morning. Susan, I wanted to ask about loan modification. How often are you using, and how [technical difficulty].
Susan Springfield: Chris, you broke up the last part of that question. Can you repeat it? Chris, are you there? And Carla, let's move on to the next question, and Chris can hop back in the queue if he needs to.
Bryan Jordan: He might be back. Chris, you back?
Susan Springfield: Yes, Carla, let's move on to the next question, and Chris can hop back in the queue if he needs to.
Operator: Our next question comes from Brennan Crowley from Baird.
Brennan Crowley: Hi, good morning, guys. Thanks for taking my question. Given to me as a guide, and I know at one point last year, kind of 2024 positive operating numbers were discussed, and kind of walked back a bit, and I know it's difficult with the investment initiative underway here, but given what you've seen through three months and the Olympic guide today, is that a good enough possibility for this year?
Susan Springfield: Thanks for the question, Brennan. I think, if you look at where the guide is, it is neutral on operating leverage or slightly positive, depending on which side of the range we come in.
Bryan Jordan: So in short, then, yes, it's positive.
Brennan Crowley: Yes. Great, thank you, guys. And then just as a quick follow-up, and maybe I missed this in the prepared remarks, but saw that the investment portfolios yield have actually felt sequentially. So just kind of wondering if you can talk about the driver there, and then maybe how you guys plan to manage the portfolio and roll off over the next couple of quarters.
Susan Springfield: Yes, first I'll mention we're currently not reinvesting in our securities portfolio, so we're letting it run off and redeploying that into the loan side of our balance sheet. But a lot of the volatility that you saw this quarter is just the mark to market, so where the market is at the end of the quarter. There was nothing material change in our balance sheet.
Brennan Crowley: Okay, great, thanks, guys.
Operator: Our next question comes from Samuel [indiscernible] from UBS.
Unidentified Analyst: Good morning.
Bryan Jordan: Good morning.
Susan Springfield: Good morning.
Unidentified Analyst: I just wanted to ask one last follow-up on NII. I appreciate you touched on the $4 billion of the fixed rate loan repricing. Could you give some color on how even that is through 2024? Is it similar to securities, where it's pretty much the same every quarter, or is it a bit more front or back loaded?
Susan Springfield: Yes, it's pretty consistent through the quarter. There's not a bulge quarter or it being back loaded.
Unidentified Analyst: Okay, great. I appreciate it. Thanks for taking my question.
Operator: And our next question comes from Christopher Marinac from Janney Montgomery Scott.
Christopher Marinac: Thanks, sorry for my issue there earlier. Susan, I wanted to ask you about loan modifications and how often they are a tactic for resolving any type of loan this year or next.
Susan Springfield: Well, I mean, any time we have either, if there's a true maturity, we're always looking at, what do we need to do that's really not a true modification. In terms of modifications, when we have loans that are non-cash that are handled in our special assets groups, there are situations where it might be in our best interest if we're the lead bank or the sole bank to work with them on modifications. And then obviously on some of the deals where we're part of a bank group and the bank group has to work together on what could be an appropriate loan modification. I would tell you, Chris, that we have a history of wanting to work with borrowers and figure out the best outcomes that obviously for us are the best outcomes for our shareholders, but we've also were complimented frequently by our borrowers about our ability to work with them and in some cases, keep them in business. And as I mentioned earlier, in many cases, they've got a lot of equity ahead of us, and so they have a best interest in working with us for to come up with something that makes sense and is economically viable for both the bank and the client.
Bryan Jordan: Yes, loan modifications used to be an accounting term of art, and I'll echo what Susan said. I often say this, and I don't say it lightly to our clients, that we look at it as a partnership. And so we use that long-term relationship and we work through the ups and downs, and I don't consider that modification. I just consider that supporting the long-term relationships that really drive the profitability of our organization and our balance sheet, and at the same time, makes our customers and our community stronger.
Christopher Marinac: No, that's great. Thank you both for your color on that. And Susan, just a quick follow-up on debt service coverage ratios. How is the stress process going for customers? Are you seeing instances where you have to criticize a loan due to just higher interest rates and the DSCRs falling?
Susan Springfield: Yes, Chris, I would say that's actually the predominant reason that we're taking loans to special mention and the initial criticized status would be that debt service coverage, while still able to service the loan, it might be it's left in either a covenant or where the borrower expected to be at a certain point in time. We do expect, and I mentioned earlier that the downgrades mostly have been into that special mention category. That's a very dynamic category and we do see borrowers come back out of it as they adjust either their operating expenses or if interest rates do start coming down. I expect you'll see a good bit of a lot of upgrades. I think that's all.
Christopher Marinac: Great, thank you again and best wishes for your success, Susan.
Susan Springfield: Thanks, Chris, appreciate it.
Bryan Jordan: Thanks, Chris.
Operator: We currently have no further questions. I will hand back over to Bryan Jordan to conclude.
Bryan Jordan: Thank you, Carla. Thank you everyone for joining the call this morning. We appreciate your time and appreciate your interest in our company. Please reach out if you have any further questions or if you need any additional information. We'll be happy to try to help. Hope everyone has a great day.
Operator: This concludes today's call. Thank you for joining. You may now disconnect your lines.
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