Thank you for standing by. At this time, I would like to welcome everyone to the Enterprise Financial Services Corp Q3 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again, press star one. Thank you. Jim Lally, President and CEO, Enterprise Financial Services Corp, you may begin your conference. Well, thank you. Thank you all very much for joining us this morning, and welcome to our 2023 Q3 Earnings Call. Joining me this morning is Keene Turner, EFSC's Chief Financial Officer and Chief Operating Officer, and Scott Goodman, President of Enterprise Bank & Trust. Before we begin, I would like to remind everybody on the call that a copy of the release and accompanying presentation can be found on our website. The presentation and earnings release were furnished on SEC Form 8-K yesterday, so please refer to Slide 2 of the presentation titled Forward-Looking Statements and our most recent 10-K and 10-Q for reasons why actual results may vary from any forward-looking statements that we make today. The Q3 represents a strong performance during a series of rapid changes affecting the economic and therefore banking landscape. Our business model, associate base, and management team has been constructed to perform during times of challenge. Our teams are adept at navigating difficult circumstances and using them to differentiate our strength as a banking partner. Over the last several years, we have worked diligently to diversify our business model such that we do not have to depend on any one business, market, or asset class to produce high quality and predictable earnings. Our Q3 financial results and momentum that we've displayed on both sides of the balance sheet during all of 2023 are the results of this focused strategy. The business model delivered well again in the Q3 of 2023. Our financial scorecard begins on Slide 3. Our strong financial performance continued during the Q3. We earned net income of $44.7 million or $1.17 per diluted share, and we produced an ROAA of 1.26% and a PPNR ROA of 1.84%. These results reflect a robust earnings profile that easily allowed us to absorb some deterioration in credit during the Q3. Combined with our already strong reserves and balance sheet, we remain positioned to operate from a position of strength. This means both delivering returns to shareholders while also supporting the needs of existing and new clients. The ability to continue to fulfill the loan needs of these clients and prospects have opened up channels of deposit growth as well. Our net interest income increased over $900,000 in the quarter, a trend that has continued each quarter since the beginning of 2022. This result, despite challenging competitive and interest rate conditions, reflects the strength of the franchise we have built. We remain positioned to produce high quality earnings stream, a high quality earnings stream that consistently improves shareholder value through deep-rooted client relationships. Growth of net interest income was aided by the defense and resilience of our net interest margin at 4.33%. This is a direct result of our appropriately priced, stable deposit base and our ability to originate commensurate to the needs of our clients, but priced well amid the current interest rate environment. As we thought would happen, loans moderated in the quarter, largely through lower line utilization and a focus on higher valued segments. This resulted in loan growth during the quarter of $104 million and total outstanding loans at the end of the quarter of $10.6 billion. We also committed to funding our second half growth with client deposits, an area where we made significant progress in the current period. For the quarter, we grew net deposits $290 million, netting out the reduction in brokered CDs. Client deposits grew by $488 million in the quarter. Equally impressive is the fact that the DDA as a percentage of total deposits remained strong at 32%, and our loan to deposit ratio at quarter end was 89%. Scott will give much more color on the markets and businesses where we saw continued success, but we are encouraged that we have a significant amount of runway to continue growing throughout the remainder of 2023 and into 2024. Our balance sheet remains strong and positioned for continued growth. Capital levels at quarter end remain stable and strong, with our TCE to TA ratio of 8.51%. Tangible book value per common share was $31.06, an increase of over 8% this year due to our strong earnings that has more than offset the impact of securities portfolio in AOCI. During the quarter, we did see credit begin to normalize. However, the results I noted both on the income statement and the balance sheet reflect that we both anticipated and are positioned well to deal with these changes. I did want to provide a little color around one commercial office loan that moved into OREO during the quarter. This was a St. Louis-based borrower that had a single tenant, Midtown office building, where the tenant defaulted on its lease. After paydowns related to the personal guarantees and lease termination penalties, we charged off approximately $4.7 million on approximately $16 million loan balance. This loan represented our only single tenant office CRE loan in our portfolio. Additionally, we saw non-performing loans edge up in the quarter. It's important to reiterate that the strength of our earnings profile generates pre-provision earnings that have averaged nearly $70 million a quarter this year. This provides a significant buffer to absorb credit issues before ever touching our loan loss reserves or capital. They are also very strong. They are also at very strong levels, particularly when considering the short duration of our loan portfolio. Slide 5 shows where we are focused for the foreseeable future. Just like we've done so, just like we've done so far this year, in the second half of 2023, we will continue to be focused on funding future loan growth with client deposits. Additionally, I'm confident that we can continue to improve shareholder value through the execution of our strategy. Our focus, combined with modest improvement in certain business lines and markets, along with continued steadfast expense management, should consistently produce strong earnings amid the current economic and rate environment that we are in. My optimism for our prospects stems from both my confidence in our existing performance, but also my conversations I'm having with our clients. Our manufacturing and distribution clients continued to have good backlogs and consistent sales volumes. Margins are compressing slightly due to increased labor and interest expense, causing overall profitability to decline, but not to a point where debt service has been compromised. Advising and helping clients navigate through times like these is a specialty of our teams. Past turbulent times have shown that these conversations will solidify the relationships that we currently have and invite several more companies to come our way. Our CRE clients predict a much lower 2024. Current projects will be completed, but new opportunities will be challenged with higher costs, particularly interest expense. I believe that higher demand asset classes, such as industrial and housing, will find return equilibrium, such that we'll see projects and corresponding loan demand come to life late in 2024. I do believe that this bit of optimism will manifest itself in our higher growth markets like Phoenix, Dallas, and Southern California. With all that said, I feel strongly that our multiple business lines and geographies will be robust enough to produce loan volumes in the mid-single digit range over the next several quarters, funded by our continued success in generating well-priced, relationship-oriented client deposits. Before turning the call over to Scott, another piece of good news that I would like to share is that we were recently awarded a $60 million New Markets Tax Credit allocation by the Community Development Financial Institutions Fund, or the CDFI, a bureau within the United States Department of the Treasury. This will serve us well over the next 12 to 18 months to attract new clients and projects that qualify for these credits. With that, I would like to turn the call over to Scott Goodman. Scott? Thank you, Jim, and good morning, everyone. As you heard from Jim, and as we show on S lide 6, loans grew by $104 million in the quarter and results in year-over-year growth of 13.5%. Components of the growth for the last 12 months are broken out on Slide 7 and reflect the prior comments regarding balance and diversification, with increases across all major categories and proportionate between our metro markets and the specialized lines of business. For the quarter, shown on Slide 8, we saw the most lift in the owner-occupied commercial real estate, tax credit, and construction categories. It's also worth noting that revolving line of credit usage declined in the quarter, as operating companies managed their working capital more efficiently in response to higher rates and a more risk-off approach to their businesses. Outstanding balances on lines declined by $100 million in the quarter. So while the C&I loan portfolio was down by $9 million, net of line reductions, this book actually grew $91 million. This C&I lift, as well as the owner-occupied commercial real estate growth, reflects continued success in attracting new operating company relationships and expanding business with our existing clients. The construction category rose in conjunction with improved momentum of projects following the COVID and supply chain-induced construction lags that we saw last year and earlier this year. While we're certainly seeing new development loan requests slow significantly, the existing projects closed over the past 12 to 18 months are continuing to move forward. This portfolio overall is well-diversified, with the majority of the book fairly well-balanced within the multifamily, residential, industrial, and mixed-use projects. Investor-owned OREO office represents less than 5% of this total construction book. Within the specialized business units, tax credit lending had a strong quarter, reflecting continued momentum in the funding of existing affordable housing projects on the books. Jim also mentioned our recent award of $60 million in New Markets Tax Credit allocation by the U.S. Treasury Department. As we have with prior awards, these credits will serve as a catalyst to facilitate much-needed projects within underinvested areas in our metro markets. But these credits will also allow our bankers to bring a differentiated solution to the table to attract new banking relationships, and can provide a source of fee income, which is typically 7%-8% of the allocation earned over 7 years. Life insurance premium finance grew modestly this quarter, with some seasonally slower premium fundings on existing policies, but has grown nearly 19% year-over-year and continues to build a solid pipeline of new opportunities. Sponsor finance also had a modest growth quarter, reflecting some seasonal softness on origination volume, but also an uptick in paydowns related to the sale of portfolio companies by our private equity sponsor companies. The SBA portfolio declined by $19 million in Q3, mainly due to the sale of $33 million in 7(a) loans. Payoffs continued to be somewhat of a headwind from certain borrowers that are now bank-qualified, while origination volumes were stable and in line with expectations. We also remain focused on improving returns opportunistically within specialties or in loan categories where the supply-demand dynamics have shifted.... Generally, in these cases, and depending upon the loan type, we're targeting some combination of higher loan spreads or requiring associated compensating deposit balances. A regional breakdown of the loan trends are shown on Slide 9. Growth of the specialized businesses continues on a solid and steady pace, up 15% annualized for the quarter and 19% year-over-year. In addition to my prior comments on these specialized businesses, our practice finance unit also performed well in 2023, growing by roughly $70 million year to date, including $23 million of growth in Q3. This team, which has a long history and deep expertise in this niche, focuses mainly on banking, dental, and veterinary practices, which are generally viewed as stable and high credit quality business types. Within the Midwest region, reduction in revolving lines were a primary headwind to growth this quarter, offsetting some of the otherwise solid origination activity. New relationships were opened in Kansas City and St. Louis for reputable, long-standing companies in these markets with businesses such as electrical contracting, hospitality, entertainment, and medical services. The Southwest region of Arizona, New Mexico, Las Vegas, and Texas grew by $50 million in the quarter, posting year-over-year loan growth of 26% and reflecting our team's successes in leveraging the above-average economic growth profile in these markets. Significant wins in Q3 included several new owner, operator, and C&I deals with a large local not-for-profit and automotive services business, a regional storage operator, and a commercial design company. In addition, these markets benefited from the elevated fundings under existing construction lines. In Southern California, which is our West region, we continued to show positive momentum, posting another quarter of growth. Year-over-year, this portfolio is up 9.3%, following an intentional shift during 2022 to move away from higher risk, large fix and flip resi real estate lending, and focus the legacy platform on a more balanced, relationship-based CRE and C&I strategy, which is consistent with our other markets. New loans during Q3 included moderate to mid-size, seven-figure relationships with an apparel manufacturer, a hospitality business, transportation company, and specialty printing business. We've also continued to expand our talent base in this region, adding a new market leader in San Diego, as well as two experienced relationship managers and a treasury management officer in the L.A. Orange County market during the quarter. Moving now to deposits, which are broken out on Slides 10 and 11. Total balances grew by $290 million in the quarter after a reduction in higher cost brokered deposits of $198 million. So net of brokered funds, client deposit balances are up $488 million, or 18% annualized in the quarter. The regional market client deposits rose $185 million, reflecting success in our sales plan to recapture excess funds from existing relationships that had moved to non-bank alternatives earlier in the year, as well as our ongoing focus on deposit-heavy new relationships. Specialized deposits rose by $303 million. This breakdown is highlighted on Slide 12. Within the geographies, we grew client deposits net of brokered balances in each of our major markets, with the exception of New Mexico. This growth generally mirrors the concentration of our C&I client base and was most evident in the Midwest, where client balances were up $125 million. In California, representing our West region, client deposits rose by roughly $46 million in the quarter. I think this is a particularly positive sign, just given the sensitivity to stressed banks in that market, and also another indicator of our success in landing balanced new relationships there. The specialized deposit portfolio, which is broken out on Slide 13, also continued its growth trajectory in Q3, now representing 27% of total deposits. There's good balance amongst the lines of business within this book, with property management and third-party escrow driving most of the growth this quarter. Property management continues to be a consolidating industry, which provides opportunity to expand the account base, as our clients are generally the larger acquirers. Slide 14 shows some additional detail on our core funding mix and account activity for the quarter. Deposits are generally balanced among our four main channels and anchored to client relationships that have an assigned team or a key point of contact within our company. These deposits are also well diversified by industry, by household, and by geographic market. The underlying account activity also continues to trend favorably, with new accounts opened exceeding closed accounts, and average balances stable to increasing across all channels. Now I'd like to turn the call over to Keene Turner for his comments. Keene? Thanks, Scott, and good morning, everyone. My comments begin on Slide 15, where we reported earnings per share of $1.17 in the Q3 on net income of $45 million. Net interest income expanded from the linked quarter as we have continued to focus on growing and defended net interest income. Our disciplined pricing on loans and deposits, combined with improved customer funding, benefited our results.... A decline in fee income offset the growth in net interest income during the quarter, and we had a few moving parts in this area that I'll touch on in a few minutes. The provision for credit losses increased for the quarter, driven by net charge-offs, an increase in non-performing loans, and loan growth. Finally, non-interest expense was higher in the current quarter, with continued growth in deposit costs to support our expanding specialized deposit business. Overall, pre-provision net revenue of $65 million for the quarter shows the strength of our earnings profile and our ability to generate capital to support balance sheet growth. Turning to Slide 16, net interest income for the Q3 of 2023 was $141.6 million, an increase of nearly $1 million compared to the linked quarter. We're pleased with the growth of net interest income in the quarter as it reflects balance sheet growth amid improving the proportion of the balance sheet that has been customer-funded since the last quarter. Interest income increased $13 million during the Q3 of 2023, driven equally by continued loan growth and higher rates on the loan portfolio. Additionally, our success in generating customer funding improved cash levels due to the timing of maturing brokered CDs and added roughly $2 million to interest income. With that said, our lending pricing and the structure of the loan portfolio continues to shine. Loan yields increased 16 basis points, while average balances were up over $230 million. The average interest rate of new loan originations in the Q3 of 2023 was 7.89%, and the most recent month yield is just under 7% overall. More details on this are on Slide 17. Interest income in the quarter was more than sufficient to absorb the $12 million increase we experienced in interest expense. We were able to grow customer deposits nearly $500 million during the quarter, which allowed for the previously mentioned decrease in brokered funding. The balance growth was coupled with a 38 basis point increase in the cost of deposits, principally driven by commercial accounts. With that said, total cost of deposits was 1.84% in the Q3 and is approximately 2% in the most recent month. The deposit pricing performance is aided overall by DDA percentage at 33%, while our asset yield and balance sheet growth more than paid for the increase in the cost of our liabilities in the Q3. The resulting net interest margin was 4.33% in the Q3 of 2023, decreasing 16 basis points sequentially. Most notably, we believe that we are seeing stabilization in net interest margin. At least that's been accurate for the last couple of months. When I say that, I mean notably that deposit pricing is becoming more predictable. We're expecting continued net interest margin drift rather than contraction in the Q4 of 2023 and early quarters of 2024. We're encouraged by both deposit generation and the overall performance of net interest income and margin, and we're growing optimistic that with modest growth in net interest income and some slowing in net interest margin compression, that we'll have the opportunity to further expand net interest income growth in the upcoming quarters. It's worth noting that excluding PPP, we've grown net interest income dollars for the last 12 quarters and expanded it by roughly 2.5 times during that period. Slide 18 reflects our credit trends. Annualized net charge-offs were 26 basis points of average loans in the period. On a year-to-date basis, net charge-offs were 13 basis points, which continues to be below our historical average. The credit relationship Jim mentioned moving into OREO made up the majority of net charge-off balance for the quarter. It's worth reiterating that this loan represented the only material loan in the investor-owned office portfolio that was supported by a single tenant. Non-performing assets were 40 basis points of total assets, compared to 12 basis points at the end of June. The increase primarily relates to the single credit totaling $6 million in foreclosed assets from the investor-owned office property that we charged down in the quarter, and an approximately $30 million increase in commercial real estate loans made up of three relationships. While we did experience some deterioration in our credit metrics this quarter, we continue to have relatively low levels of problem loans. The provision for credit losses was $8 million during the Q3 and largely reflects the impact of the net charge-offs, non-performing loans, and loan growth. Slide 19 represents the allowance for credit losses. The allowance for credit losses increased $1 million in the quarter and is 1.34% of total loans, or 1.47% when adjusting for guarantees. On Slide 20, Q3 fee income of $12 million was a decrease of $2 million from the Q2. Income from community development investments decreased, as was anticipated, which was mostly offset by recognized gains from the sale of roughly $33 million of SBA loans, which occurred in the Q3. Tax credit income was the largest driver of the sequential decline in fee income, as a 70 basis point increase in the ten-year SOFR rate in the quarter negatively impacted the credits that are carried at fair value and masked the strong transaction volumes in the period. As a reminder, tax credit income has some seasonal volatility and is typically strongest at the end of each year, and thus, we expect Q4 fee income to be roughly $15 million-$17 million. Turning to Slide 21, Q3 non-interest expense was $89 million, an increase of $3 million compared to the Q2. Deposit service expenses were higher, which was partially mitigated by a sequential decline in employee compensation and benefits, as well as other expenses. Deposit servicing expenses grew roughly $4 million in the quarter due to both rate and volume on certain specialized deposits. We expect this line item to continue to expand with both continued growth and balances, as well as higher rates, but at a decreasing rate, at least as it relates to increased pricing. We do expect specialized deposits to continue to outpace overall deposit growth, which we will continue to drive this expense line item. Comp and benefits was lower in the quarter-over-quarter due to favorable medical plan performance combined with hiring discipline. Other expenses were lower sequentially, primarily from the non-recurrence of the operational event in the Q2, as well as certain other expenses. Overall, we expect non-interest expense to increase to roughly $90-$92 million in the Q4, reflecting an increase in deposit service expense. The Q3 core efficiency was 56.2%, an increase of 220 basis points compared to the Q2, and was driven primarily by the rise in both interest and non-interest expenses, while the decrease in fee income impacted revenues. With some moderation of our net interest margin and net interest income expectations, we do expect core efficiency to move up slightly in the coming quarters. However, this is a function of our expectation for expanding our market share in the specialized deposit business. For all other expense categories, we expect to prudently maintain cost controls, which are part of our daily disciplines. Our capital metrics are demonstrated on Slide 22. Our tangible common equity ratio was 8.5% at the end of the Q3 down from 8.6% in the linked quarter. The decline is due to the increase in longer-term interest rates and the related impact on the fair value of securities and derivatives that are reflected in comprehensive income. Our regulatory capital ratios continue to be above well-capitalized minimums when including the impact of unrealized losses on available for sale and held to maturity securities. Our strong earnings and manageable dividend level allow us to quickly build capital that we can use to support our growth. Overall, this was a strong quarter, and we've been pleased with the performance so far this year. Return on assets has been 1.47%, and return on tangible common equity is nearly 17%. With that, I'll conclude my remarks and open the line for analyst questions. To ask a question, please press star one. Your first question is from Jeff Rulis of D.A. Davidson. Please go ahead. Your line is open. Thanks. Good morning. Good morning. Just a couple follow-up questions on the, on the deposit base that's impacted by the variable, deposit cost. Just want to try to get a sense for, is that the entire specialty loan or specialty deposit balance, or is it a portion of that? Hey, Jeff, this is Keene. If you look at Slide 13, it's really going to be Community, Property and third party. So that's roughly $2.5 billion that the $21 million in the quarter is attributable to. Gotcha. The other is really more part of what's assigned based on specialized, lending verticals. So that's, that's how that's delineated. Okay. So just want to kind of walk down the strategy again. Just, you know, these are, you know, maybe accretive to net interest margin, but on the expense side, certainly has been a source of cost increase. I can you just sort of lay out the strategy of that? You know, overall, it's a more efficient deposit franchise. It's stickier. Just want to kind of get a sense for the cost and the value of that relative to traditional deposits. Yeah, Jeff, this is Jim. Let me tackle that, and then Scott and Keene can certainly join in. So I look at it this way, it blends well with our overall deposit base. You know, if you think about how we built the business and the franchise carefully with commercial and business banking and consumer, and the specialized blends in nicely. It's very stable deposit base, largely an insured deposit base, and it does come in with some nice chunks, and we've done some great work relative to the areas, especially in the property management in the last year, to pick up great clients that were somewhat orphaned by those who are no longer around. And so we feel as if, as we go forward, it blends well with everything, and certainly too much of a good thing is too much of a good thing. But as we see it, it's allowed us to reduce our reliance on brokered CDs and yet maintain a very healthy return profile. Got it. Is there a limit that you know, too much of a good thing? Do you say, "Hey, we want to cap this at a certain percent right now," you know, with an elevated brokered and running it off seems appropriate? So we look at it this way. So we look at it carefully. We look at our growth for 2024 and beyond. And, you know, you know us too. We're not a spigot on, spigot off business, right? We're going to support a particular segment well, but we're not going to do it to a point that it's harmful to the company. And so I look at it this way, that if there—if behind that deposit is an entity that is a long-lived client in any rate environment, we're going to support that, and we're just going to have to figure out ways with respect to that, blended into our overall deposit base, to make a great return. And so we look at the overall growth for 2024 and 2025, and, you know, to the extent that we could fund all of that confidently without leaning into specialized deposits, likely we would, but we're not going to be able to. So it's going to be an important part of our overall growth going forward. But at this point in time, I'm not willing to put a cap on what that's going to be. Got it. Keene, you know, kind of baked into that expense guide, you're alluding to, you know, continue to expand deposit cost there, but it may be at a diminishing level. And you can give us overall deposit, excuse me, overall non-interest expense. Anything to guide us on how to model that ahead? Is there a percent of those deposits or... I guess that's variable, but any thoughts on how to model it? Yeah, let me just let me give you a couple pieces of information that I sort of think about high level, and maybe this is helpful, and you can either follow up or tell me it's not helpful. You know, so in the second quarter, the $17 million on roughly $2.2 billion of deposits was like a 3%, you know, relative cost. In the current quarter, you're at like 3.35% with the $21 million on $2.5 billion. So when you look at $4 million sequentially, you know, we estimate that roughly half was due to rate and pricing and competitive pressures, and us really trying to drive down the brokered. And then the other half was really due to, you know, growth in the underlying balances of a few hundred million. So, you know, I think obviously you've got some blending in there in the quarter, but if you took a 3.50, you know, and said that's your kind of current earnings credit. And we're, I think, viewing it as, you know, absent, you know, more activity by the Fed, that the competition in that space should calm down with some of what we're seeing in the industry. We've been very fair to those customers, and we really think that moving forward, that the majority of the expense is going to be driven by volumes. So I think from my perspective, that will be a way to, you know, kind of think about how we're at least thinking about the Q4 and maybe the Q1. And then I think, you know, you made some comments earlier to Jim and you know, in terms of the efficiency of the business, and we look at this, you know, if you stack us up versus peers, you know, our margins near the top of the stack and efficiency sort of in the top third as it's reported today. But, you know, if you reclass these deposit costs, you know, margin would maybe be in the sort of top, you know, 10 or 15%, but efficiency would go right to the top of the chart at, you know, roughly 50% in the quarter and lower than that, and then the 40% year-to-date. So, you know, to Jim's point on returns, I mean, I think if we look at it that way and you just sort of do some with and without, it helps you really characterize, you know, how efficient we are truly being in the business and, you know, where we stack up. Obviously, we wouldn't, we don't necessarily publish those results because it belongs in non-interest expense, but just a way for us to gauge, you know, what it would be if that was just truly a commercial deposit and we were paying an interest rate on it. Gotcha. Yeah. Not, not second guessing, just trying to get a better handle on it. So I appreciate the detail. Well, maybe just one other topic. Just on the loan front, and, Jim, I think you mentioned kind of mid-single digit. Just wanted to make sure that's sort of net of... Well, one, I don't maybe embedded in that is, do you anticipate more SBA loan sales? And would that mid-single digit include, is that net of expected sales or what not? Yeah, that would be... Yeah, and that would be net of that. That's what we're predicting. And part of it is, you know, not having a whole lot of faith that the CRE market's going to be significant in the first half of 2024. That's why we moderate back to that. So we feel good about that number and being able to do it in a very responsible manner with some high yield there, too. Okay. I appreciate it. I'll step back. Thanks. Your next question is from Andrew Liesch of Piper Sandler. Please go ahead. Your line is open. Some clarification on the nonperformers here. How long have they been on your radar screen? And then, looking out into the future, I mean, what are you seeing with trends in 30 to 80, 90 past dues? Yeah. Hi, Andrew. Scott, I can take that one. I mean, I think generally the credits that impacted this quarter represented historically weaker operating companies that had been in the system, in our process for a while. And I think, you know, I think the amount of movement you saw this quarter kind of reflects the intentionally proactive workout strategy that we're trying to take. You know, get to the table early when there's cash to get a pay down, liquidity to get guarantor payments, to get additional collateral, which, you know, also pushes them through our process faster. I'm happy to provide more color because I think really the movement, at least in nonperformers, is just related to three credits this quarter. You know, there was a $19 million commercial real estate developer, leasing company in SoCal, 19-year or a 13-year client of, of that legacy bank. Sixteen million of our exposure is actually secured, adequately secured by garden multifamily collatera l. There's really just this smaller unsecured piece, which is driving most of the rating, and we're in the process of securing. There's an $8 million Kansas City-based truck dealership. They deal in specially modified commercial box and delivery trucks, and I, I think we're in the process of exiting that through either a refi or a liquidation, which does include, you know, hard assets, owner-occupied commercial real estate. And then $5.5 million ag credit, which is a hog producer, and they're actually under contract to sell prior to year-end and pay us off. You know, I think by just pushing those fairly quickly and getting to the table, we've got decent strategies. I think the other question is: What do we see? You know, as we try to read the tea leaves, you know, I think the major comment is we're not seeing signs that this is part of a bigger wave at this point. Total criticized loans, so if you take classifieds plus the next level of special mentoring, we're actually down $60 million this quarter versus last quarter. You know, we've exited some of those credits, we've upgraded others. Other trends that we look at, past dues are actually down versus the prior quarter. You know, we're not seeing abnormally high activity on things like covenant breaks or additional downgrades. So just, you just look at classifieds and non-performers at the levels they're at today, it's really, you know, similar to what we saw pre-pandemic, 2019 and prior. So hopefully that provides a little bit of color. Yeah, absolutely. And obviously, we saw the increase, but I mean, still at that very low level here. And you know, actually looking at, you touched on pretty much all my other questions, so I'm in good shape. I'll step back here. Thanks, Andrew. Your next question is from Damon DelMonte of KBW. Please go ahead. Your line is open. Hey, good morning, guys. Hope everybody's doing well today. Just wanted to start off with a question on the outlook for fee income regarding the tax credit line item. Can you break down how much of the $2.7 million loss was rate related versus realized gains during the quarter? Yeah, I would say that, Damon, based on the net, you know, the rate-related loss was, like, 300% of what was posted. So, you know, there was good activity in the quarter, as I noted, but with what's carried at fair value, and how much, you know, SOFR moved, we just weren't able to, you know, really withstand that. I think we expect some rebound here in the Q4, you know, as sort of noted by my total guide. And then, you know, look, if rates are... you know, don't continue to tick up sort of as hard as they have the last couple of years, the passage of time, as well as the business activity, will drive, you know, better opportunity for next year. Maybe, you know, that tax credit line item will be able to get to, you know, call it, you know, seven or eight figures again for 2024, with just some stability, you know, returning. Got it. So that 7- or 8-figure number for 2024, the cadence of that is, is it kind of you get more realizations in the first and Q4, and the second and third are usually seasonally weak? Is that right? Yeah, I mean, some of it's probably going to be a little bit dependent on what happens with rate. I would still expect it to be driven largely in the Q4, just by nature of how the business occurs. You know, with some of the turbulence and some of the business climate issues, I mean, we've been trying to, you know, circulate some of those credits and bulk sale them, and that may, you know, somewhat affect timing, but I would still expect it to be maybe a little bit here in the Q1 if rates don't mess with us, and then, you know, back-end loaded for the Q4 of 2024. Okay, that's helpful. Thank you. And then with regards to the margin outlook, and, you know, I think you commented you expect somewhat continued drift here from this quarter's level. Can you kind of put some bookends around that? I mean, you think maybe, like, 5-10 basis points of drift over the next couple of quarters is reasonable before bottoming? Yeah, and I would just say I don't... you know, I think we think that we can get to, you know, largely level net interest income in the, in the quarter here. I mean, I think there was some inefficiency, and there probably will still be some inefficiency in the balance sheet composition because we use brokered CDs to really fund a lot of, you know, the growth in the first and Q2. My comments are sort of notwithstanding balance sheet composition, just similar level at 9/30. But yeah, I mean, I think we've got, you know, call it 3-5 basis points of drifts. And as I say, that it sounds ridiculous that in this environment, I'm guiding 3-5 basis points, but in each of the next couple of quarters is what we're thinking. And, you know, then we start to have day count in our favor, going from 1Q to 2Q, and, you know, maybe there's a chance that we can- we can start to grow net interest income again. But we are definitely seeing some stabilization. The last couple of months have been much more stable than they were. And, you know, in fact, September was a little bit higher than, than August, but, you know, one month isn't a trend, and there's a lot of pieces that drive that. But we're definitely feeling better about it, and we're seeing slowing in cumulative betas, even though we, we expect some continued degradation, in the next couple of quarters at a minimum. Got it. And then kind of on the, you know, the flip side with rates here, if the Fed does cut in the back half of 2024, I know you guys are pretty asset sensitive, so how do you kind of envision the margin reaction if there is some cuts that happen again in the back half of 2024? Yeah, I mean, you know, when you say rate cuts, I mean, I think of that as 25. I mean, I think our view is generally that we expect higher for longer to mean just really stable Fed funds, and what we'll be fighting is largely compression. But, you know, down 100, we're about 4% asset sensitive, so a 25 basis point cut is 1%, you know, on an annualized basis, and that'll come pretty immediately. I don't worry as much, you know, we, Jeff had pushed on the deposit, specialized deposit costs. We think that those can move very much in line with, you know, any Fed funds cuts. I think what we're maybe the most concerned about is if variable rates proceed or predict on a short-term basis, the Fed funds cut, because that's where we get the most compression. But just sort of assuming everything's kind of normally timed, you know, we're sort of down roughly 1% on a cut. And, you know, we think that that's generally an area where we can, on a longer-term basis, outgrow that as long as we don't have, you know, rapid 25 basis points cuts quarter after quarter. Got it. Okay, that's great. Thanks for all the color. Appreciate it. Yeah, you're welcome. Thanks, Damon. Your next question is from Brian Martin of Janney. Please go ahead. Your line is open. Hey, good morning, everyone. Hey, Brian. Hey, Keene, just one last one on the margin. So it sounds like the margin maybe bottoms next quarter or first quarter is kind of... I heard the comments on NII guidance and maybe down a little bit with the day count, but on, on the margin percentage, the drift is the next couple of quarters if, if we're kind of stable from a, a Fed environment? Yeah. I will just say this: I mean, we're really thinking about it on a net interest income dollar basis because w e got a weighted average life of eight months on the brokered portfolio, and we're trying to make it a priority to really, you know, get that largely paid down. So, you know, you could get two, three, four, five basis points just from inefficient, you know, balance sheet, you know, lower risk, but inefficient. And I don't want to just be too firm on that, but we generally feel like margin is getting firmer but still drifting. And you know, call it sometime in the first half of next year, you know, we're starting to feel better about it. And I think if we're able to get, you know, good, you know, decent loan growth in that period, I think we're optimistic that we can, you know, stabilize profitability and, you know, then start to grow in the back half. But yeah, I think, you know, you got some weird day count stuff going on, so you know, you could kind of see first quarter margin better than, you know, Q4, depending on what happens, but then it deteriorates in Q2 just with some of that, you know, 30/360, 365 stuff on the portfolio. Gotcha. Okay. And then how about just on the... I think, I don't know if maybe someone answered that, but on the SBA gains this quarter with the sales, do you guys expect to do more of that, or is that, you know, you haven't done it up until now? So just kind of wondering how to think about that with your commentary on fee income. Yeah. I would say, Brian, that the reason we did it this quarter is, you know, with the strong growth we had in the Q2, we started looking at, you know, how to fund everything and, you know, what we thought was important to investors, and we thought, you know, kind of growing net customer funding relative to loan growth was important. You know, it's a highly salable class of assets, and we had the opportunity to clear some headway there and sell some of the recent production. With Q4 being what we would expect to be seasonally strong, I wouldn't expect Q4 SBA sales, but I would say that depending on how growth looks in, you know, the early part of next year and how, you know, the fee line items look, and overall funding and costs are shaping up, you know, we, you know, view that as a play option, and we may do it, but we'd likely be sensitive to when we get some of the other periodic impacts from, you know, private equity, CDE, tax credit, and those types of businesses. Okay. So just kind of helps smooth out some of the, you know, some of the volatility within the quarters. Yeah, potentially. Now, look, if we're growing deposits well, and there's no pressure really on the funding growth, I mean, I think the best strategy versus cash is to keep those loans on the balance sheet with their profile. But if you're trading off high- other high-yield loans that you're, you know, maybe not doing because you're you know, you want to make sure that you're hitting the right funding profile, then I think that, you know, that becomes a much more viable option. So we'll continue to advise you on that. But it's certainly more more on the forefront and something that I'd say is, you know, equally weighted 50/50 versus maybe no way coming into this year. Gotcha. Okay, that's helpful. And just last two, on the expense side, you know, Keene, you talked about the deposit costs. Just in general, what do you know, those sound like they're up a bit more 4Q, and then maybe they begin to kind of the pace of increase lessens. But just as far as the other, if that's right, and then the other, how are you thinking about increases elsewhere, just inflationary, as we look into next year for kind of the comp line, yet just the, I mean, collectively, the other lines? Yeah. I, I would say, Brian, that we're trying to be very, very thoughtful about managing both the short and the intermediate term. So we don't want to do things that impair the business. I think you heard from Scott, you know, we hired a new president in our San Diego region and, and some of those things. And so we're going to continue to make the right long-term move. We're going to continue to invest in our associates in technology and training, but we're mindful of the, you know, sort of the, the operating leverage that we've, we've lost here along the last couple of quarters, and we're, we're trying to manage that the best we can. So we're going to apply, you know, the normal discipline. I mean, I think you can see it here from, you know, first to second to Q3, that we're being fairly tight on spending, and I think there's some opportunities to pay for what we'll call compensation and raises and things like that next year with some discipline on other types of expenses. But we're going to be mindful that, you know, we're in a position where even with the provision this quarter, we're still earning well, and we don't want to just try to hit a number that then ultimately becomes a lower number in future periods because we're not able to grow or we're not able to restart businesses or things like that. So I think you heard that from Jim, but I think as it bears out on expenses, you know, that's our mantra, and we're really trying to be, you know, as disciplined as we can. And maybe that's, you know, less adding than we would have in prior periods, but I don't, you know, we're not, you're not going to hear from us any big initiatives, very likely, or anything like that. Just continued discipline across the board, as much as we can. Got you. And your comments about the efficiency and kind of adjusting for the deposits, I mean, the 56 we're at today, that feels like a sustainable level now, given kind of what you expect on those deposits... cost trends? I mean, I know it's gone up, but when you adjust them, it's obviously much better relative to the peer and industry. But just kind of the efficiency in general, that level we're at, is it just higher from here or is it stable-ish? I think it's slightly higher. You know, it's kind of increasing, but at a decreasing rate, just like we expect that line item to behave. Yep. I think the rate, you know, sort of pricing impact on the, you know, that line, the kind of earnings credit rate, I think we don't expect to move as much. And so again, I think it's trend in underlying balances and collective balances and things like that, that that continues to have that grow over time. And, you know, I think part of it is just how, you know, how quickly can we get, you know, margin to sort of, or net interest income, I got to say, try and direct away from margin. Net interest income to sort of stabilize and build off that base. And I think that obviously is a big driver for what happened. I mean, I think we would have had, you know, we would have really loved to have that tax credit line item be, you know, zero or slightly positive. The quarter would have looked, you know, a lot different on a, on a pre-provision and on an operating revenue basis. But, you know, that's life, and that'll come back to us over time. Yep, gotcha. Yeah, and last one, if I could sneak it in, maybe just for Scott. The utilization in the quarter was down a lot. You know, I guess, do you expect that to continue to trend a bit lower, or is that feel like we're, you're kind of getting to a bottom? Just wondering, you know, what you think on the utilization side, relative to your comments on, you know, Jim's comments on loan growth, kind of still feeling comfortable, pretty healthy loan growth. Yeah, I agree. I think it's more of just how existing clients are opting to use their existing cash. You know, I don't think it's going to be an ongoing pressure point. I think if you just look historically, it's kind of up and down, but within a pretty narrow range of, you know, 2 or 3%. So I think it's just a function of what happened this quarter. I don't think it's going to impair the business long term. Gotcha. Okay, thanks, Scott. I appreciate the color, guys. There are no further questions at this time. I will now turn the call over to Jim Lally for closing remarks. Well, thank you. And thank you, everybody, for joining us this morning, and thank you for your interest in our company, and we look forward to speaking to you again. It'll be first part of 2025. Have a great day. This concludes today's conference call. Thank you for your participation. You may now disconnect.